Economic Environment in India Book-1

DCM1206: Economic Environment in India Manipal University Jaipur (MUJ)
BACHELOR OF COMMERCE
SEMESTER 2
DCM1206
ECONOMIC ENVIRONMENT IN INDIA
Unit 1: Economic Development 1

Unit 1
Economic Development
Table of Content
Fig No /
SL SAQ / Page
Topic Table /
No Activity No
Graph
1 Introduction - -
3
1.1 Learning Objectives - -
2 Concept of Economic Development - 1
4–6
2.1 Economic Growth vs. Economic Development - -
3 Determinants of Economic Development - 2 7 – 10
4 Sustainable Development - 3 10 – 11
5 Indicators of Economic Development 1 4 12 – 15
6 Economic Development in India 2 5 16 – 18
7 Concept Map 3 - 19
8 Summary - - 20
9 Glossary - - 21
10 Terminal Questions - - 21
11 Answers - - 22 – 24
12 Suggested Books and E- References - - 25

1. INTRODUCTION
Economic development takes place when a country begins to produce more products while
increasing the overall wealth. The economic well-being and quality of life of a nation, a
community, or an individual improves when the targeted goals and objectives are met.
Economic development is based on long-term investments, absorption of new ideas, and
infrastructure. It aims for the reduction and elimination of poverty, unemployment, and
inequality in a growing economy. Economic development is sometimes confused with
economic growth, which is the increase in overall national income and can be defined as an
increase in country’s real output of goods and services. It focuses on the overall development
of economy, whereas economic growth only focuses on the income of people. Economic
growth is possible without development in short term, but economic development creates
conditions for long run economic growth.
In this unit, you will learn about the concept of economic development and the difference
between economic growth and economic development. You will also learn about the
determinants of economic development, the concept of sustainable development, and the
different measures of economic development. In the end, you will also learn about the
economic development in India.
Over the past decades, India has recorded robust economic development. India's share of
global output has doubled to 7 percent, and it is now the world's third largest economy in
purchasing power parity terms. This growth is driven by an expansion in the services sector.
The economic development of India largely depends upon factors such as infrastructure,
public sector reforms, agricultural & rural development, and removal of labour regulations.
However, with the onset of COVID-19 pandemic, India has seen a major economic slowdown
with financial crisis.
1.1 Learning Objectives:

After studying this unit, you should be able to:
❖ Explain the concept of economic development
❖ Describe the determinants of economic development
❖ Explain the sustainable development
❖ Elaborate on the measures of economic development

2. CONCEPT OF ECONOMIC DEVELOPMENT

The term, economic development, denotes different meanings to different people. Economic
development takes place when an economy fosters and a healthy economy is created. It can
also be defined as the transformation of low-income national economy into modern
industrial economy. It is a process when the overall health and well-being of the society is
improved and the low living standards are converted into the high living standards. The
population is shifted from the agricultural to industry and then to the services sector. The
results of economic development are improved productivity; high literacy rates; improved
health; and long lifespans. In simple terms, it can also be defined as a process when economy
improves and economic and social conditions are enhanced for betterment.
According to Amartya Kumar Sen, an Indian Economist and Philosopher, “Economic

development is about creating freedom for people and removing obstacles to greater
freedom. Greater freedom enables people to choose their own destiny. Obstacles to freedom,
and hence to development, include poverty, lack of economic opportunities, corruption, poor
governance, lack of education, and lack of health”.
Economic development includes long interrelated chain of changes in the economy that lead
to a rise in net national product of a country in the long run. The changes include social,
cultural, political, as well as economic contributing to material progress. These changes
further result in equitable income distribution, greater employment, and poverty reduction.
Economic development is sometimes confused with economic growth. Economic growth can
be defined as an increase in the capacity of an economy to generate goods and services within
a specific period of time. It is a long-term expansion in the productive potential of the
economy to satisfy the needs of individuals in the society. Economic growth of a country has
a positive impact on the national income and level of employment, which further results in
higher living standards.
We can say that economic growth is about expanding the Gross Domestic Product (GDP),
which can be defined as the sum of all economic activities in the nation over a period of time.
It is the net value of all the products and services that an economy produces. On the other
hand, economic development is different from economic growth and has a wider aspect to it.
In general, it is about how the citizens of a country are affected. Although, we cannot deny
the fact that economic growth plays a crucial role in economic development.

Economic development takes into account the following information:
• Availability of housing, as well as the quality of housing
• Average life expectancy, i.e., how long people people’s lifespans are
• Educational standards
• Literacy rates, i.e., the percentage of the population that can read
• Environmental standards
• Access to healthcare and medication
• Per capita income
Let us discuss the difference between economic growth and economic development in the
next section.
2.1 Economic Growth Vs. Economic Development

The terms economic growth and economic development may sound similar, but there is a
huge difference. Economic growth is a quantitative concept that measures the increase in
goods and services produced in a country, whereas economic development is a qualitative
concept that improves the overall progress of the nation. Let us discuss the difference
between the economic growth and economic development in Table 1.1:
Economic Growth Economic Development
1. Span Economic growth is a small part of Economic development is a broader
economic development. concept.
2. Scope The scope of economic growth is The scope of economic development
unidirectional as it includes the is multi-dimensional as it includes the
growth of market value of goods development of overall aspects of the
and commodities produced. nation.
3. Term Economic growth is a short-term Economic development is a long-term
process. process.
4. Economic growth is measured by Economic development is measured
Measurement GDP and GNP (Gross National by Literacy Rate, Infant Mortality,
Product) Human Poverty Index, and Human
Development Index.

Economic Growth Economic Development

5. Support Economic growth is an automatic Economic development requires
process and therefore does not support from government or other
require any support from institutions on a regular basis.
government or institutions.
STUDY NOTE
GNP is derived by adjusting GDP to include repatriated income that was earned abroad,
and exclude expatriated income that was earned domestically by foreigners.
Without development, economic growth is possible. Sometimes, GDP increases but there are
least improvements in living standards, implying economic development cannot be seen. The
reasons are as follows:
• Sometimes, the benefits of economic growth are tapped with the bank accounts of
politicians and rich people, which we can say is corruption.
• Sometimes, the economic growth may benefit only a small percentage of population.
For example, a country producing more oil will see an increase in GDP. But it is also
possible that the oil is owned by only one organisation, which only benefits that one
organisation. Hence, the average worker may not be benefitted.
• The toxic chemicals produced in a country may increase the real GDP, but, on the
other hand, these chemicals may lead to health and environmental concerns.
• Sometimes, the production produced by a state-owned industry is not being
consumed by population. This may reflect increase in GDP but if the output is not
consumed, then there will be no changes in the living standards of a population.
Self-Assessment Questions - 1
1. ______________can be defined as an increase in the capacity of an economy to
generate goods and services within a specific period of time.
2. Economic growth is a qualitative concept. (True/ False)
3. Give any two results of economic development in an economy.
4. An economic development is a ___________concept that improves the overall
progress of the nation.
5. ‘’Economic growth is about expanding the GDP’’. What does GDP stand for?

3. DETERMIANTS OF ECONOMIC DEVELOPMENT

Economic development of a nation depends upon various factors, such as natural resources,
technology, social political cultural economic structure of country, and physical/human
capital. We can divide all these factors into economic and non-economic factors.
Economic factors include natural and human resources, whereas non-economic factors
include socio-political factors, as well as the religious factors.
Let us discuss these factors in short.
• Natural resources: This factor includes the resources that are produced by nature
either on the land or beneath the land. The resources on land include plants, water
resources, and landscape. The resources beneath the land or that are underground
include oil, natural gas, metals, non-metals, and minerals. The natural resources of a
country depend on the climatic and environmental conditions. Countries having
plenty of natural resources enjoy good development as compared to the countries
with less natural resources.
• Human resources: This is the most important factor of economic development in a

country. The quality and quantity of available human resources can directly affect the
development of an economy. Quality includes skills, abilities, training, and education
of human resources. For example, if the human resource of a country is well skilled
and trained, then the output would also be of high quality, which results in economic
development. Whereas, if is there is a shortage of skilled labour, this may affect the
economic development. Although Japan owns small geographical area with a few
natural resources, it still achieves high-growth rate due to its efficient human
resources and advanced technology.
• Capital Formation: This factor includes land, building, machinery, power, and
transportation. Producing and acquiring all these man-made products is known as
capital formation. Capital formation increases the availability of capital per worker,
which further increases capital/labour ratio. This increases the productivity of
labour, which eventually results in the increase in output and development of the
economy.
• Technological Development: The selection of right technology also plays an

important role in the development of an economy. Technology involves application

of scientific methods and production of new techniques. Technological development

helps in increasing productivity with the limited number of resources. Countries that
work in the field of technological development grow rapidly as compared to the
countries with less focus on technological development.
• Social Factors: Social factors involve customs, traditions, values, and beliefs, which
contribute to the growth of an economy to a considerable extent. A society with
traditional beliefs and superstitions may not adopt the modern ways of living. Social
institutions such as caste system and joint-family system play an important role in
economic development too. The modern ideas, values, and attitudes bring new
innovations and eventually lead to the rise of new entrepreneurs. The outdated
customs restrict occupational and geographical mobility, which pose an obstacle to
the economic development.
• Political factors: The political factors, such as participation of government in

formulating and implementing various policies, have a major part in economic
development. A better environment is created with political stability and legal
support for developmental activities. Reforms in the form of industrial policy reforms
and labour reforms lead to positive development in the society. Stable political
administration keeps people’s faith in the programmes and policies introduced by the
government. Accordingly, people make investments in diverse areas of economic
activity. A corruption-free political system is more important to keep the process of
growth and development ongoing. Civil unrest/military conflict is a major factor that
blocks the economic development as it causes investments to dry up, whereas the
resources are also wasted for unproductive means.
Exhibit: Poverty: An Important Economic Development Determinant
Following is a news article that summarises the condition of poverty in India.
POVERTY IN INDIA: FACTS AND FIGURES ON THE DAILY STRUGGLE FOR SURVIVAL
Two-thirds of people in India live in poverty: 68.8% of the Indian population lives on less than $2 a
day. Over 30% even have less than $1.25 per day available – they are considered extremely poor. This
makes the Indian subcontinent one of the poorest countries in the world; women and children, who
are considered as the weakest members of Indian society, suffer the most.

India is the second most populous country after China with ~1.2 billion people and is the
seventh largest country in the world with an area of 3,287,000 km². The highly contrasted
country has enjoyed growth rates of up to 10% over many years and is one of the largest
economies in the world, with a gross domestic product (GDP) of 1,644 billion US
dollars. But only a small percentage of the Indian population has enjoyed benefits from
this impressive economic boom so far, as the majority of people in India are still living in
unhappy circumstances due to poverty.
Poverty in India: From the Village to the Slum
More than 800 million Indian people are considered as poor. Most of them live in the
countryside and keep afloat with odd jobs. The lack of employment, which provides a
liveable wage in rural areas, is driving many Indians into rapidly growing metropolitan
areas, such as Mumbai, Delhi, Bengaluru, and Calcutta. Over there, most of them lead a life
of poverty and despair in the mega-slums, made up of millions of corrugated ironworks,
without sufficient drinking water supply, without garbage disposal, and in many cases
without electricity. Poor hygiene conditions are the cause of diseases, such as cholera,
typhus, and dysentery, in which especially children suffer and die.
Poverty in India impacts children, families, and individuals in different ways through:
The high infant mortality: About 1.4 million children die each year in India before their
fifth birthday. In addition to Nigeria, Pakistan, the Democratic Republic of the
Congo, and China, India is one of the countries with the highest child mortality
rates. Pneumonia, malaria, and diarrheal diseases, as well as chronic malnutrition are the
most frequent causes of death.
Malnutrition – not even a bowl of rice a day: India is one of the world’s top countries
when it comes to malnutrition: More than 200 million people don’t have sufficient access
to food, which includes 61 million children. About 7.8 million infants were found to have
a birth weight of less than 2.5 kilograms - alarming figures for a country commonly
referred to as the emerging market.
Lack of education – no opportunities without education: According to UNICEF, about

25% of children in India have no access to education. The number of children excluded
from school is higher amongst girls than boys. Although women and men are treated
equally under Indian law, but both girls and women, especially in the lower social caste,
are considered inferior and are oppressed by their fathers, brothers, and
husbands. Without education, the chance of finding a living wage through employment in
India is virtually hopeless.
Source: https://www.soschildrensvillages.ca/news/poverty-in-india-602

6. _____________includes land, building, machinery, power, and transportation.
7. Stable political administration would mean faith of the people in the
programmes and policies of the government. (True/ False)
4. SUSTAINABLE DEVELOPMENT
Sustainable development means a better quality of life for everyone – now and for
generations to come. It refers to the development that meets the needs of the present
generation without compromising the ability of future generations to meet their own needs.
It primarily protects the future economic growth and future development. Sustainable
development cannot be possible when the current output is financed by increasing economic
debt which future generation will have to pay later.
The economic and other policies are designed in a way to bring development that is
economically, socially, and ecologically sustainable and will not exhaust the earth’s finite
natural resources. Sustainable development prioritises poverty reduction, employment
generation, and environmental regeneration. Sustainable development also requires:
• Preservation of ecological resources

• Greater use of renewable resources
• Use of environmentally safe technologies
• Implementing policy framework for people-security and human justice
Solar panels are one of the best examples of sustainable development as they can be fitted to
buildings of any shape or size. The installation of solar panels is also cheap. These panels
provide enough power for making a building completely energy independent.
Following are the main objectives of sustainable development:
• Creating sustainable improvements in the quality of life of all people.

• Increasing the economy growth by meeting basic needs i.e., raising the standard of
living.
• Increasing public participation to keep the environment clean.

• Maintaining the natural and environmental resources, along with economic

development.
8. _____________________development means a better quality of life for everyone –
now and for generations to come.
9. 9. Sustainable development gives lowest priority to poverty reduction.
(True/ False)
STUDY NOTE
The worldwide study, Sustainable Development Report, assesses each country based
on its performance against the 17 Sustainable Development Goals (SDGs). The
6th edition of the Sustainable Development Report (2021) ranks India at 120th out of
165 countries with a country score of 60.1. Finland is on top with a score of 85.90
followed by Sweden with 85.61 and Denmark with 84.86, whereas Germany with
82.48 and Belgium with 82.19.

5. INDICATORS OF ECONOMIC DEVELOPMENT

According to Amartya Sen, “Development is about creating freedom for people and removing
obstacles to greater freedom. Greater freedom enables people to choose their own destiny.
Obstacles to freedom, and hence to development, include poverty, lack of economic
opportunities, corruption, poor governance, lack of education, and lack of health.”
The world is divided in different types of countries, such as economically developed
countries, developing countries, and the least developed countries. The criteria that are used
to measure this economic development are as shown in Fig. 1.1.
Fig. 1.1: Measures of Economic Development
Let us discuss these measures.

• GNP: GNP stands Gross National Product, the total market value of all final goods and
services produced by a country in 1 year. This helps measure the production in a
country. More the country produces per person, more "developed" it is assumed to be.
• Occupational structure of labour force: The occupations in the economy is divided into
primary, secondary, and tertiary activities. Primary activities use resources of the earth,
such as agriculture, mining, and fishing. Secondary activities convert resources into
finished goods. Tertiary activities are comprised of the services sector in the economy
such as retailing, education, and banking. The occupations structure of the countries
shift from primary to secondary and then secondary to tertiary when the development
takes place.
• Urbanisation: Urbanisation denotes the people living in towns and cities. As the country
develops, urbanisation also increases.

• Consumption per capita: It reflects the personal consumption and is calculated by

dividing the total quantity of material goods consumed by the population. The more the
citizens of a country consume, the richer a country gets.
• Infrastructure: More the development of an infrastructure in a country, more is its

economic development. A country's infrastructure includes the main foundations of a
society, which are urban centres, transport networks, communications, energy
distribution systems, schools, hospitals, factories, mines, and police.
• Human Development Index (HDI): This is the major indicator of economic

development. According to the United Nation’s Development Programme (UNDP),
human development may be defined as “a process of enlarging people’s choices.” HDI is a
statistical tool developed by United Nations (UN) that measures the country's overall
achievement in social and economic dimensions. These dimensions of a country include
people’s health, level of education, and their standard of living.
HDI measures key dimensions of human development. The three key dimensions are as
follows:
• A long and healthy life, which is measured by life expectancy.
• Access to education, which is measured by mean of total years of schooling and
expected years of schooling
• Decent standard of living, which is measured by Gross National Income per capita
adjusted for the price level of the country.
Since 1990, UN is publishing the “Human Development Reports” regularly. In the report, it
provides the values of the HDIs for ~180 countries around the world and ranking them
accordingly.

Exhibit: HDI Ranking

Let us see the HDI report of first few countries and India.

As we can see, India ranks 131 out of 189 countries on the Human Development Index
2020. India lies in the medium human development category.
As per the report, since 1990, the HDI value of India has increased to 0.645 from 0.429,
registering an increase of over 50%. During the same period, the life expectancy at birth
in India rose by nearly 12 years, while mean years of schooling witnessed an increase to
3.5 years. During this while, the expected years of schooling also rose by 4.5 years.
Moreover, during this period, GNI per capita of India also increased, registering a rise of
nearly 274%. The UNDP compared India’s value in the HDI with other countries in South
Asia, viz, Bangladesh and Pakistan. As against India’s rank at 131, Bangladesh ranked at
the 133rd position, while Pakistan stood at 154th place. In the South Asian region, India’s
HDI is more than the region’s average which stands at 0.641, while India is also above the
average value of 0.631 amongst the medium HDI category countries.
Source: http://hdr.undp.org/en/content/latest-human-development-index-ranking
https://www.financialexpress.com/lifestyle/health/india-ranks-131-on-human-
development-index-2020-all-you-need-to-know/2155827/
10. __________is the total market value of all final goods and services produced by
a country in one year.
11. HDI measures key dimensions of human development. What is HDI?
12. The more the citizens of a country consume, the poorer a country gets.
(True/ False)

6. ECONOMIC DEVELOPMENT IN INDIA

India is developing as the fastest growing economy in the world. It is expected to be in the
top three powers of the world in the next 10 years because of its strong democracy and
partnerships. Because of its large population, India attracts huge businesses. As per the
second advance estimates (SAE) for 2020–21, India’s real GDP at current prices is at Rs.
195.86 lakh crore (US$ 2.71 trillion) in FY2, and as per data from Reserve Bank of India, its
foreign exchange reserves stood at US$582.04 billion, as of March, 2021.
After witnessing the economic revolution in late 1980s and early 90s, the Indian economy
has only grown and is currently amongst the fastest growing GDP nations in the world. There
may be economic slowdown in the progress because of reasons such as political pressures
and onset of COVID 19, but still the economy is progressing towards positivity.
Let us look at the factors that affect the India’s economic development, shown in Fig. 1.2:
Factors Affecting India's

Capital flow and Foreign Taxation

stock exchange Political changes Poverty Rates Energy and Oil
Market
exchange trends system
Fig. 1.2: Factors Affecting India’s Economic Development
Let us discuss these factors.
• Capital Flow and Stock Exchange Market: India attracts many investors because of a
huge chance of getting good business opportunity. The reason behind this step is large
population. This leads to continuous flow of capital in India. Stock market is also an
indicator of economic development. Stock exchange is an institution in the capital
market that absorbs savings and provides liquidity for investments, as well as helps
reduce investment risks. It encourages entrepreneurship. As economic development
requires commitment for a long-term investment, stock exchange provides a long-term
capital for major sectors of the economy.
• Political Changes: This is the major factor that affects the economic development in
India. New governance brings new changes and new policies. These policies play a
major role in changing the trade policies and international trade structure in the

economy. The link between the various foreign ministers also plays a very important
role.
• Foreign Exchange Trends: Foreign exchange is another major factor affecting the
Indian economy. The currency of India is more or less interlinked with the currencies
of other countries such as the USA, the UK, and Japan. If the currency value of these
countries falls, then the value of Indian currency also falls and vice versa.
• Poverty Rates: After Independence, India has transformed from a poverty-stricken

economy. It has a huge international market where people cannot afford staying in
poverty. However, as per the 2021 data, over 84 million people are still living in
extreme poverty conditions, which makes up to 6% of its total population. The value of
India will enhance internationally when the total population comes out of poverty.
However, if it increases or remains stable, this may bound to take economy down.
• Energy and Oil: India is amongst the major oil importing countries in the world. The
growth of the country is dependent on its energy demand. To fulfil the increasing
demand, the Government of India has allowed 100% foreign direct investment in
various sectors such as natural gas, petroleum products, and refineries. The oil demand
in India is projected to rise at the fastest pace from 5.05 million barrel per day in 2020
to 10 million barrels per day by 2030. Increase in oil price leads to disturbance in the
Indian Rupee, which is a barrier to the fast growing economy. As per Reserve Bank
of India’s report, “every $10/barrel increase in crude prices leads to an additional $12.5
billion deficit, which is roughly 43 bps of India's GDP. So, every
$10/barrel increase in crude price will shoot up the GDP ratio by 43 bps.”
• Taxation System: If the taxation system is transparent, simple, and easy in the
economy, the cash flow also gets better. The country’s economy will rise if the citizens
will be corruption-free and honest as the taxation system will work smoothly.
EXHIBIT: COVID 19 Impact on Economic Development in India

As we all know that Indian economy has been hit very hard by the COVID-19 pandemic, it
has unfavourably impacted lives, as well as the economy in India. The rising uncertainty
of lockdowns led to closing of various businesses and thus reduced consumer and
investor confidence in businesses.
Let us see the effect of COVID-19 on economic development.

• Crashed Consumer Demand: The lockdown period has seen the declining
demands from the consumers. There were no sales as people were unable to go to
the markets. Services such as transport and hospitality saw a huge loss. The
employment levels also fell, which led to the fall in incomes, resulting in lesser
demands.
• Investment: The COVID-19 outbreak has led to the fall in the private investment
due to higher uncertainty. Most of the organisation’s balance sheets are full of
financial crisis. Even the Reserve Bank of India extended the period of payment to
companies with bank loans as they were unable to pay loans. This extension helped
but lowered the demand and put pressure on companies. This also stopped the
further investments in the economy.
• Fiscal Deficit: The tax revenue of the government also fell sharply. The fiscal deficit
rose from 6.2 to 6.5 percent in 2020–21. The fiscal deficit decreases the capacity of
the government to spend more. This means the government investment on
infrastructure and other areas of economic development fell drastically.
• Inflation: COVID-19 has led to a rise in the inflation as even with demand, the
supply went down for goods. This is because the transportation was also affected
badly. Higher inflation also affected the spending capacity of the poor.
Rising unemployment with rising inflation is the biggest economic concern during the
COVID-19 wave. It has mostly affected the informal economy and poorer households. All
of these factors indicate that the COVID-19 wave has hit the Indian economy hard and
the effects become more visible as it progresses.
13. After Independence, India has transformed from poverty-stricken
economy. (True/ False)
14. The ___________price increase led to disturbing the Indian Rupee.
15. If the taxation system is transparent, simple, and easy in the economy, the
better is the____________.

7. CONCEPT MAP
Fig. 1.3: Concept Map

8. SUMMARY
• Economic development can be defined as a process when economy becomes advanced
and economic and social conditions are improved.
• Economic development includes a long-interrelated chain of changes in the economy

that leads to a rise in net-national product of a country in the long run.
• Economic growth is a quantitative concept that measures the increase in goods and
services produced in a country, whereas economic development is a qualitative concept
that improves the overall progress of the nation.
• Economic development of a nation depends upon many factors such as natural

resources, technology, social political cultural economic structure of country, and
physical & human capital. The main factors affecting the economic development of any
nation are as follows:
▪ Natural Resources
▪ Human Resources
▪ Capital Formation
▪ Technological Development
▪ Social Factors
▪ Political Factors
• Sustainable development means a better quality of life for everyone, now and for
generations to come. It implies the development that meets the needs of the present
generation without compromising the ability of future generations to meet their own
needs.
• Measures of Economic Development are Gross National Product, Occupational

Structure of Labour Force, Urbanisation, Consumption per Capita, Infrastructure, and
Human Development Index.
• Factors that affect the India’s economic development are the capital flow & stock
exchange market, political changes, foreign exchange trends, and demographic &
poverty rates.

9. GLOSSARY
• Economic Growth: It refers to the increase in the production capacity of a country,
which is measured by comparing the GNP of a year with GNP of the previous year.
• Gross Domestic Product: It is a monetary value of all finished goods and services
made within a country during a specific period.
• Gross National Product: It refers to measure the value of all goods and services
produced by a country's residents and businesses.
• Sustainable development: It is a way of organising society so that it can exist in the

long term.
• Urbanisation: It is the shift of population from rural to urban areas.
10. TERMINAL QUESTIONS
SHORT QUESTIONS
1. What is economic development?
2. Sometimes, GDP increases but there are least improvements in living standards. What
leads to this? Explain with reasons.
3. Write a short note on sustainable development.
4. Explain some measures of economic development.
5. Explain the determinants of economic development.
LONG QUESTIONS
1. The terms ‘economic growth’ and ‘economic development’ may sound similar, but there
is a massive difference. In light of this statement, explain the difference between the
economic growth and economic development.
2. Elaborate on the economic development in India and the factors affecting it.

11. ANSWERS
Self-Assessment Questions
1. Economic growth
2. False
3. Improved productivity, high literacy rates
4. Qualitative
5. Gross Domestic Product
6. Capital
7. True
8. Sustainable
9. False
10. Gross National Product
11. Human Development Index
12. False
13. True
14. Oil
15. Cash flow
TERMINAL QUESTIONS
Short Questions
ANSWER 1. When an economy fosters and a healthy economy is created, the economic
development is said to be take place. It can also be defined as the transformation of a low-
income national economy into a modern industrial economy. It is a process when the overall
health and well-being of a society is improved, and the low-living standards are converted
into high-living standards. The population shifts from the agricultural to industrial and then
to the services sector.
For more details, refer Section 1.2. Concept of Economic Development.

ANSWER 2. The reasons are as follows:
• Sometimes, the benefits of economic growth are tapped with the bank accounts of
politicians, rich people etc., which leads to corruption.
Sometimes, the economic growth may benefit only a small percentage of population. For
example, a country producing more oil will see an increase in GDP. But it is possible that the
oil is owned by only one organisation and thus only that organisation gets benefitted. The
average workers may not be benefitted.
For more details, refer section 1.2. Concept of Economic Development.
ANSWER 3. Sustainable development means a better quality of life for everyone, now and
for generations to come. It implies the development that meets the needs of the present
generation without compromising the ability of future generations to meet their own needs.
It is all about protecting the future economic growth and future development.
For more details, refer Section 1.4. Sustainable Development
ANSWER 4. The criteria which are used to measure this economic development are as
follows:
• Gross National Product
• Occupational Structure of Labour Force
• Urbanisation
• Consumption Per Capita
• Infrastructure
• Human Development Index
For more details, refer Section 1.5. Measures of Economic Development
ANSWER 5. Economic development of a nation depends upon many factors such as natural
resources, technology, social political cultural economic structure of country, and physical &
human capital. The main factors affecting the economic development of any nation are as
follows:
• Natural Resources
• Human Resources
• Capital Formation

• Technological Development
• Social Factors
• Political Factors
For more details, refer Section 1.3 Determinants of Economic Development
LONG QUESTIONS
ANSWER 1. Economic growth is a quantitative concept that measures the increase in goods
and services produced in a country, whereas economic development is a qualitative concept
that improves the overall progress of the nation. Economic growth is a small part of
economic development. Economic development is a broader concept.
For more details, refer Section 1.2. Concept of Economic Development.
ANSWER 2. After witnessing the economic revolution in the late 1980s and early 90s, the
Indian economy has only grown and is currently amongst the fastest growing GDP nations
in the world. There may be economic slowdown in the progress because of reasons, such as
political pressures and onset of COVID-19, but still the economy is progressing towards
positivity.
Factors that affect the India’s economic development are the capital flow and stock exchange
market, political changes, foreign exchange trends, and demographic & poverty rates.
For more information, refer Section 1.6. Economic Development in India.

12. SUGGESTED BOOKS AND E-REFERENCES

BOOKS
• Balakrishnan, P. (2010). Economic growth in India: History and prospect. New Delhi:
Oxford University Press.
• Day, C. (1942). Economic development. New York: The Macmillan Company.
• Nafziger, E. W. (2012). Economic development. Cambridge: Cambridge University

Press.
REFERENCES
• ECONOMIC DEVELOPMENT IN INDIA: THE ROLE OF INDIVIDUAL ... (n.d.). Retrieved
from https://www.unescap.org/sites/default/files/apdj12-2-5-lal.pdf
• Poverty in India: Facts, Causes, Effects and Solutions. (n.d.). Retrieved from
https://fairgaze.com/interested-article/poverty-in-india-facts-causes-effects-and-
solutions.htm
• The Global Economic Outlook During the COVID-19 Pandemic: A Changed World.
(n.d.). Retrieved from
https://www.worldbank.org/en/news/feature/2020/06/08/the-global-economic-
outlook-during-the-covid-19-pandemic-a-changed-world

SEMESTER 2
DCM1206
Unit 2: Factors of Economic Development - Part 1 1

Unit 2
Factors of Economic Development: Part 1
Table of Contents
Fig No
SAQ /
SL / Table
Topic Activit Page No
No /
y
Graph
1 Introduction - -
3
2 Role of Technology Factor in an Economy - 1
2.2 Historical Evidence of Technology - - 4–9
2.3 Technological Factors and Economic Development - -
3 Role of Human Factor in Economic Development - 2
3.1 Importance of Human Resources - - 10 – 12
3.2 Human Factors and Economic Development - -
4 Role of Natural Factors in Economic Development 1 3
4.1 Natural Resources in India - - 13 – 15
4.2 Natural Resources and Economic Development - -
5 Role of Institutional Factors in Economic Development 2 4
5.1 Types of Institutions Required for Development - - 16 – 19
5.2 Institutional Factors and Economic Development - -
7 Summary - - 20
8 Glossary - - 21
10 Answers - - 22 - 24

1. INTRODUCTION
In the previous unit, you learned about the concept of economic development. When an
economy fosters, economic development is said to take place. There are many indicators of
economic development such as natural resources, technology, social, political, cultural, and
economic structure of country, as well as physical and human capital. The four basic
indicators are natural resources, human resources, technological factors, and institutional
factors.
Natural resources include land, minerals, fuels, climate;
Human resources include quantity and quality of labour;
Technological factors include machines, roads, and factories;
Institutional factors include banking system, legal system, and health care system.
In this unit, you will learn about the role of these in economic development. You will also
study the importance of these pillars of sustainability of an economy
All these four indicators of economic development are connected with each other. Natural
resources, human resources, and technology have a direct effect on the value of goods and
services supplied and to bind all these, a strong institution is required. All these indicators
lead to economic development, which is considered as a main factor for prosperity of any
nation.

❖ Explain the role of technological factors in economic development
❖ Describe the role of human factors in economic development
❖ Elaborate the role of natural factors in economic development
❖ Discuss the role of institutional factors in economic development

2. ROLE OF TECHNOLOGY FACTOR IN ECONOMY DEVELOPMENT

Technology plays a very important role in driving economic development of a country. It
allows for better and efficient production of goods and services, on which prosperity
depends. Technology can be defined as a huge body of knowledge and tools that allows to
produce goods and services efficiently and innovatively. Technology is important as it
creates future. More advanced the technology is, more quickly the economy can develop.
Inventions and innovations are largely responsible for faster economic growth and
development in countries.
Technology can be broadly classified into two major categories namely:
• Material Technology: Here knowledge is embedded into technological products such

as tools, equipment, agro-chemicals, improved plant varieties, or hybrids.
• Knowledge-Based Technology: Here knowledge is embedded into the skills of

manpower, such as technical and management skills, and other processes that are
needed for successfully producing products.
Technology involves using of scientific methods for achieving commercial or industrial

purposes. Furthermore, it involves the innovation of the production machines to enhance
the production volume. This results in competition advantages and profit enhancement for
organisations.
The role of technological growth in an economy cannot be ignored. It can have both
positive and negative effects on the economy. Through technology, the goods can be
produced with less input. Also, it is easy to transfer technology from one firm to the other
or one nation to another without any effort and cost.
Technological advances can make positive changes in the social and cultural lives of the
people. This also has created new avenues of employment in the economy.
On the global side, there is a very refined technological gap between developed countries
and developing countries. Today, the developing countries lag behind the developed
countries because the developed countries have a monopoly on the sources of
technological development. The developing countries are technologically dependent on
developed countries and thus, their imports of technology are more.

According to Joseph Alois Schumpeter, an Austrian political economist, “technological

progress is the only determinant of economic development.” The process of growth stops
when the technology becomes constant. Thus, the technological progress helps in keeping
the economy moving.
2.1 Historical Evidence of Technology

Since the beginning of history of mankind, technology has developed and continued to
evolve. The past 100 years have seen technological advances with an incredible speed.
As per the scientific thoughts, there are three main stages of technological progress such as
production (up to the first industrial revolution), machine-industrial system, and age of
automation.
The first technological evidence can be seen during the first industrial revolution in 18th
century. It is caused by the replacement of manufacturing system with an industrial
system. The industrial revolution caused a number of changes in the economic and social
life. It replaced some of the physical effort with machines and also allowed hiring of female
and child labour.
The second technological evidence is referred to automation, which enabled the

strengthening of nationwide economies. Automation allowed changes in human
development, as well as the performance of certain mental operations. The technological
progress was seen in the areas of electricity, telephone, telegraph, automobile, and aircraft.
The third technological revolution began before World War II, which is also known as
electronic revolution. The main development was of transistors, which enabled the
development of computers and microprocessors.
In the late last century, the fourth technological revolution, which is also known as the
information revolution, involved the development of a chip. A chip is directly linked to high
technology, robots, and other advanced machines and tools. The information revolution has
directly linked national economies to the global economies.

2.2 Technological Factors and Economic Development

According to the World Bank, “Today’s most technologically advanced economics are truly
knowledge-based, creating millions of knowledge-related jobs in an array of disciplines
that have emerged overnight.”
The technology is transforming everything. It is changing the nature of markets, as well as

products. It is increasing productivity and exposing the organisations to new ideas and
business models. The cost of production has also decreased. Following are some of the
advantages of using technology:
• Technology saves the time by producing more goods in less time.
• Technology contributes to the efficiency of the output of a business.
• Technology increases the division of labour and specialisation of jobs within a

business
• Technology has an ability of using natural resources in effective ways
• Technology increases international trade, allowing businesses to share information

and conduct trade
Technology improves the efficiency of labour that leads to higher profits, as well as
economic development. The innovation in technology brings newer and better goods and
services that help improve the standard of living. For example, the USA became the
industrial superpower in 20th century by transforming itself from agrarian economy in the
19th century. China has also emerged as the industrial leader in manufacturing.
Technology is an engine to economic growth. The countries with an intention to grow

invest significantly in technology.
Technology is connected with development because it brings healthier, wealthier, and

productive lives. It is the solution to poverty alleviation and economic development
challenges that we face.
• Role of Technology in Poverty Alleviation: Technology reduces the cost of doing

the work. The low cost of production increases the profit margin. This is essential in
eliminating poverty. As technology opens up the employment avenues, it increases
the household incomes amongst the poor population. For example, internet banking

offers an easy access to the poor people without transaction costs and the need for a
traditional, physical bank. Technological developments in agriculture can reduce
hunger of millions by providing better ploughing techniques.
Exhibit: Role of Technology in Reducing India’s Poverty

India, a country with large population, has benefited largely from the technology,
especially in case of poverty. India contains the largest number of people living in
poverty. Most of these people live in rural areas and rely on agriculture to make
living.
Following are the schemes introduced for reducing poverty in India.
• Nano Ganesh: This is a mobile-based remote controller used for controlling

the water pumps from mobile phone. This allows farmers to turn the water
pumps on and off and to check how much power is available. With the help of
this app, farmers can also check the water levels in the storage tank. This app
saves
farmers’ time to reach distant water pump sites.
• National Identity Card: India’s national identity card project, established in

2009, is another successful step taken to reduce poverty in India through
technology. This card contains a unique 12-digit number linked to each
person’s fingerprint and face scan. Through this card, the attendance can be
recorded for students and teachers in rural schools, as well as the presence of
doctors in rural health centres. This ID card is said to be sufficient for opening
a bank account.
• Role of technology in Health Advances: Technology has made advancements in

healthcare facilities, such as artificial intelligence, robotics, or nanotechnology.
Advanced technologies can help in early detection of health problems and thus
decrease the mortality rate. The fast information technology helps in forming data
that are collected from tests, helps in quickly monitoring the patient’s condition, and
improves the efficiency of the overall healthcare system. Technology has also

eliminated many torturous diseases, such as small pox and mortality related to
childbirth and infectious diseases.
• Role of Technology in Agriculture: Advancements in technology have facilitated

higher yields and greater efficiency in agriculture. Because of agricultural
biotechnology, it is possible to grow crops in the deserts. Using sophisticated
machines on farms helps farmers to cultivate with new capital-intensive techniques.
Transportation system allows the speedy supply of agricultural products to farms and
markets. Using advanced water sprinklers help in irrigating the big farms.
• Role of Technology in Environmental Management: The degradation of

environment affects the livelihoods, health, and vulnerability of poor people in terms
of air and water pollution, including regional issues such as acid deposition and land
degradation, and desertification. The changes in the environment can badly affect the
incomes of poor people who are dependent on natural resources for their livelihood.
Technology has helped in shaping the society, the economy, and the environment.
Though it causes many environmental problems, but it also addresses environmental
degradation, climate change, food scarcity, waste management etc. Various
technologies such as artificial intelligence (AI) and geo-spatial mapping are driving
towards a solution to the climate goals. Digital technology is helping governments,
organisations, and citizens to adopt sustainable practices, policies, and business
models that are necessary for environment. For example, with technology, waste
recycling can be done, which helps in solving the environmental problems.
• Role of Technology in Rural Development: With technology, the countries have

grown richer and faster. Many countries are growing wealthier with their rate of
growth increase with time. The problems related to health, education, unemployment,
and collapsed infrastructure are all solved with technology.
Due to technology, India is becoming a digitally advanced country. The falling cost and the
internet have made India a home to one of the world’s largest and fastest-growing bases of
digital consumers.
Technological advancements, such as cloud computing, AI is revolutionising the functioning

of economy. India has made progress in creating the infrastructure, setting up of many

research institutes and laboratories that are useful in creating innovations. The
technologies have been developed from experimental stage to operational stage. India has
become the strong platform of technology institutions that have trained manpower and an
innovative knowledge base.
In the past, India lacked effective technology transfer. Today, due to globalisation, there are
new opportunities that help in easy technology transfer. However, still some foreign
companies are unwilling to share technology and are willing to set their own industries in
India. Similarly in joint ventures, foreign organisations are trying to buy Indian companies.
No doubt, technology plays the key role in the present and future development of any
nation. It is achieved through a combination of knowledge, methods, tools, and skills. This
ensures adequate development of manpower in the society.
1. More advanced the _____________is, more quickly the economy can develop.
2. Under which of the following technology, knowledge is embedded into
technological products.
a. Material Technology
b. Knowledge-Based Technology
c. Scientific Technology
d. Information Technology
3. Technology is a solution to poverty alleviation. (True/ False)

3. ROLE OF HUMAN FACTOR IN ECONOMIC DEVELOPMENT

Human resources can be defined as the size of population of a country. along with its
educational qualities, skills, efficiency, productivity, and organisational abilities. Human
resources are also called human capital, which implies the abilities, skills, and technical
knowhow amongst the population. Humans are the main production factor contributing to
economic development, and also the main receiver of the benefits of economic
development. The working population puts a favourable influence on economic
development through labour productivity, quality of workers activities etc. Their skills,
education, and training have a direct effect on the growth of economy. This is because the
skilled labour leads to a high-quality output that adds efficiency to an economy. If there is a
shortage of skilled labour, then economic growth may drop as it will further lead to higher
unemployment.
Only due to human resources, many countries are able to develop themselves. If we take
the example of countries like Japan and Germany, they are able to achieve economic
miracle by organising their human resources.
3.1 Importance of Human Resources

With skilled human resources, a country increases the production of different goods and
services. Human resources bring new technology, which is necessary factor in bringing
development to the country. It also helps in the development of transportation,
communication, the supply of labour, etc.
Following are the importance of human resources in a country:
• Compensate the deficiency of natural resources: Sometimes, the deficiency of

natural resources (such as such as minerals, water, oil, and trees) is covered by
human resources. A country can be economically developed with the help of human
resources even if it lacks some natural resources.
• Utilisation of physical capital: Existence of physical capital guarantees economic

development, if utilized properly by the human resources. Human resources are
essential to operate machinery and equipment, and to run factories and industries.

• Increase production: The productivity of a business is increased with the help of

skilled and healthy human resources. Although, the production can also be done by
using unskilled and semiskilled manpower.
• Increase in managerial capacity and entrepreneurship: Human resources lead to

the innovation by increasing the managerial capacity and entrepreneurship. They
help in developing new production techniques, new markets, and new technologies,
which eventually ensures the increased production and national income.
• Development of agriculture and industry: Only due to human efforts, we are able
to use modern and superior technologies in all the sectors of the country, leading to
faster economic development.
In the end, we can say that human resources are very useful for the overall development of
a country. All types of resources such as capital, natural resources, and even the human
resources remain inactive if human activities are not involved in mobilising them.
3.2 Human Factors Affecting Economic Development

By learning the importance of human resources above, we can say that human conditions
should be improved in order to achieve economic development as it improves the quality of
life for the people in general. The importance of three components of Human Development
Index (HDI) i.e., rise in per capita income, higher educational attainments, and increase in
life expectancy can be considered as a benchmark for studying the improvement of human
resource in a country.
The economic development of any country depends upon the proper utilisation of its
physical resources through its human resource. Therefore, economic development
normally involves the achievement of three conditions:
STUDY NOTE
Gross Domestic Product (GDP) refers to the total monetary value of all the finished
goods and services that have been produced in the territorial boundary of a country,
during a specific time period. It represents the economic picture of an economy and
explains the size and growth rate of the economy.

• Increase in the per capita income for raising the level of living of the people;
• Fall in the magnitude and rate of unemployment and
• Reduction in the number of people living below poverty line.
In India, on one side, the human resource of the country is making positive contribution
towards development but on the other hand, rapidly growing population is retarding the
process of development in the country. This is considered harmful for economic
development. Increase in the population expands the labour force, which grows the supply
of labour, leading to increase in the market demand stimulating production. But, if the
population grows at a faster rate than the level of Gross Domestic product (GDP), the GDP
per capita falls. The quality of population depends on the educational provision in
countries. Improvement in the skills of the labour is a key factor in promoting economic
growth.
4. The deficiency of natural resources can be covered by_______________.

5. For improving human development, the three components of HDI are also
important. What does HDI stand for?
6. Human resources are also called human__________.

4. ROLE OF NATURAL FACTORS IN ECONOMIC DEVELOPMENT

The nature (natural environment) of any country plays an important role in the economy.
Nature helps satisfy the needs and maintain the environmental balance. Everything
material in the economy comes from the natural resources, such as coal, oil, soil, water,
land, and minerals. These resources are fixed in quantity and are non-renewable, therefore
it is our duty to conserve them. For example, to generate energy, we need fossil fuels, and
for the development of industries, we need mineral resources.
It takes millions of years in the formation of natural resources. With increasing population,
these are getting scarce. They need to be conserved because natural resources hold a place
in every life, whether we live in a rural area or urban area, whether we are rich or poor.
They enrich agriculture, trade, and imports, as well as exports.
4.1 Natural Resources in India

India is extremely rich in natural resources. This is because it has different kinds of lands,
the number of rivers running throughout the country, and has different mountain ranges,
coastal areas, a plateau, and forests. India is the second-largest producer of steel, the third-
largest producer of coal, and the fourth-largest producer of iron.
Let us discuss about the most important natural resources of India and where they are
found in the country. Fig. 1 shows the important natural resources:
Fig. 1: India’s Natural Resources

Some of the examples of natural resources in India are as follows:

• Coal: India has one of the largest reserves of coal in the entire world. Jharkhand,
Orissa, Chhattisgarh, and West Bengal have good reserves of coal.
• Oil: India is rich in oil with the highest number of reserves of crude oil in the areas
such as Assam, Gujarat, and the Western, as well as Eastern Offshores.
• Natural Gas: The Eastern and Western Offshores have the highest amount of natural
gas reserves in India. Assam and Gujarat have the leading reserves of natural gas in
the country.
• Metallic Minerals: These include iron, copper, aluminium, gold, silver, bauxite, and
manganese. These can be found in all the parts of the country. Many organisations are
also indulged in the production of metallic minerals. The process of mining is done to
extract the minerals from deep deposits in soil.
4.2 Natural Resources and Economic Development

The most important factor affecting the development of economy is the natural resources.
Development is dependent on the fertility of land, forest wealth, minerals, climate, water
resources, and sea resources.
The economy, deficient in the natural resources cannot develop rapidly. But also, we
cannot say that the countries rich in natural resources will have high economic growth. For
example, in less developed countries, natural resources are underutilised. As there can be
no proper exploitation because of illiteracy, poverty etc. This can be due to economic
backwardness, lack of knowledge, and various technological factors. Any country can
develop itself economically by fully developing and utilizing its natural resources. For
example, by adopting the method of rotation of crops between 1740 and 1760, Britain
underwent the agricultural revolution. Some Asian and African countries are still using the
old methods of production in agriculture.
Japan, one of the advanced countries of the world, is deficient in natural resources.
However, with superior technology and great knowledge, it has discovered new uses for
limited resources. Apart from this, by importing raw materials and minerals from other
countries, Japan has been successful in overcoming the deficiency of its natural resources.

For an economic development of the country, the proper exploitation of natural resources
through improved techniques is necessary.
Natural resources help in creating capital, which helps in beginning or catalysing the
process of development. Foreign organisations like to invest in factories and workplaces
when natural resources are abundant in a country, which brings urbanisation in the
countries and is the main step towards economic development.
STUDY NOTE
Urbanisation is defined as the development of new infrastructure and commercial
towns.
Indeed, the role of natural resources on earth is very crucial. That is why, it is
important for us to protect and respect our environment.
Self-Assessment Questions – 3
7. Name some Metallic Minerals.
8. Natural resources are unlimited in quantity and are renewable. (True/ False)
9. Countries that are rich in natural resources will have high economic growth.
(True/ False)

5. ROLE OF INSTITUTIONAL FACTORS IN ECONOMIC DEVELOPMENT

Every country needs some framework for achieving the economic development. The
factors of production such as land, labour, capital etc. are important, but to use them,
proper arrangements or systems are required, which are called institutions.
Institutions are comprised of banking systems, infrastructures, laws, contracts, protection

of property rights, the rule of law, government bureaucracies, financial markets etc.
According to C.H. Cooley, “An institution is a complex integrated organisation of collective
behaviour established in the social heritage and meeting some persistent need or want.”
According to Fichter, “Institution can be defined as a relatively permanent structure of
social patterns, role and relations that people enact in certain sanctioned and unified ways
for the purpose of satisfying basic social needs”.
Let us read some characteristics of institutions as follows:

• Institutions have its objectives to satisfy social needs.
• Institutions are permanent in their structure
• Each institution is a unified structure and functions as a unit.
• Each institution has its own code of conduct
• Each institution is affiliated by a government body
5.1 Types of Institutions Required For Development

There are different types of institutions in an economy. Some of them are shown in Fig. 2:
The banking system
The educational system
Health care system
Infrastructure
Fig. 2: Institutions Required for Economic Development

Some of the institutions are as follows:

• The banking system: This is an important driver of economic growth. A strong
banking system provides the financial infrastructure to the society. It also helps
businesses to develop and grow.
• The educational system: The best educational system is necessary for growth. The
quality and well-educated workforce are necessary to make a developed country.
• Healthcare system: A healthcare system aims to protect and improve the health of
the people. It consists of all organisations, people, and actions with a primary purpose
to promote and maintain health.
• Infrastructure: Infrastructure is needed for any economic activity to take place. It
includes roads, ports, and telecommunications networks – all of these are vital
elements to support economic development.
5.2 Institutional Factors and Economic Development

The growth of the types of institutions in the countries dominate the process of economic
development. Economic development occurs when institutions are able to generate
economic opportunities and lead to higher standards of living. The right atmosphere leads
to social, economic, legal and political institutions in the country.
Therefore, growth-promoting institutions are a pre-requisite for the rapid economic

development of a country.
According to Prof. W.A. Lewis observed, “Institutions promote or restrict growth according
to the protection, they accord to effort, according to the opportunities they provide for
specialization, and according to the freedom of action they permit.”
Growth-promoting institutions help in promoting new technologies and new types of factor
combinations. Sometimes, socio-political institutions may or may not be conducive to
economic progress. There may be some social attitudes that are more favourable to
development than are others. For example, high social values and flexible social structure
helps in accelerated development of economy.

