Indian Economy-IIML-Lect 3-5

Indian Economy – Lecture 3 – 5
Dr Ritesh Kumar Mishra, Department of Finance and Business Economics, University of Delhi
Sectoral Growth and Indian Industry
Dr Ritesh Kumar Mishra, Department of Finance and Business Economics, University of Delhi
Sectors and the Indian Economy
• We can divide any economy in three major parts or sectors based on the nature of work carried out in
these sectors:
• Primary sector (Agriculture and Allied sector)
• Secondary sector (Manufacturing or industrial sector)
• Tertiary sector (service sector).
Dr Ritesh Kumar Mishra, University of Delhi

Sectors and the Indian Economy
• When we produce a good by exploiting natural resources, it is an activity of the primary sector.
• The secondary sector covers activities in which natural products are changed into other forms
through ways of manufacturing that we associate with industrial activity.
• The tertiary sector is bit different from the above two. These activities, by themselves, do not produce
a good but they are an aid or a support for the production process in primary and secondary sector.

The Primary Sector: Agriculture sector
• Once considered the back bone of Indian economy (in terms of its contributions in GDP and
share of employment):
The present scenario
Year Share of
Agriculture in
GDP
1950 – 51 56.50
1970 – 71 45.90
1990 – 91 34.00
2000 – 01 24.70
2005 – 06 19.55
2006 – 07 18.51
2007 – 08 17.80

Can we make agriculture a dominant source of livelihood
Sir Arthur
Lewis
1. Economic development is always and everywhere about getting people out of agriculture.
2. And of agriculture becoming, over time, less important part of the economy (not in absolute term but as a share GDP).
But this must happen along

with rapid productivity growth, Agriculture cannot be seen as a dominant source
ensuring rising farm incomes of livelihood because the levels of productivity
and adequate food supplies can never approach those of manufacturing and
for the people. services.

Can we make agriculture a dominant source of livelihood
• Noble prize winner Sir Arthur Lewis – showed that economic development is always and everywhere
about getting people out of agriculture, and of agriculture becoming, over time, less important part of
the economy (not in absolute term but as a share GDP).
• But this must happen along with rapid productivity growth, ensuring rising farm incomes and
adequate food supplies for the people.
• The reason why agriculture cannot be seen as a dominant source of livelihood is that levels of
productivity, and hence, income and living standard can never approach those of manufacturing and
services.
• That means that we must get our industrialization and urbanization right for the alternatives to
agriculture become meaningful and prosperous.

Agriculture sector in the current economy
• The share and importance of agriculture sector (in terms of GVA and employment has
changed) which is indicating decline in the share of agriculture in GDP:

• Within the agriculture sector, the share and contributions of allied activities have also witnessed
changes over time:

• As per the provisional estimates of national income released by CSO on 29th May, 2020,
the share of agriculture and allied sectors in Gross Value Added (GVA) of the country at
current prices is 17.8 per cent for the year 2019-20.
• GVA of agriculture and allied sectors and its share in total GVA of the country during the last
six years at current prices is as given in (Table 1).
• The share of agriculture and allied sectors in GVA of the country has declined from 18.2 per
cent in 2014-15 to 17.8 per cent in 2019-20 (Table 1), an inevitable outcome of a
development process in which the relative performance of non-agricultural sectors becomes
more dominant.
• Within the agriculture sector, the share of crops has fallen from 11.2 per cent in 2014-15 to
9.4 per cent in 2018-19. The decline in the share of crops has been made up by an increase
in the share of livestock and fisheries sectors (Figure – 1).

Growth in Agriculture & Allied Sectors
• The growth in GVA of agriculture and allied sectors has been fluctuating over time (Figure 2).
• However, during 2020-21, while the GVA for the entire economy contracted by 7.2 per cent, growth in
GVA for agriculture maintained a positive growth of 3.4 per cent (which is a good news amid the
pandemic).

Agricultural Credit
• Given the large proportion of resource constrained small and marginal farmers in India, timely
availability of adequate credit is fundamental for the success of farming activities.
• The regional distribution of the agricultural credit is relatively skewed:

Agricultural Credit
• Given the large proportion of resource constrained small and marginal farmers in India, timely
availability of adequate credit is fundamental for the success of farming activities.
• The agricultural credit flow target for the year 2019-20 was fixed at Rs. 13,50,000 crores and against
this target the achievement was Rs. 13,92,469.81 crores.
• The agriculture credit flow target for 2020-21 was fixed at Rs. 15,00,000 crores and till 30th
November, 2020 a sum of Rs. 9,73,517.80 crores was disbursed.
• The regional distribution of the agricultural credit has, however, been skewed in favour of the
Southern Region.
• The share of north-eastern states has been very low (Map 1).
• During the year 2020-21, in the total disbursement as on 30th November, 2020, the share of southern
region in agricultural credit was more than 40 per cent while it was less than 2 per cent for the north-
eastern region (NER).

