Grade XII

Economics
Top 100
Important
Questions

#GrowWithGreen
 TOP 100 QUESTIONS IN ECONOMICS

PART-A: MACROECONOMICS

Q.1 Give a reason to explain that macroeconomics has deep roots in microeconomics.
Answer
Macroeconomics focuses on the aggregate effects of the forces of demand and supply in different
markets. Microeconomics provides the basic framework of individual units for macroeconomics
to study on aggregate measures. Therefore, it can be said that macroeconomics has deep roots in
microeconomics. Macroeconomics is a magnified version of microeconomics.

Q.2 All the sectors in an economy can be interlinked with the external sector. Explain
Answer
External sector deals with the export and import of goods and services. When a country sells
goods and services to the rest of the world it known as exports. On the other hand, when a
country purchases goods and services from the rest of the world it known as imports. These
export and imports can be by households, firms as well as government. For example, the
household can purchase goods and services from the rest of the world. Similarly, the firm can
sell the goods and services produced by them to the rest of the world. In a similar manner, the
government can also export and import goods and services. Thus, all the sectors of the economy
are interlinked with the external sector.

Q.3 Differentiate between microeconomics and macroeconomics

Answer

Points of
Microeconomics Macroeconomics
Difference

1 Study It studies about individual economic It studies about an economy as a whole.

matters units like households, firms,
consumers, etc.

2 Deals with It deals with how consumers or It deals with how different economic
producers make their decisions sectors such as households, industries,
depending on their given budget and government and foreign sector make
other variables. their decisions.
3 Method It uses the method of partial It uses the method of general
equilibrium, i.e. equilibrium in one equilibrium, i.e. equilibrium in all
market. markets of an economy as a whole.

4 Variables The major microeconomic variables The major macroeconomic variables are
are price, individual consumer’s aggregate price, aggregate demand,
demand, wages, rent, profit, aggregate supply, inflation,
revenues, etc. unemployment, etc.

5 Theories Various theories studied are: Various theories studied are:

1) Theory of Consumer’s Behaviour
and Demand
2) Theory of Producer’s Behaviour
and Supply
3) Theory of Price Determination
under Different Market Conditions
1) Theory of National Income
2) Theory of Money
3) Theory of General Price Level
4) Theory of Employment
5) Theory of International Trade

Q.4 Briefly explain the circular flow of income in a two sector (simple) economy.
Answer
Suppose the economy is divided into two sectors, namely: households and firms. The circular
flow of income in this model is depicted by the following diagram:

Assumptions of the two sector model

(i) There are only two sectors, i.e., households and firms.
(ii) The households spend their entire income. Hence, there are no savings.
(iii) There is no government in the economy. So, the households and firms need not to pay taxes.
(iv) The economy is closed, i.e., there are no imports or exports.
Observations of the two sector model
(i) Total production of goods and services by firms = Total consumption of goods and services
by household sector = factor income
(ii) Factor payments by firms = Factor income of households.
(iii) Consumption expenditure of households = Income received by firms
(iv) Real flow among firms and households = Money flow among households and firms.
The households provide labour to the firms and receive wages in return. These factor payments
by the firms act as the factor income for the households, which they use to finance their
consumption expenditure. The households provide market of the produced goods and services to
the firms. Hence, there are no leakages as there are no savings, and the economy continues to
produce the same level of output at every round.

Q.5 Explain the precautions taken while calculating factor income (any six).
Answer
The following precautions should be taken while calculating factor income:
(i) Income generated in terms of black money is not taken into account. Income from illegal
activities like smuggling, theft, gambling, etc. should not be included in calculating factor
income.
(ii) The sale of shares and bonds should not be included as such transactions are related to the
flow of goods and services.
(iii) Imputed rent of owner occupied houses should be taken into account while calculating
national income as they have rental value.
(iv) Sale of second hand goods should not be included as their values had earlier being estimated
when they were purchased.
(v) Salaries or wages, in cash and kind, social security contribution by the employers, etc. are the
components of compensation of employees and should not be included separately.
(vi) Goods which are produced for self consumption should not be included in national income.

Q.6 Classify the following as stock and flow variable.

(a) Amount of money received as on 5/3/2015.
(b) Savings of an individual
(c) Wealth of an individual
Answer
(a) Amount of money received as on 5/3/2015 is a stock variable as it relates to a particular
point of time.
(b) Savings of an individual is a flow variable as they are taken over a period of time.
(c) Wealth of an individual is a stock variable as it relates to a particular point of time.
Q.7 Identify whether the following would be treated as normal residents of India.
a. A Japanese working in WHO office located in India.
b. An ambassador of Japan in India staying in India for more than a year.
c. An American working in a American embassy in India
Answer
Normal residents of a country refer to the individuals or institutions that are the residents of that
country (for one or more years) and who’s centre of economic interest i.e. earning, spending and
accumulation of wealth, etc. lies within the economic territory of that country.
a. A Japanese working in WHO office located in India will not be treated as normal residents of
India.
b. An ambassador of Japan in India staying in India for more than a year will not be treated
as normal residents of India. This is because even when he stays in India for more than a year his
centre of interest does not lie in India.
c. An American working in American embassy in India will not be treated as normal resident of
India.

