ASSIGNMENT DRIVE – SPRING 2020

PROGRAM - BBA

SEMESTER - V

SUBJECT CODE & NAME - BBA 508 - Economic Planning and Policies

SET-I

Q.1 Explain following theories of economic development

a) Wealth of nation theory

b) Theory of comparative advantage

c) Theory of population

d) Innovation theory

Answer:-

a) Wealth of nation theory

Adam Smith has been recognized as the leading expounder of economic thought. Adam Smith’s
opinions can be prominently seen in the works published by David Ricardo and Karl Marx in the
19th century, and by John Maynard Keynes and Milton Friedman in the 20th century.

The Wealth of Nations, which is a series of five books, sought to determine the nature and cause
of a nation’s prosperity. Smith observed increasing division of labour as the main cause of
prosperity. Smith was very much opposed to mercantilism—the practice of artificially
maintaining a trade surplus on the erroneous belief that doing so increased wealth. Adam Smith
was of the opinion that government plays a vital role in promoting a nation’s prosperity. .Similar
to other modern believers, Smith also thought that the government should put into effect
contracts and grant patents and copyrights to promote inventions and new ideas. One clear
distinction between Smith and most modern believers in free markets is that Smith favoured
retaliatory tariffs. Due to the systematic and comprehensive study of the subject done until that
era, his economic thinking became the postulate for classical economics.

b) Theory of comparative advantage

The brilliant British economist David Ricardo was one of the most important figures sought out
for the development of economic theory. He articulated and formulated the ‘Classical’ system of
political economy. His thoughts dominated the economic world throughout the 19th century and
his legacy continues till today. Ricardo’s most famous work is his Principles of Political
Economy and Taxation. In 1817, David Ricardo published this book, in which he presented the
law of comparative advantage. This is one of the most important and still unchallenged laws of
economics with many practical applications.

c) Theory of population

Thomas Malthus’s social and economic ideas focussed on his theory of population. Thomas was
of the view that population increases at a faster rate as compared to the production of food. As a
result the number of people in society will be constantly pressing and creating liability on the
means of physical subsistence. Malthusian theory presented a different opinion from the more
traditional economic growth theory of Adam Smith. The acceptance of Malthus’s ideas in
Smith’s doctrine resulted in the incorporation of the most outstanding features of the classical
system of economics. Malthusian population theory was considered prominent and famous
throughout the 19th century. However, it lost its prominence when scholars realized that Malthus
had underestimated the rate of technical change. Malthus did regard serious and cumulative
efforts on the part of the people as an accelerator in the process of economic development.
Acording to him, development of an economy is not an automatic process.

d) Innovation theory

Joseph Schumpeter has tried to explain the expansion and contraction of economy through
industrial investigation. Innovation is an actual application of invention; whereas invention is
discovery of something. Invention converts into innovation. In this theory, innovation can be
introduction of new product, finding of a market source of raw material, or opening of a new
market in business. For an entrepreneur to be designated as an innovator; he has to have the
knowledge to do something new, daring and have the foresight to get ahead of others and in this
pursuit, he demand funds from the banking system. In this theory, Schumpeter opined, an
innovation can take the economy to disequilibrium from equilibrium and this will continue till
the new equilibrium position is reached

Q2 Define the significance of technological changes in economic development. Elaborate

your answer with supportive examples.

Answer:-

Significance of technological changes in economic development

The concept of technology can be explained in different ways: Technology is often identified
with the knowledge of machines and processes. In a broader sense, it refers to the body of ‘skills,
knowledge and procedures for making, using and doing useful things’. Technology consists of a
series of techniques. The development of techniques is essentially a historical process in which
one technique with one set of characteristics replaces another in the light of the historical and
economic circumstances of the time. Most of the technology used today has been developed in
the Western countries during the period of the last two and half centuries or so (i.e. after the
advent of industrial revolution). Technology is ‘science or systematic knowledge of industrial
art’. Four major roots of modern technology are as follows:

• Labour reorganization

• Usage of machines in manufacturing process

• Exploitation of manmade material and

• Application or use of new sources of energy

A natural process can help in developing the economy of a country but at a very slow rate. The
economic development of a country is dependent on the economic growth rate and this in turn
results from greater productivity.

Role of Technology

• Technology helps to reduce manual labour and increases productivity in industries. The outputs
are used as exports and for national use. Hence, economy is enhanced.