Why is Agricultural Credit important?
• In India, the credit disbursement in the agriculture sector is in fact positively related to gross cropped
area as shown in Figure 6.

Paradox of Plenty and Income in the Farm Sector
• Other sectors of the economy (i.e. industry): • Agriculture sector of the economy suffers
from the paradox of plenty
• Task is to maximize sales volume for better
bonus (!!!!)
Higher Higher
Output Output
Higher revenue Low revenue

(Given Constant Price) (Reduced Prices)
Higher Profit Lower Profit

The Economics and Geography of Farmer’s Suicides
• It is a big irony that one of the biggest and critical sectors of Indian economy is facing continuous
financial distress leading to high suicides across India.
• Although still high, but suicides rates have started to decline in the recent past.

The Geography of Farmer’s Suicides
1. A better way to understand farmer suicide data

is to compare it with the overall suicide rate in
the states.
2. In some states, such as Karnataka and
Maharashtra, both general suicides and farmer
suicides seem to be more common.
3. Conversely, other states, such as Bihar and
Uttar Pradesh, have tended to report both
lower overall suicide rates and farmer suicide
rates in recent years.
4. But there is a significant gap between overall
suicide rates and farmer suicide rates in a few
states. For instance, West Bengal reported a
high overall suicide rate and has a history of
farmer suicides, but reported zero farmer
suicides in 2018.
5. Punjab and Mizoram are the only states where
the farmer suicide rate actually exceeded the
overall suicide rate.

Reasons for Poor Performance and Distress in Farm Sector
• There are many reasons responsible for the poor performance of the farm sector:
• The paradox of plenty

• Lack of remunerative farm pricing
• High dependence on monsoon
• Limited use of advanced farm technology leading to low productivity
• Excessive use of fertilizers and declining soil health (fertilizer subsidy 0.6% GDP)
• Small land holding (not favorable for use of modern agriculture technology)
• Improperly defined land titles or ownership/property rights
• Too many welfare programs with too much leakages and corruption
• Unintended implications of MSP – inefficient distribution of incentives across states

The Economics of Floor Price – minimum legal price

• Sometimes the equilibrium competitive price, as determined based on demand and supply, may be
considered too low for sellers.
• In these instances, individuals may lobby for the government to legislate a minimum legal price for a
good. Such a price is called a price floor.
• Floor Price – The minimum price the government permits sellers to charge for a good. When this
price is above equilibrium, a surplus occurs.
• Perhaps the best-known price floor is the minimum wage, the lowest legal wage that can be paid to
workers, and the minimum support price (MSP).

• If the equilibrium price is above the price floor, the price floor has no effect on the market.
• But if the price floor is set above the competitive equilibrium level, such as Pf in Figure 2–12,
there is an effect.
• Specifically, when the price floor is set at Pf, quantity supplied is Qs and quantity demanded is
Qd.
• In this instance, more is produced than consumers are willing to purchase at that price, and a
surplus develops.
• This surplus is visible for huge surplus of rice and wheat production in India.
• This is partly because of the wrong incentive created by MSP in the production of these cereal
crops.
• The Rupee value of the lost social welfare is given by the blue triangle in Figure 2–12.
• The area of the blue triangle in Figure 2–12 is deadweight loss.

Types of Crops and MSP
• There are two major types of crops cultivated in India for which MSPs are announced, among others:
• Kharif crops – Usually sown at the beginning of the monsoon season around June and
harvested by September or October. Rice, maize, bajra, ragi, soybean, groundnut, cotton are the
types of Kharif crops
• Rabi crops – Rabi sowing season begins in October and concludes in mid-November. The main
crops of the rabi season include wheat, maize, gram, sesame, mustard, peas, oats, jowar, bajra.