Q.8 Identify whether the following would be included in the estimation of Gross Domestic
Product of India.
a. Profit earned by a foreign company located in India.
b. Wages earned by Indians working in American embassy.
c. Wages of foreign nationals working in Indian embassy.
d. Brokerage paid on purchase of old house
Answer
a. Profits earned by a foreign company located in India will be included in Gross Domestic
Product as the foreign company located in India is a part of domestic territory of India.
b. Wages earned by Indians working in American embassy will not be included in Gross
Domestic Product as American embassy is not a part of domestic territory of India.
c. Wages of foreign nationals working in Indian embassy will be included in Gross Domestic
product as Indian embassy is a part of domestic territory of India.
d. Brokerage paid on purchase of house is included in the Gross Domestic Product as
brokerage is a part of factor income.

Q.9 Giving reasons explain how the following are treated while estimating national income:
(i) Payment of fees to a lawyer engaged by a firm.
(ii) Rent free house to an employee by an employer.
(iii) Purchases by foreign tourists.
Answer
(i) The services of advocate hired by the firm should not be included in the estimation of national
income. This is because it forms a part of the firm’s intermediate consumption.
(ii) A rent free house given to an employee by the employer should be included in the estimation
of national income. This is because it forms a part of compensation of the employees.
(iii) Purchases by foreign tourists should be included in the estimation of national income. This is
because these expenditures are made by the foreigners on domestic goods and services.

Q.10 Calculate “Gross National Product at factor cost” from the following data by (i) income
method, and (ii) expenditure method:
S. No. Items (Rs in crore)
(i) Private final consumption expenditure 1,000
(ii) Net domestic capital formation 200
(iii) Profits 400
(iv) Compensation of employees 800
(v) Rent 250
(vi) Government final consumption expenditure 500
(vii) Consumption of fixed capital 60
(viii) Interest 150
(ix) Net current transfers from rest of the world (–) 80
(x) Net factor income from abroad (–) 10
(xi) Net exports (–) 20
(xii) Net indirect taxes 80

Answer
(i) By Income Method
GNPFC= Profits + Compensation of Employees + Rent + Interest + Consumption of Fixed
Capital + Net Factor Income from Abroad
= 400 + 800 + 250 + 150 + 60 + (−10)
= Rs1,650 crore
(ii) By Expenditure Method
GNPFC= Private Final consumption Expenditure + Net Domestic Capital Formation +
Government Final Consumption Expenditure + Consumption of Fixed Capital + Net Factor
Income from Abroad + Net Exports − Net Indirect Taxes
= 1,000 + 200 + 500 + 60 + (−10) + (−20) − 80
= Rs 1,650 crore
Q.11 Calculate National Income from the following data:
S. No. Particulars (Rs in crores)
(i) Private final consumption expenditure 900
(ii) Profit 100
(iii) Government final consumption expenditure 400
(iv) Net indirect taxes 100
(v) Gross domestic capital formation 250
(vi) Change in stock 50
(vii) Net factor income from abroad (−) 40
(viii) Consumption of fixed capital 20
(ix) Net imports 30
Answer

(Note: Here change in stock is not taken into account as it is a part of the gross Domestic Capital
Formation)

Q.12 Calculate Net National Product at Market Price.

(Rs crores)
(i) Net current transfers to abroad 10
(ii) Private final consumption expenditure 500
(iii) Current transfers from government 30
(iv) Net factor income to abroad 20
(v) Net exports (–) 20
(vi ) Net indirect tax 120
(vii) National debt interest 70
(viii) Net domestic capital formation 80
(ix) Income accruing to government 60
(x) Government final consumption expenditure 100
Answer
GDPMP = Private final consumption expenditure + Government final consumption expenditure +
(Net domestic capital formation + Depreciation) + Net exports
⇒ GDPMP = 500 + 100 + (80 + 0) + (–20)
⇒ GDPMP = Rs 660 crores
NNPMP = GDPMP – Depreciation – Net factor income to abroad
⇒ NNPMP = 660 – 0 – 20
∴ NNPMP = Rs 640 crores

Q.13 If nominal income is Rs 500 and price index is 125, calculate real income.
Answer

Q.14 Find out (i) Gross National Product at Market Price and (ii) Net Current Transfers from
Abroad:
S. No. Items (Rs Crore)
(i) Private final consumption expenditure 1000
(ii) Depreciation 100
(iii) Net national disposable income 1500
(iv) Closing stock 20
(v) Government final consumption expenditure 300
(vi) Net Indirect tax 50
(vii) Opening stock 20
(viii) Net domestic fixed capital formation 110
(ix) Net exports 15
(x) Net factor income to abroad (–) 10
Answer
(i)
GNPMP= Private Final Consumption Expenditure + Government Final Consumption Expenditure
+ Net Exports + Net Domestic Fixed Capital Formation + Depreciation − Net Factor Income to
Abroad
= 1000 + 300 + 15 + 110 + 100 − (−) 10
= Rs 1535 crore
(ii)
Net Current Transfers from Abroad = National Disposable Income − National Income − Net
Indirect Taxes
National Income (NNPFC) = GNPMP− Depreciation − Net Indirect Taxes
= 1535 − 100 − 50
= Rs 1385 crore
Thus, Net Current Transfers from Abroad = 1500 − 1385 − 50
= Rs 65 crore

Q.15 Explain the following situations

a. The impact of an increase in the CRR on lending capacity of banks.
b. The impact of a fall in SLR on the money supply.
Answer
a. CRR refers to the minimum proportion of the total deposits that the commercial banks has to
maintain with the central bank in form of reserves. An increase in the CRR, would mean that
banks would be required to keep a greater portion in form of deposits with the central bank. This
implies that the commercial banks are left with lesser amount of funds to lend out. Hence, the
lending capacity of the banks reduces.

b. Statutory Liquidity Ration (SLR) is defined as the minimum percentage of assets to be

maintained by the commercial banks with themselves in the form of either fixed or liquid assets.
With a fall in SLR the flow of credit in the economy is reduced. A fall in the SLR allows the
commercial banks to lend greater volume of credit into the economy, hence, increase the money
supply.