• It enables increased productivity, thus allowing for surplus profit and labour which in turn,
allows a section of society to be trained, which can lead to enhanced use of technology.
Technology works first on productivity in obvious ways, but then it turns around and increases
workforce because the greater productivity can support a larger workforce.

• In the contemporary society, Information Technology (IT) plays a very important role. It has
turned the whole world into a global village which has a global economy. The global economy is
increasingly dependent on the creative management and distribution of information.
Globalization of world economies has greatly improved the information values for business
organizations and it has also opened new opportunities for business.

• Inventions and innovations in one field stimulate inventions and innovations in other fields as
well.

• Development of business as an ongoing process rests on the constant surge of new technology
and on the capacity to generate and absorb technical change.

• Technology has led to greater output, shorter working hours, the creation of a host of skilled
jobs in design, maintenance, and engineering, safer working conditions, production of new and
better goods of standardized quality with more efficient use of raw materials, and so on.

Explanation with supportive examples:

Measuring technology is a difficult task in practice, and this in turn makes it difficult to calculate
how much of a country’s growth rates are driven by technology. Economists resort to an exercise
where they try to subtract the economic growth contribution, which is attributed to more inputs,
from overall economic growth. The remainder growth is attributable to more technology.
• Total Factor Productivity Growth = GDP growth (Labor Driven Growth + Capital Driven
Growth) This type of economic growth decomposition is called ‘growth accounting’

Q3 Explain democratic socialism in India. List down various features of democratic

socialism

Answer:-

Democratic socialism in India:

When India became independent, the Indian people were steeped in mass poverty,
unemployment and underemployment. India had an illiterate and untrained labour force, static
agriculture with semi-feudal and a comparatively less developed industrial sector, and woefully
inadequate infrastructure in the form of poor transportation and communication, energy and
power, banking and finance, etc. Jawaharlal Nehru, the architect of Indian planning, greatly
admired the achievements of Soviet Planning and so borrowed the concept of socialism from the
Russians but he also regarded the democratic values of the capitalist society as indispensable for
the full growth of a just society. Socialism and democracy are the means for the creation of a
society in India in which all have equal opportunities to education, health care, employment etc;
and exploitation of one class by another is abolished. The supreme goal of democratic socialism
is to foster free and fuller growth of human personality. If poverty, inequalities of income and
wealth are conceived of as obstacles to the realization of this supreme goal, then it is equally true
that the absence of democracy is also an impediment to the realization of this supreme goal. It is,
therefore, of vital significance to reconcile the ideas of socialism and democracy so as to evolve
a new pattern of society in which man can realize his self or his innate nature in a fuller manner,
as also attain a higher standard of material comfort. The disintegration of Soviet Russia and
political and economic upheavals in other East European Socialist countries resulting in the
introduction of market based economies have proved that the vision of Nehru was conceived of a
holistic approach to development, rather than having a bias only in favor of economic forces,
neglecting the urge for freedom and democracy as a part of the development process. India too
has been liberalizing its economy, reducing government controls and regulations, but, at the
same time, not throwing overboard the Nehruvian ideology of democratic process of dialogue
and consensus.

Features of democratic socialism:

(i) Faith in democratic values for the enrichment of the individual and communal life: The
concept of democratic socialism as conceived in India recommends democratic values for the
enrichment of the individual and communal life. The adjective ‘democratic’ before socialism
sharply distinguishes it from the socialism practiced in totalitarian economies. Only a democratic
society provides adequate opportunities to the individual for self-expression.
(ii) A socialist society aims at the removal of poverty and the provision of a national minimum:
Socialism can have meaning for the poverty stricken masses only if it can assure the provision of
basic needs of every individual and can guarantee in the near future a national minimum in
respect of food, clothing, shelter, medical aid and education. The provision of a national
minimum was incorporated as one of the goals of the Fourth Plan and of the successive Five
Year Plans.

(iii) A socialist economy aims at the reduction of inequalities of income and wealth: Socialism is
essentially a movement for redistribution of income in favour of the labouring classes of the
society. Unless the share of labour in national income improves significantly, socialism can have
no meaning for the masses. The growth of trade union pressure does help to improve the share of
labour but trade unions do not exist in such sectors as agriculture and cottage and small-scale
industries. Consequently, in a planned economy it is essential to lay down a policy to bring about
reduction of inequalities of income and wealth.

(iv) A socialist economy aims at the provision of equal opportunities to all: All citizens
irrespective of caste, class or birth should enjoy equality of opportunity. One of the basic
conditions for equality of opportunity and for achieving a national minimum is the provision of
gainful employment for every able-bodied citizen.