MSP of Kharif Crops (starts with the onset of monsoon)
• On 1st June, 2020, the Government had announced the increase in MSP for kharif crops for
marketing season 2020-21.
• The expected returns to the farmers over their cost of production are estimated to be highest in the
case of bajra (83 per cent):

MSP of Rabi Crops (winter crops - grown in Oct or Nov and harvested in
spring)
• The expected returns to the farmers over their cost of production are estimated to be highest in case
of Wheat (106 per cent) followed by rapeseed & mustard (93 per cent), gram and lentil (78 per cent).
• The differential in remuneration is aimed at encouraging crop diversification.

Mis-allocation of Incentives (MSP) and Neglect of Some Crops
• Indian agriculture can be divided in two parts (see Arvind Subramanian, Of Counsel: The Challenges
of the Modi-Jaitley Economy, 2018):
• Pampered cereal sector (wheat and rice)

• Neglected non-cereal sector (pulses, dairy and livestock)
• The current system of MSP has led to some serious distortions:
• Is heavily biased in favour of cereal crops
• This has led to surplus of what, rice and other cereal crops and shortage of non-cereals
• This has also led to unfavourable crop pattern (no diversification) in some water deficit states
(such as Punjab and Maharastra) growing too much rice which require more water.
• Due high MSP water deficit states such as Maharastra growing water guzzling crop such as
sugarcane.
The use and mis-use of fertilizer subsidy
• Excessive use of fertilizer to enhance farm produce, on the one hand, and the distortions created by
subsidy, on the other hand, have led to sharp decline in soil health and a big cost to exchequer (0.6%
of GDP).
• Excessive use of fertilizer, especially urea, has resulted in issues related soil and human health.
• To overcome this issue, the government has promoted the use of neem-coated urea. Some of the
benefits are as follows:
• Neem coating leads to more gradual release of urea, helping plants gain more nutrient and resulting in
higher yields.
• Lower underground water contamination due to leaching of urea.
• Neem serves as a natural insecticide.
• Collection of neem seeds is needed for manufacturing of neem coated urea. This would generate
employments in rural areas.
• Neem-coating will help check heavily subsidized urea’s pilferage to chemical industry and other uses such
as making of adulterated milk.

The Impact of Important Past Policy Initiatives on Agriculture
• The following three past policy initiatives have produced some unintended, but critical, impact on the
income and profitability of farm sector:
• Minimum Support Price
• Fertilizer Subsidy
• APMC Mandi system

How Agri-Produce Marketing Works in Indian Mandies
• The regulated agricultural product market function in different layers in India with variations across
states.
• However, the broad picture of APMC mandi’s functioning can be understood with the following
diagram (next slide) and points:
• The process flow is divided into two stages:
• Primary (farmer-to-trader) (https://youtu.be/SBdjcSd1hNQ)
• Secondary (Trader-to-trader and beyond).

His income is the
• Primary sale (farmer-to-trader) commission as fixed by Some agents also lend credit
the APMC. It is paid by to farmers. The Principal and
the buyer. interest is adjusted against the
payment due to farmers.
1 2
1. A commission agent is a licensed dealer,

1. Farmers bring their crop output to APMC mandi or authorized by the local market committee and acts
market yard platform. as an agent of the farmer.
2. And Farmers unload their produce on to a particular 2. He is responsible for farmer’s crop display, basic
platform of a commission agent (arhatiya) cleaning, and sorting, conducting auction and
payment to farmers.
Expenses for
3 Heaping, cleaning,
and sorting as well
Once bidding is completed, the goods are as storage charges
bagged and weighed to calculate the payable (if goods are not
amount, and the bags are then loaded on the sold the same day)
trucks of the buyer concerned are charged to the
farmer.

• From the 1960s, there have been concerted efforts to bring all wholesale markets for agricultural
produce in various states under the Agriculture Produce Market Regulation (APMC) acts.
• All states, except Kerala, Jammu and Kashmir and Manipur, enacted such laws. Bihar first
implemented and then removed it.
• The APMC Acts mandated that the sale/purchase of agricultural commodities is carried out in a
specified market area, and, producer-sellers or traders pay the requisite market fee, user charges,
levies and commissions for the commission agents (arhatias).
• These charges were levied irrespective of whether the sale took place inside APMC premises or
outside it and the charges varied widely across states and commodities.
• In the initial years, APMC acts helped remove malpractices and freed the farmers from the
exploitative power of middlemen and mercantile capital.
• The golden period for APMC markets lasted till around 1991.