Q.16 If LRR is 0.5 and initial deposits by people is Rs 200 crores, then calculate total money
created by commercial banks.
Answer
LRR = 0.5

So, money multiplier

Total money created by commercial banks = Money multiplier × Initial deposits
= 2 × 200
= Rs 400 crores

Q.17 Discuss the various functions of central bank (any four).

Answer
The Central Bank is the apex institution of a country’s monetary system. The various functions
of central bank are:
(i) Currency Authority
The Central Bank has the sole authority of issuing currency in the country. The currency issued
by central bank is its liability which is to be backed by assets of equal value. The assets usually
consist of gold coins, foreign securities and domestic currency.
(ii) Banker’s Bank
The central banks serve as a bank for commercial banks. The reserves of banks are held by
central bank which serves as a source from which it makes advances to banks acting as a lender
of last resort. The central bank supervises, controls and regulates the commercial banks.
(iii) Banker to Government
The central bank acts as a banker to the government in the sense that it carries all the banking
business of the state and the central governments. The central bank accepts receipts, makes
payments, carries out exchanges, provides short term loans and also has the responsibility of
managing public debt.
(iv) Custodian of foreign exchange reserves
The central bank is the custodian of foreign exchange reserves and controls the reserves by
selling and purchasing of foreign currency. The central bank maintains the balance of payments
situation in the country.

Q.18 Explain the process of money creation by Commercial Banks.

Answer
The process of money creation by the commercial banks starts as people deposit money in their
respective bank accounts. After receiving the deposits, as per the central bank guidelines, the
commercial banks are required to maintain a portion of total deposits in form of cash reserves. It
is this second portion of the total deposits that is responsible for the credit creation. The
remaining portion left after maintaining cash reserves of the total deposits is then lend by the
commercial bank to the general public in form of credit, loans and advances. Now if, all
transactions in the economy are routed through the commercial banks, then the money spent by
the borrowers again comes back to the banks as deposits. The commercial banks again keep a
portion of the deposits as reserves and lend the rest. The deposit of money by the people in the
banks and the subsequent lending of loans by the commercial banks is a never-ending process. It
is due to this continuous process that the commercial banks are able to create credit money a
multiple times of the initial deposits.

Q.19 How do changes in bank rate affect money creation by Commercial Banks? Explain.
Answer
Bank rate refers to the rate of interest at which central bank provides loans to the commercial
banks. It is used as an instrument by the RBI to affect the money creation by commercial banks.
An increase in the bank rate by the central bank increases the cost of borrowing for the
commercial banks. Commercial banks in turn, raise the lending rate for the customers. However,
this increase in the lending rate reduces the borrowing capacity of the general public, thereby,
discourages the demand for loans and credit. This depresses the multiplier process and thus,
decreases the value of money multiplier. Hence, the money creation by the commercial banks
also decreases.
On the other hand, a decrease in the bank rate by the commercial banks, lowers the cost of
borrowing for the commercial banks which in turn, lower the lending rate for the customers. This
reduction in the lending rate, raises the borrowing capacity of the general public, thereby,
encourages the demand for loans and credit. This accelerates the multiplier process and thus,
raises the value of money multiplier. Hence, the money creation by the commercial banks also
increases.

Q.20 How does the central bank control credit creation by commercial banks? Explain the
measures.
Answer
The credit policy of RBI involves two instruments. These are diagrammatically explained below:

Quantitative Measures
Quantitative measures refer to those measures that affect the variables, which in turn affect the
overall money supply in the economy.
Instruments of quantitative measures:
(i) Bank rate − The rate at which central bank provides loan to commercial banks is called bank
rate. This is a key instrument at the hands of RBI to control the money supply.
Increase in the bank rate will make the loans more expensive for the commercial banks; thereby,
pressurizing the banks to increase the rate of lending. The public capacity to take credit will
gradually fall leading to the fall in the volume of credit demanded. The reverse happens in case
of a decrease in the bank rate. The increased lending capacity of banks as well as increased
public demand for credit will automatically lead to a rise in the volume of credit.
(ii) Varying reserve ratios − The reserve ratio determines the reserve requirements, wherein
banks are liable to maintain reserves with the central bank.
The two main ratios are:
(a) Cash Reserve Ratio (CRR)
It refers to the minimum amount of funds that a commercial bank has to maintain with the
Reserve Bank of India, in the form of deposits. For example, suppose the total assets of a bank
are worth Rs 200 crores and the minimum cash reserve ratio is 10%. Then the amount that the
commercial bank has to maintain with RBI is Rs 20 crores. If this ratio rises to 20%, then the
reserve with RBI increases to Rs 40 crores. Thus, less money will be left with the commercial
bank for lending. This will eventually lead to considerable decrease in the money supply. On the
contrary, a fall in CRR will lead to an increase in the money supply.
(b) Statuary Liquidity Ratio (SLR)
SLR is concerned with maintaining the minimum reserve of assets with RBI, whereas the cash
reserve ratio is concerned with maintaining cash balance (reserve) with RBI. So, SLR is defined
as the minimum percentage of assets to be maintained in the form of either fixed or liquid assets
with RBI. The flow of credit is reduced by increasing this liquidity ratio and vice-versa. In the
previous example, this can be understood as rise in SLR will restrict the banks to pump money in
the economy, thereby contributing towards decrease in money supply. The reverse case happens
if there is a fall in SLR, as it increases the money supply in the economy.
(iii) Open Market Operations (OMO)
Open Market operations refer to the buying and selling of securities in an open market, in order
to affect the money supply in the economy. The selling of securities by RBI will wipe out the
extra cash balance from the economy, thereby limiting the money supply, whereas in the case of
buying securities by RBI, additional money is pumped into the economy stimulating the money
supply.
Qualitative Measures
The measures that affect the credit qualitatively are
(i) Marginal Requirements
The commercial banks’ function to grant loan rests upon the value of security being mortgaged.
So, the banks keep a margin, which is the difference between the market value of security and
the loan value. For example, a commercial bank grants loan of Rs 80,000 against security of Rs
1,00,000. So, the margin is calculated as 1,00,000 − 80,000 = Rs 20,000. When the central bank
decides to restrict the flow of money, then the margin requirement of loan is raised and vice-
versa in the case of expansionary credit policy.
(ii) Selective Credit Control (SCC)
An instrument of the monetary policy that affects the flow of credit to particular sectors
positively and negatively is known as selective credit control. The positive aspect is concerned
with the increased flow of credit to the priority sectors. However, the negative aspect is
concerned with the measures to restrict credit to a particular sector.
(iii) Moral Suasions
A persuasion technique followed by the central bank to pressurise the commercial banks to abide
by the monetary policy is termed as moral suasion. This involves meetings, seminars, speeches
and discussions, which explains the present economic scenario and thereby persuading the
commercial banks to adapt the changes needed. In other words, this is an unofficial monetary
policy that exercises the power of talk.

Q.21 Explain the ‘lender of last resort’ function of the central bank.
Answer
As the lender of last resort, the central bank is under the obligation to provide funds against
securities to the commercial bank as and when needed by them. When a commercial bank faces
financial crisis and fails to obtain funds from other sources, then the central bank plays the vital
role of ‘lender of last resort’ and provides them with the financial assistance in the form of credit.
This role of the central bank saves the commercial bank from being bankrupt. Thus, the central
bank plays the role of guarantor for the commercial banks and maintains a sound and healthy
banking system in the economy.

Q.22 Explain ‘government’s banker’ function of the central bank.

Answer
The central bank acts as a banker and financial advisor to the government. As a banker to the
government, it performs the following functions.
(i) Managing the account of the government: The accounts of the central government as well as
the state government are managed by the central bank.
(ii) Acceptance of receipts and making of payment on behalf of government: The central bank
accepts various receipts from the government such as the deposits and makes various payments
and remittances on behalf of the government.
(iii) Granting of short-term loans and credit: The central bank grants short-term loans and credit
to the central and the state government as when required. The government can borrow from the
central bank by selling treasury bills to it.
(iv) Managing the public debt: The central bank of a country also performs the task of managing
the public debt of its government. That is it manages the issue of new loans by the government.
(v) Advisor to the government: The central bank advises the government on all the banking and
financial related matters. It also helps in the formulation of policies related to the money market.

Q.23 Define money supply and explain its components.

Answer
Supply of money refers to the total stock of money (in the form of currency notes and coins) held
by the people of an economy at a particular point of time. The following are the components of
money.
i. Currency Component- It includes currency notes and coins which are issued by the Monetary
Authority of a country, collectively called the Currency Component of the money supply. In
India, RBI issues the currency notes of various denominations (such as Rs 2, Rs 5, Rs 100, Rs
500, Rs 1000) and the Government of India issues currency coins and notes of denomination less
than and equal to Re 1.
ii. Deposit Component- The savings or the current account deposits held by the public in various
commercial banks of a country. Apart from the currency notes and coins, the stock of money also
includes the Saving Deposits and the Current Account Deposits held by the public in various
commercial banks.

Q.24 State whether the following statements are true or false. Give reasons for your answer:
(a) When marginal propensity to consume is greater than marginal propensity to save, the value
of investment multiplier will be greater than 5.
(b) The value of marginal propensity to save can never be negative.
Answer
(a) False, when marginal propensity to consume is greater than marginal propensity to save, the
value of investment multiplier will not be greater than 5.
For example if MPC is 0.6 and MPS is 0.4, then investment multiplier will be

(b) True, the value of Marginal Propensity to Save can never be negative. This is because even if
the entire change in income is spent on consumption (MPC =1), then also MPS will be zero
rather than negative.

Q.25 Explain the concept of Inflationary Gap. Explain the role of Repo Rate in reducing this
gap.
Answer
Due to the excess of aggregate demand, there exists a difference (or gap) between the actual
level of aggregate demand and full employment level of demand. This difference is termed as
inflationary gap. This gap measures the amount of surplus in the level of aggregate demand.
Graphically, it is represented by the vertical distance between the actual level of aggregate
demand (ADE) and the full employment level of output (ADF). In the figure, EY denotes the
aggregate demand at the full employment level of output and FY denotes the actual aggregate
demand. The vertical distance between these two represents inflationary gap. That is,

FY – EY = FE (Inflationary Gap)
Let us understand the situation of excess demand and concept of inflationary gap with the help of
the following figure.