(v) Faith in a mixed economy: The philosophy of democratic socialism does not consider the
total abolition of private property as desirable or necessary. Only when private ownership comes
into serious conflict with common good, it should be either replaced by public ownership or by a
suitable form of co-operative ownership.

(vi) A socialist economy endeavours to check concentration of economic power and the growth
of monopolistic tendencies: The growth of large scale industrial units is responsible to a great
extent for the emergence of monopolistic tendencies, and as a result, new entrepreneurs find it
impossible to enter such industries. Moreover, the concentration of economic power in the hands
of a few individuals is the very negation of the principles of socialism. It is, therefore, essential
to devise ways and means to counteract the growth of monopolistic combinations.

(vii) The basic criterion of economic decisions in a socialist economy is not private profit but
social gain: In a mixed economy, where the public and the private sectors have both to play a
part in economic development, the criteria of public investment take a more comprehensive view
of the requirements of the economy, but in the private sector the decisions about investment are
made by considerations of costs and returns. It is therefore, necessary that appropriate economic
policies be developed so that investments in the private sector too, broadly conform to the social
pattern conceived in the plan.
 SET-II

Q1 Explain the role of public sector in Indian economy. What are the major shortcomings
of the public sector?

Answer:-

Role of public sector in Indian economy

Public sector in India has been criticized vehemently by a number of supporters of the private
sector who have chosen to shut their eyes towards the achievements of the public sector. To
understand the role of the public sector, we must have a comprehensive view of the entire public
sector. Besides autonomous corporations, departmental enterprises should also be included in the
public sector. While doing so, not only the enterprises owned and run by the Central Government
should be covered, but also the enterprises run by the State Governments and local bodies.

It would not be appropriate to use any single measure to estimate the role of the public sector in
the Indian economy, rather it would be desirable to use a few indicators:

(a) Share of public sector in employment: There are two important categories of public sector
employment:

(a) Government administration and defense and other government services like health, education,
research and various activities to promote economic development; and

(b) public sector proper, i.e., economic enterprises owned by the Centre, State and Local
Governments.

(b) Share of the public sector in GDP: From 1960 onwards, the share of the public sector in
GDP has shown a steady improvement. Measured at current prices, public sector accounted for
7.5 per cent of GDP in 195051, its share in 1993-1994 had risen to 23.6 per cent. However, it
declined to 21.2 per cent in 2009-10. Public sector, therefore, accounts for about one-fourth of
national output. This is largely due to the rapid expansion of the public sector enterprises.

(c) Share of the public sector in saving and capital formation: Gross domestic capital
formation has increased from 10.7 per cent of GNP during the First Plan to 24.6 per cent during
the Eighth Plan.

(d) Infrastructure development by the public sector: Rapid industrialization of a backward

but developing country like India depends upon the creation of infrastructure or economic
overheads such as transportation, communication, power development, basic and key industries,
etc. Unless the infrastructure is created, it is not possible for other industries to come into
existence or to develop fast enough. But the development of basic and capital goods industries
and creation of infrastructure involves heavy investment, low yield and a long gestation period.
These investments were, therefore, not attractive to the private sector nor could the private sector
raise such huge resources in the Fifties and Sixties. Naturally, it was left to the Government to
develop them and most of the public enterprises were set up in these industries. The private
sector welcomed government investment in developing these industries, as it stood to gain
directly.

(e) Role of public sector in export promotion: Most of the public sector enterprises have been
started keeping in mind the requirements of the Indian economy in the fields of production and
distribution. However, some public enterprises have done much to promote India’s exports. The
State Trading Corporation (STC) and the Minerals and Metals Trading Corporation (MMTC)
have done a wonderful job of export promotion in all parts of the world, especially in the East
European countries. The foreign exchange earnings of the public sector enterprises have been
rising from `35 crores in 1965-66 to `5,830 crores in 1984-85 and finally to `43,576 crores in
2005-06. There is no denying the fact that the export performance of the public sector enterprises
has been quite creditable.

(f) Role of the public sector in import substitution: Some public sector enterprises were
started specifically to produce goods which were formerly imported and thus to save foreign
exchange. The entry of Hindustan Antibiotics Ltd. and the Indian Drugs and Pharmaceuticals
Ltd. (IDPL) into the manufacture of drugs and pharmaceuticals so as to remove the monopolistic
stranglehold of foreign concerns in this field helped India save foreign exchange used for
importing these items.