• The market facilities at APMC mandies did not keep pace with the increase in output and regulation
did not allow farmers to sell outside APMC markets.
• The farmers were left with no choice but to seek the help of middlemen.
• Due to poor market infrastructure, more produce is sold outside markets than in APMC mandis.
• The net result was a system of interlocked transactions that robs farmers of their choice to decide to
whom and where to sell, subjecting them to exploitation by middlemen.
• Over time, APMC markets have been turned from infrastructure services to a source of revenue
generation.
• In several states, commission charges were increased without any improvement in the services.
• And to avoid any protests from the sellers against these high charges, most of these were required to
be paid by buyers like the FCI.

• In some states, mandi fees and rural development charges for wheat and non-basmati rice
purchased by FCI are four to six times the charges for basmati rice purchased by private players.
• This not only results in a heavy burden on the Centre but also increases the logistics cost for
domestic produce and reduces trade competitiveness.
• These drawbacks were recognized by experts and stakeholders and pressure started mounting for
changes in market regulations.
• Successive governments at the Centre made repeated attempts to persuade the states to make
appropriate changes in their APMC acts.
• Finally, central Govt. introduced the new act (Farmers’ Produce Trading and Commerce Act 2020
(FPTC Act)) to give more option to the farmers to sell their produce (but this is withdrawn in Nov
2021).

Strategy to Improve the Economic Conditions of Farmers
• Some important reforms in the recent past:
• Instituting soil-health cards

• Strengthening government procurement of pulses
• Introducing neem-coating urea
• Building more assets under MGNREGS
• Expanding crop insurance for farmers
• Building a common agricultural e-market via e-NAM (National agriculture Market)
• Most recent attempts to reform (September 27, 2020) – but these acts were withdrawn in Nov, 2021:
• Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act

• Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act
• The Essential Commodities (Amendment) Act

Recent Agricultural Reforms: a Remedy or a Malady
• The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020
• It seeks to create an ecosystem where the farmers and traders enjoy the freedom of choice relating to sale and purchase
of farmers’ produce.
• The reform grants freedom to farmers and buyers to transact in agricultural commodities even outside notified APMC
mandis ensuring competitive alternative trading channels to promote efficient, transparent and barrier-free interstate and
intra-state trade.
• The Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm
Services Act, 2020
• It seeks to provide for a national framework on contract farming that protects and empowers farmers in their engagement
with agri-business firms, processors, wholesalers, exporters or large retailers for farm services and sale of future farming
produce at a mutually agreed remunerative price in a fair and transparent manner.
• The Essential Commodities (Amendment) Act, 2020
• It seeks to remove commodities like cereals, pulses, oilseeds, edible oils, onion and potatoes from the list of essential
commodities. The reform ends the era of frequent imposition of stock-holding limits except under extraordinary
circumstances.
Recent Agricultural Reforms: a Remedy or a Malady
• Essential Commodities Act (ECA), 1955
• The ECA has been used by the Government to regulate the production, supply and distribution of a
whole host of commodities it declares ‘essential in order to make them available to consumers at fair
prices.
• The ECA gives consumers protection against irrational spikes in prices of essential commodities.
However, it has acted against the interest of the farmers.
• This has thwarted the creation of integrated value chains across the country.
• ECA has its roots in the Defense of India Rules of 1943, when India was ravaged by famine and was
facing the effects of World War II.
• It was scarcity-era legislation.

• By the mid-1960s, hit by back-to-back droughts, India had to depend upon wheat imports from the US and
the country was labelled as a “ship to mouth” economy.
• However, today, India is the largest exporter of rice in the world and the second-largest producer of both
wheat and rice, after China.
• We, therefore, rethink and reform the ECA from the view point current needs and requirements.
Benefits of the Farm Reforms
• The agriculture sector in India has suffered from various restrictions in marketing its produce:
• There are restrictions for farmers in selling agri-produce outside the notified APMC market yards.
• The farmers are also restricted to sell the produce only to registered licensees of the state governments.
• Further, barriers existed in free flow of agriculture produce between various States owing to the prevalence of
various APMC legislations enacted by the state governments.
• The presence of multiple intermediaries between the farmers and the final consumers has led to low realization by
farmers.
• Further, a range of taxes and cess levied by APMCs cuts into farmers’ price realization while only a small
proportion is ploughed back into the development of mandi infrastructure.
• Poor infrastructure at the mandis compounds the problem of price realization for the farmers.