In the figure, AD1 and AS represents the aggregate demand curve and aggregate supply curve
respectively. The economy is at full employment equilibrium at point ‘E’,
where AD1intersects AS curve. At this equilibrium point, OY represents full employment level
and EY is aggregate demand at the full employment level of output.
Let us suppose that the actual aggregate demand for output is FY, which is higher than EY. This
implies that actual aggregate output demanded by the economy FY is more than the potential
(full employment) aggregate output EY. Thus, the economy is facing surplus demand. This
situation is termed as excess demand. As a result of the excess demand, inflationary gap arises.
The inflationary gap is measured by the vertical distance between the actual aggregate demand
for output and the potential (or full employment level) aggregate demand. In other words, the
distance between FY and EY, i.e. FE represents the inflationary gap.

Repo rate refers to the rate at which the central bank lends to the commercial bank. In such of
inflationary gap, the central bank would increase repo rate. An increase in the repo rate increases
the cost of borrowings for the commercial banks. This discourages the demand for loans and
borrowings. Thereby, the consumption expenditure falls, and hence aggregate demand falls.

Q.26 Explain the concept of Deflationary Gap and the role of 'Open Market Operations' in
reducing this gap.
Answer
Due to the deficiency in the aggregate demand, there exists a difference (or gap) between the
actual level of aggregate demand and full employment level of demand. This difference is
termed as deflationary gap. This gap measures the amount of deficiency in the level of aggregate
demand. Graphically, it is represented by the vertical distance between the aggregate demand at
the full employment level of output (ADF) and the actual level of aggregate demand (ADE). In the
figure below, EY denotes the aggregate demand at full employment level of output
and CY denotes the actual aggregate demand. The vertical distance between these two represents
deflationary gap. That is,

EY – CY = EC (Deflationary Gap)
Let us understand the situation of deficit demand and concept of deflationary gap with the help
of the following figure.

In the figure, AD1 and AS represents the aggregate demand curve and aggregate supply curve.
The economy is at full employment equilibrium at point ‘E’, where AD1 intersectsAS curve. At
this equilibrium point, OY represents the full employment level of output andEY is the aggregate
demand at the full employment level of output.
Let us suppose that the actual aggregate demand for output is only CY, which is lower thanEY.
This implies that actual aggregate output demanded by the economy CY falls short of the
potential (full employment) aggregate output EY. Thus, the economy is facing a deficiency in
demand. This situation is termed as deficit demand. As a result of the deficit demand,
deflationary gap arises. The deflationary gap is measured by the vertical distance between the
potential (or full employment level) aggregate demand and the actual aggregate demand for
output. In other words, the distance between EY and CY, i.e. EC represents the deflationary gap.

To correct deflationary gap, the central bank purchases the securities in the market, thereby,
increasing the flow of money and subsequently enhancing the purchasing power of the people.
The higher purchasing power increases the aggregate demand.

Q.27 (i) Explain the process of investment multiplier with an example.

(ii) In an economy, C = 100 + 0.75 Y and I = 600 crores. Calculate equilibrium level of income
and consumption expenditure at equilibrium level of income.
Answer
(i) Investment multiplier is the ratio of change in income to change in investment. In other
words, how the level of investment changes due to change in level of income is shown by the
investment multiplier.

Round Increase in Investment Change in Income Change in consumption Savings

(ΔI) (ΔY) (MPC = 0.5)

1 500 500 250 250

2 − 250 125 125

3 − 125 62.5 62.5

4 − 62.5 31.25 31.25

5 − 31.25 15.625 15.625

6 − 15.625 7.8125 7.8125

7 − 7.8125 3.906 3.906

8 − 3.906 1.953 1.953

9 − 1.953 0.976 0.976

10 − 0.976 0.4882 0.4882

11 − 0.4882 0.2441 0.2441

12 − 0.2441 0.1221 0.1221

500 999.75 499.8 499.8

1000 500 500

The table shows that initial increase in investment of Rs 500 will lead to change in income by Rs
500 in the first round. Let the initial investment done by a reputed steel industry is Rs 500. The
change in the investment (ΔI) will lead to a increase in income of workers (ΔY) of steel industry
by Rs 500; assuming MPC to be 0.5. That is, the workers will consume 0.5 of increased income
(i.e. Rs 250) and thereby saves Rs 250. This will be termed as leakage.
In the next round, due to increase in the consumption expenditure by Rs 250, there will be
increase in income by Rs 250. The part of ΔY will be again spent on consumption of Rs 125 and
remaining Rs 125 is saved
In the third round, similarly the increased consumption expenditure of Rs 125 will be cause a
change in income of Rs 125, which is further spent into Rs 62.5 consumption expenditure and
automatically Rs 62.5 will be saved.
The income will go on increasing as a result of increase in consumption. The total change in
income (ΔY) = Rs 1000 (approx) and the change in the investment (ΔI) will be Rs 500.