(g) Role of public sector in raising internal resources: The generation of internal resources by
the public sector has assumed greater importance because, in addition to financing their own
planned expansion and development, they are also expected to generate surplus for financing the
needs of other priority sectors.

(h) Contribution to the exchequer: The Government exchequer has been receiving significant
contribution from the public in the form of payment of corporate taxes, excise duty, customs
duty and other duties. In this manner, they help in bringing together funds for financing the needs
for the planned development of the country.

Shortcomings of the public sector

(i) Mounting losses: A review of the working of public sector enterprises reveals that either the
profits have been deplorably low or that they have been suffering losses. As compared with the
performance of the Central Government, however, the State Governments have having perennial
lossmakers like irrigation works, State Electricity Boards and State Road Transport. The biggest
losses are made by SEBs. It is estimated that the losses incurred by SEBs rose from `4,117 crores
in 1991-92 to `30,606 crores in 2005-06—these losses were incurred because power was
supplied at a mere 240 paise per unit as against the production and distribution cost of 350 paise
per unit.
(ii) Political factors influence decision about location: It has been noted that in many
situations, political factors influence decisions about location of projects. A classic instance of
this political but irrational approach is the decision of the Central Government to break up the
MIG aircraft project into two parts to be located in two separate states. These two locations—
Nasik and Koraput—are over 900 km apart.

(iii) Delays in completion and increase in costs of construction: Many reports on the working
of public sector projects have pointed out that many projects took longer time to complete than
was initially envisaged. For instance, in the case of Trombay Fertilizer Project, it took six to
seven years to complete as against the original estimate of three years. Most of the delay in
construction time-schedule and increase in costs can be traced to poor and inadequate project
planning. It is necessary to prepare comprehensive construction plans so that the avoidable
delays and increases in costs should not put additional burden on the scarce resources.

(iv) Over-capitalization: Public sector projects are charged with overcapitalization. In other
words, the input-output ratio obtained in many projects was unfavourable. The study team found
several undertakings, viz., Heavy Engineering Corporation, Hindustan Aeronautics, Fertilizers
Corporation (Trombay Projects), etc. to be over-capitalized.

(v) Price Policy: The pricing policies of the public sector undertakings are not guided solely by
the profit maximization principle, but are under the regulation and control of the government.
Most of the public enterprises produce products which serve as inputs for other sectors of the
economy. It would be suicidal from the point of view of the overall growth of the economy if the
prices of steel, oil, fertilizers or coal are fixed very high. The public sector has to keep in mind
the social implications of its price policy. In this connection, it is important to remember that in
many cases, under public pressure, prices are kept low even when costs and prices have been
rising. This naturally affects commercial profitability. In most public sector enterprises, pricing
policies are not rational. They have no declared price policy, except perhaps that they have some
departmental directives and adhoc piecemeal orders.

(vi) Inefficient management: Managerial effectiveness and efficiency are crucial factors in
improving the overall performance of the public enterprises. For efficiency in business and
industrial enterprises it is necessary that operational decisions are prompt. This necessitates a
large measure of autonomy and flexibility of operations in the government enterprises.

Q2 Examine the impact of black income on economic and social system. List down different
factors responsible for generation of black money

Answer:-

Impact of black income on economic and social system

(i) A direct result of black income is the loss of revenue to the state exchequer. This takes place
as a result of tax evasion both from direct and indirect taxes. Moreover, tax evasion does not
include loss of revenue resulting from unreported production or illegal economic activity. As the
government is unsuccessful in its attempt to stop the outflow of tax evasion, it has to adopt other
alternatives of raising funds. Hence, it levies more taxes on commodities or increases the existing
rates of taxation on commodities. As a consequence, India built up a regressive tax structure.

(ii) The availability of black income with businessmen and capitalists and the resultant
inequalities of income lay a large amount of capital at their disposal. Easy money finds ready
passage in dispensable articles of evident consumption. This exhibits its effect on all classes of
people. As a consequence, the consumption pattern is tilted in favor of the rich and elite classes,
at the cost of encouraging the production of articles of mass consumption. A rise in the overall
consumption leaves fewer resources for investment in priority areas. These misrepresentations in
the product-mix in favor of unnecessary consumption have undesirable effects on production and
hence they deform the purpose of planning.

(iii) Black money encourages investment in precious stones, jewellery, bullion, etc. This has an
adverse effect on growth through the demonstration effect.