Way Forward
• The objective of inclusive development in India cannot be realized without the development
of rural sector which crucially depends on agriculture.
• Agriculture and allied activities engage almost half of India’s workforce and contributes close
to 20 per cent of the gross value added of the country.
• There is a need for a paradigm shift in how we view agriculture from a rural livelihood sector
to a modern business enterprise.
• In this context, both production and post production in agriculture needs urgent reforms
to enable sustainable and consistent growth.

Way Forward (see Ch. 7 BGRS)
• On the production front urgent reforms required to make immediate further improvement in the
following:
• Increase in area under irrigation,
• Adoption of hybrid and improved seeds,
• Increasing variety replacement ratio
• Augmentation in seed testing facilities
• Land reforms (resolving the issue of ‘dead money’)

Way Forward (see Ch. 7 BGRS)
• On the post-production front:
• Village level procurement centers,
• Linkages between production and processing,
• Development of rural markets,
• Option of selling outside the APMC markets
• Warehouse up-gradations
• Strengthening of railways freight operations (dedicated freight corridors)
• All these will help in addressing the low productivity concerns in the Indian agriculture. These measures will
not only reduce post-harvest losses but will also help realize the objective of doubling farmers’ income.

Way Forward – the Universal Basic Income
• The universal basic income (UBI) and QUBI can be a game changer and may prove to be a single
golden bullet for many problems in rural or farm sector.
• A small initiative in this direction has been made both at the centre and state levels:
• PM Kisan Samman Nidhi - All India

• Rythu Bandhu - Telangana
• The government should take it to next level with necessary changes.
Back to basics - what is universal basic income.pdf

Why? – Universal Basic Income
1. The Budget for 2016-17 indicates that

there are about 950 central sector and
centrally sponsored sub-schemes in
India.
2. This accounts for about 5 percent of the
GDP by budget allocation (Figure 1).
3. A large majority of these are small in

terms of allocation with the top 11
schemes accounting for about 50
percent of total budgetary allocation.
4. If the states were included, the number

of schemes would be larger.
5. But the most important question relates

to the effectiveness of existing
programme in helping the poorest.

Way Forward – the Universal Basic Income
• Arguments in favour and Against

of the Universal Basic Income

Manufacturing Sector: the Past, Present and Future

The Development of Indian Manufacturing Sector: the past
• Industrialization has big role to play in under-developed and developing countries and Indian
economy is no exception.
• While there is now almost universal agreement on the importance of industrialization, there is still
debate on the pattern of industrial development.
• Historically, industrial development has proceeded in 3 stages:
• First Stage – industry is concerned with processing of primary products (milling grain, extracting oil, tanning leather,
spinning vegetable fibers, preparing timber and smelting ores).
• Second Stage – this involves transformation of materials (making bread and confectionery, footwear, metal goods, cloth,
furniture and paper).
• Third Stage – this consists of the manufacture of machines and other capital equipments to be used in production
process.
• British Pattern (gradual evolution) and Soviet patter (direct jump from stage 1 to 3)
Labour Intensive or Capital Intensive
• Industrial expansion in developing countries like India:
• Labour intensive (labour is in abundance supply)

• Capital intensive (limited)
• The only alternative to increase the supply of capital is through imports.
• Export of primary goods are subject to high international price volatilities and cannot be considered
as a reliable source of foreign exchange.
• Two alternatives to earn foreign exchange for import of capital:
• Export Promotion Policies

• Import Substitution Policies

Export Promotion or Import Substitution
• The spread of import substituting consumer goods industries can release foreign exchange for import
of capital goods.
• Import substitution is two type:
• The substitution of home produced goods for imported goods

• The substitution of capital goods import for consumer goods imports
• Thus, if a country cannot increase its export earnings sufficiently, it can still increase its imports of
capital equipment by cutting down of consumer goods.
• While the east Asian tigers broadly followed cheap labour led export promotion policies, Indian
focused on the import substitution policies to develop our industrial base.

India’ s Industrial Pattern and the Second Five Year Plan (1956 – 61)
• The second five year plan was based on the industrial policy resolution of 1956 which envisaged a
big expansion of the public sector.
• The industrial pattern sought to be developed during the second plan was conceived in terms of the
following priorities:
• Increase the production of iron, steel, heavy engineering and machine building industries.
• Expansion of capacity for other development commodities such as aluminum, cement, chemical, fertilizer and essential
drugs.
• Modernization and re-equipment of important national industries which have already come into existence such as jute,
cotton textile and sugar.
• Fuller utilization of existing installed capacity in industries where there are gaps between capacity and production.