(ii) C = 100 + 0.75 Y

I = 600 crores
(a) Equilibrium level of income
Y = C +I
Y = 100 + 0.75Y + 600
Y 0.75Y = 700
0.25Y = 700

= Rs 2800 crores
(b) Consumption expenditure at Y = 2800
C = 100 + 0.75Y

=100 + 2100
=Rs 2200 crores

Q.28 (i) In an economy investment expenditure increased by 500 crores and MPC = 0.5.
Calculate increase in income and increase in saving.
(ii) In an economy, planned savings exceed planned investment. Explain the process of
maintaining equality between the two.
Answer

(i)
Then, MPS = 1 MPC = 1 0.5 = 0.5
Increase in income (ΔY)

So, ΔY = 500 × 2 = 1000 crores

Or, ΔS = 0.5 × 1000 = Rs 500 crores

So, increase in income = Rs 1000 crores
And increase in savings = Rs 500 crores
(ii) If S > I, then it implies that the leakages in expenditure (savings) is greater than injections of
expenditure (I). This implies that the overall expenditure in the economy would reduce as major
part people’s income will go in to savings, resulting in less increase in expenditure on goods and
services. So, some output would remain unsold and producers will end up with undesired stocks.
In order to clear this unsold stock; the firms would now plan lesser output than before. This
indicates lesser income in the economy and lesser income will automatically reduce saving. This
process will continue till S = I

Q.29 If the ratio of MPC and MPS is given as 3 : 1. Calculate the total increase in income if
investment increases by Rs 100 crore.
Answer

So, when investment increases by Rs 100 crore, the income increases by four times.
Thus, the total increase in income when increases by Rs 100 crore is Rs 400 crore

Q.30 Suppose in an anticipation of war the MPS in an economy rises. Does this suggests that in
the long run the level of savings will rise in economy ? Give reasons for your answer.
Answer
In the long run the savings in the economy will fall. This can be explained with the help of
paradox of thrift as given by Keynes. As MPS rises, the aggregate consumption expenditure falls.
However; this fall in the consumption expenditure triggers a backward functioning of the
multiplier. With the fall in the consumption expenditure, aggregate demand falls short of the
aggregate supply, consequently, the producers experience unplanned inventory accumulation.
This will force to respond by cutting-back their production and reducing employment of the
factors of production. This will further lead to fall in the aggregate income level, thereby the fall
in the aggregate savings level. That is, when all the people in an economy saves more, then it
gradually leads to slowdown of the economy in terms of circular flow of income.

Q.31 a. Explain determination of equilibrium level of income using ‘consumption plus

investment’ approach. Use diagram.
b. Explain determination of equilibrium level of income using ‘saving-investment’ approach.
Use diagram.
Answer
a. According to consumption plus investment (C + I) approach, equilibrium level of income is
determined at that point, where the Aggregate Demand (consumption plus investment) is equal to
the Aggregate Supply (AS). That is, equilibrium is established where,
AD = AS
or, (C + I) = AS

In the diagram, consumption curve is depicted by C and investment curve is depicted by the
horizontal straight line I that is parallel to the output/income axis. Summing-up both the curves,
we get the Aggregate Demand curve represented by AD= C + I. The Aggregate Supply curve is
represented by the 45° line.
E is the equilibrium point where AD curve intersects the AS curve. At this point, there is no
undesired inventory accumulation in the economy. Accordingly, OQ is the equilibrium level of
income.

b. According to the Saving-Investment approach, the equilibrium is determined at that point,

where the saving and investment are equal to each other. That is, equilibrium is established
where,
S=I
In the figure, SS represents the saving curve. Investment curve II is the horizontal straight line
that is parallel line to the income/output axis. The equilibrium is established at point E,
where SS curve intersects the IIcurve. At this point, saving and investment are equal to each
other. Accordingly, OQ is the equilibrium level of income (output).

Q.32 Outline the steps required to be taken in deriving saving curve from the given consumption
curve. Use diagram.
Answer
In the diagram, C is the consumption curve.
The 45° line is the aggregate supply curve.
At point A, consumption = income i.e (Y = C)
represents the autonomous consumption i.e. consumption at zero level of income.
Steps for derivation of supply curve from consumption curve as follows.
(i) Corresponding to in the consumption function we have - in the saving function. That is, there
are negative savings equal to autonomous consumption at Y = 0. This is represented by S on the
negative axis in the lower panel.
(ii) At point A (Y=C). This implies that all the income is spent on consumption expenditure.
Thus, savings equal to zero. This is shown as S = 0 in lower panel. This point is also known as
the Break-even point.
(iii) Beyond the break-even point, by connecting points S and Y we derive the straight upward
sloping saving curve.
(iv) SS is the required saving curve.

Q.33 Given saving curve, derive consumption curve and state the steps in doing so. Use diagram.
Answer
In the following figure, given is the supply curve represented by SS curve. −¯¯¯C-C¯ represents
negative savings. Point B is break even point where Y = C & S = 0. The following are the steps
of deriving consumption curve from savings curve.

Step 1: On the given Saving curve SS, take OS = OC.

Step 2: From point B, draw a perpendicular meeting 45o line at point A.
Step 3: By joining the points C and A and extending the line to C, we derive the straight upward
sloping consumption curve.
Step 4: CC is the required consumption curve.
Q.34 In an economy 75 per cent of the increase in income is spent on consumption. Investment
is increased by Rs 1,000 crore. Calculate:
(a) Total increase in income
(b) Total increase in consumption expenditure.
Answer
Q.35 An economy is in equilibrium. From the following data about an economy calculate
autonomous consumption.
(i) Income = 5000
(ii) Marginal propensity to save = 0.2
(iii) Investment expenditure = 800
Answer
We are given,
Income (Y) = 5000
Marginal propensity to save (s) = 0.2
so, Marginal propensity to consume = 1 – s = 1 – 0.2 = 0.8
I = 800
We know, Y = C + I
So, C= Y – I
C = 5000 – 800 = 4200

Also, C=C+cY
So, 4200 = + 0.8 (5,000)
= 200
Hence, Autonomous Consumption is 200.