Institutions influence the economic growth by providing growth of entrepreneurship,

technological changes, and employment opportunities. Following are some of the
advantages of the institutions:
• Institutions provide reward for effort and a freedom of action, which induces the
economic development
• Favourable institutional growth in the economy leads to the use of new technologies
that is necessary for an economic progress
• Institutions automatically increase a number of entrepreneurs by smoothening the
path and channelising their energy in right direction
• Institutions are responsible for an excellent development of workforce in the
economy. Social institutions largely influence the size and quality of labour force.
Some institutions prevalent in Indian society, such as caste system, restrict the
growth.
In Indian economy, the rigid institutional structure in particular areas, such as joint-family
system and child marriage, has led to a rapid growth of population with problems of
unemployment, housing, food crisis and many more.
Rapid economic development is only possible with some changes like discarding the old
and traditional philosophical thoughts. Old institutions and caste and class bondages need
to be abolished.
Exhibit: POOR INSTITUTIONAL FRAMEWORK
Sometimes poor institutional framework leads to low growth of the countries. Some of
the examples of the poor institutional factors are as follows:
• Ineffective taxation structure: In low-developed countries, there are rarely any
institutions for collecting the tax. This may be due to the poor records of population
or may be an inability to reach rural areas for collection of taxes. Low tax revenue
makes it difficult to develop the institutions.
• Lack of property rights: In many countries, there is a lack of well-developed system
of property rights. Some properties are already allotted traditionally or sometimes
even the ownership is not known and they remain vacant. This leads to a wastage of
land property and thus prevents development of the society.
• Political instability: Economic activities may stop if there is political instability in the
country. This leads to low or no investments in infrastructures in economies.
• Formal and informal markets: Formal markets are organised, whereas

informal markets are unorganised. The activities in the formal markets are
recorded, whereas activities in the informal markets cannot be recorded as
there are no proper institutions existing in informal markets.
10._____________can be comprised of banking systems, infrastructure, laws, contracts,
protection of property rights, the rule of law, government bureaucracies, financial markets
etc
11. Each institution has its own code of conduct. (True/ False)
12. _____________may or may not be conducive to an economic progress.
6. CONCEPT MAP
Fig. 3: Concept Map

7. SUMMARY
• Technology is an important driver of economic development for any country. It allows

more and efficient production of goods and services, on which prosperity depends on.
Technology can be defined as a huge body of knowledge and tools that allows to
produce goods and services efficiently and innovatively.
• Technology improves the efficiency of labour that leads to higher profits, as well as
economic development. The innovation in technology brings newer and better goods
and services that help improve the standard of living.
• Humans are the main production factor contributing to economic development but
are also the main receiver of the benefits of economic development. The working
population puts a favourable influence on economic development through labour
productivity, quality of workers activities etc. Their skills, education, and training
have a direct effect on the growth of an economy.
• Nature helps to satisfy the needs and maintain the environmental balance. Everything
material in the economy comes from the natural resources such as coal, oil, soil,
water, land and minerals. Natural resources are fixed in quantity and are non-
renewable, therefore it is our duty to conserve them as they are important for the
development of a country.
• Every country needs some framework for achieving the economic development. The
factors of production such as land, labour, capital etc. are important, but for using
them, proper arrangements or systems are required, which are called institutions.
• Institutions are comprised of banking systems, infrastructure, laws, contracts,
protection of property rights, the rule of law, government bureaucracies, financial
markets etc.
• The growth of the types of institutions in the countries dominate the process of
economic development. Economic development occurs when institutions are able to
generate economic opportunities, which lead to higher standard of living.

8. GLOSSARY
• Economic Development: This implies the creation of wealth from which economic
benefits are realised.
• Entrepreneurship: It is the process of developing and managing a business venture
to gain profit.
• Institutions: It is a large and important organisation with particular purpose, such as
a bank, a school, a financial company etc.
• Joint ventures: It is defined as a business arrangement in which two or more parties
agree to pool their resources to accomplish a specific task.
• Non-renewable resource: It is a resource which cannot be readily replaced by
natural means.
Short Questions
Q1. Explain the role of technological factors affecting economic development?
Q2. Describe the importance of human resources in the economy?
Q3. Discuss few important natural resources of India?
Q4. Explain the role of technology in environmental management?
Q5. What are the types of institutions in an economy?
Long Questions
Q1. “Since the beginning of the history of mankind, technology has developed and
continued to evolve.” In light of this statement, explain the historical evidences of
technology?
Q2. Explain the role of institutional factors in economic development?

10. ANSWERS
1. Technology
2. a. Material Technology
3. True
4. Human resources
5. Human Development Index
6. Capital
7. Iron, Copper, Aluminium, Gold, Silver, Bauxite, and Manganese
8. False
9. False
10. Institutions
11. True
12. Socio-political institutions
TERMINAL QUESTIONS
Short Questions
ANSWER 1. The technology is transforming everything. It is changing the nature of
markets, as well as products. It is increasing the productivity and exposing the
organisations to new ideas and business models. Technology improves the efficiency of
labour that leads to higher profits, as well as economic development. The innovations in
technology brings new and better goods and services that improve the standard of living.
Refer to Section 2.Role of Technology Factor in an Economy.
ANSWER 2. Skilled human resources of a country help increase the production of different
goods and services. They bring new technology that is necessary for development in a
country. There are other roles of human resources, such as the development of
transportation and communication, the supply of labour, etc.
Refer to Section 3. Role of Human Factor in Economic Development

ANSWER 3. The most important natural resources of India are as follows:

• Coal: India has one of the largest reserves of coal in the entire world. Jharkhand,
Orissa, Chhattisgarh, and West Bengal have good reserves of coal.
• Oil: India is rich in oil with the highest number of reserves of crude oil in the areas
such as Assam, Gujarat, and the Western, as well as Eastern Offshores.
• Natural Gas: The Eastern and Western Offshores have the highest amount of natural
gas reserves in India. Assam and Gujarat have the leading reserves of natural gas in
the country.
• Metallic Minerals: These include iron, copper, aluminium, gold, silver, bauxite,
manganese etc.
Refer to Section 4. Role of Natural factors in Economic Development
ANSWER 4. The degradation of environment affects the livelihoods, health, and

vulnerability of poor people in terms of air and water pollution, regional issues include acid
deposition, land degradation, and desertification. The changes in the environment can
badly affect the incomes of poor people who are dependent on natural resources for their
livelihood. Technology has shaped the society, the economy, and the environment.
Refer to Section 2.Role of Technology Factor in an Economy.
ANSWER 5. There are different types of institutions in an economy such as:

• The banking system
• The educational system
• Healthcare system.
• Infrastructure
Refer to Section 5. Role of Institutional Factors in Economic Development
Long Questions
ANSWER 1. As per the scientific thoughts, there are three main stages of technological
progress such as production (up to the first industrial revolution), machine-industrial
system, and age of automation. The first technological evidence can be seen during the first
industrial revolution in the 18th century. It was caused by the replacement of

manufacturing system with an industrial system. Refer to Section 2.Role of Technology

Factor in an Economy.
ANSWER 2. Economic development occurs when institutions are able to generate

economic opportunities, which leads to higher standard of living. That is why, appropriate
atmosphere is necessary for economic development. The right atmosphere can be of social,
economic, legal, and political institutions in the country. Institutions influence economic
growth by providing growth to entrepreneurship, technological changes, and employment
opportunities.
Refer to Section 5. Role of Institutional Factors in Economic Development
11. SUGGESTED BOOKS AND E- REFERENCES

BOOKS
• Ellul, J. (1964). The technological society. New York: Knopf.
• Harbison, F., & Myers, C. A. (1970). Education, manpower and economic growth:
Strategies of human resource development. London: McGraw-Hill.
• Murphree, M. W. (1993). The role of institutions. Airlie, VA: Liz Claiborne Art
Ortenberg Foundation.
REFERENCES
• Institutions and Economic Development. (n.d.). Retrieved from
https://jhupbooks.press.jhu.edu/title/institutions-and-economic-development
• Role of Human Resource in Economic Development of Country - Economics Notes
Grade XI. (n.d.). Retrieved from https://www.merospark.com/content/197/role-of-
human- resource-in-economic-development-of-country/
• TECHNOLOGY AND ECONOMIC DEVELOPMENT: RETROSPECTIVE. (n.d.). Retrieved
from
https://www.researchgate.net/publication/309887394_Technology_and_economic_d
e velopment_Retrospective/fulltext/5825c48608aeebc4f8a1d390/Technology-and-
economic-development-Retrospective.pdf

SEMESTER 2
DCM1206

Unit 3
Factors of Economic Development: Part 2
Table of Contents
Fig No /
SL SAQ /
Topic Table / Page No
No Activity
Graph
1 Introduction - -
3
2 Capital Formation and Economic Development 1,2 1
2.1 Significance of Capital Formation - - 4–9
2.2 Process of Capital Formation - -
3 Productivity Ratios and Economic Development 3 2
3.1 Types of Productivity Ratios - - 10 – 12
3.2 Productivity Determining Economic Development - -
4 Other Determinants of Economic Development - 3 13 – 16
6 Summary - - 17
7 Glossary - - 17
9 Answers - - 18 – 20

1. INTRODUCTION
In the previous unit, you learned about some indicators of economic development. This
unit continues with some more indicators of economic development that are capital
formation, productivity, some external factors, political stability, etc.
A nation’s development is not possible without an adequate capital. Capital refers to the
stock of all the produced means of production that an economy possesses at a point of time.
It can also be defined as the means of production that are produced through manpower
such as plant, machinery, tools, instruments, etc.
Capital formation is the addition to the existing stock of capital. The higher the rate of
capital formation in the economy, the faster is the pace of economic development. The
deficiency of capital in the nation is the major cause of underdevelopment in the third-
world economies. Various developed countries such as Japan have been able to attain
higher rate of capital formation to trigger rapid economic development. Process of capital
formation involves saving and mobilisation of savings, and conversion of savings into
capital goods through investment. Higher capital formation in an economy ensures a
continuous rise in economic growth, generates employment, facilitates technical progress,
and prompts infrastructural development.
Productivity is also the other major determinant of economic development, which

measures output as per unit of input. It measures how efficiently the inputs, such as labour
and capital, are being used to produce a given level of output in an economy. It is used as a
basic statistical information for many international comparisons and country performance
assessments.
This unit explains the capital formation and economic development. You will also learn
about the significance of capital formation and process of capital formation. The unit will
also describe the relation between the productivity and economic development. In the end,
you will learn about some other determinants of economic development.
Learning Objectives
❖ Explain capital formation and economic development
❖ Describe productivity ratios and economic development
❖ Elaborate on the other determinants of economic development

2. CAPITAL FORMATION AND ECONOMIC DEVELOPMENT

One of the most important man-made factors of production in a developing country is
capital. Capital formation can be defined as capital accumulation, a part of country’s current
output that is not consumed or exported during the accounting period. In other words, it is
an addition to the stock of capital goods, such as equipment, tools, transportation, and
electricity. The higher the capital formation of an economy, the faster an economy can grow
its aggregate income.
Producing more goods and services can lead to an increase in the national income levels.
Countries with large household savings can accumulate funds for producing capital goods
faster. The capital formation diverts the part of society’s currently available resources to
the expansion of output in future.
For the economic development of a country, capital formation plays an important role in
the following manner:
• Capital increases the volume of national output through changes in the scale or
technology of production.
• Capital raises the volume of production by providing necessary tools and inputs
• Capital increases employment opportunities for the growing number of labour force
• Accumulation of capital results in increased supply of tools and machinery per worker
2.1 Significance of Capital Formation

The key factor in the economic development of an economy is capital formation. According
to Prof. Nurkse, “Capital formation can help in breaking the vicious circle of poverty in
underdeveloped countries.” By fully utilising the available resources, capital formation
accelerates the pace of development. It increases the size of income and output. Fig. 1
shows the significance of capital formation:

Fig. 1: Significance of Capital Formation

Following is the significance of capital formation:
• Formation of Sound Infrastructure: Capital accumulation helps in establishing the
infrastructure of the countries. Basic capital goods help in the development of
economy, especially in the least developed countries.
• Using Different Methods of Production: The process of capital formation helps in

using the complex methods of production, which help in the advancement of
economy. This also leads to a rapid growth in production.
• Development of Human Capital Formation: The formation of capital helps in the

qualitative development of human resources. A good amount of capital is required for
people’s education, training, health, social, and economic security.
• Improvement in Technology: Capital formation helps in creating an easy

environment for technological changes in the economy. With good amount of capital
in economy, the new technology can be easily adapted.
• High Rate of Economic Growth: The higher rate of capital formation in a country
implies the higher rate of economic growth in an economy. The rate of capital
formation is very low in the underdeveloped countries.

• Agricultural and Industrial Development: This needs sufficient amount of funds for
setting up of different heavy or light industries. The capital is needed for technology,
infrastructure, and tools in the industry.
• Increase in National Income: The increase in the production leads to increase in the
national income, which further leads to greater production. The production can be
increased only when there is enough capital. Thus, we can say that the rate of growth
of national income necessarily depends on the rate of capital formation.
• Expansion of Economic Activities: When there is high rate of capital formation,

there is an increase in the productivity, which leads to the capital being utilised in
more profitable and extensive ways. More economic activities can be planned. More
capital would mean more production. The capital formation leads to investments,
which increases the per capita income that enhances the purchasing power. Thus, this
is a vicious circle that is positive for economy and helps get rid of poverty and attain
economic development in the economy.
• Less Dependence on Foreign Capital: A country with low capital tends to depend
upon the foreign capital, leading to an increase in the burden of interest. But, with
capital formation, a country is more dependent on its internal resources, which help
attain self- sufficiency and can get rid of dependence on the foreign capital as well.
Capital formation is a principal solution to the problems of poor countries. Public can get
more facilities as capital formation increases the economic welfare by raising the standard
of living in an economy.
Exhibit: Factors Responsible for Lower Capital Formation

Following factors attribute to the low capital formation in the economy:
• Low Per Capita Income: This results in lower savings, which is the main source
of capital formation.
• Large Size of Population: Large population leads to increase in consumption
expenditure. Higher consumption expenditure means lower savings, as well as
again less capital formation.
• Inflation: This refers to less income for further investments, implying a low rate
of capital formation.
• Lack of Investment-Friendly Environment: The lack of banks and other
financialinstitutions in the economy suppresses the environment of investments.

2.2 Process of Capital Formation

Economic development is not possible without using industrial machinery, agricultural
tools, bridges, factories, roads, railways, etc., which come under capital. All these capital
goods increase the productive capacity of the economy. Every year formation of capital
goods increases the national product. It is necessary to have a continuous formation to
provide tools and infrastructure for production. If the population of a country goes on
increasing without any capital formation taking place, then the growing population would
not be able to get resources for production, which will seriously affect the economy.
Therefore, capital formation is an essential step towards economic development.
Capital formation undergoes three main stages; these are shown in Fig. 2:
Creation of saving
Mobilisation of saving
Investment of saving
Fig. 2 : Process of Capital Formation
1. Creation of Saving: The first stage of capital formation starts with savings. For the
savings, sometimes, the current consumption has to be sacrificed for the future one.
For example, if a society consumes everything which is produced, then there will be a
fall in consumer goods in future, therefore, saving is an essential step.
2. Mobilisation of Saving: This involves using savings into investible funds. For this, the
banks and financial institutions must exist as they will help investors to channelize
their savings.
3. Investment of Saving: This stage involves the investment of savings into the
production of capital goods. This is possible with the help of efficient and skilled
entrepreneurs, who are ready to make investments for the production of capital
goods.

The economic development is said to take place when the national income exceeds the level
of consumption which means saving has occurred. The important condition for capital
formation is the positive value of investment. The investible resources should be used for
the production of capital goods than the consumption goods.
EXHIBIT: Capital Formation in India
Following data from the Reserve Bank of India shows certain estimates as per the
Survey of Professional Forecasters (SPF), since September 2007. The survey results
are presented in terms of median forecasts, along with quarterly paths for key
variables.
• Real gross domestic product (GDP) is likely to contract by 5.8 percent in 2020–21
but it is expected to recover next year, when it is likely to grow by 7.4 percent.
• Real private final consumption expenditure (PFCE) is likely to contract by 6.0
percent during 2020–21 but likely to expand by 8.0 percent during 2021–22.
• Real gross fixed capital formation (GFCF) is expected to record a large decline of
9.8 percent in 2020–21; it is projected to grow by 6.8 percent in 2021–22.
• Forecasters have assigned higher probability to real GDP growth lying between
(˗)6.0 and (˗)5.1 percent in 2020–21. For 2021–22, highest probability has been
assigned to GDP growth lying between 7.0 and 7.4 percent
• Real gross value added (GVA) is expected to decline by 5.8 percent in 2020–21,
though the agricultural activities are projected to expand; it is likely to record up
to 7.0 percent growth in 2021–22 supported by the improvements in industrial
and services activities.
Source: https://m.rbi.org.in/Scripts/PublicationsView.aspx?id=19718

1. Capital Formation is also called as __________
2. Formation of capital helps in the qualitative development of human resources.
(True/ False)
3. For the mobilisation of saving, the savings are used in _________. For this, the banks
and financial institutions must exist that will help investors to save.
4. The investible resources should be used for the production of _________goods
rather than the consumption goods.

3. PRODUCTIVITY RATIOS AND ECONOMIC DEVELOPMENT

Productivity can be defined as the physical relationship between the output and input.
Here, output is a quantity produced and input is the quantity of resources used in the
production.
The input is the resources used such as land, building, equipment, machinery, materials,
labour, etc., and output is the total production in terms of units or in terms of revenues.
Fig.3 shows the concept of productivity:
Fig. 3: Concept of Productivity

The main determinant of living standards is productivity. Productivity measures how an
economy uses the available resources of inputs to attain output.
Important factors in determining productivity are new machines, technologies, and

techniques. This can be explained with the example of the USA. In 1790, around 90% of the
working population was employed in farming, but in 2000, only 1.9% of the population was
employed in farming. This has happened because the technology has raised the productive
capabilities of the people.
Higher productivity can lead to:

• Low average costs, further leading to lower prices of goods, higher demand, more
output, and an increase in employment.
• Improved trade performance in the industry
• Increase in income per capita, which results in improvement of the standard of living
• Captures the international market and helps to increase GDP

• Reduces waste and improves the working environment

• Higher profits to entrepreneur, which are re-invested for future financial needs
• Overall prosperity and growth of an economy
Productivity growth constitutes an important element for productive capacity of an
economy. It determines the capacity utilisation in an economy where the position of
economies in the business cycle can be understood.
3.1 Types of Productivity Ratios

A simple way to calculate the productivity ratio is output over input. Apart from this, there
are some other productivity ratios used for calculating the productivity, especially in
organisations.
Some of the productivity ratios are as follows.
• Total Asset Turnover = Net Sales over Total Assets; this measures the efficiency of
assets in producing the sales.
• Fixed Assets Turnover = Net Sales over Fixed Assets; this measures the efficiency of
fixed assets in producing the sales.
• Current Assets Turnover = Net Sales over Current Assets; this measures the
efficiency of current assets in producing the sales.
STUDYNOTE
Productivity ratios highlight a fraction of output over input. Output can be defined as
the amount produced by an individual, machine, business, or any industry while input
is what can be put in a process or a system, or business for the purpose of producing
profit.
3.2 Productivity Determining Economic Development

Productivity, as discussed above, refers to achieving greater outputs from same amount of
input and creating more from less. It raises the living standards of people by decreasing the
monetary investments in everyday necessities, makes consumers wealthier and businesses
more profitable.

Productivity drives the economic development by increasing the power of an economy and
satisfying more human needs with the same resources. Economic development is increased
by increase in GDP and overall economic outputs.
The productivity is important not only as a whole for nation but for individuals too. Let us
learn how the productivity is important within a system from an economic standpoint:
• Consumers/Workers: The increased productivity leads to improved standard of

living at the micro level. When there is more efficiency in a system, there is less
requirement of inputs for generating goods. This reduces price points and minimises
the working hours for the participants within an economy, leading to high levels of
consumption.
• Businesses: Businesses with higher productivity enjoy benefits from creating more
outputs with the same or fewer inputs, better profits, and lower costs. Apart from this,
productivity also helps in providing better compensation to employees and more
working capital.
• Governments: Higher economic growth due to high productivity in the economy lead
to larger tax payments from governments. These tax payments help in doing
investments in infrastructure and social services.
5. What is the formula for productivity?
6. Current Assets Turnover = Net Sales over Fixed Assets (True/ False)
7. What are the inputs used in production?

4. OTHER DETERMINANTS OF ECONOMIC DEVELOPMENT

We have learned about various determinants of economic development – Technological,
human, natural, institutional, capital formation and productivity rations in the previous and
this unit.
Let us discuss some other important determinants of economic development.
• Occupational Structure: The occupational structure is the working population of the

country. More the working population in the primary sector, less will be the economic
development of a country. In India, increasing pressure of working population on
agriculture and other primary occupations has, with time, shifted to the secondary
and tertiary sector. When the workforce shift from primary sector to secondary or
tertiary sector, the rate of economic development and level of per capita income
increases.
• External Factors: For the economic development of a nation, it is necessary to have

active support of external factors. Domestic resources alone cannot meet the
requirements of resources that are necessary for economic development. Therefore,
the availability of foreign resources is helpful in determining the level of economic
development in a country.
Following are the external factors that play an important role in sustaining economic
development:
o Export earnings to finance the increasing import bills required for development
o Increased flow of foreign capital in the form of direct foreign investments
o Foreign aid from advanced countries like the USA, Japan, etc.
• Politico-Legal Environment: The stability in an economy is necessary for a

favourable development of the economy. Industrial policy reforms, labour reforms,
and proper judicial system of country serves the course of development. The
legislature and the judiciary should work hand in hand to create a better investment-
friendly environment for development.
Political instability in an economy leads to a collapse of government due to various

reasons between various political parties. There is a deep relation between the

economic development and political stability. There is an uncertainty with an

unstable political environment as it may reduce investments on public infrastructure,
which reduces the pace of economic development.
• Cultural Environment: Culture also plays an important role in guiding a population

along a particular path. A sound cultural setup is necessary to build a better non-
economic environment, which is conducive towards economic development. Cultural
activities improve the thinking of the people and develop a sense of boldness amongst
various sections of people living in the society. This creates a better environment for
development.
EXHIBIT: Effect of cultural values on Economic Development
Following is the article from HEC Paris, a world class business school that explains the
roleof culture in economic development.
“Over the last 10 years, economists such as Guiso, Sapienza, and Zingales have been
exploring the relationship between culture, values, individual preferences, and the
economy, focusing on the unidirectional impact of culture on the economy. They have
demonstrated empirically, for example, the level of trust that people have in their
country’s institutions and fellow citizens influence many aspects of economic activity
(such as international trade). In parallel, Thierry Verdier and Alberto Bisin have
proposed models where the transmission and inheritance of cultural traits are linked to
a person’s preferences and resources.”
The decision to transmit a cultural heritage is a compromise between preferences,

cost, and access to information. Based on this approach, it is possible to analyse the
influence of economic activities and social institutions on the dynamics of
preferences, values, and beliefs. Cultural transmission is seen, therefore, as the
outcome of interactions between decisions around socialisation within the family
and other socialisation processes, such as social imitation. When parental values are
aligned with those of society, they trust their environment and expend less effort to
educate their children. Transmission comes at a cost. In times of economic change or
shock, therefore, when the values of the wider environment are in flux, there may be
an impact on the transmission of family values.
An economic shock – such as the opening of a market – can bring about permanent
changes in personal values, cultures, and preferences in a way that is not easily
reversible

The spiral of cultural and economic change
“Olivier, Maystre, Thoenig and Verdier use the above model of cultural transmission
to develop an understanding of the dynamic that links globalisation and individual
cultural preferences and values. They show that the relationship is part of a
snowball effect. When a country opens its doors to international trade, goods
designed for a “global consumer” arrive on its market, thereby raising the welfare of
people who are responsive to this type of product and conversely lowering the
incentives of parents to transmit local cultural traits to their offspring. Over time,
the supply of globalised products further increases to meet demand, thereby
resulting in a self-sustaining cycle.”
The above dynamic naturally leads to greater value conflicts between generations,
as younger people adopt the cultural attributes symbolised by traded goods.
Individuals, non- governmental organisations, and countries may then grow to fear
open borders for non- economic reasons. The model advocated by the authors
suggests that, once a market has opened up, it is difficult to back pedal with new
restrictions on international trade, and that these periods of market opening have a
far greater impact on changes in the cultural distance between countries than
periods of trade restriction.
The dynamics of globalization
The empirical study carried out by the authors using the World Values Survey
between 1989 and 2004 confirms the model’s predictions. The average cultural
distance between countries decreased over the period, disproving the position taken
by economists such as Guiso, Sapienza, and Zingales, who view culture as an
invariable factor. Most importantly, when two countries open up to international
trade, it results in a steeper reduction in the cultural distance between them than
between countries which did not experience anincrease in the level of their bilateral
trade. This dynamic is even more pronounced when the traded goods are
differentiated. The effect is finally found to be stronger when focusingon the answers
of younger people to the survey.
Source:https://www.hec.edu/en/knowledge/articles/culture-and-economy-
understanding-dynamics-globalization

8. The occupational structure is the______________.
9. The legislature and the judiciary should work with cooperation. (True/
False)
10. When the workforce shift from primary sector to secondary or tertiary
sector, there is an increase in the rate of:
a. Economic development
b. Level of per capita income
c. Population
d. Economic development and level of per capita income.
5. CONCEPT MAP
Fig. 4: Concept Map

6. SUMMARY
• Capital formation can be defined as capital accumulation, a part of country’s current

output that is not consumed or exported during the accounting period.
• The higher the capital formation of an economy, the faster an economy can grow.
• By fully utilising the available resources, capital formation accelerates the pace of
development. It increases the size of income and output.
• Capital formation undergoes three main stages such as Creation of saving,
Mobilisation of saving, and Investment of saving.
• Productivity can be defined as the physical relationship between the output and input.
Output is the quantity produced and input is the quantity of resources used in the
production. The input is the resources used that are land, building, equipment,
machinery, materials, labour, etc. and output is the total production in terms of units
or revenues.
• Productivity drives the economic development by increasing the power of an
economy and satisfying more human needs with the same resources. Economic
development is increased with an increase in gross domestic product and overall
economic outputs.
7. GLOSSARY
• Asset Turnover: This is the ratio of total sales or revenue to average assets.
• Fixed Assets: These are the long-term assets that a company has purchased for the
production of goods.
• Investible: This means to commit or invest to gain a financial return.
• Productivity: This is a ratio between the output and inputs.
• Occupational Structure: It implies the allocation of occupations organised according
to skills or economic functions.

Short Questions
Q1. What is capital formation?
Q2. Describe the process of capital formation in an economy?
Q3. What is productivity? How is it calculated?
Q4. What are the different types of productivity ratios used in organisations?
Q5. Explain how productivity determines the economic development.
Long Questions
Q1. Explain the significance of capital formation in an economy.
Q2. Apart from capital formation and productivity, explain the other determinants of
economic development.
9. ANSWERS
1. Capital accumulation
2. True
3. Investible funds
4. capital
5. Productivity = output/input
6. False
7. Land, building, equipment, machinery, materials, labour, etc. and output
8. Working population of the country
9. True
10. d; economic development and level of per capita income
Short Questions
ANSWER 1. Capital formation can be defined as a capital accumulation, a part of country’s
current output that is not consumed or exported during the accounting period. In other
words, capital formation is an addition to its stock of capital goods, such as equipment,
tools, transportation, and electricity.

For more details, refer Section 2. Capital Formation and Economic Development.
ANSWER 2. The process of capital formation can be explained through following steps:
a. Creation of saving
b. Mobilisation of saving
c. Investment of saving
For more details, refer Section 2. Capital Formation and Economic Development.
ANSWER 3. Productivity can be defined as the physical relationship between the output
and input. Here, output is the quantity produced and input is the quantity of resources used
in the production.
For more details, refer section 3 Productivity Ratios and Economic Development.
ANSWER 4. The different types of productivity ratios are total assets turnover, fixed assets
turnover, and current assets turnover.
For more details, refer Section 3 Productivity Ratios and Economic Development.
ANSWER 5. Productivity drives the economic development by increasing the power of an

economy and satisfying more human needs with the same resources. Economic
development is increased with an increase in GDP and overall economic outputs.
For more details, refer Section 3 Productivity Ratios and Economic Development.
Long Questions
ANSWER 1. The following points show the significance of capital formation:
• Formation of Sound Infrastructure
• Using Different Methods of Production
• Development of Human Capital Formation
• Improvement in Technology
• High Rate of Economic Growth
• Agricultural and Industrial Development
• Increase in National Income
• Expansion of Economic Activities
• Less Dependence on Foreign Capital

For more details, refer Section 2.2. Capital Formation and Economic Development.
ANSWER 2. The other determinants of economic development are occupational structure,

external factors, politico legal environment, and cultural environment.
For more details, refer Section 4 Other Determinants of Economic Development.
BOOKS
• Balakrishna, R. (1968). Economic development in India. Dharwar: Karnatak
University.
• Jones, R. H. (1976). Capital formation: A Businessman’s Views. New York: American
Assembly.
• Kock, C. A., Lombard, J. A., & Stadler, J. J. (1980). Political Stability. Johannesburg.
REFERENCES
• Ejim, E. (n.d.). What Is the Relationship Between Economic Growth and Stability?
Retrieved from https://www.infobloom.com/what-is-the-relationship-between-
economic- growth-and-stability.htm
• Kock, C. A., Lombard, J. A., & Stadler, J. J. (1980). Political Stability. Johannesburg.
• The Economics of Productivity - Harvard University. (n.d.). Retrieved from
https://scholar.harvard.edu/files/jorgenson/files/econofproductivity_elgar_2009.pdf

SEMESTER 2
DCM1206
Unit 4: Planning In India and Five – Year Plan 1

Unit 4
Planning in India and Five-Year Plans
Table of Contents
Fig No /
SL SAQ / Page
Topic Table /
No Activity No
Graph
1 Introduction - -
3
2 Planning in India - 1
2.1 History of Planning in India - -
2.2 Process of Planning in India - - 4–8
2.3 Features of Planning in India - -
2.4 Objectives of Planning in India - -
3 Five-Year Plans in India - 2
3.1 First Five-Year Plan (1951–1956) - -
3.2 Second Five-Year Plan (1956–1961) - -
3.3 Third Five-Year Plan (1961–1966) - -
3.4 Fourth Five-Year Plan (1969–1974) - -
3.5 Fifth Five-Year Plan (1974–1978) - -
3.6 Rolling Plan (1978–1980) - -
9 – 21
3.7 Sixth Five-Year Plan (1980–1985) - -
3.8 Seventh Five-Year Plan (1985–1990) - -
3.9 Eighth Five-Year Plan (1992–1997) - -
3.10 Ninth Five-Year Plan (1997–2002) - -
3.11 Tenth Five-Year Plan (2002–2007) - -
3.12 Eleventh Five-Year Plan (2007–2012) - -
3.13 Twelfth Five-Year Plan (2012–2017) - -
5 Summary - - 23 – 24
6 Glossary - - 24
8 Answers - - 25 – 27

1. INTRODUCTION
In the previous unit, you learned about the different indicators of economic development.
The countries form different planning processes for economic development. In India, Five
Year Plans were formed from 1951 till 2014. When Indian Constitution came into action in
January 1950, the planning commission was set up in March 1950. The first eight five-year
plans focused on growing the public sector with huge investments in industries. From the
ninth-five-year plan in 1997, the focus shifted towards making government a growth
facilitator.
The main objectives of these Five-Year Plans were high-growth rate to improve the living
standards of the people, economic stability, self-reliant economy, social justice, and
modernisation of the economy.
The first Five-Year Plan was launched from 1951 to 1956 and these plans continued till
2015. These were laid to rest by Narendra Modi-led NDA government. Therefore, the 12th
Five- Year Plan was the last Five-Year Plan of India. Thereafter, these plans were replaced
by setting up of a new institution called National Institution for Transforming India (NITI)
Aayog, in 2015, which aimed at serving the needs and aspirations of the people.
In this unit, you will learn about the objectives of planning in India and its historical
importance. You will also be acquainted with the objectives and conclusions of all the Five-
Year Plans in India.

❖ Describe the Planning in India
❖ Explain the History of Planning in India
❖ Elaborate on the Five-Year Plans in India
❖ Explain the Objectives of Each Five-Year plan

2. PLANNING IN INDIA
We know that our country India was very backward during independence. British rule
made a lot of exploitation, which made people very poor. The political freedom was
attained; however, economic freedom was not attained, which is the removal of mass
poverty from India. At that time, there was a lack of entrepreneurs in India who could have
used the natural resources for economic development. It was necessary to improve the
living standards of people to bring economic development to the nation.
Thus, to improve that condition, the planning constitution was setup, which aimed at
preparing the Five-Year Plans to prioritise employment opportunities and removal of
poverty.
Various economists recognised the need for economic growth that was only possible if the
rate of saving and investment would rise. There was the need for involvement of both state
and private governments. In the plans, emphasis was laid on the development of basic
heavy industries and capital goods industries. There was the need of land reforms in
agriculture and development of infrastructure, such as irrigation and roads were necessary
where a planning and state could play an important role.
Though the planning for economic development started in India, in 1951, but its idea began
much earlier, even before the independence. Various committees and plans were built such
as National Planning Committee by Indian National Congress in 1938, The Bombay Plan &
Gandhian Plan in 1944, and Peoples Plan in 1945.
Not only India, but the concept of First Five-Year Plan had already started in Soviet Union
in 1920s, with other countries also starting it.
In India, the first FYP was launched in 1951 under a socialist influence of first Prime
Minister, Jawaharlal Nehru. The aim was to achieve a rapid rise in the standard of living of
the people by offering opportunities to all for employment and efficiently exploiting the
resources of the country.
STUDYNOTE
Planning is “thinking in advance what is to be done, when it is to be done, how it is to be

done, and by whom it should be
done. ”
2.1 History of Planning in India

After the independence, India faced many problems such as the backward agriculture
sector and low level of productivity. With increased poverty, the demographic profile was
unbalanced with high-infant mortality rate, low-birth rate, high-death rate, low rate of
literacy, etc. Other powerful disturbances included infrastructure deficiency, corruption in
politics, and unemployment. Thus, the Five-Year Plans were aimed at solving these
disturbances.
In India, the First Five-Year Plan was launched in 1951. The next two plans were launched
till 1965. After this, the annual plans were formed for three years from 1966 to 1969,
because of two successive years of drought, devaluation of the currency, and a general rise
in prices. In 1969, the Fourth Five-Year Plan was started. Due to changing political
situation, the eighth plan could not take off in 1990, and thus the years 1990–91 and 1991–
92 as treated as annual plans. The eighth plan was finally launched in 1992. After this, the
Ninth till Twelfth Five- Year Plans were successfully launched.
The central theme of all the Five-Year Plans was to relieve poverty with the equal
distribution of social and economic benefits.
2.2 Five Stages of Planning process in India

First Stage:
Three years prior to the start of a new plan, the first stage of planning begins. Conducting
research allows for the detection of economic status and difficulties. The results of these
investigations are used to create a broad framework for the plan, which is subsequently
presented to the Cabinet. Then it's on to NDC, which shows the growth rate and key
priorities that the plan is aiming for.
Second Stage:
In the second step, the Planning Commission determines the plan's overall dimensions in
light of the NDC's requirements, and a draught memorandum summarising the plan's
elements is prepared.
Third Stage:

The draft memorandum is subsequently presented to the National Development Council for
consideration, after which work on the plan's draft framework begins. Following that, the
state and federal ministries are invited to comment on the plan. This plan is circulated for
public discussion when NDC approves it. The informal consultative committee of
Parliament and Parliament as a whole then consider it.
Fourth Stage:
In the fourth stage, the Planning Commission discusses the plan with federal ministries and
state governments, as well as organised industries and the private sector. The Planning
Commission then writes a document outlining the key aspects of the issues that need to be
addressed further. This paper is then presented to the NDC and the Central Cabinet for
review. The plan's final report is based on the conclusions obtained in this document.
Fifth Stage:
After consulting with central ministries and state governments, a draft of the final report is
given to the NDC and the Central Cabinet for approval. It is then presented to Parliament
for discussion and approval once they have given their consent. Following the creation of a
comprehensive five-year plan, it is broken into annual plans for ease of implementation
and resource allocation
The state governments are in charge of implementing the strategy.
2.3 Features of Planning in India

The following are the features of economic planning:
1. Central Planning Authority: The Central Planning Authority is in charge of economic
planning in India. It was known as the Planning Commission in India. The Planning
Commission has been replaced by NITI Aayog, the National Institution for
Transforming India, from 2015.
2. A survey: A detailed economic survey is conducted for economic planning. The survey
comprises gathering information on human and natural resource availability and
utilisation.
3. Purposes: 'Economic planning is based on a set of predetermined goals. These goals are
both practical and adaptable.

4. Priorities and targets: Priorities are set according to the importance of each sector in
economic planning in order to accelerate economic development. The target is a
concrete step toward achieving predetermined objectives.
5. Resource mobilisation: The resources required to carry out plans are derived from a
variety of sources, including taxes, domestic savings, direct funding, public debt, and
external aid.
6. Plan period: The length of the plan is determined by the needs. Economic planning in
India is usually done for a five-year period.
7. Evaluation: The plan is evaluated on a regular basis, such as at the midpoint. This
allows for any necessary modifications in priorities and aims to be incorporated.
8. Economic planning is a never-ending process. Its goal is to help a country thrive

economically.
9. Coordination: In India, states and the central government collaborate on economic

planning. Coordination between the centre and the states is therefore assured in
economic planning.
2.4 Objectives of Planning in India

The main objectives of planning in India include the following:
• Increase in National Income: At the time of independence, the planning in India was
aimed at increasing the production with real per capita income, which leads to an
increase in the national income.
• Achieving Full Employment and Reducing Inequalities: The main reason for
poverty in a country is unemployment, which is a curse. Employment reduces poverty
and inequalities in a society. Planning removes inequality by increasing the income
levels of the poorer sections of the society.
• Removal of Bottlenecks: The challenges at the time of first planning in India
included the absence of basic industries, low rates of saving and investment,
inefficient technology, and insufficient infrastructure. Planning aimed at reducing
these bottlenecks.

• Industrialisation: Indian planning was also based on the industrialisation of an

economy. The main emphasis is on the heavy and basic industries. Though India has
assigned high priority to agricultural development, it still received poor attention. If
agriculture was developed well, this would have led to better formation of capital.
• Self-Reliance: The plans are aimed at achieving the self-reliance by lessening the
dependence on imports. The exports should be increased to achieve the competitive
strength in the global markets.
• Priority to Public Sector: In Indian planning, the public sector was assigned the first
place over the private sector for acquiring the heights of the economy and guiding the
private sector.
Thus, we can see that planning in India is aimed at the rapid economic growth, full
employment, self-reliance, and social justice. The five-year plans take the constraints and
possibilities during the period and make the necessary changes with time.
Let us discuss the different five-year plans in India.
1. The first FYP was launched in _____________
2. Years 1990–91 and 1991–92 were treated as the annual plans. (True/ False)
3. Indian planning was based on ________________ of the economy
4. The first FYP was launched in 1951 under the socialist influence of first Prime
Minister. Who was the first prime minister of India?

3. FIVE-YEAR PLANS IN INDIA

In 1951, the First Five-Year Plan in India was launched and since then, India has witnessed
twelve five-year plans. However, Indian government has discontinued the five-year plan
system from last few years. Let us discuss the five-year plans that the country has
witnessed till 2017.
3.1 First Five-Year Plan (1951–1956)

The first five-year plan, introduced in 1951, focused primarily on the development of the
primary sector, specifically agriculture. This plan was drafted by economist K.N. Raj, who
followed the Harrod–Domar model. According to this model, growth was dependent on two
things such as high level of savings and low capital-output ratio. Higher savings enabled
greater investments and low capital-output ratio ensured high-growth rate with efficient
investment.
The total budget was estimated to be Rs 2,069 crore, which got allocated in the following:
• Irrigation and energy (27.2%)
• Agriculture and community development (17.4%)
• Transport and communications (24%)
• Industry (8.6%)
• Social services (16.6%)
• Rehabilitation of landless farmers (4.1%)
• Other sectors and services (2.5%)
India was facing basic problems after the independence that is why the state played an
active role in all the economic sectors. The achievement was very good when the growth
rate was 3.6%, which was estimated at only 2.1%. The reason behind this was high yield
crops because of the monsoon season. Apart from this, there were high exchange reserves
and the per capita income, which increased to 8%. Due to a rapid population growth,
national income increased more than the per capita income. Some examples of the
irrigation projects included Bhakra, Hirakud, and Damodar Valley dams. Contracts were
signed to setup a steel plant. In the end of 1956, five Indian Institutes of Technology (IITs)
were set up as major technical institutions. To strengthen the higher education, University
Grants Commission (UGC) was also set up.

Exhibit: Presentation of the First Five-Year Plan
Following is a news article about the First Five-Year Plan.
All about the First Five-Year Plan that was presented by Nehru nearly 70 years ago
today
The First Five-Year Plan was presented before the Parliament on 9 July 1951. The target
GDP growth of the plan was 2.1%, but the country recorded a growth of 3.6% that year.
Sixty-nine years ago, on 9 July 1951, India’s first Prime Minister , Jawaharlal Nehru,
presented the First Five-Year Plan to the Parliament.
Five-year plans were a formal model of planning adopted by the Indian government
after Independence in order to maintain effective and balanced utilisation of resources.
They were formulated by the Planning Commission of India, which was established on
15 March 1950. Since it was not a constitutional body, the Commission reported directly
to the Prime Minister and its first Chairman was Nehru himself.
The Commission was tasked with a responsibility of raising the standard of living in the
country through proper allocation of resources, increasing production, and enabling
employment opportunities for everybody.
The Five-Year Plans were centralised and integrated national economic programs. The
first such plan was implemented in the Soviet Union in 1928 by Joseph Stalin. Since then,
countries such as China, Bhutan, Vietnam, South Korea, Argentina, Romania, and
Ethiopia have also implemented the Five-Year Plans.
According to Rajeev Gowda, Chairman of the Research Department of the Congress

party, it was the freedom fighter Subhash Chandra Bose who first set up a National
Planning Committee in 1938, whose primary responsibility was to utilise the then-
limited resources in the country for best possible use.
“After independence, the state had an active role in channelling resources as it could not be
done by markets alone,” explained Gowda.

First Five-Year Plan in India
With the partition as a backdrop, the country reeling with the coming of refugees,
severe food shortage, and mounting inflation, the First Five-Year Plan was
introduced in 1951. It focused primarily on the development of the primary
sector, specifically agriculture and irrigation.
Drafted by economist K.N. Raj, the plan was based on the Harrod–Domar model,
which suggested that growth was dependent on two things. Firstly, high level of
savings since higher savings enabled greater investment and secondly, a low
capital-output ratio that ensured efficient investment and a higher growth rate.
The plan had a target of 2.1 percent GDP growth for the fiscal year, however, it
ended up recording a growth rate of 3.6 percent that year.
Gowda explained that the five-year plans were focused on making India self-
sufficient, enabled industrial growth, and ensured that development went beyond
the urban areas and reached the interior parts of the country as well.
Source: https://theprint.in/india/all-about-the-first-five-year-plan-that-was-presented-by-
nehru- nearly-70-years-ago-today/457511/
3.2 Second Five-Year Plan (1956–1961)

Based on Mahalanobis model, the second plan, which was under Jawaharlal Nehru, focused
on the industrial development of the country. To maximise the economic growth, the plan
determined the optimal allocation of investment between the productive sectors. Following
are the objectives of the Second Five-Year Plan:
• Increase in the national income to raise the level of living.
• Rapid industrialisation of the country
• Expansion of employment opportunities by developing labour-intensive projects.
• Reducing inequalities of income and distribution.
The main highlights of this plan are as follows:

• Establishment of five steel plants at Bhilai, Durgapur, and Rourkela.
• Increase in the production of coal
• Addition of railway lines in North East

• Establishment of research institutes, such as The Tata Institute of Fundamental

Research and Atomic Energy Commission of India
• Search for talented young students to train for work in nuclear power.
The total amount allocated under the Second Five-Year Plan in India was INR 48 billion.
This amount was allocated among the following sectors:
• Power and irrigation
• Social services
• Communications and transport
The rapid growth in population led to fall in per capita income and rise in prices. The target
growth rate was 4.5%, whereas the actual growth rate was less, which was 4.27%. The
economist B. R. Shenoy criticised this plan because of too much dependence on deficit
financing for industrialisation. In 1957, India also faced a payment crisis. The food
production increased by 15% from 67 to 75 million tonnes.
3.3 Third Five-Year Plan (1961–1966)

The Third Five-Year Plan was known as Gadgil Yojna as it was based on John Sandy and
Sukhamoy Chakraborty's model. This plan mainly focussed on agriculture. However, the
focus from agriculture was shifted to the defence industry because of Sino-Indian war of
1962. This war exposed the weakness of the economy. Also, in 1965–1966, India fought a
war with Pakistan. At the same time, there was a severe drought, which increased the
prices and thus the priority was shifted to price stabilisation.
The main objectives of this plan are as follows:
• To achieve an increase in national income of over 5% per annum To enhance the
agricultural production and increase its exports
• To expand the basic industries such as chemicals industries, steel, power, and fuel
• To utilise the manpower resources to the fullest
The aim of this plan is to become independent and self-generating. The construction of dam
was continued and cement and fertilizer plants were also built. Abundance of wheat began
to produce in Punjab.

Thus, agriculture was given the top priority. Other work included in this plan is as follows:
• Establishment of many primary schools in rural areas
• Initiation of Panchayat elections
• Formation of state electricity boards & state secondary education boards
• States were made accountable for secondary & higher education.
This plan followed the specific approach towards the social objectives of constitution. The
victories and failures of the first two plans were recorded and based on that the current
plans were set. The target growth rate was 5.6 percent; however, the actual growth rate
was 2.8 percent. Therefore, this plan failed.
The failure of this plan forced the government to declare plan holidays from 1966 to 1969.
There was increased inflation, war, and lack of resources. Yearly plans were made where
priorities were given to agriculture and its associated sectors. The value of Indian rupee
was reduced to increase the exports. Thus, these annual plans absorbed the shocks of the
Third Five-Year Plans.
3.4 Fourth Five-Year Plan (1969–1974)

The Fourth Five-Year Plan was formulated under Indira Gandhi who was the Prime
Minister at that time. The two main objectives of this plan are growth with stability and
self-reliance economy. Following steps were taken under this plan:
• Nationalisation of 14 major Indian banks
• Start of green revolution that advanced the agriculture
• Implementation of the Family Planning Programmes
However, this plan also failed and was able to achieve a growth rate of 3.3% only against
the target of 5.7%.
The main reasons for failure were as follows:
• Poor monsoon in the last 3 years that led to fall in agriculture production
• Influx of Bangladeshi refugees
• Indo-Pakistani war led to the movement of funds from industrial development to the
war

3.5 Fifth Five-Year Plan (1974–1978)

The Fifth Five-Year Plan under Indira Gandhi gave priority to employment, agriculture,
defence, poverty alleviation, and justice. Following plans and actions were taken:
• Amendment of the Electricity Supply Act in 1975, which enabled central government
to enter into power generation and transmission
• The Twenty-Point Programme was launched, which included various socio-economic
aspects, such as housing, poverty, employment, education, agriculture, land reforms,
irrigation, drinking water, consumer protection, environment, e-Governance, etc.
• To accommodate the traffic, roads were widened and the Indian national highway
system was introduced.
• Introduction of the Minimum Needs Programme, which aimed at providing certain
basic minimum needs and improving the living standards of people
The target growth rate was 4.4 percent, whereas the actual growth achieved was 4.8
percent. However, the newly elected Morarji Desai government terminated this plan in
1978.
3.6 Rolling Plan (1978–1980)

As the Fifth Five-Year Plan was rejected by new government, the new Sixth Five-Year Plan
(1978–1990) was introduced, which was called as the Rolling Plan. The Rolling Plan
consisted of three kinds of plans that are discussed as follows:
• The First Plan: It was made for the present year which comprised the annual budget.
• The Second Plan: It was a plan for a fixed number of years, which may be 3, 4, or 5
years.
• The Third Plan: It was a plan for long-term period i.e., for 10, 15, or 20 years.
There are no fixed dates of the commencement and termination of these plans. These plans
were flexible and overcome the rigidity of five-year plans.
The main disadvantage was that in case the targets get revised each year, it is difficult to
achieve them in a five-year period scheme and they also lead to instability in the economy.
Therefore, in 1980 only, this plan was again rejected by the Indian National Congress
government and a new Sixth Plan was made.
STUDYNOTE
The rolling plan was introduced by the Janata party which was led by Moraaji Desai.