Importance of Micro, Small & Medium Enterprises (MSME): the present
• The Micro, Small & Medium Enterprises Development (MSMED) act 2006 broadened by reorganizing
the concept of enterprise to include both manufacturing and the services sector.
• It is second back bone of the economy after agriculture (economic survey 2020 – 21):
MSME GDP Contribution Employment
More than 6 crores 30 per cent to the GDP More than 11 crores people
• The entire non-agriculture sector of the economy was brought under the coverage of MSME subject
to the revised criteria prescribed for defining the MSME.
• Recently, the Govt. has undertaken numerous initiatives to empower the MSMEs to tide over the
present crisis and become drivers of growth for the Indian economy.

Need to change definition of MSME: the present
• The need for a change that provides small firms the incentives to grow and thereby reap economies
of scale was argued for in the Economic Survey 2018-19.
• The upward revision in investment criteria is expected to make them globally competitive and
facilitate robust expansion of the MSMEs in the country.
• It will help in unleashing the economies of scale in production without the fear of forgoing the
benefits of an MSME unit.
• This will lead to realization of higher employment generation along with higher productivity and
output gains.
• The Department-Related Parliamentary Standing Committee (DRPSC) report (2018) pointed that ‘…
the extent of financial limits fixed in 2006 for MSMEs are no longer relevant, given the impact of
inflation.
• Most of the Industry Associations and stakeholders have, therefore express the need for changing
the present criteria of investment in plant and machinery to annual turnover as criterion for
classification of MSMEs.’
Classification of MSME: the present

Impact of Small Scale Reservation
• The policies targeted at the small
firms referred to as the MSMEs
include priority sector lending,
incentives/exemptions till they reach
an investment upper limit quantified
in terms of investment in plant &
machinery.
• The Small Scale Industries (SSI)

reservation policy was introduced in
1967 to promote employment
growth and income re-distribution.
• Given the predominance of dwarfs

in the Indian economy and the low
productivity and employment
generation, it is crucial to examine
the role of the SSI reservation policy

Importance of Industrial Sector in GDP
• As per the latest estimates on Gross Value Added (GVA), the industrial sector is expected to record a
growth of -9.6 per cent with an overall contribution in GVA of 25.8 per cent in 2020-21 (FY21).

Ease of Doing Business and attracting more firms
• One of the essential precondition to develop a sound industrial based is the nature of economic and
business environment faced by entrepreneurs while setting-up a new business in a country.
• It goes hard and negative on the development of sound and competitive industrial base if an
entrepreneur with a brilliant business idea has to wait for months to a year or more to get the required
administrative clearance to set-up the plant in the country.
• Presence of the following factors has a negative impact on business environment:
• Time taking regulatory process which makes it difficult to obtain necessary approval to start a business
• Rigid bureaucratic control in different sectors of the economy make it difficult for business to execute their business plans
in time bound manner.
• Quality of institutions affect business sentiments

• Importance of ease of doing business in an economy:
• For example, to set-up a small business in Peru – if you work 6 hours a day it will take 289 days to set-
up your business.
• To obtain legal authorization to build a house in state-owned land took 6.11 years requiring 207
administrative steps in 52 offices.
• To obtain the legal title of the piece of land it took 728 steps (see the Mystery of Capital, De Soto).
• This will slow down the wheels of industrialization and lead to more corruption.

• In the recent past, the government has

implemented several measures that
have resulted in the simplification and
rationalization of many existing and age-
old rules and regulations:
• The introduction of information

technology
• Single window clearance to make

governance more efficient and
effective.
• The concrete steps taken by the

Government has improved the
environment of doing business.

Way Forward: Giving life to dead capital (Ch. 5 BGRS)
• Unlike the sale of food, shoes, auto repair and manufacture of phone – activities that are difficult to
count and more difficult to value – buildings and piece of land can not be hidden.
• We can ascertain their value simply by surveying the cost of the building materials and observing the
selling price of comparable buildings.
• This otherwise dead capital will help in fostering the business interest of individuals and
entrepreneurs.
Dead Capital
Housing Buildings Land
• Similarly, if the ownership title is clearly defined and the land records are publicly available for cross
verification at no cost and time – access to finance and process to setup new business will be
incentivized considerably.