Q.36 (i) Given the following for economy of a country

C = 100 + 0.5 Yd
I = 100, G = 80, T = 60 + 0.25Y
Calculate:
(a) Equilibrium income
(b) Net taxes collected by government when the economy is in equilibrium.
(ii) Show (by taking MPC = 0.80) that government spending multiplier is greater than tax
multiplier.
Answer
(i)
(a) Y = C + I + G
Or, Y = 100 + 0.5 Yd + 100 + 80
Or, Y = 100 + 0.5 (Y − T) + 180
Or, Y = 280 + 0.5[Y − (− 60 + 0.25Y)]
Or, Y = 280 + 0.5Y + 30 − 0.125Y
Or, Y + 0.125Y− 0.5Y = 310
Or, 0.625Y = 310

Or,
Or, Y = Rs 496
Therefore, equilibrium level of income = Rs 496 crores
(b) Net taxes at equilibrium income
T = − 60 + 0.25Y

=− 60 + 124
= Rs 64
(ii)
MPC = 0.80

Government expenditure multiplier

Tax multiplier

Hence, it shows that the government expenditure multiplier is greater than the tax multiplier.
Q.37 Classify the following expenditures of the government as revenue expenditure and capital
expenditure:
a. Salaries paid to employees of the government sector enterprises
b. Purchase of machinery from abroad
c. Repayment of loan taken from the Central Bank
d. Grants given to neighbouring country for flood relief
e. Payment of pensions to the retired
f. Payment of subsidies for fertilizers
Answer
a. Salaries paid to employees of the government sector enterprise is a revenue expenditure as it
neither creates assets nor causes any reduction in the liabilities of the government.
b. Purchase of machinery from abroad is a capital expenditure as it leads to creation of assets.
c. Repayment of loan taken from Central Bank is a capital expenditure as it leads to reduction in
the liabilities of the government.
d. Grants given to neighbouring country for flood relief is a revenue expenditure as it neither
creates assets nor causes any reduction in the liabilities of the government.
e. Payment of pension to retired is a revenue expenditure as it neither creates assets nor causes
any reduction in the liabilities of the government.
f. Payment of subsidies for fertilisers is a revenue expenditure as it neither creates assets nor
causes any reduction in the liabilities of the government.

Q.38 Classify the following as revenue receipts and capital receipts of the government:
a. Borrowings from the Central Bank
b. Profits of a government enterprise
c. Receipt from disinvestment
d. Financial help received for earthquake victims
e. Loan taken from a foreign country for a development project
f. License fees received by the government
Answer
a. Borrowings from central bank are capital receipts as it implies creation of liability for the
government.
b. Profits of a government enterprise are revenue receipts as it neither creates liability nor cause
reduction in the assets of the government.
c. Receipts from disinvestment is capital receipt as it implies reduction in the assets of the
government.
d. Financial help received for earthquake victims is a revenue receipt as it neither creates liability
nor causes reduction in the assets of the government.
e. Loan taken from a foreign country for a development project is a capital receipt as it creates
liability for the government.
f. License fees received by the government is a revenue receipt as it neither creates liability nor
causes reduction in the assets of the government.

Q.39 Can an increase in the budget receipts be successfully used by the government in
developing countries to cover budget deficit?
Answer
Budget receipts of the government can be classified as revenue receipts and capital receipts. Of
the various revenue receipts, tax receipts form the major component and contribute the most to
the total government receipts.
Tax receipts of the government can be in the form of receipts from direct taxes and receipts from
indirect taxes. However, in developing countries direct taxes such as income tax have little scope
of increment. This is because only a small fraction of population pays income tax in such
countries (and majority of population falls in low-income group). On the other hand, although
the indirect taxes such as the sales tax have a wider scope but cannot be increased much as they
are regressive in nature (the burden has to be borne equally by the rich and the poor). Thus, a rise
in the indirect taxes implies a reduction in the welfare of the people. Hence, the indirect taxes
and the direct taxes cannot be increased much in the developing countries.
Another form of receipts for the government can be capital receipts in the form of recovery of
loans, borrowings and disinvestment. Of these three components, borrowings and disinvestment
forms the two major sources of capital receipts. However, excessive dependence on the
borrowings implies higher debt burden and interest burden in the future. Hence, borrowing as a
source of capital receipts must be avoided. As against borrowings, disinvestment can be used to
correct budget deficit to some extent as long as it is confined to the disinvestment of inefficient
public enterprises. Also, the disinvestment can prove fruitful, if the funds received from
disinvestment are reinvested in some productive and developmental activities in the country.

Q.40 a. Explain the ‘allocation of resources’ objective of Government budget.

b. Explain the ‘redistribution of income’ objective of Government budget.
Answer
a. Allocation of resources is one of the important objectives of government budget. In a mixed
economy, the private producers aim towards profit maximisation, while, the government aims
towards welfare maximisation. The private sector always tend to divert resources towards areas
of high profit, while, ignoring areas of social welfare. In such a situation, the government
through its budgetary policy reallocates resources to maintain a balance between the social
objectives of welfare maximisation and economic objective of profit maximization. For example,
government levies taxes on socially harmful goods such as tobacco and provides subsidies for
the socially desirable goods such as food grains.

b. Redistribution of income is one of the important objectives of government budget. The

government through its budgetary policy attempts to promote fair and right distribution of
income in an economy. This is done through taxation and expenditure policy. Through its
taxation policy, the government taxes the higher income groups in the economy. Purchasing
power extracted from the higher income groups in the form of taxes is then transferred to the
poor sections of the society through the expenditure policy (subsidies, transfer payments, etc.).
Thus, with the help of taxation and expenditure policy in the budget, the government aims at
redistribution of income such that a fair and just distribution of income is achieved in the society.