3.7 Sixth Five-Year Plan (1980–1985)

The Sixth Five-Year Plan focused on the increase in national income, modernisation of
technology, and decrease in poverty. The objective of this plan was the beginning of
economic liberalisation.
Following actions were taken under this plan:
• For the development of the rural areas, the National Bank for Agriculture and Rural
Development (NABARD) was established in 1982, under Shivaraman Committee.
• Expansion of the Family Planning Programmes to avoid overpopulation
• Military Five-Year Plans were also set
This plan was a great success to the Indian economy as they were based on the investment
Yojna and infrastructural change. The target growth rate was 5.2 percent and the actual
growth rate was 5.7 percent.
3.8 Seventh Five-Year Plan (1985–1990)

The Seventh Five-Year Plan was made under Rajiv Gandhi as the Prime Minister. The
emphasis is laid on the upgradation of technology that was required to improve the
productivity level of industries. Following were the main objectives of this plan:
• To grow in the areas of increasing economic productivity
• To increase the production of food grains
• To generate employment through social justice
This plan gave importance to the private sector than public sector. The Sixth Five-Year Plan
provided a strong platform to the Seventh Five-Year Plan because in the sixth plan, there
was growth in agriculture, controlled inflation, and favourable balance of payments.
Main areas of the Seventh Five-Year Plan were social justice, modern technology,
agricultural development, eradication of poverty, clothing, and shelter. Apart from this,
labour force was expected to grow by 39 million people and employment was expected to
grow by 4 percent every year. This plan saw a self-sustained economy with a contribution
from different voluntary agencies.
The actual growth rate was 6.01 percent against the target growth rate of 5.0 percent.
After this seventh plan, the eighth plan could not take off for two years because of political
instability at the centre. Thus, for years 1990 till 1992, the annual plans were formulated.

3.9 Eighth Five Year Plan (1992–1997)

Year 1991 was a period of economic instability in India and there was a crisis in foreign
exchange reserves as well. Therefore, the socialist economy was reformed under the
leadership of P.V. Narasimha Rao, who led one of the most important administrations in
India's modern history. This era also saw the beginning of liberalisation, privatisation, and
globalisation (LPG) in India, under Dr. Manmohan Singh, who launched India's free market
reforms that helped the country to get rid of bankruptcy.
In the Eighth Five-Year Plan, the major priority was given to the Modernisation of
industries. India also became a member of the World Trade Organisation on 1 January
1995. The major objectives included the following:
• Controlled population growth
• Poverty reduction
• Employment generation
• Institutional building
• Tourism management
• Human resource development
• Decentralisation
This plan undertook drastic policy measures to combat the bad economic situation. The
outcomes of this plan were rapid economic growth, growth of agriculture, growth in
exports and imports, and improvement in trade and current account deficit.
This was the successful plan as the target growth rate was 5.6 percent and the actual
growth rate was 6.8 percent.
STUDYNOTE
Liberalisation Privatisation Globalisation (LPG) model of development was introduced

in 1991 with the objective of making the Indian economy as the fastest developing
economy. The reforms of LPG model were referred to as ‘structural adjustments’. Post
LPG model, the growth of Indian economy went up as 8% per annum.

3.10 Ninth Five-Year Plan (1997–2002)

The Ninth Five-Year Plan under the Prime Minister Atal Bihari Vajpayee came after 50
years of Indian Independence. This plan focused on promoting the economic and social
growth of India. It gave priority to the social spheres of the country. This plan saw joint
efforts from the public, as well as private sectors for contributing to economic
development.
For fulfilling the targets, Special Action Plans (SAPs) were evolved during the Ninth Plan,
which covered the areas of water policy, social infrastructure, agriculture, and information
technology.
This plan saw a hike of 48% in plan expenditure. The share of centre was approximately 57
percent and states were 43 percent. The Ninth Five-Year Plan focused on the increasing
growth in the country with an emphasis on social justice and equity and correcting the
historical inequalities, which were still prevalent in the society.
The objectives of the Ninth Five-Year Plan were as follows:
• Eliminating poverty
• Developing self-reliance in terms of agriculture
• Providing primary education to all children in the country
• Controlling population
• Generating employment
• Ensuring proper availability of food and water for the poor
• Providing primary healthcare facilities
• Empowering the socially disadvantaged classes such as Scheduled castes, Scheduled
tribes, and other backward classes.
Following actions were taken:

• Taking new initiatives for meeting the challenges in the economy
• Using scarce resources efficiently
• Combining public and private support for increasing employment
• Achieving high rates of export to achieve self-reliance
• Providing services such as electricity, telecommunication, railways, etc.
• Empowering the socially disadvantaged classes of the country

However, the Ninth Five-Year Plan failed to achieve the target growth rate of 6.5 percent
and achieved only 5.4 percent. The agriculture industry grew slowly at a rate of 2.1 percent
against the target of 4.2 percent, whereas industry growth was 4.5 percent against the
target of 3 percent.
3.11 Tenth Five Year Plan (2002–2007)

The Tenth Five-Year Plan was followed under the leadership of Atal Bihari Vajpayee and
Manmohan Singh. The main objective of this plan is to double the per capita income of
India in the next 10 years. The poverty ratio was aimed to reduce to 15 percent by 2012.
The growth target was 8.0 percent but it achieved only 7.6 percent.
The main objectives of the Tenth Five-Year Plan are as follows:

• To achieve 8 percent GDP growth per year
• To reduce poverty rate by 5 percent by 2007
• To provide high-quality employment
• To reduction gender gaps in literacy and wage rates
The target growth was 8.1 percent, whereas the growth achieved was 7.7 percent. For
bringing down regional inequalities, the Tenth Plan was expected to follow a regional
approach.
3.12 Eleventh Five-Year Plan (2007–2012)

The Eleventh Five-Year Plan was made under Manmohan Singh as the Prime Minister. It
was prepared by C. Rangarajan. The main objective of this plan was to achieve rapid and
more inclusive growth. This plan achieved a growth rate of 8 percent against a target of 9
percent.
During the end of the tenth-year plan, India emerged as the fastest economy. The savings
and investment rates increased with the growth of the industrial sector. Still, the growth is
lacking due to the problems of poverty, mortality, unemployment, etc. Therefore, the
Eleventh Five-Year Plan came with a broad vision of components that include the following
objectives:
• To increase the enrolment in higher education of 18–23 years of age group by 2011–
12

• To focus on distant education and IT education institutions

• To emphasise on the social sector
• To reduce gender inequality
• To achieve environmental sustainability
• To increase the growth rate in agriculture, industry, and services
• To provide clean drinking water
• To connect every village by telephones
The target for domestic savings was 34.8 percent, whereas the achieved rate for savings
was 33.5 percent. This plan suffered from the issue of Price Stability. The realised GDP
growth rate for the agriculture, industry, and services sector was 3.7, 7.2, and 9.7 percent
against the target of 4, 10, and 9 percent (approximately), respectively.
3.13 Twelfth Five-Year Plan (2012–2017)

The Twelfth Five-Year Plan started at a time when the global economy was going through
financial crisis. Therefore, this plan emphasised to bring the economy back to rapid growth
by making sure that the growth is both inclusive and sustainable. By inclusiveness, the plan
meant poverty reduction, group equality and regional balance, reducing inequality,
empowering people, etc., whereas by environmental sustainability, the plan meant the
development of human capital through improved health, education, skill development,
nutrition, information technology, etc.
The challenge of this plan was to reverse the growth by reviving investment as quickly as
possible. This called for solving the problems related to infrastructure, which are holding
up large projects and tax-related issues that created uncertainty in the investment climate.
The Twelfth Five-Year Plan of the Government of India decided to achieve a growth rate of
9 percent but the National Development Council (NDC) approved a growth rate of 8
percent. The rate was decreased because the Deputy Chairman of the Planning
Commission, Montek Singh Ahluwalia, said that achieving an average growth rate of 9
percent in the next five years is not possible owing to economic slowdown.
The following were the objectives of the Twelfth Five-Year Plan:

• To reduce malnutrition amongst children
• To provide electricity to all villages.

• To ensure that 50 percent of the rural population have access to proper drinking
water.
• To create 50 million new work opportunities in the non-farm sector.
• To eliminate gender and social gap in schools
• To increase access to higher education.
• To provide access to banking services to households
Following are the objectives related to environment and sustainability:

• Increase green cover by 1 million hectare every year
• Add 30,000 MW of renewable energy capacity
• Reduce emission intensity of GDP in line with the target of 20–25 per cent reduction
over 2005 levels by 2020.
After the Twelfth Five-Year Plan, there was no other plan. Due to the diversity of India, the
NDA government dissolved the Planning Commission, which was replaced by the NITI
Aayog. It is important to note that the documents of the NITI Aayog don’t have any financial
role.
India achieved a lot from the five-year plans. The growth in GDP is the result of the capital
formation that is achieved during the planning periods. Employment, infrastructure,
national income, per capital income, etc, increased during the five-year periods. Facilities
such as hospitals, banking, communication, irrigation, etc. also increased.
STUDYNOTE
NITI Aayog is a short form of National Institution for Transforming India. It was formed
after passing a resolution of the Union Cabinet on January 1, 2015. It was established to
replace the Planning Commission.

5. Match the Following:
a. Twelfth Five-Year Plan 1. 1969–1974
b. First Five-Year Plan 2. 2012–2017
c. Fourth Five-Year Plan 3. 1951–1956
6. The Twelfth Five-Year Plan started at a time when the global economy was
going through the __________________
7. Which plan was followed under the leadership of Atal Bihari Vajpayee and
Manmohan Singh?
8. SAPs were evolved during the Ninth Plan, which covered the areas of water
policy, social infrastructure, agriculture, and information technology. SAP
stands for ___________________.
9. The Third Five-Year Plan was known as __________________.
10. In the Third Five-Year Plan, the focus from agriculture was shifted to the
defence industry because of ___________________
11. Which five-year plan followed the Harrod–Domar model?
a. First Five-Year Plan
b. Second Five-Year Plan
c. Third Five-Year Plan
d. Fourth Five-Year Plan
12. In the Third Five-Year Plan, the value of Indian rupee was devaluated to
increase the exports. (True/ False)

4. CONCEPT MAP
Fig. 1: Concept Map

5. SUMMARY
• In India, various economists recognised the need for economic growth that was
possible if the rate of saving and investment would rise. There was a need for
involvement of both state and private governments
• In India, the first FYP was launched in 1951 under the socialist influence of first Prime
Minister Jawaharlal Nehru.
• The central theme of all the five-year plans was elimination of poverty with the
equitable distribution of social and economic benefits
• The First Five-Year Plan introduced in 1951 focused primarily on the development of
the primary sector, specifically agriculture. This plan was drafted by economist K.N.
Raj, who followed the Harrod–Domar model
• Based on the Mahalanobis model, the Second Plan under Jawaharlal Nehru focused on
the industrial development of the country. To maximise the economic growth, the
plan determined the optimal allocation of investment between productive sectors
• The Third Five-Year Plan was known as Gadgil Yojna as it was based on John Sandy
and Sukhamoy Chakraborty's model. This plan stressed on agriculture. However, the
focus from agriculture was shifted to the defence industry because of Sino-Indian war
of 1962
• The Fourth Five-Year Plan was formulated under Indira Gandhi, who was the Prime
Minister at that time. The two main objectives of this plan were growth with stability
and self-reliance economy
• The Fifth Five-Year Plan under Indira Gandhi gave priority to employment,
agriculture, defence, poverty alleviation, and justice
• The Sixth Five-Year Plan focused on the increase in national income, modernisation of
technology, and decrease in poverty
• The Seventh Five-Year Plan was made under Rajiv Gandhi as the Prime Minister. The
emphasis was laid on the upgradation of technology that was required to improve the
productivity level of industries
• In the Eighth Five-Year Plan, the major priority was given to the Modernisation of
industries. India also became a member of the World Trade Organisation on 1 January
1995

• The Ninth Five-Year Plan under the Prime Minister Atal Bihari Vajpayee came after 50
years of Indian Independence. This plan focused on promoting the economic and
social growth of India. It gave priority to the social spheres of the country
• The Tenth Five-Year Plan was followed under the leadership of Atal Bihari Vajpayee
and Manmohan Singh. The main objective of this plan was to double the per capita
income of India in the next 10 years
• The Eleventh Five-Year Plan was made under Manmohan Singh as the Prime Minister.
It was prepared by C. Rangarajan. The main objective of this plan was rapid and more
inclusive growth
• The Twelfth Five-Year Plan started at a time when the global economy was going
through a financial crisis. Therefore, this plan emphasised to bring the economy back
to rapid growth by making sure it is both inclusive and sustainable.
6. GLOSSARY
• Decentralisation: It is a process when the activities (planning and decision making)
of organisation are delegated from top to middle and lower level.
• Full employment: It is a situation in an economy when all the available labour
resources are used efficiently.
• Harrod–Domar model: It is a Keynesian model that explains economy's growth rate
in terms of the level of saving and capital.
• Nationalisation: It is the process of transferring privately owned assets into public
assets by bringing them under state.
• Price Stabilisation: It is the process when the market price of a security is
manipulated to achieve a particular goal.

Short Questions
Q1. What is a Rolling Plan? Why was it introduced?
Q2. Write a short note on the history of five-year plans in India.
Q3. Describe the Third Five-Year Plan of India.
Q4. What are the reasons of failure of the fourth Five-Year Plan?
Q5. Explain the Twelfth Five-Year Plan (2012–2017).
Long Questions
Q1. “In India, the planning constitution was setup that aimed at preparing the five-year
plans for giving priority to employment opportunities and removal of poverty.” In light of
this statement, explain the objectives of planning in India.
Q2. Explain the Ninth Five-Year Plan in India.
8. ANSWERS
1. 1951
2. True
3. Industrialisation
4. Jawahar Lal Nehru 5. a, 2; b, 3; c, 1
5. Financial crisis
6. Atal Bihari Vajpayee and Manmohan Singh
7. Special Action Plans
8. Gadgil Yojna
9. Sino-Indian war of 1962
10. a. First Five-Year Plan
11. True

TERMINAL QUESTIONS
Short Questions
ANSWER 1. As the Fifth Five-Year Plan was rejected by new government, a new Sixth Five-
Year Plan (1978–1990) was introduced, which was known as the Rolling Plan. The Rolling
Plan consisted of three kinds of plans.
For more details, refer Section 3 Five Year Plans in India.
ANSWER 2. In India, the First Five-year Plan was launched in 1951. The next two plans
were launched till 1965. After this, the annual plans were formed for three years from 1966
to 1969.
For more details refer Section 2 Planning in India
ANSWER 3. The Third Five-Year Plan was known as Gadgil Yojna as it was based on John
Sandy and Sukhamoy Chakraborty's model. This plan stressed on agriculture. However, the
focus from agriculture was shifted to the defence industry because of Sino-Indian war of
1962. This war exposed the weakness of the economy. Also, in 1965–1966, India fought a
war with Pakistan. At the same time, there was a severe drought, which increased the
prices and thus the priority was shifted to price stabilisation.
ANSWER 4. The main reasons for failure were as follows:

• Poor monsoon in last 3 years that led to fall in agriculture production
• Coming of Bangladeshi refugees
• Indo-Pakistani war led to the movement of funds from industrial development to the
war For more details, refer Section 3 Five Year Plans in India.
ANSWER 5. The Twelfth Five-Year Plan started at a time when the global economy was
going through a financial crisis. Therefore, this plan emphasised to bring the economy back
to rapid growth by making sure it is both inclusive and sustainable. By inclusiveness, the
plan meant poverty reduction, group equality and regional balance, reducing inequality,
empowering people, etc., whereas by environmental sustainability, the plan meant the
development of human capital through improved health, education, skill development,
nutrition, information technology, etc.

Some of the objectives of the Twelfth Five-Year Plan:

• To reduce malnutrition amongst children
• To provide electricity to all villages
• To ensure that 50 percent of the rural population has access to proper drinking water
• To create 50 million new work opportunities in the non-farm sector
• To eliminate gender and social gap in schools
• To increase access to higher education
• To provide access to banking services to households
Long Questions
ANSWER 1. In India, the first FYP was launched in 1951 under the socialist influence of
first Prime Minister Jawaharlal Nehru. The aim was to achieve a rapid rise in the standard
of living of the people by offering opportunities to all for employment and efficiently
exploiting the resources of the country. The objectives of planning in India are as follows:
• Increase in National Income: At the time of independence, the planning in India was
aimed at increasing the production with real per capita income, which would lead to
an increase in the national income
• Achieving Full Employment and Reducing inequalities: The main reason for poverty in
a country is unemployment, which is a curse. Employment reduces poverty and
inequalities in a society. Planning removes inequalities by increasing the income
levels of the poorer sections of the society
For more details, refer Section 2 Planning in India
ANSWER 2. The Ninth Five-Year Plan under the Prime Minister Atal Bihari Vajpayee came
after 50 years of Indian Independence. This plan focused on promoting the economic and
social growth of India. It gave priority to the social spheres of the country. This plan saw
joint efforts from the public, as well as private sectors for contributing to economic
development
For fulfilling the targets, Special Action Plans (SAPs) were evolved during the Ninth Plan,
which covered the areas of water policy, social infrastructure, agriculture, and information
technology


BOOKS
• Banerjee, M. (1988). Planning in India. New Delhi: Oxford & IBH.
• India: Irrigation and Power Projects; Five-Year Plans. (1967). New Delhi.
• Khare, G. P. (1958). Planning in India. Allahabad: Kitab Mahal.
• Shastri, S. (1992). Financing of State Five-Year Plans in India. New Delhi, India: Mittal
Publications.
• Sury, M. M., & Mathur, V. (2013). Five-Year Plans of India: First Five-Year Plan (1951–
52 to 1955–56) to Twelfth Five-Year Plan (2012–13 to 2016–17). New Delhi, India: New
Century Publications.
REFERENCES
• Five Year Plan - Government Of India. (n.d.). Retrieved from
http://mospi.nic.in/sites/default/files/Statistical_year_book_india_chapters/Five
Year Plan writeup_0.pdf

SEMESTER 2
DCM1206
Unit 5: Economic Reforms in India 1

Unit 5
Economic Reforms in India
Table of Contents
Fig No /
SL SAQ / Page
Topic Table /
No Activity No
Graph
1 Introduction - -
3
2 Economic Reforms in India 1 1 4–7
3 Liberalisation of Indian Economy - 2 7 – 11
4 Privatisation in Indian Economy 2 3

Introduction of Maharatnas, Navratnas, and
4.1 - - 12 – 15
Miniratnas
4.2 Degree of Privatisation in India - -
5 Globalisation in Indian Economy - 4

Impact of Globalisation on Rural Sector and
5.1 - - 16 – 19
Industrial Sector
5.2 Outsourcing: An Outcome of Globalisation - -
6 An Assessment of Indian Economy after Reforms - 5 19 – 21
8 Summary - - 22
9 Glossary - - 23
11 Answers - - 24 – 26

1. INTRODUCTION
In the previous unit, you learned about the five-year plans in India. These plans helped India
by giving priority to employment opportunities and removal of poverty. Some plans and
policies resulted in certain rules and laws that aimed at controlling and regulating the
economy. This became major interruptions in development of the economy. Also, the rising
financial crisis in the economy led to slowdown of the economy. That is why in 1991,
economic reforms were introduced, which we will discuss in this unit. The series of reforms
were initiated by the Government of India to stabilise the economy.
Economic reforms were guided by short-term and long-term objectives. In a short run,
stabilisation was necessary to control the inflation and restoring balance of payments. In a
long run, changing the structure of institutions was equally important. The major steps in
the 1991 reforms were related to fiscal reforms, monetary reforms, industrial policy
reforms, foreign policy reforms etc. The reforms focused primarily on the formal sector. The
sectors such as telecom, civil aviation, and Information Technology were benefited greatly
from deregulation. India gained highly from the Liberalisation, Privatisation, and
Globalisation (LPG) model. Liberalisation included the abolition of industrial license permit
raj, reduction in import tariffs, etc. Beginning of privatisation included the deregulation of
markets, banking reforms, etc. Globalisation included Exchange rate correction, liberalising
foreign direct investment, and trade policies.
In this unit, you will learn about the need of economic reforms in India. You will be
acquainted with the LPG model in Indian Economy. In the end, you will be able to know the
assessment of Indian economy after the reforms.
1.1 Learning Objectives

❖ Explain the need of economic reforms in India
❖ Describe the Liberalization of Indian Economy
❖ Discuss the Privatization in Indian Economy
❖ Explain the Globalization in Indian Economy
❖ Describe the assessment of Indian Economy after Reforms

2. ECONOMIC REFORMS IN INDIA

In 1991, the economic crisis in India resulted in the external debts. The government was not
able to repay the borrowings from abroad. In India, the mixed economy framework was
followed that included capitalist and socialist economic system. These systems gave birth to
new rules and laws that regulated the economy and became major hindrances in the
development of economy.
Due to financial crisis, the government of India initiated a series of economic reforms. There
was also the pressure from international organisations such as World Bank and
International Monetary Fund (IMF). The crisis also led to the rising prices of essential goods.
The introduction of the economic reforms changed the direction of developmental strategies
in India. These reforms came to be known as New Economic Policy (NEP).
During 1980s, the financial crisis led to the inefficient management of Indian economy. For
implementing the programs and for meeting the revenue for the problems, such as
unemployment, poverty etc., the government generated funds from sources such as taxation.
However, when these funds got short, government borrowed from banks and international
institutions. All this led to an exceeded government expenditure more than the revenue. The
other things that followed are as follows:
• Rise in prices of essential goods
• Rise in imports more than exports
• Decline in foreign exchange reserves
For availing loans, India approached the financial institutions, such as World Bank and the
IMF, who expected India to liberalise and open up the economy by removing restrictions on
the private sector. This required reduction in the role of the government in many areas and
removal of trade restrictions. Thus, India agreed to the conditions of World Bank and
announced New Economic Policy that consisted of new economic reforms. The main aim of
this policy was to remove the barriers of entry and growth of the firms.
The two sets of policies classified under New Economic Policy are as follows:
• Stabilisation measures: These are the short-term measures that aimed in correcting
the weaknesses developed in the balance of payments and to bring inflation under
control. For example, the devaluation of rupee

• Structural measures: These are the long-term measures that aimed at improving the
efficiency of the economy and its competitiveness at international level. These
measures removed the rigidities in Indian economy by using policies, such as
liberalisation, privatisation, and globalisation. The first two are policy strategies and
the last one is the outcome of these strategies. Liberalisation involved reducing the role
of government in many areas, privatisation involved removing the restrictions on the
private sector and globalisation involved relaxation of the trade restrictions between
India and other countries.
Fig. 1 Shows the reasons for the need of economic reforms:
Fall in foreign exchange reserves
Financial crisis
Growing government debts
Adverse Balance of Payments
Increased prices of essential goods
Fig. 1: Reasons for Economic Reforms

Economic reforms were needed for the following reasons:
• Fall in foreign exchange reserves: As we have discussed above, India met with
foreign exchange or external debt crisis in 1991.The inability to pay for imports and fall
in foreign exchange reserves led to the requirement of economic reforms.
• Financial crisis: Due to financial crisis, the government was not able to generate
sufficient revenue from internal sources, such as taxation. That is why, the foreign
exchange, which is borrowed from various countries and financial institutions, was
spent on meeting consumption needs.

• Growing government debts: In 1980s, the unavailability of funds led to an increase in

the government expenditure more than the revenue. There was no attempt to decrease
the government spending.
• Adverse balance of payments: Imports grew higher than the exports. Exports were
less because of the low quality and high prices of Indian goods. No sufficient efforts
were made to boost exports to pay for the growing imports.
• Increased prices of essential goods: The prices of essential goods rose sharply
because of inefficiencies in the private, as well as public sector. High tariffs were
charged on the imports that led to rise in expenditures.
EXHIBIT: Objectives of Reforms

Following are the objectives of reforms set by government of India.
As per the Discussion Paper on Economic Reforms brought out by the Ministry of
Finance in July 1993, the objectives of the reforms were:
“…to bring about rapid and sustained improvement in the quality of the people of
India. Central to this goal is the rapid growth in incomes and productive
employment… The only durable solution to the curse of poverty is sustained growth
of incomes and employment… Such growth requires investment: in farms, in roads, in
irrigation, in industry, in power and, above all, in people. And this investment must
be productive. Successful and sustained development depends on continuing
increases in the productivity of our capital, our land, and our labour.
Within a generation, the countries of East Asia have transformed themselves. China,
Indonesia, Korea, Thailand, and Malaysia today have living standards much above
ours… What they have achieved, we must strive for.”
Source: http://indiabefore91.in/1991-economic-reforms

1. Name some financial institutions which India approached to avail loans.
2. _____________ measures are the short-term measures.
3. 1991 reforms came to be known as ________________.
4. India met with foreign exchange or external debt crisis in 1994. (True/ False)
3. LIBERALISATION OF INDIAN ECONOMY

Liberalisation can be defined as the removal or reduction of government controls and
restrictions from different sectors of the economy. This is required for making economy
more competitive in different sectors, such as the industrial sector, financial sector, foreign
exchange markets, and investment sectors.
In India, in the beginning, there were strict rules and laws that were the major hindrances in
its growth and development. Liberalisation put an end to these restrictions and open up
various sectors of the economy.
Let us discuss some changes related to liberalisation in India.
INDUSTRIAL SECTOR REFORMS

Before 1991, to start or close a firm, industrial licencing was compulsory. Entry of the private
sector was not allowed in many industries and some goods were reserved only for the small-
scale industries. Prices and distribution were controlled for some industrial products. Major
industrial policy reforms include:
• Reduction in industrial licencing: Industrial licencing was terminated for almost all
the products. The exceptions were hazardous chemicals, alcohol, cigarettes, industrial
explosives, electronics, aerospace, drugs.
• De-reservation of public sector: Almost all the industries that were reserved for the
public sector were opened for private sector. The only industries reserved for the
public sector are a part of defence equipment, atomic energy generation, and railway

transport. Also, many goods produced by small-scale industries have now been de-
reserved.
• Removal of price control: Earlier, the prices were controlled. Now, during reforms, in
many industries, the market was allowed to determine the prices.
FINANCIAL SECTOR REFORMS

Before the reforms, in 1991, the Reserve Bank of India (RBI) was the regulator of the banks.
The amount of money to be kept by bank, the interest rates, nature of lending, etc. was
decided by the RBI. The financial sector reforms were introduced to relax some norms. These
are also called the banking sector reforms. The major aim of the financial sector reforms was
to reduce the role of RBI from regulator to facilitator of financial sector.
The reforms included under the financial sector are:

• Reduction of role of RBI from regulator to facilitator. The financial sector was allowed
to take decisions without consulting the RBI on most of the matters.
• Establishment of private sector banks
• Raising of foreign investment limit in banks by 50%.
• Setting up of new branches of banks without the approval from RBI
• Allowing the Foreign Institutional Investors (FII), such as merchant bankers, mutual
funds, and pension funds to invest in Indian financial markets.
TAX REFORMS
Also called Fiscal Policy Reforms, tax reforms were concerned with the changes in
government’s taxation and public expenditure policies. There are two types of taxes
discussed as follows:
• Direct taxes: These are the taxes that are levied directly on incomes of individuals, as
well as profits of business enterprises. These taxes cannot be shifted to others.
Examples include, Income tax, wealth tax, corporate tax, etc.
• Indirect taxes: These are the taxes that are levied on commodities and services. The
burden of these taxes can be shifted to the consumers. Examples, Goods and Service
Tax (GST), Value Added Tax (VAT), etc.

In India, the tax rates were very high before 1991 and people used to avoid them. The
reforms brought the reduction in the tax rates. The corporation tax, which was very high,
also had been gradually reduced. The tax procedures were simplified and the rates were
substantially lowered. In 2016 also, the Indian Parliament passed a law related to Goods and
Services Act 2016. The aim was to simplify and introduce a unified indirect tax system in
India, reduce tax evasion, and create one nation, one tax, and one market.
STUDYNOTE
Goods and Services Tax is a comprehensive indirect tax that has replaced many indirect taxes in
India. GST has replaced 17 indirect taxes (such as Value Added Tax, Service Tax, Excise duty, Sales
Tax, etc.)
FOREIGN EXCHANGE REFORMS

(Before 1991, Fixed exchange rate system was followed by the RBI. )
The major reforms made in the foreign exchange market are as follows:
• For solving the balance of payment crisis, Indian rupee was devalued against foreign
currencies. Devaluation can be defined as the reduction of domestic currency with
respect to foreign currency. This made the exports cheaper and lead to an increase in
the flow of foreign exchange.
• Determination of rupee value was freed from government control in the foreign
exchange market. Earlier, exchange rates were based on the RBI decisions. After 1991,
demand and supply determined the exchange rates.
TRADE AND INVESTMENT POLICY REFORMS

Before the reforms, India was following Import substitution policy. This involved high tariffs
and restrictions on imports that reduced efficiency and competitiveness, which led to slow
growth of trade in India. Thus, the liberalisation of trade and investment regime was started
to increase international competitiveness in the economy. The aim of trade and investment
policy reforms was to promote the local industries and adoption of modern technologies
with more foreign investments.

Following are the important trade and investment policy reforms:

• Removal of quantitative restrictions on imports and exports
• Reduction in tariff rates. Export duties were removed to increase the demand of Indian
goods in the international markets. Import duties were also reduced.
• Abolishing of licencing procedures for imports except in case of the environmentally
sensitive and hazardous industries.
Let us now discuss about privatisation.
Exhibit: 30 Years of Economic Liberalisation: India during 1991 (Financial Crisis)

and 2021 (COVID=19 Pandemic)
Following is a part of the article that explains how COVID-19 pandemic is more
challengingthan the 1991 economic reforms for India.
Recently, on the 30th anniversary of the economic liberalisation reforms, former Prime
Minister of India, Manmohan Singh, raised concerns over the macro-economic stability
ofthe country. According to him, the current economic crisis triggered by the COVID-
19 pandemic is more challenging than during the 1991 economic crisis and, the nation
would need to recalibrate its priorities to ensure a dignified life for all Indians.
• 1991 Crisis: In 1990–91, India faced a severe Balance of Payments (BOP) crisis,
where its foreign exchange reserves were just adequate enough to finance 15
days of imports. The inflation rate increased from 6.7 to 16.7% due to a rapid
increase in money supply and the country’s economic position became worse. To
get out of the macro-economic crisis in 1991, India launched a New Economic
Policy, which was based on the LPG model.
• 2021 Crisis: The World Economic Outlook Report 2021 states that the Indian
economy is expected to grow by 12.5% in 2021 and 6.9% in 2022. However, the
pandemic has led to massive unemployment in the informal sector as well as
poverty is increasing after decades of decline. The social sectors of health and
education have lagged behind and not kept pace with our economic progress.

Too many lives and livelihoods have been lost during the pandemic.
India is back to the old habits of borrowing excessively or extracting money (in the
form of dividends) from the RBI to finance the fiscal deficit.
The migrant labour crisis has laid bare the gaps in the growth model.
Indian foreign trade policy is again suspecting trade liberalisation, as India has
already decided to opt-out from the 16-nation Regional Comprehensive Economic
Partnership (RCEP) trade deal.
Conclusion
The 1991 reforms helped the economy stave off a crisis and then bloom. It is time to
outline a credible new reform agenda that will not just bring GDP back to pre-crisis
levels, but also ensure growth rates higher than it had when it entered the pandemic.
Source:https://www.drishtiias.com/daily-updates/daily-news-analysis/30-years-of-
economic-liberalisation
5. During the industrial reforms, industrial licencing was abolished for alcohol also.
(True/ false)
6. Before the reforms, who was the regulator of the banks?
7. Tax reforms were also called ___________________.
8. Which of the following policy was adopted before the reforms?
a. Import substitution policy
b. Globalisation
c. Trade policy
d. Privatisation

4. PRIVATISATION IN INDIAN ECONOMY

During 1991, due to depressed and slow growth in the economy, India made very important
policy changes in their economic ideologies. The Finance Minister, Dr. Manmohan Singh,
introduced some major economic reforms. One of them was privatisation.
Privatisation can be defined as a shedding of the ownership of a government-owned

enterprise and its transfer to the private sector. There are two ways of privatisation:
1. By withdrawing the government from ownership

2. By withdrawing management from public sector companies, which is also known as
disinvestment
The purpose of the privatisation was to improve financial discipline, facilitate modernisation
in the economy, and provide strong push to the inflow of the FDI.
Let us discuss the features of privatisation:

• Ownership Measures: In privatisation, the ownership of the public enterprises shifts
to the private owners. This is called denationalisation, which can be complete or partial.
• Organisational Measures: This involves some measures that limit the control of the
state in public companies. For example, leasing, restructuring of the enterprises, etc.
The different ways of privatisation are shown in Fig. 2:
Ways of
Privatisation
Delegation Divestment Displacement Disinvestment
Fig. 2: Ways of Privatisation

The different ways of privatisation followed in India are as follows.
• Delegation: This is the process in which the government assign responsibilities
through lease, franchise, and contract to a private sector company. The government
retains the ownership and responsibility and remains active, but it’s the private
company that handles all the daily activities. Private sector plays a great role in
delivering the end product or service.

• Divestment: This refers to the process in which the government sells the majority of
its stakes of the enterprise to one or more, private companies. The government remains
a minority stakeholder in the company to remain a participant in the decision-making
process.
• Displacement: This begins with certain deregulations. These allow the private
companies to enter into a sector that were previously controlled only by the
government. After the private companies compete with the public-owned enterprises,
slowly and gradually, the public enterprises are displaced from that sector. Slowly and
gradually, the private companies will displace the public enterprises.
• Disinvestment: This refers to the direct sale or liquidation of assets of publicly owned
enterprises to the private sector. This is done to reduce the financial burden or to raise
money for specific needs.
Some of the advantages of undertaking privatisation are as follows:

• Increased efficiency: Privatisation leads to higher efficiency of professionals, as well
as of the company as a whole.
• Political independence: There is no political interference in the decisions of the

private sector. The public sector has to change its ways of working because of political
interference that affects its performance.
• Increase in Competition: Through privatisation, competitiveness can be increased,

which allows the companies to enhance their efficiency. This benefits the consumers,
as well as the economy.
4.1 Introduction of Maharatnas, Navratnas, And Miniratnas

In 1997, the Government of India categorised Central Public Sector Enterprises (CPSEs)
under three categories, namely Navratna, Miniratna, and Maharatna for infusing
professionalism and enabling them to compete in the liberalised global environment. This
categorisation was based on the factors, such as annual net worth, and net profit of a
company, and the presence of the company in the stock exchange as per the Securities and
Exchange Board of India (SEBI) rules.

The government choose nine PSUs and following benefits were given to them:
• Greater managerial and operational power for taking various decisions to run the
company
• Greater operational and financial independence to profit-making enterprises
The examples of public enterprises with their status are as follows:

• Maharatnas: Indian Oil Corporation (IOCL) and Steel Authority of India Limited (SAIL)
• Navratnas: Hindustan Aeronautics Limited (HAL) and Mahanagar Telephone Nigam

Limited (MTNL)
• Miniratnas: Bharat Sanchar Nigam Limited (BSNL), Airport Authority of India (AAI),
and Indian Railway Catering and Tourism Corporation Limited (IRCTC).
The status of Navratnas helped in achieving the better performances of companies.

Therefore, the government decided to retain some of the companies in the public sector and
also enabled them to expand themselves in the global market. They also got freedom to raise
the resources by themselves from financial institutions.
4.2 Degree of Privatisation In India

The New Industrial Policy of 1991 included several reform measures for the public sector.
For example, selling of loss-making enterprises to the private sector and inviting private
participation in public sector enterprises. The low degree of privatisation was adopted.
Selling of loss-making units and strategic sale led to full privatisation as the company’s
ownership was transferred to a private entity. However, the main form followed was inviting
private participation that is disinvestment, which resulted in the transfer of minority
shareholding to the general public. Also, the sale of minority stake to private sector enabled
the government to introduce competitive private sector business practices in government
enterprises.
Privatisation was launched to increase the efficiency of public sector enterprises, as well as
to concentrate the operations of the public sector in priority areas.

STUDYNOTE
Ex-Prime Minister Manmohan Singh is referred to as the father of the new Economic Policy (NEP)
of India. Manmohan Singh was introduced on 24 July 1991.
9. In privatisation, the ownership of the public enterprises shifts to private
owners. This is called _____________.
10. Which of the following refers to the process in which the government
sells the majority of its stakes of the enterprise to one or more, private
companies?
a. Delegation
b. Divestment
c. Disinvestment
d. Displacement
11. In 1997, the Government of India categorised Central Public Sector
Enterprises (CPSEs) under three categories. Name them.

5. GLOBALISATION IN INDIAN ECONOMY

Globalisation can be defined as the integration of economies of the world through trade and
financial flows and through mutual exchange of technology and knowledge. In simple words,
globalisation turns the world into one whole or creating a borderless world. Globalisation
involves free intercountry movement of labour. It plays a major role in export- led growth,
leading to the enlargement of the job market in India.
Globalisation is an outcome of various policies that are aimed at transforming the world
towards greater interdependence and integration. It is possible through the creation of
network and activities transcending economic, social, and geographical boundaries.
Globalisation is a process in which regional economies, societies, and their cultures become
integrated. The integration is possible through a global network of trade, communication,
and transportation.
India was in major crisis in 1991 when foreign currency reserves went down to $1 billion.
Inflation roared to an annual rate of 17%. Foreign investors and NRIs lost confidence in
Indian Economy. Globalisation came with the great impact on various sectors, such as
agricultural, industrial, financial, health sector, etc. It was only after the LPG policy that India
saw its development in various sectors.
The advantages of Globalisation to Indian Economy are as follows:

• Develops an international market for companies
• Gives wide range of products to consumers to choose
• Increased flow of investments
• Faster flow of information between countries
• Greater cultural interaction to overcome cultural barriers.
• Increased technological development
Globalisation has been criticised by scholars because according to them:

• It has compromised the welfare and identity of people belonging to poor countries
• Loss of jobs in developed countries because of the outsourcing of jobs to developing
countries
• There is a greater threat of spread of communicable diseases

5.1 Impact Of Globalisation On Rural Sector And Industrial Sector

The reforms have helped to phase out government control of the market through
liberalisation, privatisation of public sector organisations through privatisation, and
reduction of export subsidies and import barriers through globalisation.
Globalisation has helped in the following areas in the rural sector:

• Raising the living standards
• Eliminating poverty
• Assuring food security
• Expanding the industry and services
• Contributing to the national economic growth
IMPACT OF GLOBALISATION ON THE INDUSTRIAL SECTOR

Globalisation destroyed the trade barriers between nations through corporate investments,
financial flow, and trade. In the industrial sector, globalisation took place in sectors such as
petroleum, chemical, textile, steel, pharmaceutical, cement, etc. Globalisation is successful
due to fast progress of technology in communications and transport.
The benefits of Globalisation on Indian industries are as follows:

• Set up of many foreign companies in India, especially in the manufacturing,
pharmaceutical, BPO, petroleum, and chemical sectors
• Reduced level of unemployment and poverty in the country
• Introduction to advanced technologies through the foreign companies
The main negative effect of Globalisation on Indian Industry was that the technology has led
to use of less labour and this has resulted in many people being removed from their jobs.
5.2 Outsourcing: An Outcome of Globalisation

Outsourcing can be defined as the hiring of regular services by a company from external
sources, mostly from other countries, which was traditionally provided internally or from
within the country. This is undertaken by companies as a cost-cutting measure.
In simple words, outsourcing can be defined as the process of getting the business operations
done outside your in-house infrastructure. A company can choose to outsource product

development, a specific task, a full project, etc. Post the reforms period, India became one of
the favourite destinations for outsourcing because of the availability of skilled manpower in
India and low wage rates.
Some of the services outsourced to India included voice-based business processes called BPO
or call centres, record keeping, website development, accountancy, banking services, etc.
India has benefited from outsourcing in terms of generating employment opportunities, as
well as contribution towards the GDP and foreign exchange reserves of the country.
The developed countries oppose outsourcing as the domestic workers have been replaced
by the workers of developing countries.
India has always got attention from entrepreneurs from the foreign countries as well. The
top tech giants, such as Microsoft, Google, Ford Motor Company (FMC), CISCO, etc. outsource
IT services to India. These giants have required resources to fulfil the growing demands of
the software industry.
The top benefits of outsourcing to India include the following:

• Talented Pool of Professionals: India is a large pool of young and technically sound
trained professionals. The virtual teams in India have a high potential for adopting new
technologies and grasping better solutions. These professionals can work on the latest
technologies and solutions, which are otherwise difficult to apply.
• Budget Friendly: The cost is one of the most attractive reasons why countries prefer
outsourcing in India. The average hourly salary of developers in India ranges from $20
to $40 per hour, whereas it is $100 to $150 per hour in western countries. This helps
in increasing the company’s profit by saving the operational expenses.
• Utilisation of Time-Zone Difference: Due to different timings, outsourcing in India
allows to gain advantages. For example, there is a 12-hour time difference between
India and the USA. This provides organisation to complete work earlier than expected.
This allows greater efficiency and increased productivity.
STUDYNOTE
Outsourcing has impacted the Indian economy in negative aspects as well. It has caused high
unemployment, loss of competitive advantage and loss of income, leaving people without any
financial assistance and employment opportunities.

12.______________involves free intercountry movement of labour.

13.Which of the following is undertaken by companies as a cost-cutting measure?
a. Globalisation
b. Outsourcing
c. Liberalisation
d. Privatisation
6. AN ASSESSMENT OF INDIAN ECONOMY AFTER REFORMS

From the above discussion, we learned that Indian economy was a closed one before 1991.
There were high tariffs and import licencing that prevented foreign goods reaching the
market. There were restrictions of foreign investment and technology, as well as
government-controlled finances and capital markets. Other than that, high duties and taxes
were charged too.
The Indian 1991 reforms have transformed the economy from poor, slow-growing economy
to the fastest-growing economy. The main objective was to jump Indian economy into the
arena of globalisation and to give it a new light of market orientation. The policy was
intended to move India towards the higher economic growth rate and build sufficient foreign
exchange reserves.
In 1991, India’s GDP stood at Rs 5,86,212 crore and 25 years later, it was Rs 1,35,76,086
crore, up to 2216%. It crossed the $2 trillion mark in 2015–16. Per capita income rose from
Rs 6,270 to Rs 93,293 between 1991 and 2016. This is a 1388% jump.
Also, before the reforms, foreign investments in India were negligible. In the first year of
reform, there were only $74 million of foreign investments. These investments rose faster
since then, except for between 1997 and 2000 & 2008 and 2012, when there was a global
economic slowdown. In 2016, the country has received a total FDI of $371 billion. The biggest
rush in the inflow was between 2005 and 2006, which was of 175.54%.

Not only this, but wireless telephone subscription also witnessed exponential growth since
the reforms. Mobile phones revolutionised the way Indians communicated. From 1991 to
2016, the wireless subscription grew by a whopping 28,611%.
Following are the positive outcomes of reforms:

• GDP increased from 5.6% during 1980–91 to 8.2% during 2007–12. Growth was seen
in the service sector, and industrial sector had some fluctuations.
• There was increase in the foreign investments, which included foreign direct
investment and foreign institutional investment. The investments increased from
about US $100 million in 1990–91 to US $ 36 billion in 2016–17. The foreign exchange
reserves also increased.
• India became a successful exporter of auto parts, engineering goods, IT software, and
textiles in the reform period.
Though India benefitted a lot from these reforms, however, these reforms were widely
criticised because of the following reasons:
• Failed to address the problems faced by our economy, especially in the areas of
employment, agriculture, industry, infrastructure development, and fiscal management
• Regarded as jobless growth as according to scholars, the GDP growth has not generated
sufficient employment opportunities in the country other than the service sector
• Increased the income and quality of consumption of only high-income groups
• Wiping out of small manufacturing and retail outlets because of cheap imports.
• Inequalities of income and wealth between the rich skilled and the poor unskilled
population
• Fallen growth in the agriculture sector, especially in infrastructure, which includes
irrigation, power, roads, etc. This affected the farmers.
• Globalisation affected the Indian farmers as they had to face increased international
competition
• Globalisation affected domestic manufacturers as they faced competition from cheaper
imports, which have replaced the demand for domestic goods.
• Lack of investment in the infrastructure facilities, including power supply
• Globalisation contributed to the destruction of the environment through pollution,
which further affected the health of people.

14. DP increased from 5.6% during 1980–91 to 8.2% during 2007–12. (True/ False)
15. In which areas the Indian reforms failed to address the problems?
7. CONCEPT MAP
Fig. 3: Concept Map

8. SUMMARY
• Due to the financial crisis, the government of India initiated a series of economic
reforms. There was also the pressure from international organisations such as World
Bank and IMF. The crisis also led to the rising prices of essential goods.
• For availing loan, India approached the financial institutions, such as World Bank and
the International Monetary Fund, who expected India to liberalise and open up the
economy by removing restrictions on the private sector. This required reduction in the
role of the government in many areas and removal of trade restrictions.
• Liberalisation can be defined as the removal or reduction of government controls and

restrictions from different sectors of the economy. This is required for making economy
more competitive in different sectors, such as the industrial sector, financial sector,
foreign exchange markets, and investment sectors.
• Privatisation can be defined as the shedding of ownership from a government-owned

enterprise and its transfer to the private sector. There are two ways of privatisation
such as 1. by withdrawing the government from ownership and 2. by withdrawing
management from public sector companies, which is also called as disinvestment
• Globalisation can be defined as the integration of economies of the world through trade
and financial flows, as well as through mutual exchange of technology and knowledge.
Globalisation is a process in which the regional economies, societies, and their cultures
become integrated. This integration is possible through a global network of trade,
communication, and transportation.
• The Indian 1991 reforms have transformed the economy from poor, slow-growing
economy to the fastest growing economy. However, these reforms were widely
criticised because they failed to address some problems.

9. GLOSSARY
• Industrial Licencing: An authority issued by the government to permit the
organisation for starting an industry or a certain function.
• Liberalisation: It can be defined as a relaxation of government restrictions in the areas

of social, political, and economic policies.
• Globalisation: It is the growing interdependence of the world's economies and

integration amongst people, companies, and governments worldwide.
• Privatisation: It is a process in which a government-owned business becomes owned

by non-government party.
• Outsourcing: This implies obtaining goods by contract from an outside supplier.

Short Questions
Q1. Explain the need for economic reforms in India.
Q2. Describe the Industrial Sector Reforms during 1991.
Q3. What is privatisation? Explain its forms.
Q4. Write a note on the degree of privatisation in India?
Q5. Explain outsourcing as an outcome of globalisation.
Long Questions
Q1. Describe the financial sector and foreign exchange reforms of India.
Q2. The Indian 1991 reforms have transformed the economy from poor, slow-growing
economy to the fastest-growing economy. Elaborate on this statement by giving light on
positive and negative effects of reforms on India.