Way Forward: Giving life to dead capital (Ch. 5 BGRS)
• Land Reforms are an effective way of solving the problem of dead capital:
• Adoption of new technologies, such as geo-tagging of land, for identification and demarcation of
real property
• Use of robust technology, such as Block chain technology, for keeping property/land records that
can be easily accessed by financial institutions
• A well designed land auction mechanism to avoid any conflict between industry and farmers
• Well defined compensation rules for acquisition of land for business purpose
• This will help our business and farmers to avoid any land related conflict and help in accessing formal
finance by using the piece of land or housing buildings that small entrepreneurs have.
The Role and Importance of Service Sector

Introduction to the Indian Service Sector
• The services sector is the dominant sector in India (in terms of contribution in GVA).
• This sector has attracted significant foreign investment, export and large-scale employment
generation.
• India’s services sector covers a wide variety of activities:
• Trade
• Tourism, hotel and restaurants
• Transport
• Storage
• Communication
• Financing
• Insurance
• Business services
• Community
• Social and personal services
• Real Estate and services associated with construction
Can Service Sector be a Economic Growth Ladder
• A World Bank's working paper released in 2014, "Can Service Be a Growth Escalator in Low Income
Countries?", tried to explain this while endorsing its role as the main growth engine (see Ghani and
O’Connell, 2014).
• It argued that: … for more than 200 years, economic growth remained associated with the
manufacturing sector. Services have been considered non-tradable, menial, low productivity, and low-
innovation.
• It sought to impress that the conventional path of manufacturing-led growth and development seems
to have hit a roadblock in many parts of the world, especially in low-income countries in Africa and
South Asia.
• Some of these countries, like the Lions of Africa (Tanzania and Ethiopia) and India have witnessed
growth driven by services, unlike the East Asian Tigers or the western developed economies.
• Four Asian Tigers – Hong Kong, Taiwan, Singapore and South Korea. Fueled by exports and
rapid industrialization, they consistently maintained high levels of economic growth since the
1960s, and have collectively joined the ranks of the world's wealthiest nations.
Can Service Sector be a Economic Growth Ladder
• It argued that the Third Revolution led by services can upset five long-held tenets of economic
development:
1. Traditional thinking that the services sector is a product of growth and can't drive growth on its own is no
longer valid; services can be produced and traded just like manufacturing goods and is contributing more
than manufacturing to growth and jobs in both low and high-income countries.
2. Global trade in services has exploded and is growing faster than trade in goods.
3. Technology, trade, and supply chains have changed services from being lower in productivity than
manufacturing.
4. It is no longer true, in both low and high-income countries, that good jobs are created only in manufacturing.
5. Services-led growth is also compatible with greener, inclusive and more gender-friendly growth.
Services as a growth escalator in low-income countries _ VOX, CEPR Policy Portal.pdf

The Tourism Sector: some facts
• Tourism sector is another major

engine of economic growth that
contributes significantly:
• Gross output
• Foreign exchange earnings
• Employment.
• Environment

Service Sector and Employment Generation
• In 2019 (closest to India's FY20), services surpassed agriculture for the first time as the largest
employer (ILO's projections).
• According to the ILO database:
Sectoral Employment Generation (2019)

Agriculture Manufacturing Services
43.2% 11.4% 44.2%

Service Industry: recent decline and rebounding
• India’s services sector activity

contracted for five consecutive
months since March as the Covid-
19 and started to pick up since
September 2020.
• The IHS Markit India Services

Business Activity Index also
known as Services Purchasing
Managers’ Index (PMI) captured
this variations.
• Services PMI was at 85 month

high of 57.5 in February, 2020, fell
to its lowest level of 5.4 in April,
2020 (Figure 1(a)).
• As lockdown restrictions were

lifted and business resumed,
Services PMI recovered sharply to
54.1 in October 2020.

Key Sectors in Service Industry in the near future
• In the near future, the performance of the following sub-sectors of services will determine the
direction of service industry:
• Fintech
• Healthcare (FDI- USD 163 Million)
• Tourism (FDI- USD 283 Million)
• Space

Key Sectors in Service Industry – Space Sector
• India’s space programme has grown
exponentially in the past six decades,
expanding from simple mapping services in
the 1960s to many diversified uses
including:
• Design and development of a series of launch

vehicles and related technologies,
• Satellites and related technologies for earth
observation
• Telecommunication & broadband
• Navigation, meteorology and space science,
R&D in space sciences
• Planetary exploration.
• India spent about US$ 1.8 billion on space

programmes in 2019-20. However, the
country still lags behind the major players in
the space sector, such as USA, Russia and
China.