(iv) Black money has encouraged diversion of resources in the purchase of real estate and
investment in luxury housing. There is large scale under-valuation of property and in this way;
lot of black money is made white. This has also increased the prices of property substantially due
to speculative purchases of land by black money operators.

(v) A part of the black income is held in cash and as a consequence there is an abundance of
liquidity which becomes available through the accumulation of savings held in the form of cash,
bullion, gold, silver, etc. This is popularly termed ‘black liquidity’.

(vi) Black money results in transfer of funds from India to foreign countries through clandestine
channels. Such transfers are made possible by violations of foreign exchange regulations through
the device of under-invoicing of exports and overinvoicing of imports.

Factors responsible for generation of black money

Divergence between the acceptable net rate of return and legally permissible rate of return:

There is a group of people who believe that the principal factor responsible for generation of
black income is that individuals expect a higher net rate of return than the legally permissible
rate of return.

Black money generation as a consequence of controls, licensing system:

There is a school of thought which firmly believes that the system of controls, permits, quotas
and licences which are associated with maldistribution of the commodities in short supply
results in the generation of black money.

Ineffective enforcement of tax law:-

Whereas the Government has an armoury of tax laws pertaining to income tax, sales tax, stamp
duties, excise duty etc., their enforcement is very weak due to widespread corruption in these
departments.

Generation of black money in the public sector:

Every successive five-year plan planned for a larger size of investment in the public sector. The
projects undertaken by the public sector have to be monitored by the bureaucrats in Government
departments and public sector undertakings.

Q3 Write short notes on

a) Food security in India

b) Indian financial system

Answer:-

a) Food security in India

Since the inception of the Planning Commission, the Indian planners recognized the need to
attain self-sufficiency in food grains as one of the important objectives of planning. During the
tenure of Prime Minister Indira Gandhi, the Government of India adopted a seed-water-fertilizer
policy commonly known as the Green Revolution. This policy brought in revolution in food
production in India and thereby stopped imports of food grains completely. In 1976, India
achieved landmark position of self-sufficiency in foodgrains and since then Indian imports of
cereals have been insignificant (except in 2006-07).

Progress on the front of foodgrains reveals the following:

(a) Foodgrains production between 1950-51 and 2010-2011 increased from 51 million tonnes to
242 million tonnes — which is more than four-fold increase in the production of food grains.

(b) The various components of cereal production indicate that whereas cereals accounted for 84
per cent in foodgrains in 1950-51, their share has increased to 92.6 per cent in 2010-11. The
share of pulses, however, has declined from 16 per cent to just 7.3 per cent during the same
period.
(c) Within the category of cereals, the distribution of the two ’superior‘ cereals — rice and wheat
— which was only 53 per cent in 1950-51 had increased to 81 per cent in 2010-2011.

Food security at the household level entails having physical and economic accessibility to food
items that are sufficient in terms of quantity, quality and affordability. To accomplish food
security at the household level, attempts should be made in the follower manner:

(i) Increasing the pace of growth of food items which are a direct source of food as well as
income through which food items can be bought.

(ii) Ensuring development of the rural areas inhabited by the poor.

(iii) Enhancing access to land and other natural resources.

(iv) Affordable loans being made available to the poor.

(v) Making provision for increasing employment opportunities.

(vi) Initiating income transfer schemes, including provision of public distribution system of
subsidized cheap food.

b) Indian financial system

India’s financial system includes many institutions and the mechanism which affects the
generation of savings by the community, the mobilization of savings and the effective
distribution of the savings among all those who demand the funds for investment purposes.
Broadly, therefore, the Indian financial system is composed of:

(a) The banking system, insurance companies, mutual funds, investment funds and other
institutions which promote savings among the public, collect their savings and transfer them to
the actual investors; and

(b) The investors in the country composed of individual investors, industrial and trading
companies and the government — these enter the financial system as borrowers.

Apart from these two broad categories of institutions which promote savings on the one side and
investment on the other, there are certain other essential institutions of the Indian financial
system which are actually facilitators.

For example, the New Issues Market which facilitates new savings to flow into new issues of
stocks and shares. In the same way, the stock exchanges in India facilitate the buying and selling
of shares and debentures of existing companies and thus, help savers to shift from one type of
investment to another. The new issues market and the stock exchange may not promote savings
and investment directly but they facilitate savings on one side and help the transfer of funds for
investment, on the other.