11. ANSWERS
1. World Bank and the International Monetary Fund (IMF)
2. Stabilisation
3. New Economic Policy (NEP)
4. False
5. False
6. Reserve Bank of India (RBI)
7. Fiscal Policy Reforms
8. a. Import substitution policy
9. Denationalisation
10. b. Divestment
11. Navratna, Miniratna, and Maharatna
12. Globalisation
13. b. Outsourcing
14. True
15. Employment, agriculture, industry, infrastructure development, and fiscal
management
Short Questions
ANSWER 1. The introduction of the economic reforms changed the direction of
developmental strategies in India. During 1980s, the financial crisis led to the inefficient
management of the Indian economy. For implementing the programs and for meeting the
revenue for the problems, such as unemployment, poverty, etc., the government generated
funds from sources such as taxation.
To avail loan, India approached the financial institutions, such as World Bank and the
International Monetary Fund (IMF), who expected India to liberalise and open up the
economy by removing restrictions on the private sector. This required the reduction in the
role of the government in many areas and removal of trade restrictions.
For more details, refer Section 2 Economic Reforms in India

ANSWER 2. In industrial reforms, industrial licencing was abolished for almost all the
products. The exceptions were hazardous chemicals, alcohol, cigarettes, industrial
explosives, electronics, aerospace, drugs. Almost all the industries that were reserved for the
public sector were opened for private sector. The only industries reserved for the public
sector are a part of defence equipment, atomic energy generation, and railway transport.
For more details, refer Section 3 Liberalisation of Indian Economy
ANSWER 3. Privatisation can be defined as the shedding of the ownership of a government-

owned enterprise and its transfer to the private sector. The different forms of privatisation
is delegation, divestment, displacement, and disinvestment.
For more details, refer Section 4 Privatisation in Indian Economy
ANSWER 4. The New Industrial Policy of 1991 included several reform measures for the
public sector. For example, selling of loss-making enterprises to the private sector and
inviting private participation in public sector enterprises. The low degree of privatisation
was adopted.
For more details, refer Section 4 Privatisation in Indian Economy
ANSWER 5. Outsourcing can be defined as a hiring of regular services by a company from

external sources, mostly from other countries, which were traditionally provided internally
or from within the country.
For more details, refer Section 5 Globalisation in Indian Economy
LONG QUESTIONS
ANSWER 1. Before the reforms, in 1991, the Reserve Bank of India (RBI) was the regulator
of the banks. The amount of money to be kept by bank, the interest rates, nature of lending,
etc. was decided by the RBI. The financial sector reforms were introduced to relax some
norms.
To solve the balance of payment crisis, the rupee was devalued against foreign currencies.
Devaluation can be defined as the reduction of domestic currency with respect to foreign

currency. This makes exports cheaper and leads to an increase in the flow of foreign
exchange.
For more details, refer Section 3 Liberalisation of Indian Economy
ANSWER 2. Though India benefitted a lot from these reforms, however, these reforms were
widely criticised because they failed to address the problems facing our economy especially
in the areas of employment, agriculture, industry, infrastructure development, and fiscal
management. There was increase in the foreign investment, which includes foreign direct
investment and foreign institutional investment. The investments increased from about US
$100 million in 1990–91 to US $36 billion in 2016–17. The foreign exchange reserves also
increased.
For more details, refer Section 6 An Assessment of Indian Economy after Reforms

BOOKS:
• Ahlawat, S. R. (2008). Economic Reforms and Social Transformation. Jaipur: Rawat
Publications.
• Choudhary, K. (2007). Globalisation, Governance Reforms and Development in India.
Los Angeles: Sage Publications.
E REFERENCES:
• Effects of Liberalization on Indian Economy and Society ... (n.d.). Retrieved from
https://www.insightsonindia.com/2014/12/14/effects-liberalization-indian-
economy- society/
• QnA, T. (2020, October 16). Positive and Negative Impact of Globalisation in India.
• Retrieved from https://theqna.org/impact-of-globalisation-in-india-positive-
negative/
• Effects of Liberalization on the Indian Economy | UPSC - IAS. (n.d.). Retrieved from
https://digitallylearn.com/effects-of-liberalization-on-the-economy-upsc-ias/

SEMESTER 2
DCM1206
Unit 6: An Introduction to NITI Aayog 1

Unit 6
An Introduction to NITI Aayog
Table of Contents
Fig No /
SL SAQ /
Topic Table / Page No
No Activity
Graph
1 Introduction - -
3
2 Introduction of NITI Aayog - 1 4–5
3 Structure of NITI Aayog 1 2 6–7
4 Activities under NITI Aayog 2 3
4.1 Women Entrepreneurship Platform - -
4.2 Poshan Abhiyaan - -
4.3 Strategy For New India - - 8 – 16
4.4 Methanol Economy - -
4.5 E-Amrit - electric mobility in India - -
4.6 Other Areas by NITI Aayog - -
6 Summary - - 18
7 Glossary - - 18
9 Answers - - 19 – 21
10 Suggested Books and E-References - - 22

1. INTRODUCTION
In the previous unit, you learned about the economic reforms in India that helped India
reviving from the financial crisis. To help India further, the Government of India replaced the
five-year plans with the National Institution for Transforming India (NITI) Aayog in 2015.
NITI Aayog is the premier policy think tank of the Government of India, providing directional
and policy inputs. NITI Aayog designs long-term policies and programmes for the
Government of India and also provides relevant technical advice to the Centre, States, and
Union Territories.
NITI Aayog is chaired by Prime Minister and comprises Chief Ministers, legislatures and
Governors of all the States and Union Territories. Its aim is to bring the states to act together
in national interest, and thereby fosters cooperative federalism. Some of the areas in which
NITI Aayog works are Women Entrepreneurship Platform, Poshan Abhiyaan, Strategy for
New India, and Methanol Economy.
In this unit, you will learn about NITI Aayog’s structure in detail. This unit elaborates on the
activities under NITI Aayog.

❖ Describe the introduction of NITI Aayog
❖ Explain the Structure of Niti Aayog
❖ Elaborate on the Activities under NITI Aayog

2. INTRODUCTION OF NITI AAYOG

In Unit 4, we discussed about the five-year plans in India that were followed from 1951 to
2017. These plans were laid to rest by Narendra Modi-led NDA government. The Twelfth
Five-Year Plan was the last five-year plan of India. Thereafter, these plans were replaced by
setting up of a new institution called NITI Aayog in 2015, which aimed at serving the needs
and aspirations of the people.
NITI Aayog is the National Institution for Transforming India (NITI), established on 1
January 2015, which is a Government of India policy that aims to encourage involvement and
participation in the economic policy-making process. The main importance is on making the
country a cooperative federalism. The first meeting for NITI Aayog was held on 8 February
2015 with Prime Minister as its Ex-offico Chairman. NITI Aayog is also referred as the
government think-tank.
NITI Aayog provides governments at the central and state levels with relevant advice. The
advice is related to the matters of national and international imports, using the best practices
adapted from other nations, infusing the new policy ideas. An initiative called “NITI Lectures:
Transforming India”, is aimed at inviting policy makers, experts, and administrators from
foreign to India. They share their expertise and knowledge that helps Indians to adapt policy
making and good governance.
NITI Aayog announced two schemes – Lucky Grahak Yojana and Digi Dhan Vyapari Yojana,
to promote digital transactions after the announcement of demonetisation in the country.
The objectives of NITI Aayog are as follows:

• Providing strategic and technical advice to the central and state governments to
formulate policies
• Developing Centre–State coordination, as well as inter-Ministerial coordination at the
Union level
• Planning a vision towards national developmental priorities amongst the centre and
states
• Strengthening cooperative federalism through structured support initiatives and
mechanisms

• Formulating plans at the village level and making them progress towards the higher
levels of government
• Ensuring that the interests of national security are merged in economic strategy and
policy
• Making plans and policies for weaker sections who failed to benefit from the economic
progress
• Designing strategic and long-term policy and programme frameworks and initiatives,
and monitor their progress
• Providing advice and encouraging partnerships between the key stakeholders
• Creating an entrepreneurial support system by taking advice from national and
international experts, practitioners, and other partners
• Resolving the inter-sectoral and inter-departmental issues
• Maintaining the repository of research on good governance and best practices to help
their dissemination in actual practices
• Monitoring and evaluating the implementation of programmes and initiatives
• Focussing on technology upgradation and capacity building for the implementation of
programmes and initiatives
• Undertaking other activities for executing the national development agenda
Let us discuss the structure of NITI Aayog.
STUDY NOTE
The present chairperson of NITI Aayog is the Prime Minister, Narendra Modi and the Vice
Chairperson is Dr. Rajiv Kumar. The vice chairperson is in the rank and status of a cabinet
minister.
1. NITI Aayog provides governments at only the central level with relevant
advice. (True/ False)
2. The _______________was the last five-year plan of India.
3. An initiative called ____________ is aimed at inviting policy makers, experts, and
administrators from foreign to India

3. STRUCTURE OF NITI AAYOG

NITI Aayog consists of the following members:
The chairperson is the Prime Minister. The governing council is headed by the Chief
Ministers of all States or union territories (UTs) and the Lieutenant Governors or
Administrators of UTs without a legislature. There are regional councils, which address
specific issues that are headed by the Prime Minister or his nominee and includes the Chief
Ministers and Lieutenant Governors/Administrators of States/UTs in the region. The full-
time organisational framework of the NITI Aayog consists of the following:
• Vice Chairperson who is in-charge of its everyday activities

• Four full-time members who have the rank of Minister of State at the Union level
• Two part-time members who are academics from leading universities, research
organisations, etc
• Four Union Cabinet Minister nominated by the Prime Minister as ex-officio members
• A Chief Executive Officer who has a rank of Secretary to the Government of India is
appointed by the Prime Minister. He has a fixed tenure and serves as the Member-
Secretary to the Aayog
• A Secretariat
Following Fig. 6.1 shows the structure of NITI Aayog:
Fig. 6.1: Structure of NITI Aayog

4. A full-time organisational framework of the NITI Aayog consists of

________________________, who is in-charge of its everyday activities.
5. Regional councils address specific issues that are headed by the Prime Minister or
his nominee. (True/False)
4. ACTIVITIES UNDER NITI AAYOG

With necessary knowledge and skills, NITI Aayog develops itself as a state-of-the-art
resource centre. The actions are implemented with speed and innovation and aim at making
strategic policy vision for the government. There are two attached offices, Atal Innovation
Mission (AIM) and Development Monitoring and Evaluation Organisation (DMEO) – and an
autonomous body, National Institute of Labour Economics Research and Development
(NILERD).
NITI Aayog’s entire range of activities can be divided into four main heads, shown in Fig. 6.2:
Policy and Programme

Activities Under NITI Aayog
Framework
Cooperative Federalism
Monitoring and Evaluation
Think Tank, and Knowledge

and Innovation Hub
Fig. 6.2: NITI Aayog’s Activities
Some of the examples of the sectors in which NITI Aayog works are administration;
agriculture and allied sectors; communication; education; governance and research;
infrastructure; natural resources and environment; rural development; women
empowerment; child development, etc.

Let us discuss some of the areas in which NITI Aayog works.
4.1 Women entrepreneurship platform

The Women Entrepreneurship Platform (WEP), proposed by Shri Amitabh Kant, CEO, NITI
Aayog is a unified access portal which brings together women from different parts of India.
The aim is to build an ecosystem that help them to realise their entrepreneurial aspirations.
There are three pillars of ecosystem: Iccha Shakti; Gyaan Shakti; and Karma Shakti, where
Iccha Shakti represents motivating developing entrepreneurs to start the business, Gyaan
Shakti represents providing knowledge to women entrepreneurs for developing
entrepreneurship, and Karma Shakti represents providing support to entrepreneurs in
setting and scaling up businesses.
Other services provided under WEP are as follows:

• Free credit ratings
• Mentorship
• Funding support to women entrepreneurs
• Aapprenticeship and corporate partnerships
WEP also encourages women entrepreneurs to share their entrepreneurial journeys, and
experiences for a nurtured learning. In addition, WEP offers development and acceleration
support to women start-ups through its various partners who provide necessary support to
help them start and scale-up.
EXHIBIT
Niti Aayog, Cisco launch next phase of Women Entrepreneurship Platform
Following is an article by Economic Times on Women Entrepreneurship Platform, where

CISCO has started a new phase of this program.
The Niti Aayog and the US-based tech giant, Cisco, on Thursday, launched the next phase of
the Women Entrepreneurship Platform (WEP), according to an official statement. Titled
'WEP Nxt', this next phase of Niti Aayog's flagship platform will leverage Cisco's technology
and experience working with India's start-up ecosystem to enable more women-owned
businesses across the country, the statement added.

The WEP is a first of its kind, unified access portal that brings together women from
different parts of India to realise their entrepreneurial aspirations.
Speaking on the occasion, NITI Aayog’s CEO, Amitabh Kant, said that as per the Sixth
Economic Census, women only constitute 13.76 percent of the total entrepreneurs, i.e.,
8.05 million out of the 58.5 million entrepreneurs in the country.
"WEP Nxt will further catalyse women entrepreneur movement and I am confident with
Cisco as our partner, this technology platform will soon be the personalised guide for
every woman entrepreneur in the country to realise her dreams," Kant added.
Cisco’s Chief Operating Officer, Maria Martinez said, "We are excited about our
partnership with the NITI Aayog and hope to bring the benefits of digital technologies to
more women-owned enterprises."
Source:
https://economictimes.indiatimes.com/tech/tech-bytes/niti-aayog-cisco-launch-next-phase-of-
women-entrepreneurship-
platform/articleshow/85655905.cms?utm_source=contentofinterest&utm_medium=text&utm_ca
mpaign=cppst
4.2 Poshan Abhiyaan

The Poshan Abhiyaan is the holistic nourishment mission to improve the nutritional
outcomes for children, pregnancy, and lactating mothers. NITI Aayog in September 2017,
made the National Nutrition Strategy and presented a micro-analysis of the problems related
to the nutrition domain and presented the implementation plan.
On a regular basis, the implementation status reports of POSHAN Abhiyaan are submitted to
the Prime Minister’s Office (PMO) by the NITI Aayog. These implementation reports are
carried out with the help of Technical Support Unit (TSU) established at NITI Aayog. This
provides research, policy, and technical support to the Abhiyaan.

EXHIBIT
Mission Poshan 2.0 launched to improve nutritional outcomes
The supplementary nutrition programme and the Poshan Abhiyaan has been merged to
launch Mission Poshan 2.0. Mission Poshan 2.0 was announced by the Finance Minister,
Nirmala Sitharaman, as a part of the Union Budget 2021–22 presentation on 1 February
2021.
The supplementary nutrition programme and the Poshan Abhiyaan has been merged to
launch Mission Poshan 2.0. The programme will be aimed at improving and
strengthening nutritional content, delivery, outreach and outcomes. Finance Minister
said that the government will adopt an intensified strategy to improve nutritional
outcomes across 112 aspirational districts.
Key Details
FM Sitharaman announced that out of Rs 24,435 crore allocated to the Women Child
Development (WCD) Ministry, an amount worth Rs 20,105 crore has been assigned to
Saksham Anganwadi and Poshan 2.0.
Union Women and Child Minister, Smriti Irani said that Mission Poshan 2.0 will prioritise
112 aspirational districts and develop practices that will nurture health, wellness, and
immunity of children and pregnant women, thereby making a concerted effort towards
removing malnutrition from its roots.
SOURCE: https://www.jagranjosh.com/current-affairs/mission-poshan-20-launched-to-improve-
nutritional-outcomes-1612253392-1
4.3 Strategy for New India

Released on 19 December 2018, Strategy for New India @75 by NITI Aayog replaced the five-
year plans. The main aim is to accelerate economic growth to 9–10% by making the country
a $4-trillion economy by 2022–23 and achieve UN Sustainable Development Goals.
The strategy for New India is a detailed explanation of crucial areas that recognises the
progress already made, identifies constraints, and suggests the ways of achieving the stated
objectives for 2022–23.

To make the report, the officials of NITI Aayog deeply consult with the three groups of
stakeholder’s business persons, academics, and government officials. This is followed by
consultations at the level of the Vice Chairman with a diverse group of important persons,
such as scientists and innovators; farmers; civil society organisations; think tanks; labour
representatives and trade unions; and industry representatives. In 2019, when this
document was made, to get the valuable suggestions, the drafted document was circulated
to all the States and Union Territories. Many stakeholders from the government and external
experts were consulted during the preparation of the document.
The strategy document aims at achieving the policy environment in which private investors
and stakeholders can contribute towards achieving the goals set out for New India 2022. In
coming future, civil society and citizens will be encouraged to share their ideas and strategies
in the Strategy document.
EXHIBIT
NITI unveils 'Strategy for New India @75' to make India $4-trillion economy
Following is the news article from Business Standard stating, NITI Aayog’s action on
making India a rich economy.
The NITI Aayog has said that the average annual growth of 8 percent from 2018–19 to
2022–23, with the concluding year yielding 9–10 percent expansion, is needed to
generate sufficient jobs and make India a $4 trillion (Rs 285 trillion) economy.
In a document titled ‘Strategy for New India @75', it suggested that this growth rate can
be achieved through an increase in the investment rate, improving the ratio of taxes to
Gross Domestic Product (GDP), raising export, continued exit of the government from
non-strategic public sector units, and further liberalising the Foreign Direct Investment
routine.
The acceleration in economic growth, it has said, must be inclusive, sustained, ‘clean’ and
formalised. The investment rate should be raised from the present 29 percent of GDP to
36 percent by 2022–23, of which, half must come from the public investments.
Government contribution to capital expenditure should be raised to 7 percent by 2022–
23, from 4 per–cent at present.

The strategic document to be followed by a vision document, which will spell out the 15-
year growth trajectory that India needs to follow is in pipeline of the Aayog. The main
focus of both documents is to ensure as to how reforms and the best of government
initiatives reach the bottom of the pyramid.
According to Mr. Bery, NITI Aayog’s Vice Chairman, Niti Aayog's challenge is to develop a
vision of the way ahead based on deep analysis and wide debate and to work with India's
states, which is where economic development ultimately happens.
The document is silent on farm loan waivers but has suggested the concept of a minimum
support price for production that is to be replaced with that of a Minimum Reserve Price.
The latter should be the starting point for auctioning at official wholesale markets, so that
farmers get at least a basic income.
"The government should consider replacing the Commission on Agricultural Costs and
Prices (CACP) by an agriculture tribunal in line with the provisions of Article 323B of the
Constitution," it said.
The strategy paper also called for having flexible fiscal deficit targets, based on prevailing
economic conditions. It bats for governance reforms in public sector banks, through
independent and commercially driven boards of directors, performance assessment of
executives, and increased flexibility in personnel policy. Private investment in
infrastructure should be focused on through a renewed public-private partnership
model.
The economy is projected to grow by an average of 7.4 per cent during the five years of
the current government, 2014–15 to 2018–19. The latest year it had crossed 8 percent
was in 2015–16, when it grew 8.2 percent. Nine percent annual growth has been rare. In
the old-series data, base 2004–05, a 9 percent growth rate was recorded in the successive
years of 2005–06, 2006–07, and 2007–08. These rates have since been revised. A double-
digit growth rate – of 10.2 percent – was recorded only once, in 1988–89, on a low base.
The document replaces the now-defunct five-year plans. The Eleventh Five-Year Plan
of the erstwhile Planning Commission also discussed about scaling up of economic
growth to 10 percent, in the concluding year of 2011–12, but this was not achieved.

“You can’t get growth of 8 percent and more on a sustained basis unless all sectors grow
simultaneously. Things such as raising the investment rate from 29 to 36 percent, of
which half will come from public investment, requires a sound policy environment,”
Pronab Sen, the government's Former Chief Statistician, Director for the India
Programme of the International Growth Centre, told Business Standard. More important
than the target is the government’s road map towards this.
Earlier, the Aayog had issued a 3-year action agenda, from 2017–18 to 2019–20.
On the suggested raising of investment, especially public investment, it was said that two
areas which could absorb the latter are housing and infrastructure.
To enhance public investment, the country should aim to increase its tax to GDP ratio to
at least 22 percent of GDP by 2022–23, from the current 17 percent, the paper has said.
The average among OECD countries is 35 percent. India's economy is low even when
compared to other emerging economies – Brazil's is 34 percent, South Africa’s has 27
percent, and China’s 22 percent.
Source: https://www.business-standard.com/article/economy-policy/niti-unveils-
strategy-for-new-india-75-to-make-india-4-trillion-economy-118122000054_1.html
4.4 Methanol Economy

The Methanol Economy programme is aimed at reducing India's oil import bill and
greenhouse gas (GHG) emissions. This is helpful in converting coal reserves and municipal
solid waste into methanol. Methanol can be described as a low carbon, hydrogen carrier fuel
produced from high ash coal, agricultural residue, carbon dioxide from thermal power plants
and natural gas. It is slightly lower in energy content than petrol and diesel. Methanol is a
clean burning drop in fuel that can be used in place of petrol & diesel in transportation &
LPG. It can also be used in place of Railways, Marine Sector, and Power Generation.
Methanol can be used in the transport sector, retail cooking, and energy sector. Creating a
methanol economy creates around 5 million jobs through methanol production/application
and distribution services. Methanol stoves can result in at least 20% savings for households.

In 2018, Assam Petrochemicals launched Asia’s first canister-based methanol cooking fuel
programme. This was done to reduce the import of crude oil and achieving a clean, cost-
effective, and pollution-free cooking medium. The methanol programme is expanded to the
States of Uttar Pradesh, Maharashtra, Gujarat, Telangana, Andhra Pradesh, Goa, Karnataka,
Jharkhand, and Manipur.
Thermax Ltd. has successfully developed a 5 KW methanol-based reformer on a Direct

Methanol Fuel Cell (DMFC). This module is being tested to replace DG sets in mobile towers.
For direct electricity generation, Kirloskar Oil Engines Ltd. has converted a 5 KW generator
set to run on 100% methanol. Kirloskar is working towards converting generator sets of
150–300 KVA/KW capacity, in collaboration with Dor Chemicals, Israel.
NITI Aayog’s road map for Methanol Economy comprises of the following:
• Production of methanol from Indian high ash coal from indigenous technology
• Producing methanol in large quantities at Rs.19 a liter
• Bio-mass, stranded gas, and MSW for methanol production
• Utilization of methanol as a domestic cooking fuel
• Utilization of methanol in fuel cell applications in Marine, Gensets, and Transportation
By adopting methanol, India can have its own indigenous fuel at the cost (Rs. 19 per liter),
which is cheaper than any available fuel. This can also result in great environmental benefits.
4.5 E-Amrit - Electric Mobility in India

E-Amrit is a one-stop destination for all information on electric vehicles—busting myths
around the adoption of EVs, their purchase, investment opportunities, policies, subsidies, etc.
Under a collaborative knowledge exchange programme with the UK government and as part
of the UK–India Joint Roadmap 2030, signed by the Prime Ministers of the two countries.
E-Amrit intends to complement initiatives of the government on raising awareness on EVs

and sensitizing consumers on the benefits of switching to electric vehicles. Lower running
costs, low maintenance cost, zero tailpipe emissions, tax and financial benefits are
highlighted by the government.

Electric vehicles are easy to drive and quiet, convenience of charging at home and no noise
pollution are some of the practical benefits of EV vehicles. Schemes such as FAME and PLI
are especially important in creating an ecosystem for the early adoption of EVs.
In the recent past, India has taken many initiatives to accelerate the decarbonisation of
transport and adoption of electric mobility in the country. For the same, four types of electric
vehicles - battery electric vehicle hybrid electric vehicle, plug-in hybrid electric vehicle, and
fuel cell electric vehicles will be available in the country very soon. This initiative will help
to save our planet also.
4.6. Other Areas by Niti Aayog

Some of the other important areas include the following:
INDIA ENERGY SECURITY SCENARIOS, 2047
India Energy Security Scenarios (IESS), 2047 is an energy scenario building tool. This
explores a range of potential future energy scenarios for India, for diverse energy demand
and supply sectors, leading up to 2047. This is an online tool, which is available at
www.indiaenergy.gov.in developed by the Planning Commission, Government of India.
This tool encourages informed discussions on the future energy choices. Serious debates
related to energy security, resource use (land, water, etc.), country’s finances, and local and
global environmental issues, etc. are conducted. This helps in creating the own energy future
pathways.
Prayas, an Energy Group, was invited to become a core knowledge partner in developing this
tool. This tool was launched on 28 February 2014 as its first version.
TRANSFORMING INDIA’S GOLD MARKET

NITI Aayog made a committee on Transforming India’s Gold Market. This was done for
tapping the potential of the sector and provide a stimulus to exports, economic growth, and
employment.
Diverse stakeholders, departments of the Government of India, Reserve Bank of India, and
industry associations are brought together for looking into various aspects of the gold

market. The gold market challenges and gives opportunities were considered for improving
the exports, generating employment, and boosting the domestic supply of gold.
The areas on which recommendations of this committee focus are as follows:

• Make in India in gold
• Financialization of gold
• Tax and duty structure
• Regulatory infrastructure
• Skill development and technology upgradation
STUDY NOTE
India is the biggest market for gold in India and accounts for a major portion of demand for gold
in the country. The second largest gold consuming state is Goa. It is estimated that India
consumes around 800-900 tonnes of gold annually.
6. The ___________________ proposed by Shri Amitabh Kant, CEO, NITI Aayog is a unified
access portal that brings together women from different parts of India.
7. Gyaan Shakti represents providing knowledge to college students for developing
entrepreneurship. (True/ False)
8. What are the services under WEP?
9. What is methanol?

5. CONCEPT MAP

6. SUMMARY
• The five-year plans in India were followed from 1951 to 2017. These plans were laid to
rest by Narendra Modi-led NDA government. The 12th five-year plan was the last five-
year plan of India. Thereafter, these plans were replaced by setting up of a new
institution called NITI Aayog in 2015.
• NITI Aayog is the National Institution for Transforming India (NITI), established on 1
January 2015, which is a Government of India policy that aims to encourage
involvement and participation in the economic policy-making process.
• In NITI Aayog, the chairperson is the Prime Minister. The governing council is headed
by the Chief Ministers of all States or UTs and the Lieutenant Governors or
Administrators of UTs without a legislature.
• With the necessary knowledge and skills, NITI Aayog develops itself as a state-of-the-
art resource center. The actions are implemented with speed and innovation and aim
at making strategic policy vision for the government.
• Some of the areas in which NITI Aayog works are Women Entrepreneurship Platform,
Poshan Abhiyaan, Strategy for New India, and Methanol Economy.
7. GLOSSARY
• Entrepreneurship: It is the act of starting and running your own business.
• Federalism: It can be defined as a mixed mode of government that combines a general

government with regional governments.
• Financialization: This is defined as the increase in importance and size of a country’s

financial sector. The financial markets and financial institutions gain greater influence
over economic policy.
• Legislature: It can be defined as the legislative body of a country or state.
• Methanol: It is a light, volatile, colorless, flammable liquid with a distinctive alcoholic

odour.

Short Questions
Q1. What is NITI Aayog?
Q2. Describe the structure of NITI Aayog?
Q3. What are NITI Aayog activities?
Q4. Explain the strategy for New India?
Q5. Describe NITI Aayog’s work on Transforming India’s Gold Market?
Long Questions
Q1. NITI Aayog provides governments at the central and state levels with relevant advice.
The advice is related to the matters of national and international imports, using the best
practices adapted from other nations, infusing the new policy ideas. In light of this statement,
explain the objectives of NITI Aayog?
Q2. Describe Women Entrepreneurship Platform?
9. ANSWERS
1. False
2. Twelfth Five-Year Plan
3. NITI Lectures
4. Vice Chairperson
5. True
6. Women Entrepreneurship Platform (WEP)
7. False
8. Services provided under WEP are as follows:
o Free credit ratings
o Mentorship
o Funding support to women entrepreneurs
o Apprenticeship and corporate partnerships

9. Methanol can be described as a low carbon, hydrogen carrier fuel produced from high
ash coal, agricultural residue, carbon dioxide from thermal power plants, and natural
gas. It is slightly lower in energy content than petrol and diesel.
Short Questions
ANSWER 1. NITI Aayog is the National Institution for Transforming India (NITI),
established on 1 January 2015, which is a Government of India policy that aims to encourage
involvement and participation in the economic policy-making process.
For more details, refer Section 2 Introduction of NITI Aayog.
ANSWER 2. NITI Aayog consists of the following members:

The chairperson is the Prime Minister. The governing council is headed by the Chief
Ministers of all States or UTs and the Lieutenant Governors or Administrators of UTs without
a legislature. There are regional councils, which address specific issues that are headed by
the Prime Minister or his nominee and include the Chief Ministers and Lieutenant
Governors/Administrators of States/UTs in the region.
For more details, refer Section 3 Structure of Niti Aayog
ANSWER 3. NITI Aayog’s entire gamut of activities can be divided into four main heads that
are:
• Policy and Program Framework
• Cooperative Federalism
• Monitoring and Evaluation
• Think Tank and Knowledge & Innovation Hub
For more details, refer Section 4 Activities under NITI Aayog
ANSWER 4. Strategy for New India is a detailed explanation of crucial areas that recognize
the progress already made, identify constraints, and suggest the ways achieving the stated
objectives for 2022–23.

ANSWER 5. NITI Aayog made a committee on Transforming India’s Gold Market. This was
done to tap the potential of the sector and provide a stimulus to exports, economic growth,
and employment. Diverse stakeholders, departments of the Government of India, Reserve
Bank of India, and industry associations are brought together for looking into various aspects
of the gold market.
LONG QUESTIONS
ANSWER 1. The objectives of NITI Aayog are as follows:
• Providing strategic and technical advice to the Central and State governments to
formulate policies
• Developing Centre–State coordination, as well as inter-Ministerial coordination at the
Union level.
• Planning a vision towards national developmental priorities amongst the Centre and
States
For more details, refer Section 2 Introduction of NITI Aayog.
ANSWER 2. The Women Entrepreneurship Platform (WEP), proposed by Shri Amitabh Kant,
CEO, NITI Aayog, is a unified access portal which brings together women from different parts
of India. The aim is to build an ecosystem that help them to realise their entrepreneurial
aspirations.


BOOKS:
• Saksena, K. D. (2019). NITI Aayog and Planning Commission: Some reflections. Delhi,
India: Shipra.
• Singh, S. K. (2020). Understanding the Indian economy from the Post-Reforms of 1991.
New York, New York (222 East 46th Street, New York, NY 10017): Business Expert
Press.
E REFERENCES:
• National Institution for Transforming India (NITI Aayog ... (n.d.). Retrieved from
https://byjus.com/free-ias-prep/niti-aayog/
• NITI Aayog Releases North Eastern Region District SDG ... (n.d.). Retrieved from
https://www.thehindubusinessline.com/news/national/niti-aayog-releases-north-
eastern-region-district-sdg-index-and-dashboard/article36123767.ece
• A Honeyed Shot in the Arm for Aatmanirbhar Bharat. (n.d.). Retrieved from
https://www.niti.gov.in/ NITI Lectures Top of Form Bottom of Form

SEMESTER 2
DCM1206
Unit 7: Industrial Development and Private Sector in India 1

Unit 7
Industrial Development and Private Sector in
India
Table of Contents
SL Fig No / Table SAQ /

Topic Page No
No / Graph Activity
1 Introduction - -
3
2 Role of Private Sector 1 1
2.1 The Importance of the Private Sector - -

Contribution of Private Sector in
2.2 - - 4 - 12
Indian Economy
Challenges faced by Indian Private
2.3 - -
Sector
Initiatives Adopted by Government to
2.4 - -
Increase the Role of Private Sector
3 Industrialisation in India 2 2
3.1 History of Industrialisation in India - - 13 - 20

Role of Industrialisation in Indian
3.2 - -
Economy
5 Summary - - 22
6 Glossary - - 22
8 Answers - - 23 - 25

1. INTRODUCTION
In the previous unit, you learned about NITI Aayog that designs long-term policies and
programmes for the Government of India. The government of India has also realised the
importance of private sector and industrialisation in the Indian economy. The private sector
of India is the major engine of growth and employment. The contribution to gross domestic
product (GDP) growth has increased from around 66% in the 1980s to 80% in 1990s with
overall employment more than 90% since the 1980s. Private sector contributes more than
75% of capital formation and the main driver of investment in India. Private sector of Indian
economy has surpassed the public sector in the areas of transport, financial services, etc.
Industrialisation can be defined as the process of manufacturing consumer goods and capital
goods, as well as building infrastructure. Industrialisation plays a major role in the economic
development of underdeveloped countries such as India with vast manpower and varied
resources. In an economy, industrial development is imparted in the form of rapid growth
and a diversified economic structure, which makes it a progressive economy. With
Industrialisation, managerial and technical skills are helpful in increasing the efficiency of
operations.
In this unit, you will learn about the role of private sector and challenges faced by the Indian
private sector. The role of Industrialisation in India is explained well in the unit.
1.1 Learning objectives

❖ Explain the role of private sector
❖ Discuss about the challenges faced by Indian private sector
❖ Describe the industrialization in India

2. ROLE OF PRIVATE SECTOR
The role of private sector in the country’s economic development cannot be overstated.
Private sector helps in creating employment, building competitiveness, and driving
innovation in the economy. This sector is largely responsible for the remarkable growth
since the Indian economy opened up in 1991. Investments by private sector have led to
higher growth rates and economic development. This is because more investment creates
multiplier effect in the economy by increasing employment and consumption.
Though the role of private sector is crucial for economic development, the government plays
a central role in supporting it. It offers powerful and cost-efficient policies that help the
private sector to flourish. Along with these policies, government maintain the institutions
that help regulate those policies. The laws, as well as policies of government determine the
role of private sector in the economic growth. The provision of public goods is the major
determinant of quality of life for communities and individuals that also influence the nation
to private investment.
Not only this, but the private sector also has the power to use technology for unleashing
greater prosperity for the nation.
2.1 The Importance of The Private Sector

The engine of growth for any country is the private sector as it drives efficiency, which helps
in economic development. The private sector:
• funds over 60% of investments in developing countries

• contributes greater than 80% of government revenue through taxes, resource rents,
and income tax on employees
• provides important services such as education, banking, telecommunications, and
health
• is the dominant producer of exports in nearly every economy.
The private sector strongly influences the monetary flows in the economy. The higher
private funding is related to faster-growing economies. The government laws also can
motivate or even discourage the flow of private investment into an economy. Sometimes, bad

policy options result in under-investment by the private sector. This suffocates the
entrepreneurial activity and job development, as well as sector development. This limits
progress & poverty reduction potential to an economy.
2.2 Contribution of Private Sector in Indian Economy

In-spite of large progress of the public sector during the planning period, the importance of
private sector is important in the Indian economy.
The contribution of private sector in Indian economy is given in Fig. 7.1:
Industrial Development
Agriculture
Infrastructural Development
Employment Generation
Small Scale and Cottage Industry
Private Sector and Services Sector
Developing entrepreneurship and innovation
Environmental Efficiency
Fig. 7.1: Contribution of Private Sector in an Economy
Let us discuss the contribution of private sector in an Indian economy.

• Industrial Development: The private sector played a responsible role in Indian
economy during the pre-independence period. It expanded the business of cotton and
jute textiles, sugar, paper, edible oil, tea, etc. The investment by private companies is
done on intermediate products that include paints, machine tools, chemicals, plastic,
etc. In India, consumer goods industry is mainly developed by the private sector.
Examples of industries being promoted by private sector include the newspaper
business, high sugar business, edible oil sector, textile industry, etc. Private sector is
also playing a greater role in capital goods industry, iron and steel, heavy engineering,
etc. and examples of top private companies in India include Reliance Industries, Tata
Motors, Hindustan Lever, Tata Steel, etc.

• Agriculture: We know that India is an agro-based economy. Around 60% of the total
working population in the large agricultural sector is controlled by the private sector.
As per the reports from the economic times, 80% of agricultural sector is driven by
private companies. The role of the private sector in agriculture can be seen through
advanced technologies and infrastructure. In the last decade, the changes can be seen
in terms of mechanised farming, soil changes, new markets, etc. Not only this, the
private financial institutions play an important role in the agri-business sector,
especially on the credit front due to the priority sector lending requirement. With the
help of these institutions, farmers get the finance at each and every stage of the value
chain in order to make the agro-system sustainable.
• Infrastructural Development: The key driver for the Indian economy is

infrastructure. The sector includes power, bridges, dams, roads, and urban
infrastructure development. Private sector provides active support to the
infrastructural sector, though the major areas lie in the hands of the public sector. Some
of the areas which remains open for private sector works are power generation, road
transport, water transport, air transport, highways, and bridges.
EXHIBIT
INDIAN INFRASTRUCTURE SECTOR IN INDIA
In Union Budget 2021, the government has given a massive push to the infrastructure
sector by allocating Rs. 233,083 crore (US$ 32.02 billion) to enhance the transport
infrastructure. The government expanded the ‘National Infrastructure Pipeline (NIP)’ to
7,400 projects. 217 projects worth Rs. 1.10 lakh crore (US$ 15.09 billion) were completed
as of 2020. The key highlights of the Budget 2021 are as follows:
• In June 2021, the NTPC floated a global Expression of Interest (EoI) to set up two
pilot projects for standalone fuel cell-based backup power system and a
standalone fuel cell-based microgrid system with hydrogen production using
electrolyser at NTPC premises. Through these projects, NTPC is looking to further
strengthen its footprint in green and clean fuel. The NTPC will collaborate for the
implementation and further commercialisation of the projects.

• In May 2021, Minister for Road Transport & Highways and MSME, Mr. Nitin
Gadkari stated that the government is giving utmost priority to infrastructure
development and has set a target of road construction of worth Rs.15 lakh crore
(US$ 206 billion) in the next 2 years.
• The Ministry of Railways plans to monetise assets including Eastern and Western
Dedicated Freight Corridors after commissioning, induction of 150 modern rakes
through PPP, station redevelopment through PPP, railway land parcels,
multifunctional complexes (MFC), railway colonies, hill railways, and stadiums.
• In March 2021, the government announced a long-term US$ 82 billion plan to
invest in the country’s seaports. 574 projects have been identified, under the
Sagarmala project, for implementation through 2035.
• In April 2021, the Ministry of Power (MoP) released the draft National Electricity
Policy (NEP) 2021. The MoP created an expert committee including members
from state governments, the Ministry of New and Renewable Energy (MNRE),
NITI Aayog and the Central Electricity Authority (CEA).
• In March 2021, the Parliament passed a bill to set up the National Bank for
Financing Infrastructure and Development (NaBFID) to fund infrastructure
projects in India.
• Indian railways received Rs. 1,10,055 crore (US$ 15.09 billion), of which Rs.
1,07,100 crore (US$ 14.69 billion) is for capital expenditure.
• Rs. 1,18,101 crore (US$ 16.20 billion) has been allocated towards the road
transport and highway sector.
• In Budget 2021, the government announced the following interventions under
Pradhan Mantri Aatmanirbhar Swasth Bharat Yojana (PMANSY).
• An outlay of Rs. 64,180 crore (US$ 8.80 billion) over 6 years to strengthen the
existing ‘National Health Mission’ by developing capacities of primary, secondary
& tertiary care and healthcare systems & institutions to detect and cure new and
emerging diseases.
• This scheme will strengthen 17,000 rural and 11,000 urban health and wellness
centres.

• Setting up integrated public health labs in all districts and 3,382 block public
health units in 11 states.
• Establishing critical care hospital blocks in 602 districts and 12 central
institutions.
• Strengthening the NCDC (National Centre for Disease Control) to have five
regional branches and 20 metropolitan health surveillance units.
• Expanding an integrated health information portal to all states/UTs.
• Rolling out the pneumococcal vaccine, a ‘Made in India’ product, across the
country.
• Rs. 35,000 crore (US$ 4.80 billion) has been allocated for COVID-19 vaccines in
FY22.
• The government announced Rs. 18,998 crore (US$ 2.61 billion) for metro projects.
• Mega Investment Textiles Parks (MITRA) scheme was launched to establish
world-class infrastructure in the textile sector and establish seven textile parks
over 3 years.
• The government announced Rs. 305,984 crore (US$ 42 billion) over the next 5
years for a revamped, reforms-based, and result-linked new power distribution
sector scheme.
SOURCE : https://www.ibef.org/industry/infrastructure-sector-india.aspx
• Employment Generation: The private sector plays an important role in generating

employment within the country. The private sector includes the industries that have
created growth, jobs, and hope in the last three decades. Examples include airlines,
banks, telecom, insurance, IT services, internet companies, etc.
• Small Scale and Cottage Industry: The small scale and cottage industries are labour
intensive in nature thus; they help in giving the employment opportunities. In 1994–
95, the small scale and cottage industries, numbering 25.71 lakh units, have generated
employment to the extent of 146.5 lakh and contributed nearly 34% of the total exports
of the country. The management and control of the small and cottage industries is
under the private sector; however, the Government also takes various supporting
measures for the promotion and development of this sector. In 1991, the Government

announced the liberalisation in the industrial policy and also introduced some other
industrial policy reforms in the subsequent years.
• Private Sector and Services Sector: The services sector of the country is totally under
the control of the private sector. Examples of private services rendered by the private
sector throughout the country include entertainment services, professional services,
repairing services, domestic services, etc.
• Developing Entrepreneurship and Innovation: The private sector is integral for
fostering innovation and entrepreneurship and ensuring the future progress of an
economy. Entrepreneurship injects the economy with new jobs, wealth, innovation, and
prosperity. This has induced the development of small-scale industries in the country.
Not only this, but government has also taken various efforts to lead entrepreneurship
development. Entrepreneurial agencies are developed for enhancing economic
development through wealth creation and employment creation.
• Environmental Efficiency: The major threat to any economy is scarcity of natural
resources and environmental degradation. The role of private sector is necessary for
ensuring environmental efficiency as it has the capability, as well as technology to
adopt greener technologies and share best practices. The private sector’s use of new
technologies in sustainable production promotes sustainability and efficiency for the
use of inputs and raw materials. Private companies aim at taking efforts to reduce
pollution, use the natural resources effectively, and reduce greenhouse gas emissions.
For example, using a paper bag instead of recyclable bag. Paper bags are easier to
recycle because they are biodegradable.
2.3 Challenges faced by indian private sector

Following are the challenges faced by the Indian private sector:
• Increasing Disparity between Rich and Poor: The involvement of private sector in
the development processes lead to inequality between the rich and poor.
• Regulatory laws by Government: The Government laws on the private sector has
resulted in delays and lengthy procedures in industrial production.
• Inadequate Diversification: Sometimes, the private sector is not allowed to
participate in the heavy and infrastructural sectors.

• Lack of Finance and Credit: Sometimes, small-scale private sector is unable to get the
funds from the banks. This can be due to the laws from the government.
2.4 Initiatives adopted by government to increase the role of private

sector
The initiatives adopted by government for increasing the role of the private sector is as
follows.
• Make in India: This is an initiative that is aimed at strengthening India’s

manufacturing sector. It sets up factories to encourage production in India. It facilitates
investment, foster innovation, and enhance skill development. The objective of Make in
India is to attract investments from across the globe. The programme eliminates the
unnecessary laws and regulations and makes bureaucratic processes easier. Therefore,
the government aims at becoming more transparent, responsive, and accountable.
Exhibit
Make in India Initiative
While introducing the programme in Independence Day speech in 2014, Prime Minister
of India, Mr Narendra Modi said, “I want to tell the people of the whole world: Come, make
in India. Come and manufacture in India. Go and sell in any country of the world, but
manufacture here. We have skill, talent, discipline, and the desire to do something. We
want to give the world an opportunity that come make in India,”
The initiative was formally introduced on 25 September 2014 by Mr Modi at Vigyan

Bhawan, New Delhi, in the presence of business giants from India.
The focus of Make in India programme is on 25 sectors. These include: automobiles,

automobile components, aviation, biotechnology, chemicals, construction, defence
manufacturing electrical machinery, electronic systems, food processing, IT & BPM,
leather, media and entertainment, mining, oil and gas, pharmaceuticals, ports and
shipping, railways, renewable energy, roads and highways, space, textile and garments,
thermal power, tourism, and hospitality and wellness.
Source: https://www.ibef.org/economy/make-in-india

• Production-Linked Incentive (PLI) schemes: This scheme gives incentives to

companies on incremental sales from products manufactured in domestic units. It
encourages the local companies to expand existing manufacturing units and generate
more employment. Following are some of the objectives:
o Supporting food manufacturing entities with stipulated minimum sales
o Supporting the creation of global food manufacturing champions
o Strengthening selected Indian brand of food products for global visibility and
wider acceptance in the international markets
o Increasing employment opportunities of off-farm jobs
o Ensuring remunerative prices of farm produce and higher income to farmers
STUDY NOTE
PLI Schemes were introduced in March 2020 with second edition introduced in November,2020.
It was launched by DoT with the main purpose of boosting domestic manufacturing of the
telecom and networking items.
• SWAMIH Investment Fund: SWAMIH is the Special Window for Affordable & Mid-
Income Housing launched by central government in 2019. It provides debt financing
for the completion of stalled housing projects falling under the affordable and middle-
income housing categories. This focuses on infrastructure creation that creates
employment and increases the growth of real estate sector in India.
Private sector plays a dominant role in economic development by improving

Industrialisation. This includes the launch of new commodities, new strategies of production,
new plants equipment's, and types of machinery. After the launch of the new manufacturing
policy in 1991, the private sector leads a crucial role in the country's industrial development.
Let us discuss the industrial development in India.

Self-Assessment Questions -1
1. _________________helps in creating employment, building competitiveness,
and driving innovation in the economy.
2. The private sector does not have any power to use technology for
unleashing greater prosperity for the nation. (True/ False)
3. The private sector strongly influences the _____________flows in the
economy.
4. What developments are included under Infrastructure sector?
5. The small scale and cottage industries are __________ intensive in nature.

3. INDUSTRIALISATION IN INDIA
Industrialisation has played a major role in the economic development of underdeveloped

countries such as India. Industrialisation can be defined as the period of social and economic
change that transforms an industrial society from an agrarian society. This can also be called
the extensive manufacturing reorganisation of an economy. It also involves building
infrastructure for providing goods and services to both individuals and businesses. The
various elements involved in Industrialisation are land, labour, capital technologies, etc. that
help to grow an industrial society.
Industrialisation provides greater opportunities for employment in the small- and large-
scale industries. It increases the community income by absorbing the underemployed and
unemployed farmworkers. It helps in expanding the trade, bringing technological progress,
and providing the necessary elements for the establishment of successful economy.
There is a need for rapid industrialisation in India as it provides support and strength to the
agricultural base. Industries keep pace with the fast-moving world in terms of advanced
technology. Rapid industrialisation is necessary for making India self-reliant. The
infrastructure of the industry depends on two factors, namely, geographical factors that
include raw materials, power supply, water, transport, labour, market, and climate. The
second is commercial factors that include capital, bank and credit facilities, Government
policies, and organisational efficiency.
3.1 History of Industrialisation In India

• During the British rule period, India followed the non-industrial model, which was
considered as the main barrier towards its growth. Only industrialisation was expected
to maximise the economic growth of the country. Thus, after independence, India’s first
Prime Minister Jawaharlal Nehru saw industrialisation as the key to eliminating
poverty.
• Industrialisation promised self-sufficiency and offered external economies by giving
technical progress. The potential of exports and agriculture was limited. Therefore,
taxation occurred on the basis of the terms of trade. By emphasising imports
substitution, heavy industry of the country was given attention.

• In 1854, when Bombay opened its first steam-powered cotton mill in Asia, the
industrial revolution entered India. The growth was slow, and the expansion of these
modernised cotton mills was not done until the 1870s and 1880s. Over time, the
licencing requirements became increasingly stringent and were accompanied by the
procedures that required clearance. Thus, private sector was at low growth in initial
period. India opted for state control over key industries. Nationalised industries
included chemicals, electric power, steel, transportation, life insurance, coal and textile
industries, and banking.
In the late 19th century, to promote a competitive economy, economic reforms were
launched, which opened the doors for foreign investments and trade. These reforms allowed
to carry out the business operations without the requirement of permit or licence.
Economic reforms liberalise trade, industrial, and financial policies, while subsidies, tax
concessions, and the depreciation of the currency improved. The industrial-licencing system
was dismantled especially in the areas of electricity generation, oil industry, heavy industry,
air transport, roads, and telecommunications. The outcomes of industrial policy 1991 are as
follows:
• Liberalisation of the economy by reducing excessive regulation and other industrial

growth obstacles
• Reduction in the role of public sector industries in the economy, which reduced the
government burden
• Increased competition in the industrial sector due to liberalisation that improved the
efficiency
• Introduction of policies, such as Special Economic Zones (SEZ), Export Processing
Zones (EPZ), etc., increased India's exports
Exhibit
Growth of national income
Growth of national income in GNP per capita in India was about 1.4% in the years from
1960 to 1980. The effects of the reforms of the 1980s are reflected in growth figures: the
average GNP per capita growth increased to 3.25%. And with further opening up in the

1990s, the GNP per capita reaches new heights with 3.8% average growth in the period
from 1987 to 1997.
Alleviation of poverty: In the early 1950s, about half of India’s population was living in
poverty. Since then, poverty has been declining slowly. The poverty reduction was given
new push by the reforms: falling from around 55% in 1974 to just under 35% in 1994 by
a headcount index. In the 1980s and 1990s, poverty reached historically low levels. Still,
because of India’s rapid population growth rate, the relative reduction of poverty has not
been sufficient to reduce the absolute number of poor that increased from about 164
million in 1951–312 million in 1993–94.
Reduction of income inequalities: The reduction of income inequalities has only made
slight advances. The biggest advances were made mostly before the reforms. On the other
hand, one of the biggest increases in inequality happened in the late 1970s, and the
developments for the late 1980s/early 1990s.
3.2. Role of Industrialisation In Indian Economy

The role of industrialisation in the Indian economy is shown in Fig. 7.2:
Increased Income
Economy’s changed
structure
Role of Industrialisation
High-Income
Demands
Absorbing Surplus
Labour
Bringing Technological
Progress
Strengthening the
Economy
Self-reliance in
Defence Production
Fig. 7.2: Role of Industrialisation

Let us discuss the role of Industrialisation in the Indian Economy:
• Increased Income: The industrial development provides a rapid growth of income.