Service Industry related developments – self reading
• Some of the developments in the services sector in the recent past are as follows:
• The Indian healthcare industry is expected to shift to tele-consultation mode of healthcare. The telemedicine
market in India is expected to increase at a CAGR of 31% from 2020 to 2025.
• In September 2020, NASSCOM FutureSkills and Microsoft collaborated to launch a nationwide AI skilling
initiative to train 1 million students in AI by 2021.
• In October 2020, Bharti Airtel entered cloud communications market with the launch of business-centric
‘Airtel IQ’.
• Services sector is the largest recipient of FDI in India with inflow of US$ 84.25 billion between April 2000 and
September 2020.

Service Industry related developments … self reading
• Some of the developments in the services sector in the recent past are as follows:
• In the next five years, the Ministry of Electronics and Information Technology is working to increase the
contribution of the digital economy to 20% of GDP. The government is working to build cloud-based
infrastructure for collaborative networks that can be used for the creation of innovative solutions by AI
entrepreneurs and startups.
• Government of India has launched the National Broadband Mission with an aim to provide Broadband
access to all villages by 2022.
• Under the Mid-Term Review of Foreign Trade Policy (2015-20), the Central Government increased
incentives provided under Services Exports from India Scheme (SEIS) by 2%.

Readings
• PDFs provided in the PPT on different slides.
• For further readings, see BGRS: Chapters 5 and 7

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Indian Economy – Lecture 3 – 5

• Primary sector (Agriculture and Allied sector)

• Secondary sector (Manufacturing or industrial sector)

• Tertiary sector (service sector).

Dr Ritesh Kumar Mishra, University of Delhi

Dr Ritesh Kumar Mishra, University of Delhi

Dr Ritesh Kumar Mishra, University of Delhi

But this must happen along

Dr Ritesh Kumar Mishra, University of Delhi

Dr Ritesh Kumar Mishra, University of Delhi

Dr Ritesh Kumar Mishra, University of Delhi

Dr Ritesh Kumar Mishra, University of Delhi

Dr Ritesh Kumar Mishra, University of Delhi

Dr Ritesh Kumar Mishra, University of Delhi

Dr Ritesh Kumar Mishra, University of Delhi

Dr Ritesh Kumar Mishra, University of Delhi

Dr Ritesh Kumar Mishra, University of Delhi

Higher revenue Low revenue

Higher Profit Lower Profit

Dr Ritesh Kumar Mishra, University of Delhi

Dr Ritesh Kumar Mishra, University of Delhi

1. A better way to understand farmer suicide data

Dr Ritesh Kumar Mishra, University of Delhi

• The paradox of plenty

Dr Ritesh Kumar Mishra, University of Delhi

Dr Ritesh Kumar Mishra, University of Delhi

Dr Ritesh Kumar Mishra, University of Delhi

• The area of the blue triangle in Figure 2–12 is deadweight loss.

Dr Ritesh Kumar Mishra, University of Delhi

Dr Ritesh Kumar Mishra, University of Delhi

Dr Ritesh Kumar Mishra, University of Delhi

• Pampered cereal sector (wheat and rice)

• The current system of MSP has led to some serious distortions:

• Is heavily biased in favour of cereal crops

Dr Ritesh Kumar Mishra, University of Delhi

• Minimum Support Price

• APMC Mandi system

Dr Ritesh Kumar Mishra, University of Delhi

• The process flow is divided into two stages:

• Primary (farmer-to-trader) (https://youtu.be/SBdjcSd1hNQ)

• Secondary (Trader-to-trader and beyond).

Dr Ritesh Kumar Mishra, University of Delhi

1. A commission agent is a licensed dealer,

Dr Ritesh Kumar Mishra, University of Delhi

Dr Ritesh Kumar Mishra, University of Delhi

Dr Ritesh Kumar Mishra, University of Delhi

Dr Ritesh Kumar Mishra, University of Delhi

• Some important reforms in the recent past:

• Instituting soil-health cards

• Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act

Dr Ritesh Kumar Mishra, University of Delhi

• The Essential Commodities (Amendment) Act, 2020

• It was scarcity-era legislation.

Dr Ritesh Kumar Mishra, University of Delhi

Dr Ritesh Kumar Mishra, University of Delhi

• Increase in area under irrigation,

• Adoption of hybrid and improved seeds,

• Increasing variety replacement ratio