There is the high level of income and industrial development. The GNP per capita
income is very high in the industrially developed countries.
• Economy’s Changed Structure: The history proves that to become a developed

economy, the share of the industrial sector as compared to agricultural sector should
rise. The Industrialisation results trickle down to the other sectors of the economy in
the form of rise in employment, output, and income.
• High-Income Demands: In the start, consumers have demand for the essential goods.
The demand for industrial goods takes place when the essential good’s demand is over.
Thus, after the certain limits, the demands of the people are usually for industrial
products alone. This means that the income-elasticity of demand for the manufactured
goods is high and that of agricultural products is low. Therefore, the Industrialisation
is necessary for meeting these demands and increasing the economy’s output.
• Absorbing Surplus Labour: As industrialisation generates employment, it has the

ability to absorb the surplus labour. This is beneficial for a highly developed countries,
such as India.
• Bringing Technological Progress: The process of industrialisation is associated with

research and development. The development of capital goods, such as machines
enables a country to produce goods in large quantities and at low costs. This results in
an industrial environment for rapid progress that is necessary for any healthy
economy.
• Strengthening the Economy: Industrialisation in any country can provide the

necessary elements for strengthening the economy. Some of them are as follows:
o Through industrialisation, it is possible to produce the goods which cannot be
imported. Examples include railways, dams, etc., which are essential for the future
growth of an economy.
o Through industrialisation, it is easy to change the comparative advantage of the
country to suit its resources and potentialities of manpower.

o Through industrialisation, the agricultural development is possible. For example,

chemical fertilizers, irrigation, and transport facilities.
• Self-reliance in Defence Production: With the help of industrialisation, achieving

self-reliance in defence production is possible. It is very risky to be dependent on
foreign countries for war weapons, especially during war. Atomic explosion at Pokhran
(Rajasthan) and Agni Missile are major examples of industrial growth.
Exhibit
A defence-industrial agenda for India
Following is an article that states the efforts for strengthening the defence in India.
Finance Minister Nirmala Sitharaman’s recent announcement of defence reforms are an

appropriate opportunity for India to create a vibrant and profitable defence-industrial
base by focusing on the procurement process, capitalising on emerging technologies, and
partnering with like-minded countries.
On 16 May 2020, Finance Minister Nirmala Sitharaman announced a series of measures

to strengthen defence manufacturing in India. These measures include raising the foreign
direct investment limit from 49% to 74% in the defence sector under the automatic
route, promotion of corporatisation of the Ordnance Factory Board, and a ban on imports
of certain weapons and platforms. These are undoubtedly ambitious measures, and if
appropriately implemented, will significantly expand domestic defence-industrial
capacities.
In the last two decades, India has modernised its military, mostly through imports as
domestic manufacturing of advanced equipment is restricted and burdened by excess
regulation. Efforts to promote the private sector participation in defence manufacturing
has yielded limited results, largely due to the opposition of the defence public sector units
(DPSUs). These have enjoyed a seven-decade old monopoly in a monopsony market,
without commensurate quality production.
Unable to make progress in this area, India’s private sector companies, such as Tata,
Bharat Forge, and Mahindra Aerostructures have participated through tie-ups with the

U.S. and European aerospace companies, enabling them to manufacture and export sub-
systems as an active participant of the global supply chain.
Under the flagship ‘Make in India’ programme of 2014, the government sought to expand
the country’s defence-industrial base. The mechanisms for participation are through the
Strategic Partnership (SP) model and the Innovations for Defence Excellence (iDEX)
programme. The SP model allows tie-ups between Indian and foreign defence companies
to produce fighter jets, submarines, helicopters, and warships. The model was announced
in 2017 but due to the protracted defence procurement procedure, it has only been
activated recently, in January 2020 by the Defence Acquisition Council when it shortlisted
public sector Mazagon Dock and private sector L&T for Rs. 45,000-crore contract, for
P75I diesel-electric submarines for the Indian Navy.
The Defence Innovation Organisation, funded by Hindustan Aeronautics Limited and

Bharat Electronics Limited, has been promoting innovation through the iDEX
programme. There is no commercial output as yet, since the programme is still being
fleshed out. Once developed, some of these technological innovations such as unmanned
surface and underwater, 4G/LTE tactical local area, secure hardware encryption devices,
etc., which are being developed by individual innovators and start-ups will come on the
market and are expected to augment the operational capabilities of the Indian military.
These limited mechanisms will not do much towards helping India create a vibrant
defence-industrial base. India is far, far behind, and is in stark contrast to countries, such
as South Korea, Turkey, and Brazil which have built a robust defence-industrial base and
become defence exporters. Similarly, China, which was one of the largest arms importers,
till two decades ago, is now the world’s fifth-largest arms exporter. It has achieved this
through a focus on research and development (R&D), coupled with ‘reverse engineering’
of Russian and Western hardware. China’s self-reliance in defence manufacturing also
has serious implications for India as Beijing has assiduously exploited its role as a defence
supplier to entrench itself in India’s neighbourhood.

This reform, therefore, comes not a moment too soon, and the Ministry of Defence will
have to step up the pace of deregulation and pragmatic planning for the immediate,
medium, and long term.
Source: https://www.gatewayhouse.in/defence-industrial-india/
• Urbanisation: In any area, industrialisation brings growth of transport and

communication. Schools, colleges, banking, and health facilities are established near the
industrial base. For example, Rourkela was the dense forest in Orrisa but now is an
ultra-modern town. Many ancillary units have been established after setting up of a big
industry.
EXHIBIT
INDUSTRIALISATION IN ROURKELA, ORISSA
Pre-Industrialisation Rourkela Region: Before the advent of industrialisation in the
Rourkela region, tribals were leading lives of sustainable subsistence. They depend on
traditional agriculture and a regenerative forest economy. However, with the commercial
exploitation of forest economy, which is the commercial exploitation of forests through
mining, there has been a shift in the tribal livelihood of the region. Tribal, whose
subsistence was dependent on forest produce, such as edible fruits, leaves, and tubers,
were gradually deprived of their common property resources. Moreover, with the
opening of tribal lands in the wake of industrialisation, the tribe caste interaction was
intensified. This has resulted in mark changes in tribal lifestyle, changes in their food
habits, and dresses and the upsurge of a new culture. Tribals have become pauperized as
their own resources base is shrinking and encroached upon by the industry and also by
outsiders. The numbers of wage earners in the tribals are increasing. Many of the
educated tribals are now forced to remain unemployed as there is a little prospect of
getting suitable job in any organised industrial and territorial sector employment in and
around Rourkela.
Almost 97& of population was dependent upon the subsistence agriculture and their total
livelihood was dependent upon agriculture, and rest of the other 3% of population was
dependent upon other sources, such as vegetable seller, plant worker, and mechanic
labour.

The post-displacement scenario has represented a different scenario. The state

government in collaboration with the capitalist-led development agencies encroached in
the tribals’ belt and snatched away their land-leading displacement of tribals extensively.
The tribals could not be properly rehabilitated from their independent self-employment
status in agriculture and the forest economy. The tribals have become wondering wage
earners in the informal sector urban economy, with their traditional sources of livelihood
now almost lost. The domination of the upper caste Hindus in the organised sector’s jobs
of the region leaves them with little scope to enter in the formal job market.
Extensive mining activities in the entire Panposh area and Bonai sub-division of
Sundargarh have destroyed dense forest and fertile agricultural lands, and the tribal are
now dependent upon the unsustainable mining economy by hiring themselves out as
daily wage workers. When they fail to get work, they migrate to Rourkela as turnover and
seasonal migrants. Working as a contract labour of steel plant or as informal sector
workers, such as coolies, rickshaw puller, unskilled construction workers, and domestic
maids.
It is evident from the above diagram that there is an enormous change in the post-
industrialisation period. In fact, in the post-industrialisation part, the dependency upon
agriculture has been vanished and the people were dependent upon the daily wage
works, such as rickshaw puller, contract labourers, coolies, and construction workers.
6. ___________can be defined as the period of social and economic change that
transforms an industrial society from an agrarian society.
7. Industrialisation promised _____________and offer external economies by giving
technical progress.
8. Economic reforms liberalise trade, industrial and financial policies. (True/
False)
9. After Independence who saw industrialisation as the key to alleviating
poverty in India?
10. During the British rule period, India followed the ____________, which was
considered as the main barrier towards its growth.

4. CONCEPT MAP

5. SUMMARY
• The role of private sector in the country’s economic development cannot be overstated.
Private sector helps in creating employment, building competitiveness, and driving
innovation in the economy.
• The private sector strongly influences the monetary flows in the economy. The higher
private funding is related to faster-growing economies. The government laws can also
motivate or even discourage the flow of private investment into an economy.
• The initiatives adopted by government for increasing the role of private sector is Make
in India, Production-Linked Incentive (PLI) schemes, and SWAMIH Investment Fund.
• Industrialisation can be defined as the period of social and economic change that
transforms an industrial society from an agrarian society. This can also be called the
extensive manufacturing reorganisation of an economy. It also involves building of
infrastructure to provide goods and services to both individuals and businesses.
• The industrialisation helps in increased income, economy’s changed structure, high-

income demands, absorbing surplus labour, bringing technological progress,
strengthening the economy, and self-reliance in defence production.
6. GLOSSARY
• Debt financing: It is the borrowed money that is to be paid back with interest within
an agreed time frame.
• Industrialisation: It is the process by which an economy is transformed from an

agricultural one to a manufacturing one.
• Multiplier effect: It is the proportional amount of increase, or decrease.
• Remunerative prices: It is the minimum price.
• Self-reliance: It means depending on yourself for things instead of relying on others.

Short Questions
Q1. Explain the role of private sector. Give its importance.
Q2. What initiatives are taken by Indian government to increase the role of private sector?
Q3. Elaborate on the history of industrialisation in India.
Q4. What are the challenges faced by Indian private sector.
Q5. Write a short note on industrialisation in India.
Long Questions
Q1. Describe the role of industrialisation in Indian Economy.
Q2. In spite of large progress of the public sector during the planning period, the importance
of private sector is tremendous in the Indian economy. In light of this statement, explain the
contribution of private sector in the Indian economy.
8. ANSWERS
1. Private sector
2. False
3. Monetary
4. Power, bridges, dams, roads, and urban infrastructure development
5. Labour
6. Industrialisation
7. Self-sufficiency
8. True
9. Jawaharlal Nehru
10. Non-industrial model

TERMINAL QUESTIONS
Short Questions
ANSWER 1. The role of private sector in the country’s economic development cannot be
overstated. Private sector helps in creating employment, building competitiveness, and
driving innovation in the economy. This sector is largely responsible for the remarkable
growth since the Indian economy opened up in 1991.
For more details, refer Section 2 Role of Private Sector
ANSWER 2. Some of the initiatives taken by government on private sector are Make in India
scheme, Production Linked Incentive Schemes, SWAMIH investment fund, Public Private
Partnership, etc.
ANSWER 3. During the British rule period, India followed the non-industrial model, which
was considered as the main barrier towards its growth. Only industrialisation was expected
to maximise the economic growth of the country. Thus, after independence, India’s first
Prime Minister, Jawaharlal Nehru saw industrialisation as the key to eliminating poverty.
For more details, refer Section 3 Industrialisation in India
ANSWER 4. The challenges faced by the Indian Private sector are increasing Disparity
between Rich and Poor, Regulatory laws by Government, Inadequate Diversification, etc.
ANSWER 5. There is a need for rapid Industrialisation in India because it provides support
and strength to the agricultural base. Due to industrialisation, industries keep pace with the
fast-moving world in terms of advanced technology.
For more details, refer Section 3 Industrialisation in India
Long Questions
ANSWER 1. Following points explained the role of industrialisation in the Indian economy
that are increased income, high income, absorbing surplus labour, strengthening the
economy, technological progress, etc.
For more details, refer Section 3 Industrialisation in India.

ANSWER 2. The contribution of private sector in an Indian economy can be explained

through industrial development, agriculture, infrastructure development, etc. The private
sector played a responsible role in Indian economy during the pre-independence period. It
expanded the business of cotton and jute textiles, sugar, paper, edible oil, tea, etc. The
investment by private companies is done on intermediate products, which include paints,
machine tools, chemicals, plastic, etc. In India, the consumer goods industry is mainly
developed by the private sector.

BOOKS:
• Ramanadham, V. V. (1989). Privatisation in Developing Countries. London: Routledge.
• Ray, R. (1979). Industrialization in India: Growth and Conflict in the Private Corporate
Sector 1914-1947. Delhi.
• Singh, R. S. (1992). Industrialization in India. New Delhi: Deep & Deep.
E REFERENCES:
• Industrialisation and India's Economic Development. (2015, December 19). Retrieved
from https://www.economicsdiscussion.net/economic-
development/industrialisation-and-indias-economic-development/14186
• Privatisation of Indian railways: Latest News & Videos ... (n.d.). Retrieved from
https://economictimes.indiatimes.com/topic/Privatisation-of-Indian-railways
• Will Privatisation boost Indian Economy Growth? (n.d.). Retrieved from
https://www.civilserviceindia.com/current-affairs/articles/privatisation-and-india-
economy-growth.html

SEMESTER 2
DCM1206
Unit 8 : Public Sector in India 1

Unit 8
Public Sector in India
Table of Contents
SL Fig No / Table / SAQ /

Topic Page No
No Graph Activity
1 Introduction - -
3
2 Introduction to Public Sector in India 1, 2 1 4-6

Role of Public Sector in Economic
3 3 2 7 - 11
Development
4 Problems of Public Sector - 3 12 - 15
A Shift From Public Sector: Emergence of
5 - 4 16 - 18
Privatisation
7 Summary - - 20
8 Glossary - - 21
10 Answers - - 22 - 24

1. INTRODUCTION
In the previous unit, you learned about the role of private sector in India. Before the
emergence of the private sector, the public sector fulfilled the specific objectives of planning
in India. When India gained independence, there were serious gaps in the industrial
structure of the country. Essential goods industries required large capital investment. Due
to the lack of funds, the private sector could not come forward to establish such industries,
therefore public sector succeeded in filling up these gaps through rapid industrialization.
The industries in the public sector are primarily set up for the welfare of the workers, as well
as the society. The profits made are utilized towards financing the economic development of
the country. Though there are many shortcomings of the public sector such as ineffective
management, lack of financial controls, wastage of resources, and unstable pricing policy.
Still, the pc sector has provided large employment and contributed to the saving rate and
capital formation in the economy. It has provided the industrial base to the economy such as
infrastructure. Based on the serious role played by the public enterprises, there is a need to
understand the status of the public sector enterprises in the country.
In this unit, you will learn about the concept of public sector in India and the role of public
sector in economic development. The unit will detail about the problems of public sector and
the shift from public sector to private sector.
1.1 Learning objectives

❖ Explain the concept of public sector in India
❖ Describe the role of public sector in economic development
❖ Elaborate on the problems of public sector
❖ Discuss about the shift from public sector

2. INTRODUCTION TO PUBLIC SECTOR IN INDIA
In India, a public sector company can be defined as a company in which the Union
Government or State Government or any Territorial Government owns a share of 51% or
more. There are only some sectors reserved for the government that are railways, police,
taxation, atomic energy, and explosive material. The industrial policy resolution 1956 of
India gave the first category of industries as the industries that remain exclusively under the
domain of the government. Before the independence, there were only a few private sector
companies. Some important public sector companies were Indian Railways, the Port Trusts,
the Posts and Telegraphs, and All India Radio. There was a weak industrial base and India
was mostly dependent on agriculture. After the independence, for improving the socio-
economic status of the country, some policies were planned out by the visionary leaders in
which the public sector was used as a tool for the growth of the nation’s economy. The basic
objectives of setting up the public companies were to build infrastructure, create
employment opportunities, and generate investable resources for development.
Fig. 8.1 shows the categorisation of public enterprises in India.
Fig. 8.1: Categorisation of Public Enterprises

In 1991, when the government shifted to a liberalised economy, the larger role for the private
sector was determined. There was reduction in the scope of industrial licensing, reforms in
the Monopolies and Restrictive Trade Practices (MRTP) Act, and disinvestment of equity of
selected public sector enterprises (PSEs). For improving the overall condition, the industries
went through privatisation which helped in coping the market competition. Public sector is
the strongest tool for government involvement in economic activities of a country. Through
this only, the government can control, regulate, and guide the private sector.
If we look at the data, there is big increment in number of Central Public Sector Enterprises.
Numbers of units under public sector increased 58 times from 1951 to 2014. As on 31 March
2014, there were 290 Central Public Sector Enterprises. Table 8.1 shows the growth of public
sector in India.
Table 8.1: Growth of Public Sector
As on 31st March Number of Units Total investment

(crores)
1951 5 29
1961 47 948
1979 160 15,534
1990 244 99,329
2002 240 324,614
2012 260 729,298
2013 277 845,334
2014 290 992,971
From the Table 8.1, we can see that aggregate financial investment also grew manifold in
public sector. The investment of Rs. 29 crores in 1951 increased to 100,000 crore in 1991
and stood at Rs. 9,92,971 crore.
Some of the essential roles of the public sector in the economic development of a country
such as India are as follows:
• Promoting economic development by filling gaps in the industrial structure

• Promoting infrastructural facilities for the growth of an economy

• Undertaking economic activity in strategically significant development areas

• Checking monopolies and concentration of power in the hands of few
• Promoting balanced regional development to grow less developed areas of the country
• Reducing the disparities in the distribution of income and wealth by bridging the gap
between the rich and poor
• Creating and enhancing sufficient employment opportunities in different sectors by
making heavy investments
• Eliminating dependence on foreign aid and foreign technology
• Reducing the pressure of balance of payments by promoting export and reducing
imports
Let us discuss the role of public sector in an economy in detail in the next section.
1. In 1987, when the government shifted to a liberalised economy, the larger role
for the private sector was determined. (True/ False)
2. A ______________can be defined as a company in which the Union Government or

State Government or any Territorial Government owns a share of 51% or more.
3. Which public enterprise provides infrastructural facilities to provide an

investment base to private entrepreneurs?
4. Give any one example of Promotional Public Enterprises.

3. ROLE OF PUBLIC SECTOR IN ECONOMIC DEVELOPMENT
The public sector plays an important role in the economic development of the country. It
occupies the important place in our economy as its effective performance depends on the
achievement of the country's economic and social goals. It is an important instrument of self-
reliance.
The contribution of public enterprises to the country's economy is shown in Fig. 8.2:
Employment Generation
Balanced Regional
Development
Development of
Contribution of Public Enterprises
Infrastructure
Optimum Utilisation of
Resources
Public Welfare
Research and
Development
Development of
Ancillary industries
Social Justice
Fig. 8.2: Contribution of Public Sector
The contribution of public sector in the economy is as follows:

• Employment Generation: There are millions of jobs created by the public sector of the
economy. It contributes towards the improvement of working and living conditions of
workers. In the organised industrial sector, public sector accounts for about two-thirds
of the total employment. Public sector protects the employment of millions by taking
over sick units. The public sector employs firefighters, teachers, police officers, etc. for
maintaining a safe and productive community. The public sector is not revenue driven.
The jobs in the public sector are funded by taxpayers. Also, the employment in the
public sector is more stable and linked to attractive retirement and health benefits.

STUDY NOTE
As per the reports published in July 2019 the central government employment constitute to
around 14% of the total public employment in India.
• Balanced Regional Development: This implies a uniform distribution pattern of the

planned investment in the different regions of a country. The distribution of investment
is done in such a way that the growth rates in all the regions are equally attained. This
eliminates the regional disparities in the country. In India, public sector industries
focus on setting the plants and industries in backward regions of the country. These
areas lack some important and basic facilities, such as electricity, water supply, etc. The
public sector is able to provide these facilities that had led to the complete
transformation of the socio-economic life of the people in these regions. Examples
include Steel plants of Bhilai, Rourkela and Durgapur; fertilizer factory at Sindri, etc.
Private companies are focused on the industrial areas, however public companies
focused on maintaining the regional balance. Both private and public sector role in
economic development is necessary.
The objective of balanced regional development gives the following benefits:

• Reducing regional disparities in the distribution of income and wealth
• Removal of poverty in backward areas and increase in the living standards of the people
• Provision of employment opportunities on an equitable basis
• Optimum utilisation of national resources
• Control over the problems of slums, overcrowding, congestion of traffic, etc.
• Development of Infrastructure: Backbone of any economy is its infrastructure. The
lack of financial support in private sectors stop them to invest money in infrastructure
projects. Public sector plays a great role in building the infrastructure of the country
and it makes sure that there is no shortage of money, advanced technology, or even
workforce. For example, agricultural development is not possible without the advanced
irrigation technologies and industrial development is also not possible without roads,
railways, and electricity. The road, railways, air, and sea are developed by the public
sector.

• Optimum Utilisation of Resources: The public sector uses scarce resources optimally.
Due to their big size, they are able to reap the benefits of large-scale operations. They
help in cutting down wasteful completion and ensure full use of installed capacity.
Finally, optimum utilisation of resources results in better and cheaper production.
• Public Welfare: Public sector improves the state of welfare in the economy. The
essential commodities at affordable prices are provided to the needy. Public
enterprises can protect and promote the interests of workers. For example, since
independence, India’s medical and public health services have improved dramatically.
• Research and Development: For the economic development of the nations, the public
enterprises undertake research and development for attaining the high technology and
heavy industries. Public sector has laid strong base for self-reliance in the field of
technical know-how, industrial plants, machinery, and equipment in the country. This
reduced the dependence on foreign technologies.
• Development of Ancillary industries: The ancillary industry also called as tertiary

services can be defined as an industry in which the fixed investment in plants and
machines do not exceed 1 crore rupees. In India, the government has set up the strong
base of ancillary industries at several centres, such as the Bhilai Steel Plant, the Bokaro
Industrial Complex, The Rourkela Steel Complex, the Heavy Engineering Corporation at
Ranchi, etc.
• Social Justice: Social Justice is the foundation stone of Indian Constitution. It means
treating all the citizens equally without any social distinction based on caste, colour,
race, religion, sex, and so on. The absence of privileges is extended to any particular
section of the society. Indian Constitution makers who constitute public sector are well
known to use the various principles of justice. Public sector has helped in achieving the
constitutional objectives related to social justice. This sector is helpful in curbing the
anti-social monopolies, controlling the national economy, and bringing a socialistic
pattern of society.

EXHIBIT: INFRASTRUCTURE SCHEME IN RURAL AREAS
UP’s rural infra scheme: Pay 50% cost, get it named as per your wish
Following article dated 16 September 2021 shows the scheme offsetting the
infrastructure in rural sector in India in which both economies, as well as citizens benefit.
The Chief Minister made the announcement while virtually laying the foundation stones
of various road projects under the Prime Minister, Gramin Sadak Yojana
In a unique initiative to improve rural infrastructure, the BJP government in Uttar

Pradesh has announced a new scheme in which any person can bear 50% of the project
cost and name it after their family members.
Announcing the scheme, Uttar Pradesh Matra Bhumi Yojana, Chief Minister Yogi
Adityanath on Wednesday said: “Under this scheme, every person will get a chance to
directly participate in various works of infrastructure development in the villages. The
government will bear 50% of the total cost of the project, while the remaining 50% will
be contributed by the interested people. In return, the project can be named after the
relatives of the collaborators as per their wish.”
The Chief Minister made the announcement while virtually laying the foundation stones
of various road projects under the Prime Minister Gramin Sadak Yojana. According to a
statement issued by the government, Adityanath has asked the Department of Rural
Development and Panchayati Raj to submit an action plan for the formal launch of the
“innovative scheme”.
The rural infrastructure and development projects that could likely come under the
scheme are health centres, roads, Anganwadi centres, library, stadium, gymnasium, open
gym, cattle breed improvement centre, playground, fire service station, CCTVs for smart
villages, development of funeral sites, installation of solar lights amongst others in
villages, said officials. Several other government schemes can also be connected with this
scheme, an official added.
Claiming both the Central and the state governments have been “continuously working”
for the overall development of villages, Adityanath said the new scheme could bring
“great opportunities” in the villages.

While interacting with the presidents and members of gram panchayat, kshetra
panchayat, and district panchayat, the chief minister said the panchayats need to be self-
reliant, and with sufficient available resources, efforts should be made for self-reliance
by adopting innovations.
He also said that for the betterment of panchayats, healthy competition should be
encouraged and innovations should be rewarded.
He also encouraged panchayat chiefs to give a model of sustainable development. “Roads

are not just a means of transport but also a powerful means of strengthening the rural
economy. Countries with developed infrastructure are also economically prosperous. In
a state like Uttar Pradesh, about 80 % of the population lives in rural areas. To strengthen
the rural economy, good roads and better connectivity are essential that is being done
continuously through the Pradhan Mantri Gram Sadak Yojana,” he said.
Citing the recent actions against corrupt officials and government employees, the CM
warned against delay in payment of dues to the contractors, and directed zila panchayat
chiefs to conduct physical verification of construction works in their areas.
Source: https://indianexpress.com/article/cities/lucknow/ups-rural-infra-scheme-pay-50-cost-
get-it-named-as-per-your-wish-7511662/
5. __________ implies uniform distribution pattern of the planned investment in the
different regions of a country.
6. Backbone of any economy is its infrastructure. (True/ False)
7. The ancillary industry is also called as _________services.

4. PROBLEMS OF PUBLIC SECTOR
Today, maximum numbers of public enterprises in India are facing huge losses. As compared
to huge investment, they do not earn reasonable returns. Lack of financial controls, wastage
of resources and unstable pricing policy result in losses. Following are the arguments against
public enterprises on the grounds that show their weaknesses:
• Poor Project Planning: The decisions related to investment in the public sector are
sometimes not based upon proper evaluation of demand and supply. The cost benefit
analysis and technical feasibility is missing. There are flaws in planning with long gaps
and delays. Also, sometimes there are high costs for projects that are overestimated.
For example, Barauni Refinery was commissioned 2 years behind the schedule. The
Trombay fertilizer plant was delayed by 3 years. This caused an increase of cost of Rs.
13 crores in the original estimates.
• Unclear Objectives and pricing policy: Sometimes, the objectives of public
enterprises are not clear. In the absence of unclear objectives, the efficiency cannot be
judged. Also, there is no clear cut price policy. Sometimes, cost plus price policy,
administered pricing, dual pricing etc. are followed. There is no clarity with regard to
the price policy.
• Over-capitalisation: Sometimes, the poor financial planning and because of easy
availability of money from the government, public enterprises suffered from over-
capitalisation. This resulted in high capital-output ratio and wastage of scare capital
resources. For example, Hindustan Aeronautics, Heavy Engineering Corporation, and
Indian Drugs and Pharmaceuticals Ltd. were over-capitalised. One of the research
studies stated, “The causes leading to over capitalisation can be traced to inadequate
planning, delays, and avoidable expenditure during construction, surplus machine
capacity, tied aid resulting in completion to purchase important equipment on non-
competitive basis, expensive turn-key contracts, bad location of projects, and the provision
of housing and other amenities on liberal scale”.
• Delayed public projects: Many projects under the public sector take longer time to
complete than it is estimated. This leads to high costs of the projects. This is the result
of the poor planning.

• Excessive Overheads: Heavy expenditure with large overheads is incurred on

townships, schools, hospitals, etc. There is very little focus on cost control and
utilisation of resources effectively in these public sectors as the money is financed by
government. Example, Hindustan Steel incurred an expenditure of Rs. 78.2 crore on
townships.
STUDY NOTE
Excessive overheads lead to mounting losses or deplorably low profits in comparison to the
capital employed. The total number of PSUs that are making losses rose from 79, in 2015-16 to,
84 in 2019-20.
• Over-staffing: In public enterprises, the problem of overstaffing is there. There is

excess manpower. Also, the salary costs and pension costs are very high as compared
to the work. This is because public enterprises are considered the main generators of
employment. For example Bhilai Steel have excess manpower. There is also the lack of
proper education and training of the employees in the public sector.
• Inefficient Management: The management of public enterprises lack leadership and
have excessive centralisation. There are frequent transfers as well that lead to
instability and disturbances in the work. Employees at lower level often lack proper
training and use bureaucratic practices. Low flexibility leads to slow decisions. As
decisions are taken by the board, the success of the company depends on the efficiency
of the members of the board.
• Lack of Coordination: Many public enterprises are dependent on each other as output
of one is input of another. However, still there is a lack of efficient coordination at
various stages. There should be proper software and research programs that help in
reducing the excess stocks and shortages of vital inputs. For instance, the power and
steel plants depend on the production and transportation of coal which in turn is
dependent upon supplies of heavy equipment machinery.
• Political Interference: The working of public projects is often disturbed by the
frequent interference by politicians. This minimises the initiative and freedom of
action. Therefore, we can say that the public enterprises enjoy little autonomy and
flexibility of operations.

Expanding the public sector aimed at the fulfilment of our national goals, the removal of
poverty, acceleration of agriculture, reduction in inequalities of income, and industrial
development, etc. However, these objectives could not be achieved as desired. That is why,
government adopted spree of privatisation of these enterprises.
Exhibit: Delay in Government projects up by 100% in last 6 years: Ministry
Following news article dated November 2020 states the delay in public projects in India
and action taken by ministries.
• EW DELHI: Union Minister for Road Transport & Highways Nitin Gadkari on
Thursday pulled up officers for an ‘inordinate delay’ in finishing projects. Terming
it as a ‘matter of shame,’ the transport minister said that the Rs 250 crore-NHAI
building project was finalised in 2008 and but was inaugurated only recently.
However, a close analysis of the government data on infrastructure projects has
disclosed that the number of delayed projects and cost overrun has increased in the
last five years.
• The Ministry of Statistics and Programme Implementation data disclosed that the
cost overrun of the projects due to delay has gone up by over 100 per cent between
the years 2014 and 2020. Analysis of the data showed that the number of projects
that got delayed in 2014 was 209 out of total 710 and the cost overrun was of Rs
1,79,607 crore. While the original cost of the projects was Rs 9,24,307 crore, the
anticipated cost due to the delay was Rs 11,03,914 crore.
• Data also disclosed a constant rise in the number of delayed projects as it increased
to 324 out of 751 in 2015 and 343 out of total 1076 in the subsequent year. As per
March 2020 data, total number of such projects have increased to 567 and the cost
overrun reached the mark of Rs 4,05,175 crore. According to the ministry, the main
reasons for cost overrun include under-estimation of original cost, changes in rates
of foreign exchange and statutory duties, high cost of environmental safeguards,
and rehabilitation measures.
• Similarly, spiralling land acquisition costs, shortage of skilled manpower, changes

in project scope, monopolistic pricing by vendors of equipment services, and

general price rise and inflation are a few other reasons. Moreover, delay in land
acquisition and forest clearance has also been one of the reasons. The government
has taken many initiatives to ensure successful completion of Central Sector
Infrastructure Projects without time and cost overruns and periodic review of
projects under PRAGATI through video conferencing is one of the main steps.
• Moreover, various steps are being taken to facilitate the speedy implementation of
major projects by removing bottlenecks. The measures include – project appraisal,
Online Computerised Monitoring System (OCMS) for better monitoring, setting up
of revised cost committees for fixation of responsibility for time and cost overruns,
regular review of infrastructure projects amongst others. The ministry has also
compiled data on time and cost overruns of on-going Central Sector Infrastructure
Projects costing Rs 150 crore and above based on the information provided by
project implementing agencies.
Source: https://www.newindianexpress.com/nation/2020/nov/02/delay-in-govt-projects-up-by-
100-in-last-6-years-ministry-2218137.html
8. In private enterprises, the problem of overstaffing is there. (True/ False)
9. The management of public enterprises lacks __________ and have excessive
centralisation.

5. A SHIFT FROM PUBLIC SECTOR: EMERGENCE OF PRIVATISATION
We have already discussed in Unit 8 about the role of private sector in economic
development. In 1991, government dismantled its old development policies and overhauled
the entire economic system with denationalisation, delicensing, devaluation, and
disinvestment. Thus, the pendulum of economic growth in India was shifted from public
sector to the private sector and gave birth to Liberalisation, Privatisation and Globalisation
(LPG) in the economy. The main reasons for following LPG were as follows.
• The external debt crisis

• Unmanageable foreign exchange deficit
• Collapse of socialist regimes
• Spectacular growth of East and southeast Asian countries
The role of private sector increased in the service sectors such as education, health,
insurance, and banking. Liberalisation regime led to restructuring and consolidation of
Indian Industry. However, agriculture, which is the large part of the economy, remains
unorganised and backward. It could not be integrated automatically with the mainstream of
market-led economy. The reason was the growing urban bias and rural neglect.
Now, the great importance is given to the private sector for attaining rapid economic
development. The Government had fixed roles for the private sector in the field of industries,
trade, and services sector. Also, almost 80% of agricultural sector is now driven by private
companies. The major portion of the industrial sector is engaged in providing consumer
goods both durables and non-durables, electronics and electrical goods, automobiles,
textiles, chemicals, food products, light engineering goods, etc.
The private sector is managing the services sector, wholesale, and retail trade in the country
in a most rational manner. The road transport is also now being shifted to the private sector.
Thus, the private sector is being assigned with much greater responsibilities in various
spheres of economic activities.

Exhibit: How private sector is helping cultivators with technology, buyback and
improving their social standards?
Following article explains the role of private sector in helping agricultural growth in
India.
NEW DELHI: At first glance, farming seems a state-dependent enterprise across India’s
hinterland. The state sets floor prices for farm output, and its agencies control the
procurement centres and subsidies. But the role of top private labels becomes apparent
just beneath the surface, with the Adani Group, ITC, Hindustan Unilever, or the Godrej
Group helping cultivators through the crop cycle – from improving soil health and
providing the best seeds to buying the output.
“About 80% of the agricultural sector is driven by private companies. But given the
involvement of 138 million farmer families, more needs to be done to provide them
technology on the field and ensure remunerative prices. Enacting a liberal APMC law,
scaling up digital technologies, encouraging private players to set up mandis, and lifting
export bans or stock limits should be priorities,” said Ashok Gulati, Agricultural
Economist and Former Chairman of the Commission for Agricultural Costs and Prices.
Private investment in agriculture is not the exclusive preserve of home-grown

companies. Cargill, Hindustan Unilever, PepsiCo, or McCain are equally involved, as are
the Tata Group, the Mahindra, Ruchi Soya, or DCM Shriram. Over the past few years, these
groups have been working with farmers, in collaboration with agrochemical and farm-
machinery companies to bring best practices and raise yields or lower costs.
“For the first time in 25 years, I witnessed a drop in water usage for growing mint. Instead
of 11 irrigations, I used 8 this year. I have also used a modified distillation unit that helped
earn 30% more,” said Ram and Ruprani, mint growers from Zaidpur village in Barabanki,
Uttar Pradesh.
They are beneficiaries of the Shubh Mint project, run by Mars Wrigley Confectionery,
which makes Orbit, M&M, and Skittles. It seeks to improve mint plant science and ensure
the long-term viability of mint, an essential ingredient in gums and mint confections.

“Through our project…, yields increased 68% and water requirement fell 23%, saving an
average of Rs 6,222 over the course of the crop season,” said Kim Frankovich, VP, global
sustainability, at Mars Wrigley Confectionary. The project covered about 2,600 farmers.
For Mars Wrigley, 65% of its gum and mint brands use natural mint or menthol
flavouring, and 90% of these products contain oil derived from the menthe arvensis plant
grown in India.
Similarly, US- based Amy’s Kitchen, which specialises in organic, non-genetically

modified food, is seeking to work with horticulture farmers in India. Several start-ups in
retailing horticulture produce have started working with farmers directly, weeding out
the middlemen. The association between farmers and the formal corporate sector goes
back a long way. In 1987, PepsiCo started working with tomato farmers in Punjab,
providing technology and firm prices, said Gokul Patnaik, chairman, Global AgriSystem,
a food processing consultancy firm.
Source:https://economictimes.indiatimes.com/news/economy/agriculture/how-private-sector-is-
helping-cultivators-with-technology-buyback-and-improving-their-social-
standards/articleshow/61989717.cms?utm_source=contentofinterest&utm_medium=text&utm_ca
mpaign=cppst
10. LPG stands for ______________________.
11. Liberalisation regime led to restructuring and consolidation of Indian Industry.
(True/ False)
12. Give any one reason for following privatisation.

6. CONCEPT MAP

7. SUMMARY
• In India, a public sector company can be defined as a company in which the Union
Government or State Government or any Territorial Government owns a share of 51%
or more. There are only some sectors reserved for the government that are railways,
police, taxation, atomic energy, and explosive material.
• The different categories of public enterprises are Commercial Public Enterprises,

Manufacturing Public Enterprises, Financial Public Enterprises, Promotional Public
Enterprises and Public Utilities.
• The public sector plays an important role in the economic development of the country.
It occupies the important place in our economy as its effective performance depends
on the achievement of the country's economic and social goals.
• The contribution of public sector can be described under the following points,
Employment Generation, Balanced Regional Development, Development of
Infrastructure, Optimum Utilisation of Resources, Public Welfare, Research and
Development, Development of Ancillary industries, and Social Justice.
• As compared to huge investment, public enterprises do not earn reasonable returns.

Lack of financial controls, wastage of resources, and unstable pricing policy results in
losses. The arguments against public enterprises are poor project planning, unclear
objectives and pricing policy, over-capitalisation, delayed public projects, over-staffing,
inefficient management, etc.
• The pendulum of economic growth in India is shifted from public sector to the private
sector and gave birth to LPG in the economy.
• The role of private sector increased in the service sectors such as education, health,
insurance, and banking. Liberalisation regime led to restructuring and consolidation of
Indian Industry.

8. GLOSSARY
• Ancillary industry: It is the industry that has fixed investments in plant and machines
which do not exceed 1 crore rupees.
• Balanced regional development: It means equal development of all regions within

one country.
• Public enterprise: A business organisation that is wholly or partly owned by the state
and controlled through a public authority.
• Private company: A business or industry that is managed by independent companies

or private individuals.
• Over-capitalisation: It is the situation when the company has raised capital beyond
the specific limit.
Short Answer Questions
Q1. Explain the concept of public sector in India.
Q2. What are the categories of public enterprises?
Q3. What are the essential roles of the public sector in the economic development of a
country?
Q4. Describe any five problems of public sector.
Q5. Write a short note on emergence of privatisation.
Long Answer Questions

Q1. Describe the categorisation of public enterprises in India.
Q2. “The public sector plays an important role in the economic development of the country.” In
light of this statement, explain the role of public sector in economic development.

10. ANSWERS
1. False
2. Public sector company
3. Manufacturing Public Enterprises
4. National Small Industries Corporations
5. Balanced Regional Development
6. True
7. Tertiary
8. False
9. Leadership
10. Liberalisation, Privatisation, and Globalisation
11. True
12. External debt crisis; collapse of socialist regimes

ANSWER 1. In India, a public sector company can be defined as a company in which the
Union Government or State Government or any Territorial Government owns a share of 51%
or more. There are only some sectors reserved for the government that are railways, police,
taxation, atomic energy, and explosive material.
For more details, refer Section 2 Introduction to Public Sector in India.
ANSWER 2. The different categories of public enterprises are Commercial Public

Enterprises, Manufacturing Public Enterprises, Financial Public Enterprises, Promotional
Public Enterprises and public utilities.
For more details, refer section 2 Introduction to Public Sector in India.
ANSWER 3. The essential roles of the public sector in the economic development of a country
like India are promoting economic development by filling gaps in the industrial structure,
promoting infrastructural facilities for the growth of the economy.
ANSWER 4. As compared to huge investment, public enterprises do not earn reasonable

returns. Lack of financial controls, wastage of resources, and unstable pricing policy result

in losses. The arguments against public enterprises are poor project planning, unclear
objectives and pricing policy, over-capitalisation, delayed public projects, over-staffing,
inefficient management, etc.
For more details, refer Section 8.4 Problems of Public Sector.
ANSWER 5. In 1991, government dismantled its old development policies and overhauled
the entire economic system with denationalisation, delicensing, devaluation, and
disinvestment. Thus, the pendulum of economic growth in India is shifted from public sector
to the private sector and gave birth to LPG in the economy.
For more details, refer Section 5 A Shift from Public Sector: Emergence of Privatisation.

ANSWER 1. The different categories of public enterprises are Commercial Public
Enterprises, Manufacturing Public Enterprises, Financial Public Enterprises, Promotional
Public Enterprises and Public Utilities. Commercial Public Enterprises are not engaged in
the manufacture of any product or service. Manufacturing Public Enterprises Produce
capital, as well as consumer goods. They provide infrastructural facilities to provide an
investment base to private entrepreneurs.
ANSWER 2. The contribution of public enterprises to the country's economy is described as

follows:
• Employment Generation: There are millions of jobs created by the public sector of the
economy. It contributes a lot towards the improvement of working and living
conditions of workers. In the organised industrial sector, public sector accounts for
about two-thirds of the total employment. Public sector protects the employment of
millions by taking over sick units. The public sector employs firefighters, teachers,
police officers, etc. for maintaining a safe and productive community. The public sector
is not revenue-driven. The jobs in the public sector are funded by tax payers. Also, the
employment in the public sector is more stable and linked to attractive retirement and
health benefits.

• Balanced Regional Development: This implies uniform distribution pattern of the

planned investment in the different regions of a country. The distribution of investment
is done in such a way that the growth rates in all the regions are equally attained. This
eliminates the regional disparities in the country. In India, public sector industries
focus on setting the plants and industries in backward regions of the country. These
areas lack some important and basic facilities, such as electricity, water supply, etc. The
public sector is able to provide these facilities that had led to the complete
transformation of the socio-economic life of the people in these regions. Examples
include Steel plants of Bhilai, Rourkela, and Durgapur; fertiliser factory at Sindri, etc.
Private companies focused on the industrial areas; however, public companies focused
on maintaining the regional balance. Both private and public sector’s role in economic
development is necessary.
For more details, refer Section 3 Role of Public Sector in Economic Development
BOOKS:
• Martinussen, J. (1980). The Public Industrial Sector in India. , Denmark: Institute of
Political Science, University of Aarhus.
• Ramanadham, V. V. (1989). Privatisation in Developing Countries. London: Routledge.
REFERENCES:
• Role of Public Sector and Private Sector in India. (2016, March 01). Retrieved from
https://www.economicsdiscussion.net/india/role-of-public-sector-and-private-
sector-in-india/19190
• Balanced Regional Development – What Does It Mean ... (n.d.). Retrieved from
https://www.wdc.ie/balanced-regional-development-what-does-it-mean/

SEMESTER 2
DCM1206
Unit 9 : Public Sector 1

Unit 9
Public Sector
Table of Contents
SL Topic Fig No / Table / SAQ / Page No

No Graph Activity
1 Introduction - -
3-4
2 Government Policies of Public Sector - 1 5-7

3 Problems of Public Sector - 2 8 - 10
4 The Issue of Privatisation - 3 11 - 13
6 Summary - - 14 - 15
7 Glossary - - 15
9 Answers - - 16 - 19

1. INTRODUCTION
The public sector plays a significant role in the socio-economic policies of the country by
building the required infrastructure, along with enabling the architecture national
development. Management of the public sector involves the managing of financial, financial,
productivity, and other forms of resources. Public sector management involves the process
of planning, formation, and execution of various projects, programmes, and policies for
delivering goods and services for the people in the country. The different governmental and
institutional arrangements are involved in the activities to meet the socio-economic needs
of the country and to fulfil the development plans of the nation. The public sectors are
involved in creating sound public policies and laws aimed at promoting harmony, stability,
and growth in the economy. The formation of public sector programs is involved with
balancing various solutions that address different aspects of problems. Every policy has
three main factors, such as problem definition, goals to be achieved, and the policy
instruments to address the problem and achieve the goals. The public sector policies are
concerned with the general welfare and development of the society that includes
programmes such as providing enforcement of law and order, provision of education &
employment opportunities, economic stabilisation, anti-pollution legislation, and more.
Public sector programs and policies respond to the needs of society and protect the people
through laws and regulations that protect the rights of the public. Public sector policies are
made and implemented to attain certain objectives of the government for the benefit of the
public that involves many participants in different roles. These policies spell out the
programmes of government with a purposive course of action taken to deal with a problem
or concern. The public sector is concerned with the general welfare and development of the
society that includes programmes such as providing enforcement of law and order, provision
of education and employment opportunities, economic stabilisation, anti-pollution
legislation, and more. The finances in the public sector come from taxes, grants, investments,
donations, and more. The public sector companies are state-owned, government-owned
companies, public-owned companies, government business organisations, public sector
undertakings, and more that undertake various activities on behalf of the government.

❖ Explain the government policies of the public sector

❖ Discuss about the problems of the public sector
❖ Describe the issues of privatisation

2. GOVERNMENT POLICIES OF PUBLIC SECTOR
The government policy framework for the public sector is determined by a broad set of
regulations, laws, ordinances, policies, and more that is used for governing the actions of
groups and organisations. The problems associated with policies need to be addressed by
laws and regulations adopted by the government for reaching a solution. The policies are
goal-oriented to fulfil certain objectives the government has in mind for the people of the
country. The primary reason for the creation and implementation of these policies is the
welfare of the citizens of the country. Public policies are made for implementing a solution
to problems faced by society and they are made for their betterment.
The broad set of public policies are made:
• In response to some sort of issue or problem that requires attention

• Policies are in form of law, or regulation, or the set of all the laws and regulations that
govern a particular issue or problem
• Following what the government chooses to do (in actuality) or not do (implied) about
a particular issue or problem
• Is made for the welfare of the public
• Is oriented towards a goal or desired state that includes a solution to a problem
• Is made by governments or through the interaction of government and the public
• Is an ongoing process that does not always have a clear beginning or end, since the
decisions about who will benefit from the policies and who will bear the burden
resulting from the policy are continuously reassessed, revisited, and revised
• Public policy may be positive or negative. If it is positive then it requires the concern
and action of the government, and if it is negative then it involves a decision by the
governmental officials regarding not taking any action
The government policies consist of various activities that need to be done in a certain manner
for the benefit of the people in a certain direction. There can be several problems related to
public problems that can originate in many different ways that require different policy
solutions. The government policies for the public sector can be broken into different
categories for addressing the needs of the people to fit into each area of society.

These are:
• Regulatory policies: These are policies that determine the boundaries that are needed
for regulating the activities and processes involved with the regulation of trade,
business, safety measures, public utilities, and more. This type of regulation is done by
independent organisations that work on behalf of the government to regulate the
different sectors of the economy
• Substantive policies: These policies are concerned with the general welfare and
development of the society, the programmes such as provision of education and
employment opportunities, economic stabilisation, law and order enforcement, anti-
pollution legislation, and more
• Distributive policies: These policies are meant for specific segments of society and the
use of government funds for the payment of public goods that are distributive for the
good of the people. It can be in the area of the grant of goods, public welfare or health
services, and more. These mainly include all public assistance and welfare programmes
• Redistributive policies: These are the policies that are concerned with the
rearrangement of policies that are concerned with bringing about basic social and
economic changes
• Capitalisation policies: These policies are concerned with financial subsidies that are
given by the Union government to the state and local governments, such subsidies are
also granted to the central and state business undertakings or some other important
when required
• Facilitating policies: These are used to facilitate the growth of business in an economy
STUDY NOTE
NABARD used to facilitate policy in rural credit and EXIM bank formulates policies to improve the import-export
industry of the country.

1. Government policies for public sectors are prepared keeping in mind the welfare
of public. (True/ False)
2. _______________ policies are framed for general welfare of the people of the society.
3. Which policies are framed for facilitating the growth of business?

3. PROBLEMS OF PUBLIC SECTOR
Public enterprises face innumerable problems such as poor planning and management,
political interference, control by the government and their policies, political instability,
suffering from the technological gap, low motivation, morale, attitude of the employees,
financial mismanagement, lack of funding, and more. There are other major issues related to
the functioning of public sector involving the bureaucratic culture, allocation of resources,
limitations on operational autonomy, tight regulations associated with investments, and
more.
Let us further understand the problems and challenges faced by the public sector companies
are:
• Lack of autonomy and bureaucratic management

The major concern in public sectors is that most public enterprises are run by
bureaucrats who do not have much knowledge concerning the administration and
running of an organisation. They do not have much information and knowledge
concerning industrial trends and practices. There is a lack of autonomy, independence,
and flexibility in running the system, since it is under the control of the bureaucrats and
politicians who eventually affect the performance of the enterprise.
STUDY NOTE
Max Weber is regarded as the father of the bureaucratic management theory. Weber was a German sociologist and a
political economist which considered bureaucracy positive and believed it to be more rational and efficient than
others.
• Unplanned production and delayed decisions
The problem with a lot of public sector enterprises is that they produce products and
services that are outdated and in market demand. They do not take into account the
needs while planning their production, which eventually leads to poor sales and the
company has no alternative but to sell and dispose-off their unsold stocks at a
discounted price. Due to red-tapism and bureaucratic methods, there are delayed
decisions and by the time the decision process takes place, it is too late for any action
for making any changes

• No clear price policy and high overheads
There is no clarity and proper methods of following pricing for the products and other
services. The products and items are being produced arbitrarily and not in line with the
market demand. High cost is incurred and there is no control on costing and reduction
in wastage and cost due to lot wastage on various resources.
• Cost overruns and inconsistent delays
Many projects are delayed due to bad planning and no having enough funds, poor
management, and more reasons. Not having proper planning leads to cost overruns and
incomplete projects due to a lack of funds. Bad planning results in starting the new
project without completing the older ones lead to mismanagement.
• Over-staffing and high employee turnover
The public sectors are normally overstaffed with a high employee turnover, since the
promotions are based more on seniority level rather than on performance, and there
are no incentive schemes for improved performance and they do not have the freedom
of implementing innovative ideas and methods at work. The people work on obsolete
technologies and salaries paid to them are also very low ad compared to the private
sectors. The basic pension costs and salary costs are high in the public sector.
STUDY NOTE
Employee turnover is a tool to measure the number of employees that leave the organisation during a particular time
period. High employee turnover causes operational inconveniences.
• Low capacity utilisation and poor productivity
Due to the lack of planning, there are inefficiencies in managing the processes and
having control over the projects that result in poor productivity. This results in major
losses and there is a low motivation level of the employee that has a major impact on
the productivity levels of these enterprises. Due to these reasons, there is a low capacity
utilisation
• Poor work ethics and low profitability

The people in public sectors are not very dedicated to their work and they do not find
enough reasons for working hard since they enjoy job security and there are labour
unions that are politically affiliated for protecting the rights of the people. This leads to
low productivity and eventually, low profitability, and many companies suffer major
losses and the government needs to regularly infuse them with money to make them
run
• Poor labour management relations and corruption
Many public sector companies are poorly managed and the companies are perpetually
on strikes due to their strained relations with the unions. There are regular agitations
that result in low employee productivity, low motivation and morale, reduced output,
and poor quality of goods being produced. Many of the companies are dominated by
political conditions and there is rampant corruption with certain people enjoying
undue favours and politically instigated patronage
• Dependent on government funding and low-quality output
Most of these companies are dependent on the government for their funding which is
not certain at times. They are not able to plan their investments for longer terms
effectively, due to which the lack of investment done on technology and buying of
inferior quality of raw materials resulting in low quality of output. Due to these reasons,
the public sector companies are unable to keep up with the private sector companies.
4. Most public enterprises are run by the autocrats. (True/ False)
5. ________________ interference worsens the situation of public units.

4. THE ISSUE OF PRIVATISATION
The government today is aware of the relative strength and efficiency of commercial
activities and operations of the private sectors, which have prompted them to address issues
and moving toward the process of privatising certain projects. It also requires the need of
tapping and making use of investment sources outside the domain of government funding
by collaborating with the private sectors. It requires making use of private infrastructures
and services and shares the risks of the dynamic economy, along with being able to quickly
respond to market demand and opportunities. The important strengths of the private sector
are:
• Robust management and their ability to recruit and using qualified personnel,
managers, and technicians
• Have the flexibility and freedom of operating outside the constraints of political and
bureaucratic and political conditions
• Effective relations with labour unions and better labour management by the private
enterprises
• Have the ability to be competitive in the global markets for trading with a better
experience in developing operational facilities and providing services
• Better access to resources for investment in the infrastructure and better facilities for
trading
These are reasons and attributes due to which the government sector promotes the
involvement of the private sector for improving efficiency and productivity and due to their
speedy decision and making investments they can respond quickly to market changes. It
helps with reducing the administrative and financial burden on the public sectors and
reduces the demand for government resources with regards to human resources and time
management. Promoting the involvement of the private sector in the economy has helped
the public sector to generate maximum revenue by reducing the need for investments. It has
helped to attract new and additional forms of business and trading, and the involvement of
the private sectors has also enabled the sharing of risk and makes an appropriate return on
its investments.

Privatisation brings in more efficiency because the private sector enterprises run their
business economically by eliminating wasteful spending and bringing objectivity to the
company which is what the public sectors are not concerned about. The public sector
indulges in the privatisation of the public sector companies by the following processes:
• Disinvestment: This is the process where the public sector companies sell off parts of
the equity of PSEs to the public. It is done to facilitate the process of better financial
position and efficiency.
• Transfer of ownership: In this method, the public sector companies are converted to
private companies by the total sale of public sector companies or by the government
withdrawal from the ownership and management of public sector companies
These methods can be undertaken by:
• Selling off public shares

• Public tenders and auction
• Direct negotiations
• Lease with rights to purchase
• Total transfer of control of the company
Privatisation leads to enhancing the services with a reduction in the cost of production and
increase in profits and it brings down the burden on the government. It has created a major
impact and many public sectors are collaborating with the private sectors to take over
certain industries.
STUDY NOTE
Privatisation was primely introduced by former Prime Minister Manmohan Singh. Privatisation process initiated in
1991-92.

6. Making use of private infrastructure is the central idea of privatisation. (True/

False)
7. Privatisation brings in more efficiency because the private sector enterprises

run their business economically. (True/ False)
8. In ______________ method, the public sector companies are converted to private

companies by the total sale of public sector companies.
5. CONCEPT MAP

6. SUMMARY
• The public sector plays a significant role in the socio-economic policies of the country
by building the required infrastructure, along with enabling the architecture national
development.
• Public sector programs and policies respond to the needs of society and protect the
people through laws and regulations while protecting the rights of the public. Public
sector policies are made and implemented to attain certain objectives of the
government for the benefit of the public that involves many participants in different
roles.
• The government policy framework for the public sector is determined by a broad set of
regulations, laws, ordinances, policies, and more that is used to govern the actions of
groups and organisations.
• Public policies are made for implementing a solution to problems faced by society and
they are made for their betterment.
• The government policies consist of various activities that need to be done in a certain
manner for the benefit of the people in a certain direction.
• Public enterprises face innumerable problems such as poor planning and management,
political interference, control by the government and their policies, political instability,
low motivation, morale, attitude of the employees, financial mismanagement, lack of
funding, and more.
• Due to lack of planning, there are inefficiencies in managing the processes and having
control over the projects that result in poor productivity
• Most of these companies are dependent on the government for their funding which is
not certain at times. They are not able to plan their investments for longer terms
effectively, due to which, there is lack of investment done on technology and buying of
inferior quality of raw materials, which results in low quality of output.
• The government today is aware of the relative strength and efficiency of commercial
activities and operations of the private sectors, which have prompted them to address
issues and moving towards the process of privatising certain projects.

• These are reasons and attributes due to which the government sector promotes the
involvement of the private sector for improving efficiency and productivity, and due to
their speedy decision and making investments they can respond quickly to market
changes.
• Privatisation brings in more efficiency because the private sector enterprises run their
business economically by eliminating wasteful spending and bringing objectivity to the
company which is what the public sectors are not concerned about.
7. GLOSSARY
• Public sector: This consists of enterprises that are owned by the governments or are
controlled or funded by the publicly funded agencies and other entities and are
involved with delivering services and goods to the public
• Public policies: These are made for implementing a solution to a problem faced by
society and it is done for their betterment
• Regulatory policies: These are the policies that determine the boundaries which are
needed for regulating the activities and processes involved with the regulation of trade,
business, safety measures, public utilities, and more
• Distributive policies: These policies are meant for specific segments of society. It is
for the use of government funds for the payment of public goods that are distributive
for the good of the people
employment opportunities, economic stabilisation, law and order enforcement, and
more.
• Bureaucratic: This is a system of government where important decisions are taken by
the government officials and not by the elected representatives

SHORT QUESTIONS
Q1. What is the role of public sector in socio-economic policies?
Q2. Explain the need for public sector programmes and policies.
Q3. What are distributive policies?
LONG QUESTIONS
Q1. Why are public policies made?
Q2. Explain the need for regulative and substantive policies.
Q3. Explain any three problems of public sector.
9. ANSWERS
SELF ASSESSMENT QUESTIONS
1. True
2. Substantive
3. Facilitating
4. False
5. Political
6. True
7. True
8. Transfer of ownership
TERMINAL QUESTIONS
SHORT QUESTIONS
ANSWER 1. The public sector plays a significant role in the socio-economic policies of the
country by building the required infrastructure, along with enabling the architecture
national development. Management of the public sector involves the managing of financial,

financial, productivity, and other forms of resources. Public sector management involves the
process of planning, formation, and execution of various projects, programmes, and policies
to deliver goods and services for the people in the country.
For more details, refer Section 1. Introduction.
ANSWER 2. Public sector programmes and policies respond to the needs of society and
protect the people through laws and regulations that protect the rights of the public. Public
sector policies are made and implemented to attain certain objectives of the government for
the benefit of the public that involves many participants in different roles. These policies
spell out the programmes of government with a purposive course of action taken to deal with
a problem or concern. The public sector is concerned with the general welfare and
development of the society that includes programmes such as providing the enforcement of
law and order, provision of education and employment opportunities, economic
stabilisation, anti-pollution legislation, and more.
ANSWER 3. The distributive policies are meant for specific segments of society and the use
of government funds for the payment of public goods that are distributive for the good of the
people. It can be in the areas of the grant of goods, public welfare or health services, and
more. These mainly include all public assistance and welfare programs
For more details, refer Section 2. Government Policies of Public Sector.
LONG QUESTIONS
ANSWER 1. The primary reason for the creation and implementation of these policies is the
welfare of the citizens of the country. Public policies are made to implement a solution to
problems faced by society for their betterment. The broad set of public policies are made:
• In response to some sort of issue or problem that requires attention

• Policies are in form of law, or regulation, or the set of all the laws and regulations that
govern a particular issue or problem

• Following what the government chooses to do (in actuality) or not do (implied) about
a particular issue or problem
• Is made for the welfare of the public
• Is oriented toward a goal or desired state that includes a solution to a problem.
• Is made by governments or through the interaction of government and the public
• Is an ongoing process that does not always have a clear beginning or end, since the
decisions about who will benefit from the policies and who will bear the burden
resulting from the policy are continuously reassessed, revisited, and revised
• Public policy may be positive or negative. If it is positive, then it requires the concern
and action of the government and if it is negative then it involves a decision by the
governmental officials regarding not taking any action
• For more details, refer Section 2. Government Policies of Public Sector.
ANSWER 2. The government policies consist of various activities that need to be done in a
certain manner for the benefit of the people in a certain direction. There can be several
problems related to public problems that can originate in many different ways which require
different policy solutions. The government policies for the public sector can be broken into
different categories to address the needs of the people to fit into each area of society. These
are:
• Regulatory policies: These are the policies that determine the boundaries which are
needed to regulate the activities and processes involved with the regulation of trade,
business, safety measures, public utilities, and more. This type of regulation is done by
independent organisations that work on behalf of the government to regulate the
different sectors of the economy
employment opportunities, economic stabilisation, law and order enforcement, anti-
pollution legislation, and more. For more details, refer Section 2. Government Policies
of Public Sector.

ANSWER 3. Public enterprises face innumerable problems such as poor planning and
management, political interference, control by the government and their policies, political
instability, low motivation, morale, attitude of the employees, financial mismanagement, lack
of funding, and more. Let us further understand the problems and challenges faced by public
sector companies:
• Lack of autonomy and bureaucratic management
The major concern in public sectors is that most public enterprises are run by
bureaucrats who do not have much knowledge concerning the administration and
running of an organisation. They do not have much information and knowledge
concerning industrial trends and practices. There is a lack of autonomy, independence,
and flexibility in running the system since it is under the control of the bureaucrats and
politicians, who eventually affect the performance of the enterprise.
• Unplanned production and delayed decisions
The problem with a lot of public sector enterprises is that they produce products and
services that are outdated and in market demand. They do not take into account the
needs while planning their production, which eventually leads to poor sales and the
company has no alternative but to sell and dispose-off their unsold stocks at a
discounted price. Due to red-tapism and bureaucratic methods, there are delayed
decisions and by the time the decision process takes place it is too late for any action
for making any changes
• No clear price policy and high overheads
There is no clarity and proper methods of following pricing for the products and other
services. The products and items are being produced randomly and not in line with the
market demand. High cost is incurred and there is no control on costing and reduction
in wastage and cost due to a lot of wastage on various resources.
For more details, refer Section 3. Problems of Public Sector.


BOOKS
• Nigro, L. G. (1984). Decision making in the public sector. Atlanta: Marcel Dekker.
• CARNEVALE, D. (2019). ORGANIZATIONAL DEVELOPMENT IN THE PUBLIC SECTOR. S.l.:
ROUTLEDGE.
• Lane, J. (2000). The public sector: Concepts, models and approaches. London: SAGE
Publications.
REFERENCES
• Public sector. (n.d.). Retrieved from https://www.britannica.com/topic/public-sector

• Roles Played by Public Sector in Indian Economy. (2015, July 12). Retrieved from
https://www.yourarticlelibrary.com/economics/indian-economy/roles-played-by-
public-sector-in-indian-economy/62893

SEMESTER 2
DCM1206
Unit 10 : Agriculture in India 1

Unit 10
Agriculture in India
Table of Contents

No Graph Activity
1 Introduction - -
3-4
2 Agriculture Production & Productivity: The

- 1 5-8
Role of Agriculture
3 Nature of India’s Agriculture and Agriculture

- 2
Policy In India 9 - 14
3.1 Recent Trends - -
5 Summary - - 15 – 16
6 Glossary - - 16
8 Answers - - 17 – 20

1. INTRODUCTION
Agriculture has a significant role to play in the Indian economy and the majority of the
population in the country is dependent on agriculture. The contribution of agriculture to the
total GDP of the country is at 18% and it holds an important place as the primary sector of
the Indian economy.
Indian agriculture has shown impressive growth over the last few years and it is a mode of
employment for more than 61% of India’s population. More than 44% of the geographical
area of India is used for agriculture which has resulted in a major increase in the production
of grains from 52 million tonnes to over 300 million tonnes since Independence.
Agriculture has helped the Indian economy with:
• Contributing to the share in National Income

• Largest sector for employment
• A major contribution to resources for capital formation
• Helped with providing raw material to the industries
• They created a market for industrial products
The economic development of the country is dependent on agriculture and it is concerned

with the utilisation of resources, distribution, and allocation of resources needed for farming
and agriculture. Agriculture helps with providing surplus that is converted to funds that
helps with buying types of equipment needed for the economic development of the country
for the welfare of the people.
The funds are used for building roads, infrastructure, and providing for other kinds of public
services. In recent years, India has made a lot of progress and advances in the production of
agriculture with the introduction of high-yielding seeds. India has also initiated the proper
use of fertilizers and improved methods of water management systems like water
harvesting.
Agriculture has also helped with the expansion of the industrial sector since the time of
industrial revolution with the supply of raw materials. Agriculture has also contributed to
the supply and earning of foreign currency because it has contributed with its surplus in

export of grains and crops to other countries and international markets without much
investment.
❖ Discuss about agriculture production and productivity: The role of Agriculture

❖ Explain the nature of India’s agriculture and agriculture policy in India
❖ Describe the recent trends in agriculture

2. AGRICULTURE PRODUCTION & PRODUCTIVITY: THE ROLE OF

AGRICULTURE
Agricultural production and productivity involve evaluating and assessing the relationships
of production and the principles involved with logical decision-making for optimising the
use of agricultural resources and also rationalising the use of production inputs for the total
economy.
Even though production and productivity are closely related to each other they are however
different from each other. Production is seen as the total volume of the net produce of output
of a crop from agricultural land in a particular season or annually. On the other hand,
productivity deals with the rate of production which is calculated as the amount of output
per unit input.
Agricultural production is necessary for sustaining the growing population of the country
and for that it is required to increase the level of productivity. Increasing productivity is
necessary to increase the inputs required for production and efficient use of resources for
increasing the level of production output. It involves the selection of the various production
inputs and patterns of land, labour, capital, and management along with efficient use of
resources to optimise the level of production.
The agricultural production in the country can be increased by measures:
• By determining the best use of resources considering the changing needs,

requirements, values, and goals of the society.
• Helping the policymakers with determining effective measures required for alternative
public policies for increasing output, resources and profits.
• Analysing methods for improvement in farm management and understanding the
various aspects of methods and operations of the farm for profit maximisation.
• Assess the impact of changes in technical and institutional aspects on the use of
resources and agricultural production.
• Establish methods for agricultural adjustments in the supply of output and use of
resources with the changes in economic variables of the economy
The role of agriculture in the economy will be clearer from the following facts:

Influence of Agriculture on national income
Agriculture has been a major contributor to the national income of the country. Today
agriculture contributes almost 60% or more towards the gross domestic product (GDP) of
the country.
Plays a significant role in generating employment
More than two-thirds of the population in the country are involved with agriculture and
agriculture is their source of living. The agriculture sector employed over 55% of the
population in the country.
STUDY NOTE
Agriculture is also a prime source of disguised unemployment. Disguised unemployment can be explained as a
situation where the productivity is low and frequently accompanied by informal labour markets and agricultural
markets.
Provides food for the population in the country
The increase in population has put enormous pressure on the agricultural sector and there
is a major demand for food due to which the production of food increases at a rapid pace.
The income elasticity of demand for food is very high in the country due to an increase in
demand for food and a lesser increase in the capita income. Therefore, it is essential for
agriculture to increase its surplus of food grains to avoid any form of crisis in the country.
Contributes to capital formation
Agriculture plays a significant role in capital formation in the country since it is one of the
largest sectors in India. Hence it plays an important role in boosting the rate of capital
formation. There are several government policies made in the country for extracting the
surplus from the agricultural sector.
Supplies raw material to industries
Agriculture is an important supplier of raw products to the agro-based industries of jute,

cotton, sugar, textile mills, and more. There are also other food processing industries that
are dependent on agriculture.

The market for industrial products
Since the majority of the Indian population lives in rural areas hence, it is essential to
increase the purchasing capability in their purchasing power for industrial development.
After independence, the purchasing power of the farmers in the country increased because
of their increase in income and lesser burden of taxes.
A major influence on internal and international trading
Agriculture plays an important role in the internal and external trading of food grains and
other kinds of agricultural products in the international markets. For many years the export
of jute, cotton and tea has added to more than 52% of export earnings in the country and
also contributed to the expansion of the service sector.
Contributed to the government budget
After independence and from the initiation of the First Five Year Plan agriculture has been
the main revenue-generating sector for the country and adding to the central and the state
budgets. Agriculture, along with its other subsidiaries, in form of animal husbandry, fishing,
poultry farming, rearing of cattle, and more have contributed to the government budgets.
STUDY NOTE
Indian Agriculture budget doubled over a period of 5 years to Rs. 57,600 crore in the accounting year 2016-17 as
compared to the one presented in the year 2013-14.

1. Agricultural production can be increased by improving farm management.
(True/False)
2. _____________ is an important supplier of raw products to the agro-based
industries.
3. Agriculture plays an important role in the ___________ and _____________ trading of
food.

3. NATURE OF INDIA’S AGRICULTURE AND AGRICULTURE POLICY IN

INDIA
The agriculture sector has gone through a major change from the time of independence and
being subsistence in nature in the early period to the present time moving towards a high-
tech agribusiness. The production is not confined only to the farm level but today it has
moved to the method of processing, storing, and distributing various forms of agricultural
products from the different kinds of agribusiness industries.
The government has taken initiatives of creating agricultural policies for raising agricultural
production and productivity so that it increases the level of income and improves the
standard of living for the people in the country. India is the second-largest producer of wheat
and rice in the world, and it is the world’s largest producer of pulses, spices, and spice
products. According to Food and Agriculture Organization, “India is the world’s largest
producer of rice, wheat, sugarcane, groundnut, vegetables, fruit, and cotton. It is also one of
the leading producers of spices, fish, poultry, and livestock and plantation crops.”
According to the data provided by Central Statistical Office, “Agriculture has a significant
contribution in India’s GDP and the year 2018-19, agriculture contributed to about 15% of
India’s GDP.”
Agriculture in India is the backbone of the Indian economy and over 50% of the people in
the country depend on agriculture which is the main source of income for them. More than
7% of agricultural production is converted into processed food and many people in the
country are directly or indirectly connected with agriculture and some people are involved
in doing business with the agricultural goods.
The domestic demand for agriculture is very high which is sustained with the help of
agriculture. The Government of India has introduced many policies for supporting the
agricultural sector in terms of providing land, bank loans and other kinds of farm machinery
for the rural farmers for bringing an improvement in the Indian economy. Since the
development of agriculture helps with providing an overall development of the country and
it helps with decreasing the rural and urban gap of the society.

The government has been taking many steps for dealing with the issues related to the
agricultural sector and has introduced many schemes for supporting the farmers. The
government has introduced several policies for provided farmers with an improved variety
of seeds, fertilizers, and nutrients for increasing productivity depending on the soil quality
of the land. The policies are made for a total comprehensive improvement and development
of the agricultural sector. The main focus of the agricultural policy of the government is for
removing the major problems of the agricultural sector.
In 2015, Pradhan Mantri Krishi SinchayeeYogna was launched to increase the extent of
irrigation and improving the efficiency of water for agriculture
The Paramparagat Krishi Vikas Yojana (PKVY) was introduced in 2015 for promoting
organic farming. Thereafter, Pradhan Mantri Fasal Bima Yojana (PMFBY) was introduced in
2016 for providing insurance cover to the framers in case of damage to their crops because
of natural calamities, diseases, or pests. Apart from this, many other schemes are launched
for the fishermen, insurance schemes for Livestock for protecting the cattle-rearers and the
farmers.
The significant objectives of the Indian agricultural policies are:
• For increasing the productivity the Inputs for purchasing better quality and high-
yielding seeds, fertilizers, pesticides, improvement in different irrigation projects, and
more. The policy aimed at improving the bio-security of the farmland, crops, cattle, fish,
and forest trees for protecting the livelihood and income security of the farmers.
• The major objective of the agricultural policies is to increase agriculture productivity
along with adding smaller holding for raising the value-added per hectare of land. The
policy aimed at protecting and improving the land conditions, resources, biodiversity
needed for the increase in productivity and bringing stability to the farming systems.
• The focus of the policies is for protecting the interest and the living conditions of the
marginal and the poor farmers in the villages and increasing the net income of the
farmers for ensuring agricultural progress. The policies aimed at removing the various
issues and intermediaries related to land reforms providing support to the farmers
with institutional credit facilities and more.

• Introducing of latest technologies for modernising the agricultural sector and using of
improved variety of high-yielding seeds and other inputs.
• The agricultural policies are made for checking degradation of the land and the
environment and for developing other support services of providing the farmers with
high-yielding seeds, machinery, and implements, irrigation, power, fertilizers and
credit facilities at affordable prices
• The policies were made for the facilities of agricultural research and training and to
provide enhanced methods to the farmers for improving their productivity.
• The policy was also aimed at removing the bureaucratic obstacles and issues related to
the cooperative societies and other institutions
• The focus of the policies was to provide effective risk management measures for proper
and timely compensation to farmers. It aimed at providing proper price and trade
policy methods for increasing the profitability and income of the farmers.
• The government policies aimed at making India a global outsourcing hub for the
production and supply of various inputs required for sustained agricultural progress
and using Information and Communication Technology and biotechnology for
developing processes and products.
Source: Government of Punjab
3.1 Recent Trends
The process of liberalisation has resulted in creating several favourable impacts on the
agricultural sector and the economy of the country. The application of the latest technologies
and modern techniques, diversifying of the sector, increasing productivity, improved

investments, increased volume of export of and developing of food processing industries,

developing of floriculture and horticulture have added to the emerging trends in agriculture.
The labour-intensive economy has helped with the development of its agricultural and other
sectors, which has put them in an advantageous position due to an increase in population.
Liberalisation and globalisation have helped with the modernisation and development of the
agricultural sector and also have provided an opportunity to achieve the maximum benefit
from an increase in agricultural exports. In the latest trends, the changes in agriculture are
based on:
• Digital innovation
The process of digital innovation has helped with streamlining the policies procedures,
the building of required infrastructure, implementing and commercialising the new
innovative methods and providing incentives for using the innovations for boosting the
adoption of digital solutions in the agricultural businesses
STUDY NOTE
Agriculture has now become more sophisticated with usage of technologies like robots, temperature and moisture
sensors, GPS technology, and aerial images. These technologies have brought in precision agriculture and made it
more profitable, safer, efficient, and environmentally friendly.
• Strategies for mitigation of climate risk
Climate change has a major impact on agriculture which is a big concern of the
government due to flooding of lands and also due to low rainfall resulting in an
unseasonal drought. The focus of the government is on introducing methods and
strategies for overcoming the challenges faced by climatic changes. The government
introduced methods for implementing and mitigating risks of flooding and other
agricultural hazards by installing early warning systems.
• Initiating price control
The government has initiated the scheme of ‘Operation Greens” where an amount of Rs
500 crores was provided to the different organisations and processing facilities and
professional management and Farmer Producers Organizations (FPOs). The various

initiatives were introduced for stabilising the demand and supply of crops and
initiating methods for price control.
• Introducing water management initiatives
The government has brought in many forms of water management initiatives that
include drip irrigation facilities, watershed management, water harvesting, and more
for improving the supply of water and for strengthening the agricultural sector.
• Creation of Farmer producer organizations (FPO)
The producer organisations have benefited the farmers, fishermen, weavers, rural
artisans, dairy owners, fishermen, and various craftsmen in the rural areas for ensuring
better facilities of income and using this scheme for providing the farmers with
business security, access to finance, crop management techniques, better insurance
plans, and more.
• Agricultural exports
The recent trends have seen an increase in exports of agricultural products which has
been possible due to government initiatives, low labour costs, the lower unit cost of
inputs, and favourable climatic conditions. The increase in the exports sector helps with
will diversifying the operations of agriculture by generating more jobs and increasing
the share of the country's trade in the international markets.
Source: https://www.aic-pinnacle.org/2020/01/07/emerging-trends-in-indian-
agriculture/

4. Agriculture in India, is a backbone of ______________.
5. In 2015, Pradhan Mantri Krishi Sinchayee Yogna was launched to increase the
extent of irrigation and improving the efficiency of water for agriculture.
(True/False)
6. What is the full form of FPO?
4. CONCEPT MAP

5. SUMMARY
• Agriculture has a significant role to play in the Indian economy and the majority of the
population in the country is dependent on agriculture.
• More than 44% of the geographical area of India is used for agriculture which has
resulted in a major increase in the production of grains from 52 million tonnes to over
300 million tonnes since Independence.
• The economic development of the country is dependent on agriculture and it is
concerned with the utilisation of resources, distribution, and allocation of resources
needed for farming and agriculture.
• Agriculture has also contributed to the supply and earning of foreign currency because
it has contributed with its surplus in the export of grains and crops to other countries
and international markets without much investment.
• Agricultural production and productivity involve evaluating and assessing the
relationships of production and the principles involved with logical decision-making
for optimising the use of agricultural resources and also rationalising the use of
production inputs for the total economy.
• Increasing productivity is necessary to increase the inputs required for production and
efficient use of resources for increasing the level of production output.
• The agriculture sector has gone through a major change from the time of independence
and being subsistence in nature in the early period to the present time moving towards
a high-tech agribusiness.
• The government has taken initiatives of creating agricultural policies for raising
agricultural production and productivity so that it increases the level of income and
improves the standard of living for the people in the country.
• Agriculture in India is the backbone of the Indian economy and over 50% of the people
in the country depend on agriculture which is the main source of income for them.
• The government has been taking many steps for dealing with the issues related to the
agricultural sector and has introduced many schemes for supporting the farmers.
• The process of liberalisation has resulted in creating several favourable impacts on the
agricultural sector and the economy of the country.

• The labour-intensive economy has helped with the development of its agricultural and
other sectors which has put them in an advantageous position due to an increase in
population.
• Liberalisation and globalisation have helped with the modernisation and development
of the agricultural sector and also have provided an opportunity to achieve the
maximum benefit from an increase in agricultural exports.
6. GLOSSARY
• Agriculture: Involves methods used for cultivating the soil for growing crops, raising
livestock and marketing various kinds of agricultural products
• Livestock: are domesticated animals like cattle, sheep, pigs, goats, horses and more
raised in the agricultural environment
• National Income: Refers to the value and worth of goods and services produced by a
country in a specific year or time period
• Economic Development: refers to the policies, activities and procedures adopted for
improving the economic conditions and standard of living in the economy of the
country
• Agricultural Productivity: is the measuring the ratio of the output of agriculture from
the number of inputs
• Agricultural Policies: are a set of laws and regulations implemented by the
government for increasing agricultural production and productivity in the country.

SHORT ANSWER QUESTION
Q1. Explain the role of agriculture in the economy
Q2. What is the influence of agriculture on national income?
Q2. Explain the contribution of agriculture towards capital formation
LONG ANSWER QUESTIONS
Q1. How has agriculture helped the Indian economy?
Q2. What is the role of agricultural production and productivity in the country?
Q3. Explain the nature of the agricultural sector in India
8. ANSWERS
1. True
2. Agriculture
3. Internal; External
4. Economy
5. True
6. Farmer Producers Organizations
TERMINAL QUESTIONS
SHORT QUESTIONS
ANSWER 1. Agriculture has a significant role to play in the Indian economy and the majority
of the population in the country is dependent on agriculture. The contribution of agriculture
to the total GDP of the country is at 18% and it holds an important place as the primary sector
of the Indian economy. Indian agriculture has shown impressive growth over the last few
years, and it is a mode of employment for more than 61% of India’s population.

For more details, refer Section 2. Agriculture Production & Productivity: The Role of
Agriculture.
ANSWER 2. Agriculture has been a major contributor to the national income of the country.
Today agriculture contributes almost 60% or more towards the gross domestic product
(GDP) of the country.
Agriculture.
ANSWER 3. Agriculture plays a significant role in capital formation in the country since it is
one of the largest sectors in India. Hence it plays an important role in boosting the rate of
capital formation. There are several government policies made in the country for extracting
the surplus from the agricultural sector.
Agriculture.
LONG QUESTIONS
ANSWER 1. More than 44% of the geographical area of India is used for agriculture which
has resulted in a major increase in the production of grains from 52 million tonnes to over
300 million tonnes since Independence.
Agriculture has helped the Indian economy with:
• Contributing to the share in National Income

• Largest sector for Employment
• A major contribution to resources for capital formation
• Helped with providing raw Material to the industries
• They created a market for industrial products
The economic development of the country is dependent on agriculture and it is concerned

with the utilisation of resources, distribution, and allocation of resources needed for farming
and agriculture. Agriculture helps with providing surplus that is converted to funds that
helps with buying types of equipment needed for the economic development of the country

for the welfare of the people. The funds are used for building roads, infrastructure, and
providing for other kinds of public services.
Agriculture.
ANSWER 2. Agricultural production and productivity involve evaluating and assessing the
relationships of production and the principles involved with logical decision-making for
optimising the use of agricultural resources and also rationalising the use of production
inputs for the total economy. Even though production and productivity are closely related
to each other they are however different from each other. Production is seen as the total
volume of the net produce of output of a crop from agricultural land in a particular season
or annually. On the other hand, productivity deals with the rate of production which is
calculated as the amount of output per unit input. Agricultural production is necessary for
sustaining the growing population of the country and for that it is required to increase the
level of productivity. Increasing productivity is necessary to increase the inputs required for
production and efficient use of resources for increasing the level of production output. It
involves the selection of the various production inputs and patterns of land, labour, capital,
and management along with efficient use of resources to optimise the level of production.
Agriculture.
ANSWER 3. The agriculture sector has gone through a major change from the time of
independence and being subsistence in nature in the early period to the present time moving
towards a high-tech agribusiness. The production is not confined only to the farm level but
today it has moved to the method of processing, storing, and distributing various forms of
agricultural products from the different kinds of agribusiness industries. The government
has taken initiatives of creating agricultural policies for raising agricultural production and
productivity so that it increases the level of income and improves the standard of living for
the people in the country. India is the second-largest producer of wheat and rice in the world
and it is the world’s largest producer of pulses, spices, and spice products.

Agriculture in India is the backbone of the Indian economy and over 50% of the people in
the country depend on agriculture which is the main source of income for them. More than
7% of agricultural production is converted into processed food and many people in the
country are directly or indirectly connected with agriculture and some people are involved
in doing business with the agricultural goods. The domestic demand for agriculture is very
high which is sustained with the help of agriculture. The government of India has introduced
many policies for supporting the agricultural sector in terms of providing land, bank loans
and other kinds of farm machinery for the rural farmers for bringing an improvement in the
Indian economy.
For more details, refer Section 3. Nature of India’s Agriculture and Agriculture Policy In India.
BOOKS
• Chandra, S., Kumar, S., & Bairwa, K. C. (2017). An Introduction to agricultural social
sciences: (Agricultural economics, extension education and statistics. New Delhi: New
Vishal Publications.
• Prasad, C. S. (2012). Agriculture and sustainable development in India. New Delhi: New
Century Publications.
• Rao, B. S. (2003). Agriculture in India: Policy and performance. Delhi: Serials Publ.
REFERENCES
• India Brand Equity Foundation. (2017, July 17). Analysis About Indian Agriculture
Industry, Market Size, Export & Investment Opportunity. Retrieved from
https://www.ibef.org/industry/agriculture-india.aspx
• Yadav, M. R. (n.d.). Strengthening the Indian Agriculture ecosystem. Retrieved from
https://www.niti.gov.in/strengthening-indian-agriculture-ecosystem

SEMESTER 2
DCM1206
Unit 11 : National Income 1

Unit 11
National Income
Table of Contents

No Graph Activity
1 Introduction - -
3-4
2 National Income - - 5
3 Population 1 1 6-9
4 Poverty and Unemployment 2, 3 2 10 -15
6 Summary - - 16 - 17
7 Glossary - -
18
8 Terminal Questions - -
9 Answers - - 19 - 23

1. INTRODUCTION
The performance of an economy is dependent upon the total worth and quantity of goods
and services that are produced by the economy. It involves the net result of all economic
activities of any country during a specific period in the economy. Due to the increase in
population in the country, there are unlimited wants in the society with limited resources.
National income is the total value of income that is the result of economic activities during a
fixed period in the country. It is the total expenditure for the various good services and it is
also used for projecting the performance of the economy. India has a large population, which
has put a lot of burden on the public expenditures for mobilising resources and providing
services to the people in the country.
An increase in population puts major pressure on the economy and the available natural
resources of the country and it hampers the progress and development of the economy. The
growth in population leads to more demands of the people that have an impact on the
national income directly or indirectly.
India has a low per capita income, which is calculated by taking the ratio of national income
over the total population in the country. The majority of the Indian population is involved
with agriculture and activities associated with agriculture for their living. Even then the
productivity levels are very less due to the pressure of population on land. Since the per
capita availability of land area is very low because of the high population, it is unable to
provide high output. Due to the limited resources of the land, a majority of people in India
are forced to work as labour on the agricultural land at low wages. Also, the lack of advanced
technologies, irrigation facilities, training, and education are some of the reasons for the low
productivity of agriculture in the country.
The other main concern of the country is the condition of poverty and inequality in the
country. More than 25% of the Indian population is below the poverty line and they do not
have enough money to buy the goods and services. There is inequality in the distribution of
wealth among the people in India, which shows the concentration of economic capacity
available to a few people.

Unemployment is one of the major reasons for poverty in the country due to the lack of job
opportunities for people working as labour in the country. In India, due to the increase in
population, every year a large number of people are added to the labour force because of a
lack of expansion in the industrial and service sectors at the same speed.
❖ Discuss the population in the country

❖ Explain the reasons for poverty and unemployment

2. NATIONAL INCOME
National income means the value of goods and services produced by a country during a
financial year. Thus, it is the net result of all economic activities of any country during a
period of one year and is valued in terms of money. National income is an uncertain term and
is often used interchangeably with the national dividend, national output, and national
expenditure. We can understand this concept by understanding the national income
definition.
For example, a product runs in the supply from the producer to distributor to wholesaler to
retailer and then to the ultimate consumer. If on every movement commodity is taken into
consideration then the value of National Income increases.
Also, one other reason is that there are products which are produced but not marketed.
For example, In an agriculture-oriented country like India, there are commodities that
though produced but are kept for self-consumption or exchanged with other commodities.
Thus, there can be an underestimation of National Income.

3. POPULATION
The population of the country refers to a group of inhabitants or people living in a specific
area or place and making their living in a similar environment relying on the availability of
resources. The growth and development of a country and the rise in per capita income are
all connected directly with the population of the country. The growth of the population is
dependent upon the birth rate and death rate in the country. The population in India is
increasing every year and according to statistics, it is the second most populated country
after China.
According to predictions by economists and a report from United Nations, it has been said
that by 2025, India will become the world’s most populated country overtaking China. The
population in the country started increasing by the 1950s and by the 1960s, it had the
highest growth of over 25% and by 1970, there was an approximate growth of 28%.
Thereafter, the Government of India initiated several measures for controlling the
population through family planning programs, population policies, and other family welfare
programs. By the 1990s, there was a significant reduction in population growth in the
country. The two significant reasons for population growth in India were:
• The birth rate is higher than the death rate thereafter, there was a significant decline in
the death rates
• Even though due to the government’s population policies and other government
measures, fertility is going down, but it is still much higher in comparison to other
countries.
The other causes concerning the increase in population in the country are:
• Universal marriage system and early marriage: The system of early marriage in the
country is still very prevalent in the country and it is a significant reason for an increase
in population. Though the legal age for marriage age for girls is 18 years, they are
married off earlier for prolonging the childbearing age. Marriages in India are
considered a universal practice and sacred obligations among the people in the country.
• Poverty and illiteracy: Poverty is a significant factor contributing to the rapid growth
of the population since there is a belief among the people that if there are more people

in the family, there would be more income. Others believe that they need more children
to take care of them during their old age. Due to illiteracy, people in rural areas are not
aware of birth control measures and contraceptives, which is a major cause of
overpopulation in the country.
• Old traditional cultural norms: The earlier traditional belief among the people of
India was that sons are the bread earners of the families and it put a lot of pressure on
the families to produce a male child. Hence, they believed the more the children, the
better it would be for them.
• Illegal migration: A lot of illegal migration has been happening from Bangladesh,
Nepal, and other neighbouring countries that has led to an increase in population in the
country.
The population growth in India has had a major impact on the growth and development of
the country where the marginal growth in national income is disappearing due to the
increase in population. This results in a meagre or no increase in per capita income which
has a greater impact on the standard of living of the people and resulting in poverty and
unemployment in the country. It is leading to overcrowding of infrastructures and depletion
of all kinds of resources at a faster rate. According to the UN reports, “one-fifth of Indians are
living below the poverty line and almost one-fourth of the Indians are illiterate even after 73
years of independence. The problem of overpopulation is prevalent mainly in poor and
developing countries.”
The impact of overpopulation in the country leads to the following problems
• The problem of unemployment: It becomes challenging for creating jobs and

employment for a large population in the country. The rate of unemployment is
increasing due to an increase in the number of illiterate people increasing every year.
• Utilisation of Manpower: Due to slow business development and growth of the
economy, there is an increase in unemployment leading to a rise in the number of
jobless people in the country.
• Utilisation and depletion of resources: The increase in population results in demand
for food and shelter, which leads to the utilisation of resources. The need and
requirements of the people disturb the natural balance of the environment and this

results in the exploitation of the environment and depletion of the resources. Human
activities involve the cutting of trees from forests for their benefit, erratic use of fossil
fuels, industrialisation, and other aspects of activities that lead to affecting the
ecological balance of the environment and scarcity of resources.
• Pressure on infrastructure: The increased pressure of population is putting pressure
on the infrastructural facilities that are not able to keep up with the population growth.
There is insufficient availability of infrastructure, housing, transportation, healthcare,
and other public welfare facilities. An increase in population is resulting in
overcrowding, traffic congestion, lack of healthcare facilities, and more.
• Increase in cost and decreased production: Unfortunately, the distribution and
production of food have not been able to keep pace with the increase in population.
There is a misbalance in demand and supply increasing prices and costs of production
resulting in inflation.
• Inequality in income distribution: Increase in population has led to an unequal
distribution of income and as result, there is a vast difference between the income
distribution between the rich and the poor.
The Government of India is working on many population control policies for controlling the
growing population in order to increase the economic growth of the country. Many steps
have been executed and are still required to be worked upon for controlling the population
in the country. This can be done through increasing awareness, the spread of education,
improving the welfare and status of women and girls, encouraging female empowerment,
sex education, encouraging male sterilisation, free distribution of contraceptives and
condoms, opening more health care centres for the poor, and more schemes for controlling
the population in the country.

Fig. 11.1: Percentage of India’s Population Growth
Source: https://geographyandyou.com/indias-population-profile/
1. By 2025, India will become the world’s most populated country overtaking
_______________:
a. United States of America
b. China
c. Pakistan
d. Dubai
2. A lot of illegal migration has been happening from Bangladesh, Nepal, and other
neighbouring countries. (True/False)
3. _______________ has been working to control population of the country.

4. POVERTY AND UNEMPLOYMENT
Poverty and unemployment is a major problem experienced by many economies around the
world. The situation of poverty arises when people live below a certain standard and they
are not able to satisfy the minimum necessities of life in terms of food, clothing, shelter,
education, health, and more necessities. Even the aspects of unemployment and
underemployment are reasons that contribute to poverty in the country.
There is a direct and indirect relationship between poverty and unemployment.

Unemployment leads to poverty and poverty, in turn, leads to unemployment. This is
because an unemployed person does not have any means to earn money and cannot fulfil his
own and his family's basic needs. There is a loss of income, and this results in poverty
because when a person is not employed, there is a lack of income and the families cannot
meet up with the living expenses. This leads to indebtedness from borrowing money to
support one’s needs, use of savings leading to homelessness, and malnutrition if individuals
are unable to find other sources of income or finance.
Poverty has been defined by UN Human Rights Council as “A human condition characterized
by the sustained or chronic deprivation of the resources, capabilities, choices, security, and
power necessary for the enjoyment of an adequate standard of living and other civil, cultural,
economic, political and social rights”.
Illiteracy is also an important reason for poverty in the country. The main reasons for
poverty in the country are:
i. Increase population
The increasing rate of population is a major cause of poverty and unemployment in
the country. There are about 18 million people that get added to the population every
year that leads to an increase in demand for consumption goods
ii. Low agricultural productivity
The increase in population adds a lot of pressure on the agricultural productivity level
due to lack of capital, using traditional methods for agriculture, divided and
fragmented holdings, and more reasons.
iii. Lesser utilisation of resources

The low productivity in the agricultural sector in the country is due to lesser
utilisation of resources, underemployment, and unemployed human resources that
has resulted in a downfall in their living standards.
iv. Low rate of economic development:
There is a very low rate of economic development in the country because there is a
major gap between the productivity and requirements of goods and services which is
resulting in poverty.
STUDY NOTE
The inflation rate in the year 2017 was 2.14%; 2018 was 2.44%; 2019 was 1.81% and 2020 was 1.25%.
v. Increase in prices
There is a disparity in income distribution in the country and poverty is increasing
due rise in prices of goods and services. It has benefited the rich and the urban class
but the people living in the villages and rural areas who are still in the lower-income
group find it difficult to get their minimum needs.
vi. Level of unemployment
Unemployment is one of the main causes of poverty and the level of unemployment
is on the rise with more people seeking jobs in the country and lesser availability of
jobs for the people in the country. The number of unemployed in the country is at a
higher rate than the expansion in employment opportunities.
vii. Capital shortage and efficient entrepreneurship
Capital, as well as effective and sustainable entrepreneurship, play a significant role
in accelerating the increase in productivity and growth of the country. This is
happening due to the short supply of capital and able entrepreneurship.
viii. Social factors
India still is very traditional and behind the rest of the world in terms of its social
factors, which is not beneficial for their growth and development. The rigid customs
and traditions, caste system, inheritance law, and more are major obstacles to
effective development and have resulted in the problem of poverty.
ix. Political factors

The political factors have played a major role in the low development of the country
due to bad management and exploitation of natural resources which has weakened
and brought down the industrial base of the Indian economy. They have not been able
to find a solution for poverty and unemployment in the country.
x. Unequal distribution of income
The increase in population has put a lot of pressure on the productivity and growth
of the economy. This is one of the major reasons for inequality in the distribution of
income and concentration of wealth among the people in the country. There should
be proper pricing and monetary policies in the country by the government for
controlling inequality of income and checking the concentration of wealth.
xi. Regional poverty and the problem of distribution:
There is an uneven proportion of rich and poor in certain states in the northeast
regions, Orissa, Bihar, and more. The government should take initiatives for offering
special amenities for attracting investment opportunities in these states. There is also
the problem of distribution of goods and food grains in these states leading to a
situation of poverty. The system of distribution should be well organised in the
villages and the rural areas of the country.
Fig. 11.2: Reasons of Poverty in India
Source: https://www.slideshare.net/abhisheklahiry/poverty-and-unemployment-in-india
Unemployment leads to many problems where there is loss of income causing financial
problems that affect families there is a reduction in consumer spending and it affects the

communities. There is less demand for goods, lesser consumption, and buying power of the
people. This results in low business profits, cutting down of budgets and resulting in further
reduction of workforce. Hence, it creates a cyclical effect that is continuous and will remain
so until there is some form of government intervention. India faces a major problem of
unemployment due to the pressure of a high population, and there are 45% of people
between the age group of 15 to 35 years hence there is a large labour force available in the
country. The problems that are there is a shortage of skilled labour, lack of capital, and many
other issues that lead to the problem of unemployment in the country. The rate of change of
wages also plays a major role in leading toward unemployment because the supply of labour
is greater than the demand for it with the number of people looking for employment exceeds
the number of available jobs. The causes for unemployment in the country are:
• The rapid increase in population and labour force

• Caste system and prohibition of work for certain castes
• Slower growth of the economy
• Slow growth in the agricultural sector
• Absence of manpower planning
• Faulty system of education
• Use of old traditional technology
• Slower growth in the industrial sector
• Fewer savings and investments
• Deterioration of rural and cottage industries
• Immobility of labour and jobless growth

Fig. 11.3: Unemployment Level in India
Source: https://www.indiainfoline.com/article/general-blog/rising-unemployment-and-the-
future-of-indian-youth-118112200298_1.html
In 2018 there were approximately 32 million jobless in the country by February 2019 the
unemployment increased to about 7.3%. Due to unemployment, the economy of the country
has been impacted in the following manner:
• The causes of unemployment have given rise to the problem of poverty in the country
• Due to unemployment, there is a decrease in the level of production and consumption
of goods and services by the people which puts an extra burden on the government.
• Unemployment in the country results in an increase in illegal and criminal activities for
earning money, an increase in thefts, crime, and antisocial elements which makes the
people lose faith in the democratic values of the country.
• The economy of the country is impacted due to an increase in unemployment in the
country because if the people were employed then it would have resulted in the
generation of resources. But unemployment results in an increase in socio-economic
costs and reduction of GDP of the country.
The government of India has taken several steps for controlling unemployment in the
country like:
• In 1979, the government initiated the scheme of Training of Rural Youth for Self-
Employment (TRYSEM) for helping the unemployed rural youth and women between
the age of 18 and 35 years for acquiring skills for self-employment.
• In 1980, the government launched the Integrated Rural Development Programme
(IRDP) for creating employment opportunities in rural areas.
• In 1989, the government merged the two wage employment programs of the National
Rural Employment Programme (NREP) and Rural Landless Employment Guarantee
Programme (RLEGP) and they started the Jawahar Rozgar Yojana (JRY) which was a
scheme that initiated an 80:20 cost-sharing between the centre and the states.
• In 2015 the Pradhan Mantri Kaushal Vikas Yojana (PMKVY) was launched for
industry skill training for a lot of young Indians for them to earn a better livelihood.

• In 2016, the Stand Up India Scheme was initiated by the government of India for
providing bank loans between 10 lakhs and 1 crore to the SC or ST borrowers for
setting up a Greenfield enterprise for one women borrower from a bank branch.
These were some measures that have been taken up by the government for encouraging
entrepreneurship amongst the youth of the country and also for removing social barriers for
women and their participation in job markets. The government needs to bring in
multidimensional policies that include the National Employment Policy (NEP) or covering
a broad range of socio-economic issues affecting the different aspects of policies related to
the people, economic growth, population control, labour management, skill development,
and providing a sufficient number of jobs to the people in the country.
STUDY NOTE
Other initiatives undertaken by government to control unemployment are:
• Integrated Rural Development Programme (IRDP)
• Training for Self-Employment
• Jawahar Rozgar Yojana
• Nehru Rozgar Yojana
• The Swaran Jayanti Rozgar Yojana
• Ayushman Bharat
4. There is a direct and indirect relationship between ____________ and
_________________.
5. Unemployment is one of the main causes of poverty. (True/False)
6. In 1979, the government initiated the scheme of________________:
a. Pradhan Mantri Kaushal Vikas Yojana (PMKVY)
b. Jawahar Rozgar Yojana (JRY)
c. Training of Rural Youth for Self-Employment (TRYSEM)
d. National Employment Policy (NEP)

5. CONCEPT MAP
6. SUMMARY
• The performance of an economy is dependent upon the total worth and quantity of
goods and services that are produced by the economy. It involves the net result of all
economic activities of any country during a specific period in the economy.
• India has a low per capita income, which is calculated by taking the ratio of national
income over the total population in the country. The majority of the Indian population
is involved with agriculture and activities associated with agriculture for their living.
• The other main concern of the country is the condition of poverty and inequality in the
country. More than 25% of the Indian population is below the poverty line and they do
not have enough money to buy the goods and services.
• The population of the country refers to a group of inhabitants or people living in a
specific area or place and making their living in a similar environment relying on the
availability of resources.
• According to predictions by economists and a report from United Nations, it has been
said that by 2025, India will become the world’s most populated country overtaking
China.

• The population growth in India has had a major impact on the growth and development
of the country where the marginal growth in national income is disappearing due to the
increase in population.
• The Government of India is working on many population control policies for controlling
the growing population in the country to increase the economic growth of the country.
Many steps have been executed and are still required to be worked upon for controlling
the population in the country.
• Poverty and unemployment is a major problem experienced by many economies
around the world. The situation of poverty arises when people live below a certain
standard and they are not able to satisfy the minimum necessities of life in terms of
food, clothing, shelter, education, health, and more necessities.
• Unemployment leads to poverty and poverty, in turn, leads to unemployment this is
because an unemployed person does not have any means to earn money and cannot
fulfil his own and his family's basic needs.
• Unemployment leads to many problems where there is loss of income causing financial
problems that affect families, there is a reduction in consumer spending and it affects
the communities.
• The rate of change of wages also plays a major role in leading toward unemployment
because the supply of labour is greater than the demand for it with the number of
people looking for employment exceeds the number of available jobs.
• These were some measures that have been taken up by the government for
encouraging entrepreneurship amongst the youth of the country and also for removing
social barriers for women and their participation in job markets.

7. GLOSSARY
• National income: is the value of goods and services that are produced in a country
during a specific year
• Low per capita income: measure the amount of money that is earned by a person in a
country
• Poverty: is a situation where the people do not have the financial resources and other
essentials needed for their living
• Unemployment: Refer to people who do not have a job and are looking around actively
for a job
• Population: of the country refers to a group of inhabitants or people living in a specific
area or place and making their living in a similar environment relying on the availability
of resources
• Population growth: This is the increase in the number of people living in a country or
region
SHORT QUESTIONS
Q1. What is national income?
Q2. Explain the impact of a large population in the country
Q3. What is the reason for poverty and illiteracy in the country?
LONG QUESTIONS
Q1. Explain the significance of population and the two reasons for population growth in India
Q2. What is the impact of overpopulation in the country?
Q3. Explain any four reasons for poverty in India
Q4. What are the reasons for unemployment in India?

9. ANSWERS
SELF ASSESSMENT QUESTTIONS
1. China
2. True
3. Government of India
4. Poverty; Unemployment
5. True
6. Training of Rural Youth for Self-Employment (TRYSEM)
TERMINAL QUESTIONS
SHORT QUESTIONS
ANSWER 1. National income is the total value of income that is the result of economic
activities during a fixed period in the country. It is the total expenditure for the various good
services and it is also used for projecting the performance of the economy.
ANSWER 2. India has a large population that has put a lot of burden on the public
expenditures for mobilising resources for providing services to the people in the country. An
increase in population puts major pressure on the economy and the available natural
resources of the country and it hampers the progress and development of the economy. The
growth in population leads to more demands of the people that have an impact on the
national income directly or indirectly.
For more details, refer Section 2. Population.
ANSWER 3. Poverty is a significant factor contributing to the rapid growth of the population
since there is a belief among the people that if there are more people in the family there
would be more income. Others believe that they need more children to take care of them
during their old age. Due to illiteracy, the people in the rural areas are not aware of birth
control measures and contraceptives which is a major cause of overpopulation in the
country.

For more details, refer Section 3. Poverty and Unemployment.
LONG QUESTIONS
ANSWER 1. The population of the country refers to a group of inhabitants or people living
in a specific area or place and making their living in a similar environment relying on the
availability of resources. The growth and development of a country and the rise in per capita
income are all connected directly with the population of the country. The growth of the
population is dependent upon the birth rated and death rate in the country. The population
in India is increasing every year and according to statistics, it is the second most populated
country after China.
According to certain predictions by economists and a report from United Nations, it has been
predicted that by 2025 India will become the world’s most populated country overtaking
China. The population in the country started increasing by the 1950s and by 1960s, it had
the highest growth of over 25% and by 1970, there was an approximate growth of 28%.
Thereafter, the Government of India initiated several measures for controlling the
population through family planning programs, population policies, and other family welfare
programs. By the 1990s, there was a significant reduction in population growth in the
country. The two significant reasons for population growth in India were:
• The birth rate is higher than the death rate thereafter, there was a significant decline in
the death rates.
• Even though due to the government’s population policies and other government
measures the fertility is going down but it is still much higher in comparison to other
countries.
ANSWER 2. The impact of overpopulation in the country leads to the following problems:
• The problem of unemployment: It becomes challenging for creating jobs and

employment for a large population in the country. The rate of unemployment is
increasing due to an increase in the number of illiterate people increasing every year.

• Utilisation of Manpower: Due to slow business development and growth of the

economy, there is an increase in unemployment with a rise in the number of jobless
people in the country.
• Utilisation and depletion of resources: The increase in population that results in
demand for food and shelter which leads to the utilisation of resources. The need and
requirements of the people disturb the natural balance of the environment and which
result in the exploitation of the environment and depletion of the resources. Human
activities involve the cutting of trees from forests for their benefit, erratic use of fossil
fuels, industrialisation, and other aspects of activities that lead to affecting the
ecological balance of the environment and scarcity of resources.
• Pressure on infrastructure: The increased pressure of population is putting pressure
on the infrastructural facilities that are not keeping up with the population growth.
There is insufficient availability of infrastructure, housing, transportation, healthcare,
and other public welfare facilities. An increase in population is resulting in
overcrowding, traffic congestion, lack of healthcare facilities, and more.
• Increase in cost and decreased production: Unfortunately, the distribution and
production of food have not been able to keep pace with the increase in population.
There is a misbalance in demand and supply increasing prices and costs of production
resulting in inflation.
• Inequality in income distribution: Increase in population has led to an unequal
distribution of income and as result, there is a vast difference between the income
distribution of the rich and poor.
ANSWER 3. Poverty and unemployment is a major problem experienced by many economies

around the world. The situation of poverty arises when people live below a certain standard
and they are not able to satisfy the minimum necessities of life in terms of food, clothing,
shelter, education, health, and more necessities. Even the aspects of unemployment and
underemployment are reasons that contribute to poverty in the country. The main reasons
for poverty in the country are:
i. Increase population

The increasing rate of population is a major cause of poverty and unemployment in

the country. There are about 18 million people that get added to the population every
year that leads to an increase in demand for consumption goods
ii. Low agricultural productivity
The increase in population adds a lot of pressure on the agricultural productivity level
due to lack of capital, using traditional methods for agriculture, divided and
fragmented holdings, and more reasons.
iii. Lesser utilisation of resources
The low productivity in the agricultural sector in the country is due to lesser
utilisation of resources, underemployment, and unemployed human resources, which
has resulted in a downfall in their living standards.
iv. Low rate of economic development:
There is a very low rate of economic development in the country because there is a
major gap between the productivity and requirements of goods and services, which
is resulting in poverty.
ANSWER 4. Unemployment leads to many problems where the loss of income causing
financial problems that affect families there is a reduction in consumer spending and it
affects the communities. There is less demand for goods, lesser consumption, and buying
power of the people.
This results in low business profits, cutting down of budgets and resulting in further
reduction of workforce. Hence it creates a cyclical effect that is continuous and will remain
so until there is some form of government intervention. India faces a major problem of
unemployment due to the pressure of a high population, and there are 45% of people
between the age group of 15 to 35 years hence, there is a large labour force available in the
country.
The problems that are there is a shortage of skilled labour, lack of capital, and many other
issues that lead to the problem of unemployment in the country. The rate of change of wages
also plays a major role in leading toward unemployment because the supply of labour is

greater than the demand for it with the number of people looking for employment exceeds
the number of available jobs. The causes for unemployment in the country are:
• The rapid increase in population and labour force

• Caste system and prohibition of work for certain castes
• Slower growth of the economy
• Slow growth in the agricultural sector
• Absence of manpower planning
• Faulty system of education
• Use of old traditional technology
• Slower growth in the industrial sector
• Fewer savings and investments
• Deterioration of rural and cottage industries
• Immobility of labour and jobless growth

BOOKS
• Ray, S. K. (1987). Indian economy. New Delhi: Prentice-Hall of India.

• Datt, R., & Sundharam, K. P. (2009). Indian economy. New Delhi: S. Chand.
• Loganathan, M. S., & Nandhakumar, B. (2010). Dictionary of economics. New Delhi: Excel
Books.
REFERENCES
• Pettinger, T., Simeon, A., Sonawane, M., Bichhin, Biswas, A., Jangid, G., . . . Ramya. (2019,
December 10). Problems Facing Indian Economy. Retrieved from
https://www.economicshelp.org/india-2/problems-indian-economy/
• Poverty and Unemployment in India. (2019, June 13). Retrieved from
https://iasgatewayy.com/poverty-and-unemployment-in-india-2/

SEMESTER 2
DCM1206
Unit 12 : Transport System 1

Unit 12
Transport System
Table of Contents

No Graph Activity
1 Introduction - -
3-4
2 Transport System and Service Sectors in
- 1 5-9
India: Importance of Transport
3 Modes of Transport - 2 10 - 12
4 Growth Related Problems in Transport - 3 13 - 15
6 Summary - - 17 - 18
7 Glossary - - 19
9 Answers - - 20 – 23

1. INTRODUCTION
The transport system has a major role to play in the economic life of the country and it is the
physical link connecting various aspects of the economy to the markets, manufacturers,
suppliers, customers, and the people of the country.
India is one of the fastest and the largest growing economies in the world in the transport
and logistics industry sector. The transport system in India is one of the largest in the world
serving a population of over one billion.
A transport system is a connecting medium to all these elements and transportation adds
value to the goods by providing time and place utility, and also by ensuring the availability
of items when they are needed, and where they are needed.
The network services consist primarily of roads, railways, and air services and it can be
divided into:
• Land transport system

• Water transport system
• Air transport system
The government of India has invested a lot of money in developing the infrastructure
required for the transport system in the country. The growth of the economy has added to
the increase in demand for the transportation industry. The transport sector caters to the
needs of billions of people in the country providing major connectivity between the rural and
the urban areas that are required for the economic growth of the country.
The system of transportation adds to the competitiveness in the markets since the system
increases the opportunities for suppliers and buyers and improves the allocation process of
goods and services. The different regions in the country are connected by the transport
systems leading to economic, social, and cultural development, which reduces the regional
imbalances in the country.
The rapid fluctuations in demand for transport services in terms of volume and direction
results in a high imbalance between supply and demand in many services. This results in

operating problems resulting in a major impact on the economy with a misbalance in supply
and demand for goods in the markets, thus leading to a rise in prices.

❖ Discuss the transport system and service sectors in India
❖ Describe the importance of transport and modes of transport
❖ Explain growth-related problems in transport

2. TRANSPORT SYSTEM AND SERVICE SECTORS IN INDIA:

IMPORTANCE OF TRANSPORT
The transport system plays a significant role in removing the distance barriers and it is an
essential part of the economic and sustainable development of the country. The efficiency of
transport systems facilitates the movement of goods, services, and people physically from
one place to another. It also increases the productivity and competitiveness of the economy.
The transport system ensures the movement of raw materials and machinery from one
location to another for effective and smooth functioning of the industries and for
transporting the outputs from the industries to various destinations. The transport sector
contributes majorly to the GDP of the country and it has also played an important part in
contributing to the exports and attracting foreign investments.
The transport and the services sector has employed over 21 lakh people on a large scale in
the country by covering various forms of activities like trading, storage, communication,
insurance, financing, business services, construction, hotels and restaurants, community
services, and more.
The transport industry in the country is dominated by a large network of roads, which is the
largest in the world consisting of approximately 3.33 million km and it contributes to
approximately 6.5% of GDP. The roads in the country are used for carrying over 61% of
freight and 86% of the country’s passenger traffic.
The roads in the transport system consist of:
• National highways
• State highways
• Rural and district roads
• Express highways
STUDY NOTE
There are around 599 national highways in India with NH-44, as per old numbering system, as the longest national
highway. The shortest national highway is the NH 47A which 5.9 km in length.

The water transport system consists of:
• Inland Water Transport or River Transport

• Coastal or Marine Transport
The transport system and the services sector are involved in establishing civilisation and
enhancing economic development by enabling effective trade, commerce, and
communication links. The transport system provides the connectivity between production
facilities and the consumer markets for the movement of goods from one place to another.
The increase in large-scale industries has been majorly due to the contribution of the
transport sector which has enabled mass production of goods and also expansion and
creation of new markets. The efficiency of the transport system provides cultural, social, and
political advantages with accessibility to various markets, distribution of resources,
attracting investors, employment opportunities, and more opportunities.
It has a direct impact on the country’s development and boosting of national income of the
country and improving the living conditions of the people in the country. Transportation is
an important contributor to the economy and has a major role to play in the logistics
function, supply chain, and the larger economy. It is also seen as a competitive force in
business. The contribution and the importance of transportation can be understood from the
following points:
• Supply of Products
Transportation helps with creating a place and time utility of goods by transporting
them from one place to another. It is needed for carrying the required raw materials for
the production of goods and thereafter, it is needed for the supply of the finished goods
to the end-users.
Transportation helps with increasing the sales of goods and it is an important factor of
marketing that helps to narrow the gap between the producers and the customers,
along with carrying the goods to remote places that are spread across the country far
and wide. They also facilitate the distribution of goods to the consumers at minimum
cost and time.

• Specialisation of Resources
Transportation is medium that is adopted by every company in different states so that

they can make efficient and optimum use of their available resources. Transportation
helps because of the geographical locations of the industries in various states.
The cost of transportation is affected by the localisation of industries since the

manufacturing of goods takes place where the cost of production is less, and the
environment is the best. It becomes socially and economically necessary for making
maximum utilisation of local resources, which then results in minimum wastage of
resources and reduction in the cost of production.
• Mobility of Labour and Capital
Transportation helps with the mobility of various factors of production and provides
mobility to labour and capital. An effective transport facility provides the movement of
people and labour from one place to another. The investment of capital gets
channelised with an effective transportation service. It encourages more productive
use of labour and capital in other sectors.
• Stabilisation in Price
There is stability in the prices of products and commodities with the use of
transportation. It helps in transporting goods where they are needed and where they
have to be supplied in remote areas.
This helps in coordinating the demand and supply by supplying the necessary goods
regularly to the consumers and it effectively brings stability to prices. This helps the
end-users to get the goods that they want at lower prices. This increases the level of
competition among producers where they compete to produce on mass production,
and this keeps the prices low.
• Beneficial to the Customers
Effective transportation benefits the customers as they can get the goods and
commodities that they require. They can enjoy the benefits of goods that are

transported from other places, which are not produced locally. It helps to increase the
purchasing power of the customers by lowering the costs.
• Development of Large-Scale Industries
Transportation has an important role to play in the development of large-scale

industries. It provides the facilities for procuring raw materials, gathering the
workforce, and transporting the finished goods. Transportation helps the economy and
the industries with their large-scale production, which leads to reducing the unit cost
of production.
• Provides Political and Cultural Connectivity
Transportation is linked with other factors concerning the social, political, and cultural
elements. By narrowing the geographical distance, it helps in establishing social and
cultural utility, and also strengthens national integration. Transportation helps with
the connectivity with the foreign countries and helps to widen knowledge and skill in
different sectors. It helps to provide uniformity, integrity, social utility and strengthens
national security.
The government of India has been continuously allocating a major portion of the
planned resources of the country through successive plans for the all-round
development of the transport sector and other services as well as the communication
system of the country.
STUDY NOTE
The budget 2021 outlined the allocation of Rs. 1,18,101 crores to the Ministry of Road Transport and Highways. The
budget was presented by the Inion finance Minister Nirmala Sitharaman.

1. World’s largest road system is in _______________:
a. United States of America
b. China
c. India
d. Dubai
2. Water transportation involves inland transportation and marine transportation.
(True/False)
3. ____________________ is linked with other factors concerning the social, political,
and cultural elements.

3. MODES OF TRANSPORT
Transportation is an important part of the supply chain and various transport systems are
designed to either carry the goods, freight, passengers, or cargo and a combination of both
from one location to the other. The trucks and ships can carry more freight than a passenger
plane, and each mode is characterised by a set of commercial, technical, and operational
features.
The different modes of transports are:
• Railways
The Indian railway system is the fourth largest railway system in the world and it has
grown as the largest in Asia. The railway networks are very effective for long-distance
and can efficiently transport large tons of loads to different parts of the country.
There are fixed costs involved in the railroad operations that are required for
maintaining their tracks, procuring expensive equipment, changing terminals, and
yards. Transportation by rail is good for very heavy, low-value shipments that are not
time-sensitive because of the time taken by railways to transport the goods.
There are many advantages of the railway's system in India which are as follows:
• Carries large capacity of load

• It is very economical
• Well protected through various seasons
• Provides containerisation
• Links various cities, markets, and countries
• Roadways
The Indian road network is the largest in the world. It is a cheaper mode of transport
compared to the other modes. The advantage of using road transport is that it is effective for
door to door delivery of products and goods. It also has its flexibility in being loaded and
unloaded in various destinations.

It has certain advantages which are as follows:
• Very economical for short distances

• Faster movement of goods
• The capability of reaching goods to difficult regions and areas
• Not many limitations on conditions of service
• Airways
Airways provide the means of transportation for faster delivery of goods and for
transportation across global markets. It is a means of transport that is used by companies
who are looking for short lead times for transporting the goods. Air transport is best for high-
value items, small loads, or goods that are time-sensitive and need to be sent to long
distances. It is an effective support to the other modes of transportation.
The advantages of using airways transportation are as follows:
• Faster mode of transport

• Dependable service during every situation
• Higher consumer satisfaction
• Requires lesser inventory and provides uninterrupted services
• Waterways
Waterways are another effective means of transportation of goods from one state to another
as well as to other countries. Water transports use ships and large vessels to carry large tons
of cargo. It is used for transporting large quantities of goods and it is a cheap method of
transport for heavy shipments.
The facility for waterways is still not fully developed in India, though there is a great potential
for water transport in the country. Normally the delays caused at the different ports,
customs, security, and the management of containers used are some of the main problems
associated with global shipping.
The advantages of waterways are as follows:
• Very effective for heavy cargoes and fragile goods at low costs

• Facilities of loading and unloading

• Provides independent movement with no issues of congestion
• It promotes international trading
• Pipe-Lines
Pipelines are specialised methods of transportation for transporting petroleum products,

crude oil, iron ore, gas, chemicals, coal, crude petroleum, and many other forms of products.
It involves a fixed cost in setting up the required pipelines and infrastructure between
different regions.
The pipelines are flexible hence, it has a limited scope with its products, and it is unable to
transport different kinds of products. Countries like USSR, the USA, and Middle-east have
been using the method of pipelines for many years and India is still very new to this method
of transportation. In India, it is specifically reserved for oil refineries for transporting petrol
and gas from the sources to the required markets and states.
The advantages of this form of transportation are as follows:
• Very economical
• Through underground pipeline
• No chance of any wastage
• Uninterrupted services
Every mode of transport has its level of advantages and disadvantages in regards to its
performance. The chart below shows some of the advantages and disadvantages of the
different modes of transport.
STUDY NOTE
As per the National waterways Act, 2016, there are 111 officially notified Inland National Waterways in India. Out of
111 waterways, 106 were created in 2016.
4. The Indian railway system is the __________ largest railway system in the world.
5. Airways is a cheap method of transport for heavy shipments. (True/False)
6. Waterways promote ______________ trading.

4. GROWTH-RELATED PROBLEMS IN TRANSPORT

The transport sector plays a significant role in the movement of people and goods within the
country and across the borders. The transportation sector is linked to the manufacturing
industries, healthcare, hospitality sector, and more. The transportation sector is evolving at
a rapid pace and it has an integral role in connecting places, organisations people within the
economy.
There are many hurdles and other growth-related problems that are associated with the
path of progress of the transportation sector. Some of these are:
• Flawed planning of transport system
In India, there is major pressure on the road and railway sector in certain regions which
makes the system unbalanced. The government must create alternate routes for
decreasing the pressure on road transport.
• Lack of railroad co-ordination
The road and rail transport systems must work in coordination since they are the two
integral part of transport systems in the country. The system requires effective
coordination between sharing of the freight traffic and passenger traffic between the
railways and road transport. The railways should be involved with carrying large and
bulky goods through long distances. Road transport should be used for short distances
and carrying smaller loads of goods.
• Maintaining bulk orders
It has become challenging for the transport sector to keep up with the timeliness of
large bulk orders. The high volume orders are not easy to handle for most of the
transport companies and it also becomes difficult for them to work through tight
timelines for the supply chain companies for delivery of orders on time with limited
resources.

• Unforeseen weather conditions
The transport sector is affected by many forms of unforeseen delays due to various
kinds of weather conditions and terrain in India that lead to situations of unreliability
in the transportation sector. The transport sector moves through tough terrains in the
country with unfavourable road conditions, remote and internal areas, hilly regions
which are majorly prone to landslides and accidents during the monsoon seasons.
• Environmental issues
There are many environmental and other forms of emission reduction regulations
brought about by state and local governments which have made it challenging for
transportation sectors to adhere to the regulations and also be cost-efficient. The
logistic and supply chain sectors need to work on route and load optimisation, tracking
and reporting emissions, upgrading engines, and choosing alternative fuels. These are
cost-efficient methods that give better mileage in the long run.
• Worn out and Obsolete Assets:
The problem associated with the transport sector is the obsolete and worn-out assets
and infrastructure that hamper the growth of the sector. In every mode of transport,
there are old and worn-out infrastructures, machinery, and another kind of assets that
need replacement. Many buses running on the roads run by state corporations are old
models that have become outdated and even some of the air transport fleets need to be
replaced.
• Improved technology
The process of modernisation and use of the latest technology has become a necessity
for the growth of the transport sector. The old technology being used for the road and
rail transport sector has resulted in slower growth of the transport system. The wear
and tear of the vehicles due to substandard road construction has raised the
expenditures for the transport sectors. The worn-out tracks of the railway's network,

multi-axle engines, obsolete and old signalling systems are some of the issues that
hamper the growth of railway transport.
STUDY NOTE
Transportation industry uses technologies for counting traffic, collection of tolls and fares, detection of crashes, and
management of transit operations and traffic signal systems.
• The rise in fuel costs
The major challenge for the transport sectors is the concern regarding the rise in fuel
prices across the globe. Higher fuel prices increase transportation costs due to rising
surcharges added to freight rates and a rise in wages, which in turn increases the
transport costs. Therefore, cutting down on transportation costs has continued to be
one of the greatest strategic challenges for transport companies and it has become
challenging for the sector to operate and manage the fuel expenses.
7. Road transport should be used for ________ distances:
a. Long
b. Unplanned
c. Short
d. Busy
8. The problem associated with the transport sector is the obsolete and
worn-out assets. (True/False)
9. _______________ fuel prices increase transportation costs.

5. CONCEPT MAP

6. SUMMARY
• The transport system has a major role to play in the economic life of the country and it
is the physical link connecting various aspects of the economy to the markets,
manufacturers, suppliers, customers, and the people of the country.
• The government of India has invested a lot of money in developing the infrastructure
required for the transport system in the country. The growth of the economy has added
to the increase in demand for the transportation industry.
• The rapid fluctuations in demand for transport services in terms of volume and
direction results in a high imbalance between supply and demand in many services.
• The transport system plays a significant role in removing the distance barriers and it is
an essential part of the economic and sustainable development of the country.
• The transport industry in the country is dominated by a large network of roads which
is the largest in the world consisting of approximately 3.33 million km and it
contributes to approximately 6.5% of GDP.
• The transport system and the services sector are involved in establishing civilisation
and enhancing economic development by enabling effective trade commerce and
communication links.
• The efficiency of the transport system provides cultural, social, and political advantages
with accessibility to various markets, distribution of resources, attracting investors,
employment opportunities, and more opportunities.
• Transportation is an important part of the supply chain and various transport are
designed to either carry the goods, freight, passengers, cargo, and a combination of both
from one location to the other.
• The Indian railway system is the fourth largest railway system in the world and it has
grown as the largest in Asia.
• The Indian road network is the largest in the world. It is a cheaper mode of transport
compared to the other modes.
• Airways provide the means of transportation for faster delivery of goods and through
global markets. It is a means of transport that is used by companies who are looking
for short lead times for transporting the goods.

• Waterways are another effective means of transportation of goods from one state to
another or other countries. Water transports use ships and large vessels to carry large
tons of cargo.
• Pipelines are specialised methods of transportation for transporting petroleum
products, crude oil, iron ore, gas, chemicals, coal, crude petroleum, and many other
forms of products.
• The transport sector plays a significant role in the movement of people and goods
within the country and across the borders. The transportation sector is linked to the
manufacturing industries, healthcare, hospitality sector, and more.
• The process of modernisation and use of the latest technology has become a necessity
for the growth of the transport sector. The old technology being used for the road and
rail transport sector has resulted in slower growth of the transport system.
• The major challenge for the transport sectors is the concern regarding the rise in fuel
prices across the globe. Higher fuel prices increase transportation costs due to rising
surcharges added to freight rates and a rise in wages which in turn increases the
transport costs.

7. GLOSSARY
• Transport system: is the physical link connecting various aspects of the economy to
the markets, manufacturers, suppliers, customers, and the people of the country
• Land transport system: Consists of rail and road transport for the movement of
people, animals, or goods from one location to another
• Water transport system: Consists of pipelines, large ship containers, ships, canals,
bridges, and tunnels for intentional movement of water through long distances.
• Air transport system: consist of airports, airline and air traffic control systems
• Coastal transport system: involves the movement of goods from one place to another
through the ocean, sea, or from one coastline to another.
• Inland water transport system: is the carriage of goods or cargo using ships and
barges through inland waterways of rivers, lakes, ponds, streams, groundwater,
springs, cave waters, floodplains, and more
A. SHORT QUESTIONS
Q1. What is the role of the transport system?
Q2. Explain the concept of mobility of labour and capital with transportation
Q3. Explain the method of using pipelines for transportation
B. LONG QUESTIONS
Q1. Explain the importance of the transport system in India
Q2. What is the role of railways in the transportation system?
Q3. Give any four problems related to the growth of transport system in India

9. ANSWERS
1. India
2. True
3. Transportation
4. Fourth
5. False
6. International
7. Short
8. True
9. Higher
TERMINAL QUESTIONS
SHORT QUESTIONS
ANSWER 1. The transport system plays a significant role in removing the distance
barriers and it is an essential part of the economic and sustainable development of the
country. The efficiency of transport systems facilitates the movement of goods, services, and
people physically from one place to another and it increases productivity and
competitiveness of the economy.
For more details, refer Section 2. Transport System and Service Sectors in India: Importance
of Transport.
ANSWER 2. Transportation helps with the mobility of various factors of production and
provides mobility to labour and capital. An effective transport facility provides the
movement of people and labour from one place to another. The investment of capital gets
channelised with an effective transportation service. It encourages more productive use of
labour and capital in other sectors.
of Transport.

ANSWER 3. Pipelines are specialised methods of transportation for transporting petroleum

products, crude oil, iron ore, gas, chemicals, coal, crude petroleum, and many other forms of
products. It involves a fixed cost in setting up the required pipelines and infrastructure
between different regions.
The pipelines are flexible hence, it has a limited scope with its products and it is unable to
transport many kinds of products. Countries like USSR, the USA, and Middle-east have been
using the method of pipelines for many years. India is still very new to this method of
transportation, and it is specifically used by oil refineries for transporting petrol and gas
from the sources to the required markets and states.
For more details, refer Section 3. Modes of Transport.
LONG QUESTIONS
ANSWER 1. The transport system plays a significant role in removing the distance barriers
and it is an essential part of the economic and sustainable development of the country. The
efficiency of transport systems facilitates the movement of goods, services, and people
physically from one place to another. It also increases the productivity and competitiveness
of the economy.
The transport system ensures the movement of raw materials, machinery from one location
to another for effective and smooth functioning of the industries, and for transporting the
outputs from the industries to various destinations. The transport sector contributes majorly
to the GDP of the country and it has also played an important part in contributing to the
exports and attracting foreign investments. The transport and the services sector has
employed over 21 lakhs of people on a large scale in the country with covering various forms
of activities like trading, storage, communication, insurance, financing, business services,
construction, hotels and restaurants, community services, and more.
of Transport.
ANSWER 2. The Indian railway system is the fourth largest railway system in the world, and
it has grown as the largest in Asia. The railway networks are very effective for long-distance

and can efficiently transport large tons of loads to different parts of the country. There are
fixed costs involved in the railroad operations that are required for maintaining their tracks,
procuring expensive equipment, changing terminals, and yards. Transportation by rail is
good for very heavy, low-value shipments that are not very time-sensitive because of the
time taken by railways to transport the goods.
There are many advantages of the railway's system in India which are as follows:
• Carries large capacity of load

• It is very economical
• Well protected through various seasons
• Provides containerisation
• Links various cities, markets, and countries
For more details, refer Section 3. Modes of Transport.
ANSWER 3. The transport sector plays a significant role in the movement of people and
goods within the country and across the borders. The transportation sector is linked to the
manufacturing industries, healthcare, hospitality sector, and more. The transportation
sector is evolving at a rapid pace, and it plays an integral role in connecting places,
organisations, and people within the economy.
There are many hurdles and other growth-related problems that are associated with the
path of progress of the transportation sector. Some of these are:
• Flawed planning of transport system
In India, there is major pressure on the road and railway sector in certain regions,
which makes the system unbalanced. The government must create alternate routes for
decreasing the pressure on road transport.
• Lack of railroad co-ordination
The road and rail transport systems must work in coordination since they are the two
integral part of transport systems in the country. The system requires effective

coordination between sharing of the freight traffic and passenger traffic between the
railways and road transport. The railways should be involved with carrying large and
bulky goods through long distances. Road transport should be used for short distances
and carrying smaller loads of goods.
• Maintaining bulk orders
It has become challenging for the transport sector for keeping up with the timeliness of
large bulk orders. The high volume orders are not easy to handle for most of the
transport companies and it also becomes difficult for them to work through tight
timelines for the supply chain companies for delivery of orders on time with limited
resources.
• Unforeseen weather conditions
The transport sector is affected by many forms of unforeseen delays due to various
kinds of weather conditions and terrain in India that lead to situations of unreliability
in the transportation sector. The transport sector moves through tough terrains in the
country with unfavourable road conditions, remote and internal areas, hilly regions
which are majorly prone to landslides and accidents during the monsoon seasons.
For more details, refer Section 4. Growth Related Problems in Transport.

BOOKS
• Chopra, S. (2020). Supply chain management strategy, planning and operation. New
York, NY: Pearson Education.
• Indian human settlements programme: Research report. (1988). New Delhi: Human
Settlement Management Institute.
REFERENCES
• India Directory. (n.d.). Retrieved from https://www.indiaonline.in/about/transport

• Transport System in India: Meaning, Advantages and Types. (2015, October 26).
Retrieved from https://www.yourarticlelibrary.com/transport/transport-system-in-
india-meaning-advantages-and-types/65100

SEMESTER 2
DCM1206
Unit 13 : Services Sector 1

Unit 13
Services Sector
Table of Contents

No Graph Activity
1 Introduction - -
3-4
2 Service Sector: Meaning of Services and

1, 2 1
Importance on the Value of Services 5-9
2.1 The Types of Services - -
3 Factors and Role of the Sector in Indian

3 2 10 - 13
economic Development
5 Summary - - 15 – 16
6 Glossary - - 16
8 Answers - - 17 - 21

1. INTRODUCTION
The pre-condition for the economic development and progress of the country is the existence
of the strong, competitive, and reliable service sector. The services sector consists of a broad
range of services from the modern ones with the latest technological advancements to the
unorganised ones consisting of unskilled workers. After independence, India has made a lot
of progress in the services sector and it is attributed to being the second-fastest growing
service sector globally. This has been possible due to several reasons such as growth and
development of the IT sector, introduction to digital technologies, growing affluence, &
industries, improved status of women, development of the markets, and more reasons.
Though the services sector has had to face several obstacles such as inadequate
infrastructure, slow implementation of reforms, bureaucratic systems, the existence of many
public entities, lacking customer-friendly attitude, and more, which have resulted in poor
quality of service levels across many industries.
The growth and development of the service sector have provided large-scale employment to
the people in the country and it plays a dominant role in India’s GDP. The services sector has
also attracted foreign investment in the country, which has contributed majorly to the
exports of the country. The services sector covers a variety of activities linked to the
hospitality industry, trading sector, transport sector, communication, finance & insurance,
real estate, and many other kinds of social, personal, community, and business services.
The government of India has played a significant role in promoting the development and
growth of the services sector by providing many incentives and introducing credit incentive
programs. These credit programs are focussed on the different sectors of education,
engineering, tourism, healthcare, transportation, information technology, finance & banking,
management, and many other domains of services. The increase and growth of the services
sector’s output have resulted in the growth of employment and it has been noticed that the
service sector is one of the biggest employers in most of the world’s economies today. The
world trading sector has changed with an increase in the services sector across different
economies that have created a different impact on their growth and development.

❖ Explain about the service sector its meaning and importance on the value of services and
types of services
❖ Discuss the factors and role of the sector in Indian economic development

2. SERVICE SECTOR: MEANING OF SERVICES AND IMPORTANCE ON THE

VALUE OF SERVICES
The service sector of the economy is made up of industries that generate revenue by
providing services and intangible products. The service sector is also referred to technically
as the territory sector and it is the third sector of the economy after the primary and
secondary sectors. The service sector is the largest value-added sector that comprises
different service industries such as healthcare, hospitality entertainment industry, waste
management, social assistance, education, finance & investment services, professional
services, and more. The service sector contributes a majorly to the domestic and global
economy and it consists of a large variety of tangible and intangible services. The advent of
globalisation has benefited the service economy with an increase in the Gross National
Product (GNP) of the country and it has opened the doors for foreign investments in the
country. According to many economists, the increase in growth and development of the
services sector has increased economic growth of the country.
According to Stanton “Services are those separately identifiable essentially intangible

activities, which provide and want satisfaction when marketed to consumers and/or industrial
uses and which are not necessarily tied to the sale of a product or another service”.
The economy consists of three sectors where the primary sector is involved with mining,
farming, and other forms of agricultural business activities. The secondary sector is involved
with the production and manufacturing of tangible goods. The goods are manufactured with
the resources and raw materials that are made available by the primary sector. This is the
third sector of the economy known as the tertiary sector that contributes to a major portion
of business activity in the global economy. The advent of information technology (IT) has
benefited the services sector and it has changed their methods of operations through the
availability of knowledge and information. It has helped the business enterprises to be able
to quickly understand the needs and desires of their target customers in a cost-effective
manner, which gives them a competitive edge over the others. Hence, the importance of the
services sector is:
1. Contributes to the share in Net National Product (NNP) due to the employment of 23%
of the working population

2. Facilitates industrialisation by the improvement of the transport, communication,

electricity, transport, banking, and more sectors
3. Helps with the development of the agricultural sector by providing an effective network
system
4. Growth of market while providing various services to the industrial and the agricultural
sectors
5. Eliminates imbalances with efficiently organised transport and communication
services
6. Improves quality of life and standard of living by providing better services and creating
a path for economic development
7. Increases productivity through a well-organised network of communication and
transport that increases information and mobility amongst the workforce
8. The developed service sector leads to an increase in foreign trade that leads to an
increase in foreign exchange reserve in the country
Fig. 13.1: Importance of the service sector
Source: lexiprep.com/NIOS-Notes/Secondary/Economics/NIOS-Economics-Ch-20-Sectoral-
Aspects-of-Indian-Economy-Part-2.html

STUDY NOTE
The main characteristics of services are:
• Intangible - Can’t be touched, manufactured, or stored.
• Perishable – Performed in s moment and are finished when they are over.
• Inconsistent – Can’t be repeated exactly between services.
2.1 The Types of Services
The services sector provides services to many sectors of industries that can be classified into
the following categories:
• Professional Oriented: These services are provided by professionals and they are a
part of the business market, involving independent individuals, and it includes both and
other market segments. Examples of professional services are financial advisors,
advertising, business & management consultancy, engineering, architecture & interior
designing, legal & medical services, other market agencies or stockbrokers, and more.
• Consumer Oriented: These are non-professional services that are mainly consumer-
oriented, and are directed from business to business or towards consumer markets or
they could be consumer oriented. Examples are travel & tourism, catering & hospitality
services, cleaning services, transport services, communication services, financial
services, entertainment & media services, and more.
The services provided by the service sector are mainly intangible and are concerned with
functions and activities concerning production and consumption. The services used by
organisations are termed as business services. There are several business enterprises and
industries that make up the service sector and cater to different types of business services.
The service sector today has become one of the largest sectors of the economy. It starts from
the initial stage of activities moving from the start of manufacturing of goods or services till
they are delivered to the final customers. There are many kinds of services that are used and
availed by many organisations from different industries that consist of financial services,
information technology, communication, software development, consultancy, training
services, and more. The services can be further categorised as follows:

• Business Services: Business services involve the business enterprises in supporting

the daily functioning and different activities of the enterprises. These are in form of
banking & financial services, transportation services, communication services,
management services, insurance, distribution & supply chain services, warehousing,
and more services
• Social Services: These are important public services normally provided by voluntary
organisations such as Non-government organisations (NG0) and government agencies
for attaining certain social equality within the society. These objectives are focussed on
improving the lifestyle and the standard of living of the backward and weaker sections
of society. The government or the NGOs provide many facilities such as educational
facilities to the children of the weaker class and also take care of housing, healthcare,
sanitation, and hygienic facilities in the rural and slum areas. The main idea of these
organisations is not to make profits but to provide services for social causes.
• Personal Services: Personal services are not consistent by nature and differ for
different people depending upon the service provider. These services are dependent
upon the needs, preferences, and requirements of the people and customers. The
personal services can be in form of tourism, hospitality services, professional services,
consulting & staffing services, recreational services, and more.
Fig. 13.2: Types of Services
Source: https://www.slideshare.net/ZafridZafrid/service-sector-in-india-83786727

STUDY NOTE
There are around 13 types of service sectors in India. It includes:
• Trade
• Tourism
• Shipping
• Port Services
• Storage Services
• Telecom and Related Services
• Real Estate Services
• IT Services
• Accounting and Auditing Services
• Research and Development Services
• Legal Services
• Consultancy
• Construction
1. Service sector is third sector of economy. (True/False)
2. __________% of population is employed in the service sector:
a. 20
b. 23
c. 25
d. 32
3. The three types of services are __________, ____________, and ___________.

3. FACTORS AND ROLE OF THE SECTOR IN INDIAN ECONOMIC

DEVELOPMENT
The development and growth of the economy of the country are mostly dependent upon the
growth and progress of the three sectors of the nation’s economy. In recent years, there has
been a rapid increase in the service sector due to the advancement of technology and
knowledge management and it has a major share of the contribution to the country’s income,
output, and level of employment. The service sector plays a dominant role in the economy
and its development by reducing inequalities in the distribution of income and by its
contributions to different aspects of the economy. The growth and development of an
economy are due to the demand and supply factors that play a significant role in the economy
of the country. The factor demand that impacts the growth of services in the economy is
normally because of factors resulting from an increase in the usage of input of services by
other sectors of the economy. The supply side is affected by the liberalisation policies and
reforms made by the government that has increased trade services. The liberalisation of
trade has resulted in the development of service sectors of transport, communication,
finance, hospitality sectors, and more.
There has been an increase in demand and also the expansion of education and healthcare
facilities. The services sectors are also responsible for over 71% of new job opportunities
from the agricultural and industrial sectors of the economy. Many social service
organisations have contributed majorly to the health, education, and other public services in
the economy. With the expansion of the economy, there is an increase in the service sector
activities that contribute more the 51% of income towards the national income of the
country. The service sectors generate more employment opportunities that lead to economic
growth and sustainable development and the different activities of the service sector
contribute to the expansion of the primary and secondary sectors. The service sector plays
a significant role in balancing the regional development of the country. Many factors have
contributed to the growth of the service sector in form of growth of the IT sector, improved
status of women people become health-conscious, opening up of the economy in the country,
developed & organised markets, and more reasons. The factors that contribute to the growth
of the service sector are:

• Policies of the Government
The government policies and regulations play a major role in attributing to the growth
of the service sector. The government policies concerning the distribution policies,
price levels, transformation of operations, and restructuring of the economy in terms
of privatisation and other forms of social changes.
• Changes in business trends
The modern trends of automation and digitalisation have introduced many changes
and restructuring of the business strategies. There is an increase in franchising in many
sectors of the industry and the issue of licences to the individual entrepreneur have
resulted in the expansion of business by independent entrepreneurs and also an
increase in other forms of marketing and promotional activities.
• Advancement in Technologies and Growth of IT
The changes and advancements in newer technologies have resulted in the integration
of IT and telecommunication systems. The digitalisation of the system has enabled the
business organisation to collect and manage large databases concerning information
about their customers and also be able to predict the changes in the market and look
forward to new opportunities in the markets
• Social Changes and Structural Transformation
The social changes in the economy have resulted in major changes in the social
structures of the families with more working members adding to an increase in income
and purchasing power of the family. This results in better lifestyles and standards of
living with changes in levels of income consumption and employment. There was a
major structural transformation of shifting of economic dependency from the primary
to the tertiary sectors.
STUDY NOTE
The service sector of India started to expand in mid-1980s, but the actual acceleration started in 1990’s. This occurred
due various economic reforms after severe balance of payment crisis were faced.

• Liberalisation and Economic Reforms
The growth of the service sector can be attributed to the liberalisation and the
introduction of different economic reforms in the country. Due to these reforms, there
was a reduction in restrictions and movement of foreign investments in the country
that led to a major inflow of capital and foreign investments in the country along with
major outsourcing of business to India. This led to a major increase in the growth of the
service sector in India
• Globalisation of the Economy
The internationalisation of the economy has expanded the Indian economy to the global
markets with many countries expanding their operations in other countries and also
many international companies investing and opening their offices in India. This has
lead to an increase in trade and commerce and also an increase in competition which
has further led to the innovation of new products and services globally.
• Increase in trade and commerce
The growth of the service sector is because of an increase in the volume of trade and
also due to low tariff and non-tariff barriers on imports in India. Many products from
the Indian markets were able to compete in the global markets.
There has been an increase in the service sector because in the last few years the
markets in the country have become more organised and developed. The markets in
the country are moving towards wholesaling and retailing, and it has led to an
emergence of more activities in the service sectors. Many foreign companies are
showing interest in investing in India and outsourcing their business to India because
India has a large pool of highly skilled and educated workers available at a low cost.
Due to this reason, there has been an increase in the number of industries, healthcare,
and medical facilities in the country. The service sector has made a major contribution
to the Indian economy and the statistical growth of Indian service sectors are:

• There has been an 85% increase in business services

• The software service has seen an increase of 34% and there was revenue of USD 4.8
billion
• The export of products and engineering services grew by 24% percent
• The cultural, recreational, and personal service grew by 97%
• The financial services increased by 89%
• The services concerning insurance, travel and transport increased by 24%
All of these service sectors have contributed to the growth and development of the Indian
economy and it accounts for 55.49% of India’s GDP and is considered as the main indicator
of the economic progress and development of the country.
Fig. 13.3: Contribution of Service Sector
Source: https://www.slideshare.net/MAYANKAGRAWAL89/growth-of-service-sector
4. The liberalisation of trade has resulted in the underdevelopment of service
sectors of transport, communication, finance, hospitality sectors, and more.
(True/False)
5. Service sector has contributed to around __________% of India’s GDP.
6. The growth of the service sector is because of an increase in the volume of trade
and also due to low tariff and non-tariff barriers on imports in India.
(True/False)

4. CONCEPT MAP
Fig 13.4: Concept Map

5. SUMMARY
• The pre-condition for the economic development and progress of the country is the
existence of a strong, competitive, and reliable service sector.
• The growth and development of the service sector have provided large-scale
employment to the people in the country and it plays a dominant role in India’s GDP.
The services sector has also attracted foreign investment in the country, which has
contributed majorly to exports of the country.
• The government of India has played a significant role in promoting the development
and growth of the services sector by providing many incentives and introducing credit
incentive programs.
• The service sector of the economy is made up of industries that generate revenue by
providing services and intangible products. The service sector is technically referred as
the territory sector and it is the third sector of the economy after the primary and
secondary sectors.
• The economy consists of three sectors where the primary sector is involved with
mining, farming, and other forms of agricultural business activities. The secondary
sector is involved with the production and manufacturing of tangible goods.
• The services provided by the service sector are mainly intangible and are concerned
with functions and activities and are involved in activities concerning production and
consumption.
• There are many kinds of services that are used and availed by many organisations from
different industries consisting of financial services, information technology,
communication, software development, consultancy, training services, and more.
• The development and growth of the economy of the country are mostly dependent
upon the growth and progress of the three sectors of the nation’s economy.
• The liberalisation of trade has resulted in the development of the service sectors of
transport, communication, finance, hospitality sectors, and more.
• There has been an increase in demand and also the expansion of education and
healthcare facilities. The services sectors are also responsible for over 71% of new job
opportunities from the agricultural and industrial sectors of the economy.

• The government policies and regulations play a major role in attributing to the growth
• The changes and advancements in newer technologies have resulted in the integration
of computers and telecommunication systems.
• The social changes in the economy have resulted in major changes in the social
structures of the families with more working members adding to an increase in income
and purchasing power of the family.
• The internationalisation of the economy has expanded the Indian economy to the global
markets with many countries expanding their operations in other countries and also
many international companies investing and opening their offices in India.
6. GLOSSARY
• Service Sector: The service sectors of the economy is made up of industries that
generate revenue by providing services and intangible products
• Professional-Oriented Services: These services are provided by professionals and
they are part of the business market, individual, and both or other market segments
• Consumer-Oriented Services: These are non-professional services that are mainly
consumer oriented that are directed from business to business or towards consumer
markets or they could be consumer oriented.
• Social Services: These are important public services normally provided by voluntary
organisations such as non-government organisations (NG0) and government agencies
for attaining certain social equality within the society
• Personal Services: These services are dependent upon the needs, preferences, and
requirements of the people or customers

SHORT ANSWER QUESTIONS
Q1. Explain the progress of the service sector after independence.
Q2. What is the role of the government of India in promoting the development and growth
of the services sector?
Q3. Explain the term ‘social services’ in the service sector.
LONG ANSWER QUESTIONS
Q1. Explain the importance of the service sector.
Q2. What are the types of services in the service sector?
Q3. Give four factors that contribute to the services sector.
8. ANSWERS
SELF ASSESSMENT QUESTION
1. True
2. 23
3. Business; Social; Personal
4. False
5. 55.49
6. True
TERMINAL QUESTIONS
SHORT QUESTIONS
Answer 1: The services sector consists of a large range of services from the modern one with
the latest advancements in technologies to the unorganised ones consisting of unskilled
workers. After independence, India has made a lot of progress in the services sector and it is
attributed to being the second-fastest growing service sector globally. This has been possible

due to several reasons such as growth & development of the IT sector, introduction to digital
technologies, growing affluence, and industries, improved status of women, development of
the markets, and more reasons.
For more details, refer Section 1. Introduction
Answer 2: The government of India has played a significant role in promoting the
development and growth of the services sector by providing many incentives and
introducing credit incentive programs. These credit programs are focussed on the different
sectors of education, engineering, tourism, healthcare, transportation, IT, finance & banking,
management, and many other domains of services. The increase and growth of the services
sector’s output have resulted in the growth of employment and it is seen that the service
sector is one of the biggest employers in most of the world’s economies today.
Answer 3: Social Services are a form of public services normally provided by voluntary
organisations such as NGOs and government agencies for attaining certain social equality
within the society. These objectives are focussed on improving the lifestyle and the standard
of living of the backward and weaker sections of society. The government or the NGOs
provide many facilities such as educational facilities to the children of the weaker class and
also take care of housing, healthcare, sanitation, and hygienic facilities in the rural and slum
areas. The main idea of these organisations is not to make profits but to provide services for
social causes.
For more details, refer Section 2.1. The Types of Services
LONG QUESTIONS
Answer 1: The service sector is the largest value-added sector that comprises different
service industries such as healthcare, hospitality entertainment industry, waste
management, social assistance, education, finance & investment services, professional
services, and more. The service sector contributes majorly to the domestic and global
economy and it consists of a large variety of tangible and intangible services. The advent of
globalisation has benefitted the service economy with an increase in the GNP of the country

and it has opened the doors for foreign investments in the country. According to many
economists with the increase in growth and development of the services sector, there is a
growth in the economy of the country.
The advent of IT has benefited the services sector and it has changed their methods of
operations through the availability of knowledge and information. It has helped the business
enterprises to be able to quickly understand the needs and desires of their target customers
in a cost-effective manner, which gives them a competitive edge over the others. Hence, the
importance of the services sector is:
i. Contributes to the share in NNP due to the employment of 23% of the working
population
ii. Facilitates industrialisation by the improvement of the transport, communication,
electricity, transport, banking, and more sectors
iii. Helps with the development of the agricultural sector by providing an effective network
system
iv. Growth of market with providing various services to the industrial and the agricultural
sectors
v. Eliminates imbalances with efficiently organised transport and communication
services
vi. Improves quality of life and standard of living by providing better services and creating
a path for economic development
vii. Increases productivity through a well-organised network of communication and
transport that increases information and mobility amongst the workforce
viii. The developed service sector leads to an increase in foreign trade that leads to an
increase in foreign exchange reserves in the country.
For more details, refer Section 2. Service Sector: Meaning of Services and Importance on the
Value of Services
Answer 2: The services provided by the service sector are mainly intangible and are
concerned with functions and activities and are involved in activities concerning production
and consumption. The services used by organisations are termed business services. There

are several business enterprises and industries that make up the service sector and cater to
different types of business services. The service sector today has become one of the largest
sectors of the economy. It starts from the initial stage of activities revolving around the start
of manufacturing of goods or services till they are delivered to the final customers. There are
many kinds of services that are used and availed by many organisations from different
industries consisting of financial services, IT, communication, software development,
consultancy, training services, and more.
The services can be further categorised as follows:
• Business Services: Business services are services that involve the business enterprises
in supporting the daily functioning and different activities of the enterprises. These are
in the form of banking & financial services, transportation services, communication
services, management services, insurance, distribution & supply chain services,
warehousing, and more services
• Social Services: These are services that are important public services normally
provided by voluntary organisations such as NGOs and government agencies for
attaining certain social equality within the society. These objectives are focussed on
improving the lifestyle and the standard of living of the backward and weaker sections
of society. The government or the NGOs provide many facilities such as educational
facilities to the children of the weaker class and also take care of housing, healthcare,
sanitation, and hygienic facilities in the rural and slum areas. The main idea of these
organisations is not to make profits but to provide services for social causes.
• Personal Services: Personal services are not consistent by nature and these services
differ for different people depending upon the service provider. These services are
dependent upon the needs, preferences, and requirements of the customers. The
personal services can be in form of tourism, hospitality services, professional services,
consulting & staffing services, recreational services, and more.
For more details, refer Section 2.1. The Types of Services
Answer 3: The service sector plays a significant role in balancing the regional development
of the country. Many factors have contributed to its growth in terms of growth of IT sector,

improved status of women people become health-conscious, opening up of the economy in

the country, developed & organised markets, and more reasons. The factors that contribute
to the growth of the service sector are:
• Policies of the Government

The government policies and regulations play a major role in attributing to the growth
• Changes in Business Trends

The emerging trends of automation and digitalisation have introduced many changes
in the business sectors. There is widespread franchising in many sectors of the industry
and the issue of licences to the individual entrepreneur have resulted in the expansion
of business by independent entrepreneurs and also an increase in other forms of
marketing and promotional activities.
• Advancement in Technologies and Growth of IT

The changes and advancements in newer technologies have resulted in the integration
of computers and telecommunication systems. The digitalisation of the system has
enabled the business organisation to collect and manage large databases concerning
information about their customers and also be able to predict the changes in the market
and look forward to new opportunities in the markets
• Liberalisation and Economic Reforms

The growth of the service sector can be attributed to the liberalisation and the
introduction of different economic reforms in the country. Due to these reforms, there
was a reduction in restrictions and movement of foreign investments in the country
that led to a major inflow of capital and foreign investments in the country, along with
major outsourcing of business to India. This led to a major increase in the growth of the
service sector in India
For more details, refer Section 3. Factors and Role of the Sector in Indian economic
Development


BOOKS
• Balaji, B. Services Marketing and Management. S Chand & Co Ltd, 2010.

• Datt, Ruddar, and K. P. M. Sundharam. Indian Economy. S. Chand, 2009.
• Shanker, Ravi. Services Marketing, the Indian Experience. Manas Publications, 1993.
REFERENCES
• “Brand India.” IBEF, https://www.ibef.org/industry/services.aspx. By: Remya

Lakshmanan Remya Lakshmanan Principal Investment Specialist Share: et al. “Service
Sector in India: A Paradigm Shift.” Service Sector in India – Statistics and Overview |
Invest India, https://www.investindia.gov.in/team-india-blogs/service-sector-india-
paradigm-shift.

SEMESTER 2
DCM1206
Unit 14 : Banking Sector 1

Unit 14
Banking Sector
Table of Contents

No Graph Activity
1 Introduction - -
3–4
2 Banks and their Assistance to Development
- 1 5–8
Banking Structure in India
3 Roles and Responsibilities of Banks in

- 2 9 – 12
4 Concept Map - - 13
5 Summary - - 14 – 15
6 Glossary - - 15
8 Answers - - 16 – 20

1. INTRODUCTION
The banking sector in India is evolving at a rapid pace offering a large number of products
and services to its customers. Modern banking has led to the launching of new products
which are gaining ground and banking has become highly developed with several changes in
the banking sector.
The changes are implemented towards an increase in business, development of new

technological processes, creation of new ideas, and innovation processes being encouraged
with the execution of new technologies. The main objective of the banks is to enable 24/7
opportunities for their clients to use banking services without going to the bank and shorten
the operational time of the banks.
The new generation is fast adapting to the new banking services hence necessary the banks
need to communicate to their clients regarding the new products and services the benefits
of using internet banking, mobile banking, and more.
The development of technological processes and the emerging trends of the dynamic market
have made it necessary for the banking and financial world to develop new and innovative
processes to keep up with the changing times.
The banks work continuously to improve their operations and to maintain their market
positions. This can be achieved through employees who work to support the overall process,
continuous market research, understanding customer needs for specific products and
services, improvements in existing and new product development and innovations. Banks
require investment costs for increasing customer service and are always available to
customers while generating profit for the bank.
They are providing new facilities to the customers that include payment by mobile phones,
ATMs, use of mobile phones instead of payment cards, digital wallets, voice marketing, and
others. The main focus of the banks is not only to create and win more customers but also to
retain them through effective customer service.
The banks are the main backbone of the economy and they are involved with providing short
and long-term funds and the accessibility to the working capital needed by the industries.

They are involved with providing loans and other advances to the industrial sectors, along
with the creation and expansion of the private sectors. The banks are involved with the
promotion, management, and expansion of the economy in the rural sectors. They are
involved with providing assistance, management, technical assistance, and the revival of sick
industrial units. The aspect of multi-channel banking has become more relevant by offering
multiple integrated channels across various channels and an optimal balance of services.

❖ Discuss about banks and their assistance to development banking structure in India
❖ Explain the roles and responsibilities of banks in economic development

2. BANKS AND THEIR ASSISTANCE TO DEVELOPMENT BANKING

STRUCTURE IN INDIA
The banking sector in the country is involved with mobilising the surplus resources from
various sectors and channelising the same to the different needy sectors within the economy.
The process involves accumulative capital growth through the process of institutionalisation
of savings and investment that helps to foster economic growth in the country.
The monetary authority in India is the Reserve Bank of India that manages and oversees the
country’s supply of money, interest rates, and inflation. It acts as the watchdog for regulating
the commercial banking system and acts as the regulator of other banks of the country. The
Reserve Bank of India acts as a banker and financial adviser to the government and because
of its important role in the banking system, it is also known as ‘lender of last resort.’
Banks have an important role to play in the economic development of the country and the
Reserve Bank of India has a specific goal of nurturing the development of sustainable
microfinance providers and other small and large-scale industries. It has resulted in the
formation of the Apex banking institutions that are independent institutions with a strong
board and management that protect the system from political intervention ensuring that
management can make decisions on technical grounds. The liberalisation, privatisation, and
globalisation policies have helped the banking sector to grow rapidly in India which has
brought in economic reforms in the country with along with many opportunities through
their lending and financial facilities. The Reserve Bank of India along with the other banks in
the country is involved with:
• Regulating the banking system

• Playing a vital role in the economic development of a country
• Monetary policy formulation
• Encouraging savings and investment
• Links savers and investors
• Enables and helps in capital formation
• Removes deficiency of capital formation
• Important sources of finance and credit

• Helps in the allocation of risk and act as intermediaries between buyers and sellers
• Facilitates expansion of financial markets
• Are the main engines for balanced regional development within the economy
• Financing of agriculture and other allied services
• Improving the living standards of the people in the country
The banking sector is involved with the development of the economy through the
development banks in form of the Apex institutions are set up as a priority for promoting a
particular industry or for the development and growth of the sectors of the economy. The
Apex banking Institutions are financial institutions that offer lending facilities to small
businesses in both urban and non-urban regions.
These banks are a part of the set of institutions, which are engaged in financing rural and
agricultural development in the country. They are monitored and regulated by the Reserve
Bank of India (RBI) and come under the Banking Regulations Act, 1949 as well as the banking
laws act, 1965. They are referred to as apex bodies since they have the authority and
directives that have to be adhered to by banks and other bodies. The working of these
institutions are coordinated by the development banks of Apex institutions and they are
engaged in financing, promoting, and developing the industry and also assist with providing
credit and other kinds of facilities for industrial development.
The most important function of the banking sector is to select the MFIs (Microfinance
Institutions) to be funded because there are a limited number of qualified MFIs and the
management have problems with applying for proper selection criteria since some of them
are faced with political pressure or pressure to disburse large amounts of funds quickly.
Since they are more familiar and closer to the market which puts them in a better position
to identify the capable MFIs and they can do so cost-effectively.
The banking institutions are involved with the development and promotional functions,
credit functions, supervisory functions, with institutional and capacity banking. They
coordinate the activities of various intermediaries and institutions engaged in creating
rehabilitation schemes, restructuring of credit institutions, extension of credit, training,
development work, supervision of mobilisation of resources, and more. The banking sectors
achieve effective multiplier effects by rapidly expanding the number of MFIs along with the

client-serving capability of each. They can do this by coordinating their activities in

collaboration with the Reserve Bank of India, the Government of India, the state government,
and other forms of national institutions.
The banking sector along with the development banks provides a window through which
governments, donors, and international lenders can invest large amounts of money into
microfinance for lending directly to MFIs. The funding of Microfinance institutions (MFI) by
the development banks or the Apex banking system is based on systematic and clear
selection criteria like the quality of management, portfolio quality, progress towards
sustainability, and depth of outreach.
The development banks or the Apex institutions have the authority to discontinue funding
to MFIs if they fail to meet the above criteria. The funding and loans by the development
banks are tailored to the cash flow patterns and planning needs of MFI and they are not set
on any pre-set disbursement plans. The banks monitor MFIs based on specific defined
performance perimeters and targets that are enforced seriously. The management of the
development banks or the Apex institutions is of very high quality that consists of
comprehensive microfinance expertise, financial and managerial skills, and integrity.
The main features of the development banks or the Apex Banking Institutions are:
• The banks are sponsored, supported, and subsidised by the government- and financial
agencies in India
• They facilitate the flow of credit and perform many kinds of developmental and
promotional functions along with coordinating the activities of various other agencies
that are involved in the similar activities
• They have a three-tier linkage and vertical integration within the federal structure.
• Some of them are scheduled banks but most are unscheduled.
• They perform all the main banking functions to their range of services is narrower than
that of commercial banks. Though they have a wide geographical coverage
Some of the development banks operating in India are:
• Industrial Finance Corporation of India (IFCI): for providing medium and long term
credit for industries

• Industrial Credit and Investment Corporation of India (ICICI): Is a private sector

development bank for promoting the private sector industries
• Industrial Development Bank of India (IDBI): Is involved with the operations of other
development banks and term-financing institutions
• Industrial Reconstruction Bank of India (IRBI): Is involved in providing assistance
and revival of sick industrial units in both sectors.
• Small Industries Development Bank of India (SIDBI): Provides financial and non-
financial assistance to the small-scale sector.
• State-Level Industrial Development Banks: (SFCs and SIDCs): these are a
combination of industrial development banks and financial institutions for assisting the
backward and remote regions in different states for the development of medium and
small-scale industries.
STUDY NOTE
Industrial Finance Corporation of India (IFCI), established in the year 1948, is the first development bank of India.
Government of India is the founder of IFCI which is registered with the Reserve Bank of India.
SELF ASSESSMENT QUESTIONS - 1
1. The Reserve Bank of India acts as a ____________ and ______________ to the

government
2. The most important function of the banking sector is to select the MFIs
(Microfinance Institutions) to be funded. (True/False)
3. Some of the development bank are unscheduled banks but most are scheduled.
(True/False)
4. ______________ is involved in providing assistance and revival of sick industrial

units in both sectors:
a. Industrial Credit and Investment Corporation of India (ICICI)
b. Small Industries Development Bank of India (SIDBI)
c. Industrial Development Bank of India (IDBI)
d. Industrial Reconstruction Bank of India (IRBI)

3. ROLES AND RESPONSIBILITIES OF BANKS IN ECONOMIC

DEVELOPMENT
The banking system has a significant role to play in the growth of the Indian economy and
they are involved with collecting funds through the savings and investments made by the
people and other business entities. They also provide loans and assistance to business
enterprises and manufacturers. Capital formation and lending money by the banks help with
the process of commerce and trading. The banks provide loans to manufacturers in form of
working capital for buying raw materials. Keeping the money in the banks helps the people
to save and they also earn interest and the savings are thereby used for producing new
capital assets.
The role and responsibilities of the development banks are:
• Providing funds for the weaker sections of the society for starting a business
• Promoting the development of the country, providing financial assistance to new
entrepreneurs, and long term social development
• Assist the backward units and other provincial development in the lesser developed
regions
• Help with direct and indirect employment generation by financing the industrial units
• Facilitating the acceleration of industrialisation by providing financial and technical help
for the availability of goods and services in the country for improving the standards of
living of the people
• Provide funding and credits for development refinancing of the housing sector and other
financial institutions. They are involved with the promotion and development of the
housing and the financial institutions
• The development banks provide credit for farming and rural development for
encouraging agriculture and rural growth in the country. The National Bank for
Agriculture and Rural Development (NABARD) is a rural development bank that has
been established for providing credit to agriculture and from the growth of the economy.

• The development banks are involved with improving foreign trade by providing
Overseas Buyers Credit for purchasing Indian products and goods. It promotes foreign
trading with international banks for purchasing capital products from India.
• The development banks help with the revival of sick units through the process of
rebuilding, providing credit and other facilities, and encouraging modernisation. The
launching of the Industrial Investment Bank of India (IIBI) helped with taking care of the
sick units and restoring them.
• The development banks contribute to the capital markets by investing in mutual funds,
equities, shares, and debentures for different companies
The promotional activities taken up by the development banks are:
• Making surveys of backward and remote areas

• Providing the facility of technical consultancy organisations
• Determine entrepreneurial development programs
• Ensuring technological improvement with sharing of knowledge through research and
development activities
Some of the development banks and the apex institutions involved with the economic
development of the country are:
Agriculture finance- (NABARD) - National Bank for Agriculture and Rural

Development
NABARD is the acronym for the ‘National Bank for Agriculture and Rural Development.’
NABARD is India’s financial banking institution that provides rural and agricultural
financing. They have their headquarters in Mumbai, branches all over India. NABARD was
formed by a special parliamentary act and the main focus of the organisation is the
advancement of rural India by enhancing the flow of credit for the elevation of agriculture as
well as the rural non-agricultural sector. NABARD has certain departments that work
towards the desired goals of building an empowered and financially secured rural India.
STUDY NOTE
Dr. G.R. Chintala is the current chairman of NABARD with effect from May 7, 2020.

National Housing Bank
The National Housing Bank (NHB) is an institution that was set up on July 9, 1988, under the
National Housing Bank Act, 1987. It is a banking institution created for providing housing
finance to promote the housing sector in India, both at local and regional levels and they have
their head office in New Delhi. The bank is a government-owned entity with multi-
dimensional activities for serving the housing needs of all segments of the population. They
are also involved in making policies for the housing finance sector and are regulators for
Housing Finance Institutions (HFIs). NHB focus on providing housing to low and moderate-
income groups and the bank also assists the government in formulating policies at the Centre
and the State levels. NHB is involved in creating policies for developing a sound and
sustainable housing finance system that can serve the different segments of the population
especially the low and moderate-income groups. NHB also partners World Bank for housing
projects.
Small Industries Development Bank of India (SIDBI)
The Small Industries and Development Bank of India (SIDBI) were established on 2nd April
1990 as a wholly-owned subsidiary of the Industrial Development Bank of India (IDBI). Their
main focus is to strengthen the MSME sector by facilitating cash flow. SIDBI is involved in the
financing, promotion, and development of Micro, Small, and Medium Enterprises (MSMEs).
It is engaged in assisting the small-scale industrial sector in the country for the development,
commercialisation, and marketing of its innovative technologies and products. SIDBI
administers various loan schemes through customised financial schemes of administering
Small Industries Development Fund and National Equity Fund and other services for meeting
the demand of different business projects. It also assists the small-scale industrial sector in
the country through other financial institutions like state finance corporations, commercial
banks, and state industrial development corporations.
Industrial Development Bank of India Limited (IDBI)
Industrial Development Bank of India (IDBI) was launched under the Industrial
Development Bank of India Act, 1964 as a Development Financial Institution (DFI). The bank

was established as a wholly-owned subsidy of the Reserve Bank of India under the Industrial
Development Act of 1965. The bank was launched in 1964 as an apex institution for planning,
promoting, coordinating, and financing the development of industry and institutions
engaged in financing, promoting, or developing industries in the country. The main objective
of setting up the IDBI was to make a coordinated and collaborated effort for achieving
maximum industrial growth.

5. NABARDS stands for _________________.
6. NHB has its head office in New Delhi. (True/False)
7. SIDBI is involved in the financing, promotion, and development of ______________.

4. CONCEPT MAP

5. SUMMARY
• The banking sector in India is evolving at a rapid pace offering a large number of
products and services to its customers. Modern banking has led to the launching of new
products that are gaining ground and banking has become highly developed with
changes in the banking sector
• The development of technological processes and the emerging trends of the dynamic
market have made it necessary for the banking and financial world to develop new and
innovative processes to keep up with the changing times.
• The banks are the main backbone of the economy and they are involved with providing
short and long-term funds and the accessibility to the working capital needed by the
industries.
• The aspect of multi-channel banking has become more relevant with offering multiple
integrated channels with offers across various channels, an optimal balance of services.
• The banking sector in the country is involved with mobilising the surplus resources from
various sectors and channelising the same to the different needy sectors within the
economy.
• The Reserve Bank of India acts as a banker and financial adviser to the government and
because of its important role in the banking system, it is also known as ‘lender of last
resort.’
• The liberalisation, privatisation, and globalisation policies have helped the banking
sector to grow rapidly in India which has brought in economic reforms in the country
with along with many opportunities through their lending and financial facilities.
• The banking sector is involved with the development of the economy through the
development banks in form of the Apex institutions that are set up as a priority for
promoting a particular industry or initiative for the growth of the economy.
• The banking institutions are involved with the development and promotional functions,
credit functions, supervisory functions, with institutional and capacity banking.
• The management of the development banks or the Apex institutions is of very high
quality that consists of comprehensive microfinance expertise, financial and managerial
skills, and integrity.

• The banking system has a significant role to play in the growth of the Indian economy
and they are involved with collecting funds through the savings and investments made
by the people and other business entities and they provide loans and assistance to
business enterprises and manufacturers.
• Keeping the money in the banks helps the people to save and they also earn interest and
the savings are thereby used for producing new capital assets.
• NABARD is the acronym for the ‘National Bank for Agriculture and Rural Development.’
NABARD is India’s financial banking institution that provides rural and agricultural
financing
• The National Housing Bank (NHB) is an institution that was set up on July 9, 1988, under
the National Housing Bank Act, 1987.
• The Small Industries and Development Bank of India (SIDBI) were established on 2nd
April 1990 as a wholly-owned subsidiary of the Industrial Development Bank of India
(IDBI).
• Industrial Development Bank of India (IDBI) was launched under the Industrial
Development Bank of India Act, 1964 as a Development Financial Institution (DFI).
6. GLOSSARY
• Banking sector: in the country is involved with mobilising the surplus resources from
various sectors and channelises the same to the different needy sectors in the economy
• Reserve Bank of India: is the Central bank of India and the monetary authority in India
• Apex institutions: are institutions that are set up as a priority for development and
promoting a particular industry or sector of the economy
• NABARD: National Bank for Agriculture and Rural Development
• MFIs: Microfinance Institutions
• Industrial Finance Corporation of India (IFCI): for providing medium and long term
credit for industries
• Industrial Development Bank of India (IDBI): Is involved with the operations of other
development banks and term-financing institutions
• Industrial Reconstruction Bank of India (IRBI): Is involved in providing assistance
and revival of sick industrial units in both sectors

Q1. Explain the evolution of the banking sector
Q2. What is the role Reserve Bank of India?
Q3. What is NABARD?

Q1. Explain the role of development banks and the Apex institutions
Q2. What is the responsibility of the Small Industries Development Bank of India (SIDBI)?
Q3. Explain the role of banks in the development and promotional functions for the growth
of the Indian economy
8. ANSWERS

1. Banker; Financial Adviser
2. True
3. False
4. Industrial Reconstruction Bank of India (IRBI)
5. National Bank for Agriculture and Rural Development
6. True
7. MSMEs
TERMINAL QUESTIONS
SHORT QUESTIONS
ANSWER 1. The banking sector has evolved at a rapid pace offering a large number of
products and services to its customers. Modern banking has led to the launching of new
products which are gaining ground and banking has become highly developed with changes
in the banking sector. The changes are implemented due to an increase in business,
development of new technological processes, creation of new ideas, and innovation
processes being encouraged with the execution of new technologies. The main objective of

the banks is to enable 24/7 opportunities to use banking services for the clients without
going to the bank and shorten the operational time of the banks.
ANSWER 2. The monetary authority in India is the Reserve Bank of India that manages and
oversees the country’s supply of money, interest rates, and inflation. It acts as the watchdog
for regulating the commercial banking system and acts as the regulator of other banks of the
country. The Reserve Bank of India acts as a banker and financial adviser to the government
and because of its important role in the banking system, it is also known as ‘lender of last
resort.’ Banks have an important role to play in the economic development of the country
and the Reserve Bank of India has a specific goal of nurturing the development of sustainable
microfinance providers and other small and large-scale industries.
For more details, refer Section 2. Banks and their Assistance to Development Banking
Structure in India.
ANSWER 3. NABARD is the acronym for the ‘National Bank for Agriculture and Rural
Development.’ NABARD is India’s financial banking institution that provides rural and
agricultural financing. They have their headquarters in Mumbai, branches all over
India. NABARD was formed by a special parliamentary act and the main focus of the
organisation is the advancement of rural India by enhancing the flow of credit for the
elevation of agriculture as well as the rural non-agricultural sector. NABARD has certain
departments that work towards the desired goals of building an empowered and financially
secured rural India.
For more details, refer Section 3. Roles and Responsibilities of Banks in Economic
Development.
Long Questions
ANSWER 1. Banks have an important role to play in the economic development of the
country and the Reserve Bank of India has a specific goal of nurturing the development of
sustainable microfinance providers and other small and large-scale industries. It has
resulted in the formation of the Apex banking institutions that are independent institutions
with a strong board and management that protect the system from political intervention

ensuring that management can make decisions on technical grounds. The liberalisation,
privatisation, and globalisation policies have helped the banking sector to grow rapidly in
India which has brought in economic reforms in the country with along with many
opportunities through their lending and financial facilities. The Reserve Bank of India along
with the other banks in the country is involved with:
• Regulating the banking system

• Playing a vital role in the economic development of a country
• Monetary policy formulation
• Encouraging savings and investment
• Links savers and investors
• Enables and helps in capital formation
• Removes deficiency of capital formation
• Important sources of finance and credit
• Helps in the allocation of risk and act as intermediaries between buyers and sellers
• Facilitates expansion of financial markets
• Are the main engines for balanced regional development within the economy
• Financing of agriculture and other allied services
• Improving the living standards of the people in the country
The banking sector is involved with the development of the economy through the
development banks in form of the Apex institutions that are set up as a priority for promoting
a particular industry or initiative for the growth of the economy.
The Apex banking Institutions are financial institutions that offer lending facilities to small
businesses in both urban and non-urban regions. These banks are a part of the set of
institutions, which are engaged in financing rural and agricultural development in the
country. They are monitored and regulated by the Reserve Bank of India (RBI) and come
under the Banking Regulations Act, 1949 as well as the banking laws act, 1965.
For more details, refer Section 2. Banks and their Assistance to Development Banking
Structure in India.

ANSWER 2. The Small Industries and Development Bank of India (SIDBI) was established
on 2nd April 1990 as a wholly-owned subsidiary of the Industrial Development Bank of India
(IDBI). Their main focus is to strengthen the MSME sector by facilitating cash flow. SIDBI is
involved in the financing, promotion, and development of Micro, Small, and Medium
Enterprises (MSMEs).
It is engaged in assisting the small-scale industrial sector in the country for the development,
commercialisation, and marketing of its innovative technologies and products. SIDBI
administers various loan schemes through customised financial schemes of administering
Small Industries Development Fund and National Equity Fund and other services for meeting
the demand of different business projects. It also assists the small-scale industrial sector in
the country through other financial institutions like state finance corporations, commercial
banks, and state industrial development corporations.
For more details, refer Section 3. Roles and Responsibilities of Banks in Economic
Development.
ANSWER 3. The banking institutions are involved with the development and promotional
functions, credit functions, supervisory functions, with institutional and capacity banking.
They coordinate the activities of various intermediaries and institutions engaged in creating
rehabilitation schemes, restructuring of credit institutions, extension of credit, training,
development work, supervision of mobilisation of resources, and more. The banking sectors
achieve effective multiplier effects by rapidly expanding the number of MFIs along with the
client-serving capability of each. They can do this by coordinating their activities in
collaboration with the Reserve Bank of India, the Government of India, the state government,
and other forms of national institutions.
The banking sector along with the development banks provides a window through which
governments, donors, and international lenders can invest large amounts of money into
microfinance for lending directly to MFIs. The funding of Microfinance institutions (MFI) by
the development banks or the Apex banking system is based on systematic and clear
selection criteria like the quality of management, portfolio quality, progress towards
sustainability, and depth of outreach.

The development banks or the Apex institutions have the authority to discontinue funding
to MFIs if they fail to meet the above criteria. The funding and loans by the development
banks are tailored to the cash flow patterns and planning needs of MFI and they are not set
on any pre-set disbursement plans. The banks monitor MFIs based on specific defined
performance perimeters and targets that are enforced seriously. The management of the
development banks or the Apex institutions is of very high quality which consists of
comprehensive microfinance expertise, financial and managerial skills, and integrity.
The main features of the development banks or the Apex Banking Institutions are:
• The banks are sponsored, supported, and subsidised by the government- and financial
agencies in India
• They facilitate the flow of credit and perform many kinds of developmental and
promotional functions along with coordinating the activities of various other agencies
that are involved in the similar activities
• They have a three-tier linkage and vertical integration within the federal structure.
• Some of them are scheduled banks but most are unscheduled.
• They perform all the main banking functions to their range of services is narrower than
that of commercial banks. Though they have a wide geographical coverage
• For more details, refer Section 3. Roles and Responsibilities of Banks in Economic
Development.

BOOKS
• Lalitha, N., & Dayanandan, R. (2005). NABARD & rural transformation. New Delhi:
Dominant and Distributors.
• Multinational financial management. (1996). Upper Saddle River: Prentice-Hall.
• Financial Market Place. (n.d.). Addison-Wesley.
REFERENCES
• About NABARD. (n.d.). Retrieved from https://www.nabard.org/

• India Brand Equity Foundation. (2017, November 01). Indian Banking Industry:
Analysis Market Size, Export & Investment Opportunity. Retrieved from
https://www.ibef.org/industry/banking-india.aspx

SEMESTER 2
DCM1206
Unit 15 : Banking Sector Reforms 1

Unit 15
Banking Sector Reforms
Table of Contents

No Graph Activity
1 Introduction - -
3
2 Banking Sector Reforms: Narsimham
- 1 4–7
Committee Recommendations
3 BASEL Norms - 2 7 – 10
4 Concept Map - - 11
5 Summary - - 12 – 13
6 Glossary - - 13
7 Terminal Questions - - 13 – 14
8 Answers - - 14 – 16

1. INTRODUCTION
The banking sector is an important part of the Indian economy that is involved in the
regulation for the smooth functioning of the economy. The banking sector consists of banks,
financial institutions, instruments, and markets that are involved with mobilising resources
from the surplus sector and channelising the same to the rural and remote sectors in the
economy.
The main focus of the banking sector reforms is to increase the growth and development of
the country by improving efficiency and increasing the productivity of the Indian banking
system. Their main objective is for keeping the financial markets stable by maintaining
sufficiency in the financial market.
The advent of the modern banking system during the end of the 18th century resulted in the
formation of the Reserve Bank of India, which was formulated for monitoring and regulating
the economy. The Reserve Bank of India had the responsibility of managing and executing
the core banking system of the country and along with managing the complexities of the
banking system and the multiple technological interdependencies.
Reserve Bank of India (RBI) introduced the modern banking platform for streamlining the
workflows, reducing the overall operating costs, and improving their processes through
increased agility. The RBI transformed India’s central banking operations by providing
technological benefits for a range of initiatives that changed the functioning of the
commercial banking sector.
The liberalisation, globalisation, and privatisation of the economy led to the formation of
various global banks in the country, which initiated the beginning of direct foreign
investments in the country. It brought flexibility and relaxation to various processes and
methods of taxation, licensing. It also introduced various acts and reforms to bring stability
and strengthen the Indian banking system.

❖ Explain the Banking sector reforms: Narsimham Committee recommendations
❖ Discuss about BASEL norms

2. BANKING SECTOR REFORMS: NARSIMHAM COMMITTEE

RECOMMENDATIONS
The banking reforms in the country started with economic and financial liberalisation to
make the banking industry in India more productive, competitive, versatile, and efficient.
The foundation of reforms in the banking sector was laid down by the Narasimham
Committee in1991. Thereafter, there were two other phases of the reforms in 1992 and in
1998 that brought in more efficiency and stability to the banking sector in India.
Some different acts and reforms have been launched for the Banking System of India in two
phases. The initial phase of the reforms consists of general policies and institutional
frameworks. The second phase revolves around structuring and developing the industry
with the latest advancements.
In August 1991, a committee of nine members was appointed by the Government of India
that was headed by M. Narasimham, who was the former Governor of RBI. The main
responsibility of the committee was to study the working of the banking sector and the other
financial institutions and find methods for restructuring them for improving and increasing
their efficiency.
The report of the Narasimham committee was aimed at deploying the resources of the banks
practically so that the depositors could get the maximum benefit. They believed that the
profitability, productivity, and efficiency of the banks were reduced due to the direct credit
programs and direct investments. The high statutory liquidity ratio (SLR) and cash reserve
ratio (CRR) put pressure on the banking sector in form of reserved taxes which diverted a
major amount of funds from the banks towards ineffective and unyielding purposes.
The Narasimham Committee report in 1991 was the first phase focusing on:-
• Ensuring autonomy in their decision making and the banking system

• Providing a high level of flexibility, reforms in the role of RBI, and changes in the CRR
and SLR system
• Recovery of Debts
• Establish a level of professionalism, competitiveness, and freedom of functioning for the
local area banks and other norms.

• Determine the entry of foreign investments and banks.

• The recommendations of the Narasimham Committee of 1991 were as follows:
• Restructuring of the banking sector: The committee suggested the restructuring of the
banking sector:
o Determining certain banks for international transactions and allowing foreign banks
to start operations in the country.
o There should be some national banks with their branches across the country and
there need to be some local branches in the regional sectors and opening of some
rural banks.
• No nationalisation of banks: According to the committee there should be no
nationalisation of banks in the country
• RBI should set up new banks: The committee suggested the setting up of new banks in
the private sector by RBI for meeting the capital and other requirements.
• Separate quasi-autonomous body: The committee believed that there should be a
separate quasi-autonomous body for managing the functions of banks and other
financial institutions in the country
• Refinancing role: The committee recommended that IDBI should only be involved with
refinancing and they should assign the direct lending to a different organisation
• Requirement of Prudential guidelines: The functioning of all financial institutions should
be governed by the prudential guidelines. SBI should make certain prudential guidelines
for protecting the interest of the investors during regulation of capital markets
• Reducing SLR and CRR: the committee suggested the reduction of Statutory Liquidity
ratio (SLR) and Cash Reserve Ratio (CRR)
• Regulation of Interest rates: The committee recommended that the interest rates should
be determined by the market forces and the government should remove the regulations
and control the interest rates.
• Eliminating direct credits: The committee suggested eliminating the direct credit
programs. They suggested priority to be given to the farmers, artisans, village and
cottage industries, other rural areas, and more through rural bank subsidiaries or a
certain percentage of bank credit facility.

• Appointment of staff: The recommendation of the committee was to keep the

appointment of the personnel in the banking sector away from political interference. The
appointment of the staff should be done through a regular panel of independent experts.
• Latest technologies: The committee suggested the use of the latest technologies and
computerisation of the banking sector for improving efficiency and initiating
competition.
The second Narasimham Committee was set up in 1998, which marked the second phase and
it was again headed M.Narasimhan to review the reforms introduced by the first committee.
It was referred to as the ‘Second Narasimham Committee’ and the reports were submitted
by them in April 1998. The main focus of this committee was on:
• Making a better and stronger banking system in the country

• Developing the financial institutions and rehabilitation of weaker public sector banks
• Amending and reviewing of banking sector laws like the RBI Acts, Bank of India Act,
Banking Regulation Act, and more and also removal of non-performing assets
• Tightening of provision norms and credits
• Problems relating to capital adequacy and the committee suggested increasing the
capital adequacy ratio or improving the strength of the banks
• Creating corporate strategies for improving the power and flexibility required for the
operation of public sector banks by improving shareholder value
• Ensuring credits for rural and small scale industries
STUDY NOTE
Former RBI governor Maidavolu Narasimham is regarded as the architect of modern Indian banking system. He joined
World Bank as an executive director and later joined the International Monetary Fund as well.


1. M. Narasimham, who was the former ____________ of RBI:
a. Governor
b. Secretary
c. Deputy Governor
d. Chairperson
2. the reports of ‘Second Narasimham Committee’ were submitted in April 1998.
(True/False)
3. SLR stands for ______________.
3. BASEL NORMS
BASEL norms are issued by Basel Committee formed globally for Banking Supervision
(BCBS). These are norms formed on international banking regulations for coordinating the
banking regulations globally. These norms are meant for strengthening the banking system
all over the globe and it consists of various representatives from central banks and other
regulatory authorities from various countries, including India. The committee for the BASEL
norms got its name from the location of its secretariat at the Bank of International
Settlements (BIS) that is located in the city of Basel in Switzerland.
The BASEL committee had three sets of regulations referred to as BASEL-I, BASEL II, and
BASEL III.
BASEL I norms
The BASEL I norms were issued in 1988 and the focus of these norms was on the risk of
credit faced by the banks in form of defaulters. The main aspects of the BASEL I norms were:
• All the banks should maintain a capital adequacy ratio of 8 %.

• The capital adequacy ratio is defined in terms of the ratio of capital in regards to the risk-
weighted assets. The banks need to have a minimum capital requirement which is the
capital adequacy ratio.

• The capital of banks was categorized into Tier 1 and Tier 2 capital where:
o Tier 1 capital: is the main capital of a bank in form of equity and disclosed reserves
that are dependable and permanent.
o Tier 2 capital: are the undisclosed reserves, cumulative non-redeemable
preference shares, provisions against Non-performing Assets, general provisions,
and more that are in form of supplementary capital.
• The bank’s assets weighed according to their risks is referred to as risk-weighted assets
• The risk-weighted assets (RWA) consisted of assets with different risk profiles that
mean that the assets that are backed with collateral carry lesser risks in comparison to
other personal loans that do have any collateral.
The guidelines of BASEL norms were adopted by India in 1999
BASEL II norms
The BASEL II norms were issued in 2004 and it was based on the following factors:
• Banks need to have a minimum capital adequacy requirement of 8% of risk assets and
the capital was divided into 3 tiers, where:
o Tier 3 capital; consisted of short-term subordinated loans and it is generally repaid
after other debts in case of bank liquidation
• The other factor in the BASEL II norms was that the banks were required to have better
risk management techniques and supervisory methods for monitoring and managing
three types of risks faced by the banks through their operations, credits, and market
risks.
• The third BASEL norm was that the banks included market discipline where there was
an increase in the disclosure requirements by the banks. The banks must disclose their
risk exposure, CAR (Capital Adequacy ratio), and more to the Central Bank
India, at present, follows the BASEL II norms.

BASEL III norms
The BASEL III norms were issued in 2009-10, and the primary guidelines were brought in
due to the financial crisis in 2008. The BASEL committee believed that it was necessary to
strengthen the banking system since the banks in the developed economies were not being
utilised and they were over-leveraged and they depended more on short-term funding.
The committee was also of the opinion that the quality and quantity of capital during BASEL
II were considered as not sufficient for handling any more risk. Hence, the guidelines for
BASEL III norms were aimed at promoting a more flexible banking system by focussing on
the parameters of capital, leverage, funding, and liquidity.
The main objective of these guidelines was aimed at:
• Capital: The banks required to maintain their capital adequacy ratio is to be maintained
at 12.9% and the minimum Tier 1 capital ratio needs to be at 10.5% and the minimum
Tier 2 capital ratio should be at 2% of risk-weighted assets.
• Apart from this, the banks are required to maintain a capital conservation buffer of 2.5%
and a counter-cyclical buffer needs to be maintained at 0-2.5%
• Leverage: The banks need to have a leverage rate of 3% where the leverage rate refers
to the ratio of a bank’s tier-1 capital to average total consolidated assets
• Funding and liquidity: BASEL III committee created two kinds of liquidity ratios- LCR
and NSFR
o In liquidity coverage ratio (LCR), the banks are needed to keep a buffer of high-
quality liquid assets that should be enough to take care of the cash outflows that
come up due to a situation of acute short-term stress as identified by the
supervisors.
o It was for preventing situations of ‘Bank Run’ (when several customers of a bank
withdraw their deposits simultaneously leading to concerns of the bank's solvency).
Since the main objective is to ensure that the banks have enough liquidity for a
period of 30-days stress situation if it was to take place.
o Under the Net Stable Funds Rate (NSFR), the banks are required to maintain a stable
funding profile concerning their off-balance-sheet assets and activities. NSFR

requires banks to have a stable source of finance for funding their activities that can
be relied on for at least one year and the minimum NSFR requirement is 100%.
• Hence the LCR measures short-term of a minimum of 30 days resilience, and NSFR
measures a minimum of 1 year of resilience.
The BASEL III norms were to be initiated in India in March 2019, but they got postponed to
March 2020 due to the Coronavirus pandemic. Thereafter RBI decided to delay the
implementation of these norms by another six months.
STUDY NOTE
The basel committee consists of around 45 members from 28 jurisdiction comprising of central banks and other
authorities with formal responsibility in order to supervise banking business.

4. _________________ that is located in the city of Basel in Switzerland.
5. The BASEL II norms were issued in 2004. (True/False)
6. LCR measures short-term of a minimum of _____________ days resilience:
a. 60
b. 30
c. 120
d. 350

4. CONCEPT MAP

5. SUMMARY
• The banking sector is an important part of the Indian economy, which is involved in the
regulation for the smooth functioning of the economy.
• With the advent of the modern banking system during the end of the 18th century, the
Reserve Bank of India was created for monitoring and regulating the economy.
• The liberalisation, globalisation, and privatisation of the economy led to the formation
of various global banks in the country which initiated the start of direct foreign
investments in the country.
• The banking reforms in the country started with economic and financial liberalisation to
make the banking industry in India more productive, competitive, versatile, and
efficient.
• Some different acts and reforms have been launched for the Banking System of India
which are in two phases. The initial phase of the reforms consists of general policies and
institutional frameworks. And the second phase revolves around structuring and
developing the industry with the latest advancements.
• The high statutory liquidity ratio (SLR) and cash reserve ratio (CRR) put pressure on the
banking sector in form of reserved taxes which diverted a major amount of funds from
the banks towards ineffective and unyielding purposes.
• The second Narasimham Committee was set up in 1998 which was the second phase and
it was again headed M.Narasimhan to review the reforms introduced by the first
committee.
• BASEL norms are issued by Basel Committee formed globally for Banking Supervision
(BCBS). These are norms formed on international banking regulations for coordinating
the banking regulations globally.
• The BASEL I norms were issued in 1988 and the focus of these norms was on the risk of
credit faced by the banks in form of defaulters
• The other BASEL norm was that the banks include market discipline where there was an
increase in the disclosure requirements by the banks.
• The BASEL III norms were issued in 2009-10 and the primary guidelines were brought
in due to the financial crisis in 2008.

• Hence the guidelines for BASEL III norms were aimed at promoting a more flexible
banking system by focussing on the parameters of capital, leverage, funding, and
liquidity.
• The BASEL III norms were to be initiated in India in March 2019, but they got postponed
to March 2020 due to the Coronavirus pandemic. Thereafter, RBI decided to delay the
implementation of these norms by another six months.
6. GLOSSARY
• Banking reforms: are changes in the banking system for making it more reliable and
efficient
• Reserve Bank of India: Is the Central bank of India
• Narasimhan Committee: was a committee of nine members was appointed by the
Government of India that was headed by M. Narasimham who was the former Governor
of RBI
• BASEL norms: are issued by Basel Committee formed globally for Banking Supervision
(BCBS). These are norms formed on international banking regulations for coordinating
the banking regulations globally
• Capital adequacy ratio: is defined in terms of the ratio of capital in regards to the risk-
weighted assets
• Risk-weighted assets: Are the bank’s assets weighed according to their risks
Short Answer Questions:
Q1. What is the main focus of the banking sector reforms?
Q2. Explain the need for the Reserve Bank of India?
Q3. What are BASEL norms?

B. Long Answer Questions:

Q1. Explain the role of Narsimham Committee recommendations.
Q2. What was the focus and need for the second Narasimham Committee reforms?
8. ANSWERS

1. Governor
2. True
3. Statutory Liquidity Ratio
4. Bank of International Settlements (BIS)
5. True
6. 30
TERMINAL QUESTIONS
SHORT QUESTIONS
ANSWER 1. The main focus of the banking sector reforms is to increase the growth and
development of the country by improving efficiency and increasing the productivity of the
Indian banking system. Their main objective is for keeping the financial markets stable by
maintaining sufficiency in the financial market.
For more details, refer Section 2. Banking Sector Reforms: Narsimham Committee
Recommendations
ANSWER 2. The advent of the modern banking system during the end of the 18th century
resulted in the formation of the Reserve Bank of India, which was formulated for monitoring
and regulating the economy. The Reserve Bank of India had the responsibility of managing
and executing the core banking system of the country and along with managing the
complexities of the banking system and the multiple technological interdependencies.
ANSWER 3. BASEL norms are issued by Basel Committee formed globally for Banking
Supervision (BCBS). These are norms formed on international banking regulations for

coordinating the banking regulations globally. These norms are meant for strengthening the
banking system all over the globe and it consists of various representatives from central
banks and other regulatory authorities from various countries including India.
For more details, refer Section 3. BASEL Norms
LONG QUESTIONS
ANSWER 1. The banking reforms in the country started with economic and financial
liberalisation to make the banking industry in India more productive, competitive, versatile,
and efficient. The foundation of reforms in the banking sector was laid down by the
Narasimham Committee in1991. Thereafter there were two other phases of the reforms in
1992 and in 1998 that brought in more efficiency and stability to the banking sector in India.
Some different acts and reforms have been launched for the Banking System of India which
are in two phases. The initial phase of the reforms consists of general policies and
institutional frameworks. And the second phase revolves around structuring and developing
the industry with advancements.
In August 1991, a committee of nine members was appointed by the Government of India
that was headed by M. Narasimham who was the former Governor of RBI. The main
responsibility of the committee was to study the working of the banking sector and the other
financial institutions and find methods for restructuring them for improving and increasing
their efficiency.
The report of the Narasimham committee was aimed at deploying the resources of the banks
practically so that the depositors could get the maximum benefit. They believed that the
profitability, productivity, and efficiency of the banks were reduced due to the direct credit
programs and direct investments. The high statutory liquidity ratio (SLR) and cash reserve
ratio (CRR) put pressure on the banking sector in form of reserved taxes which diverted a
major amount of funds from the banks towards ineffective and unyielding purposes.
Recommendations

ANSWER 2. The second Narasimham Committee was set up in 1998 which was the second
phase and it was again headed M.Narasimhan to review the reforms introduced by the first
committee. It was referred to as the ‘Second Narasimham Committee’ and the reports were
submitted by them in April 1998. The main focus of this committee was on:
• Creating a better and stronger banking system in the country

• Developing the financial institutions and rehabilitation of weaker public sector banks
• Amending and reviewing of banking sector laws like the RBI Acts, Bank of India Act,
Banking Regulation Act, and more and also removal of non-performing assets
• Tightening of provision norms and credits
• Problems relating to capital adequacy and the committee suggested increasing the
capital adequacy ratio or improving the strength of the banks
• Creating corporate strategies for improving the power and flexibility required for the
operation of public sector banks by improving shareholder value
• Ensuring credits for rural and small scale industries
Recommendations

BOOKS
• Dangar, J. P., & Mehta, R. L. (2016). Economic environment of business. Jaipur, India: Shree
Niwas Publications.
• Adhikary, M. (1994). Economic environment of business. New Delhi: S. Chand.
• Datt, R., & Sundharam, K. P. (2009). Indian economy. New Delhi: S. Chand.
REFERENCES
• Important Banking Sector Reforms and Acts in India. (2021, March 26). Retrieved from
https://data-flair.training/blogs/banking-sector-reforms-and-acts-in-india/
• Prabhu, M. S. (2021, May 06). Time for 5th generation banking reforms. Retrieved from
https://www.thehindubusinessline.com/opinion/time-for-5th-generation-banking-
reforms/article34500228.ece

Economic Environment in India Book-1

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Economic Environment in India Book-1

Uploaded by

Copyright:

Available Formats

DCM1206: Economic Environment in India Manipal University Jaipur (MUJ)

Unit 1: Economic Development 1

Unit 1: Economic Development 2

1.1 Learning Objectives:

Unit 1: Economic Development 3

2. CONCEPT OF ECONOMIC DEVELOPMENT

According to Amartya Kumar Sen, an Indian Economist and Philosopher, “Economic

Unit 1: Economic Development 4

Economic development takes into account the following information:

• Availability of housing, as well as the quality of housing

• Access to healthcare and medication

• Per capita income

2.1 Economic Growth Vs. Economic Development

Unit 1: Economic Development 5

Economic Growth Economic Development

Unit 1: Economic Development 6

3. DETERMIANTS OF ECONOMIC DEVELOPMENT

• Human resources: This is the most important factor of economic development in a

• Technological Development: The selection of right technology also plays an

Unit 1: Economic Development 7

of scientific methods and production of new techniques. Technological development

• Political factors: The political factors, such as participation of government in

Exhibit: Poverty: An Important Economic Development Determinant

Following is a news article that summarises the condition of poverty in India.

Unit 1: Economic Development 8

Poverty in India: From the Village to the Slum

Lack of education – no opportunities without education: According to UNICEF, about

Unit 1: Economic Development 9

• Preservation of ecological resources

• Creating sustainable improvements in the quality of life of all people.

Unit 1: Economic Development 10

• Maintaining the natural and environmental resources, along with economic

Unit 1: Economic Development 11

5. INDICATORS OF ECONOMIC DEVELOPMENT

Fig. 1.1: Measures of Economic Development

Let us discuss these measures.

Unit 1: Economic Development 12

• Consumption per capita: It reflects the personal consumption and is calculated by

• Infrastructure: More the development of an infrastructure in a country, more is its

• Human Development Index (HDI): This is the major indicator of economic

Unit 1: Economic Development 13

Exhibit: HDI Ranking

Unit 1: Economic Development 14

Unit 1: Economic Development 15

6. ECONOMIC DEVELOPMENT IN INDIA

Factors Affecting India's

Capital flow and Foreign Taxation

Fig. 1.2: Factors Affecting India’s Economic Development

Let us discuss these factors.

Unit 1: Economic Development 16

• Poverty Rates: After Independence, India has transformed from a poverty-stricken

EXHIBIT: COVID 19 Impact on Economic Development in India

Unit 1: Economic Development 17

Unit 1: Economic Development 18

Fig. 1.3: Concept Map

Unit 1: Economic Development 19

• Economic development includes a long-interrelated chain of changes in the economy

• Economic development of a nation depends upon many factors such as natural

• Measures of Economic Development are Gross National Product, Occupational

Unit 1: Economic Development 20

• Sustainable development: It is a way of organising society so that it can exist in the

• Urbanisation: It is the shift of population from rural to urban areas.

10. TERMINAL QUESTIONS

3. Write a short note on sustainable development.