Q.41 From the following data about a Government budget, find out (a) Revenue deficit, (b)
Fiscal deficit and (c) Primary deficit:
S. No. Items (Rs Arab)
(i) Capital receipts net of borrowings 95
(ii) Revenue expenditure 100
(iii) Interest payments 10
(iv) Revenue receipts 80
(v) Capital expenditure 110
Answer
(a) Revenue Deficit = Revenue Expenditure − Revenue Receipts
= 100 − 80 = Rs 20 Arab
(b) Fiscal Deficit = Revenue Expenditure + Capital Expenditure− Revenue Receipts− Capital
Receipts net of Borrowings
= 100 + 110 − 80 − 95
= Rs 35 Arab
(c) Primary Deficit = Fiscal Deficit − Interest Payments
= 35 − 10
= Rs 25 Arab

Q.42 Government raises its expenditure on producing public goods. Which economic value does
it reflect? Explain.
Answer
The economic value that is reflected in the rise in the production of public goods is the "social
welfare". The major objective of the budgetary policy of the government is to enhance the
welfare of the society at large. For this, it performs the allocative function. The allocative
function is concerned with allocating the resources between the private and public sectors. As the
public goods cannot be provided by the private sectors through market mechanism, hence the
need for providing such goods is to be fulfilled by the government. In addition to this, private
goods cannot be afforded by all, that is, only those who can pay for these goods can avail the
benefits of such goods. But, as the public goods are required by all and are essential from welfare
point of view, thus, government provide these goods.

Q.43 Identify whether the following will be included in current account or capital account of
BOP:
a. Export of machinery abroad
b. Loan taken from a foreign country
c. Purchase of shares of a domestic company by a foreign company
d. Financial assistance received from a foreign country
e. Donation received from foreign country for health care project
f. Consultancy services provided by an Indian company to a foreign company
Answer
The Current Account of BOP is that account which maintains the records of imports and exports
of goods and services as well as the record of unilateral transfers.
Accordingly, export of machinery abroad (a), donation received from foreign country for health
care project (e) and consultancy services provided by an Indian company to a foreign company
(f) will be recorded under current account of BOP.
On the other hand, capital account refers to that account of BOP, which records all the
transactions that cause a change in the status of assets and liabilities of the government or any of
the residents of a country.
Accordingly, loan taken from a foreign country (b), purchase of shares of a domestic company
by a foreign company (c), financial assistance received from a foreign country (d) will be
recorded under capital account of BOP.

Q.44 Suggest ways to finance a deficit on current account other than by lowering official foreign
exchange reserves. What are their implications? Where are they recorded in the capital account?
Answer
Other than by lowering foreign exchange reserves the deficit on current account can be financed
through either borrowings from rest of the world or by selling assets to the rest of the world.
The major implication of this is that it adds to the financial obligations of the country in terms of
returning the principal as well as interest amount.
As the borrowings as well as selling of assets imply a receipt of foreign exchange in the capital
account, they are recorded as a positive item in the capital account of BOP.
Q.45 State components of the current account of balance of payments account.
Answer
The Current Account of Balance of Payments (BOP) is that account which maintains the records
of imports and exports of the goods and services as well as the records of the unilateral transfers.
The following are the main components of the Current Account of BOP.
i. Export and Import of Goods: Export of goods are recorded as positive items as they result in
inflows of the foreign exchange in the country. On the other hand, import of goods are recorded
as a negative item in BOP as they cause an outflow of foreign exchange. This record of export
and import of goods is also called the 'Balance of Visible Trade'
ii. Export and Import of Services: The export of services are recorded as positive items, while,
the import of services are recorded as negative items in BOP. This record of export and import of
services is also known as 'Balance of Invisible Trade'.
iii. Unilateral Transfers: These are one-sided transactions consisting of gifts, donations, etc.
Receipts of such transfers are recorded as positive items, whereas, the payment of unilateral
transfers are recorded as negative items in BOP.

Q.46 a. Explain the meaning and two merits of fixed foreign exchange rate.
b. Explain two sources each of demand and supply of foreign exchange.
Answer
a. Fixed exchange rate is the rate of foreign exchange that is fixed by the monetary authority of
the country. That is, when the value of domestic currency against other foreign currencies is
fixed by the monetary authority it is called as the fixed exchange rate.
Merits of Fixed Foreign Exchange Rate
The following are the two merits of fixed exchange rate system.
1. Avoids frequent fluctuations in the exchange rate: Since, under the fixed exchange rate
system, the exchange rate is fixed by the government, therefore, the exchange rate becomes free
from frequent fluctuations. In other words, this system ensures stability in the exchange market.
2. Makes international trade more predictable: A fixed exchange rate makes the export and
import transactions more predictable. That is, this system ensures guarantee returns to the
exporters as well as helps importers in anticipating the payments more clearly.

b. The following are the two sources of demand for foreign exchange.
1. Import Payments: Foreign exchange is demanded for imports, that is, for purchasing goods
and services from the rest of the world.
2. Gifts and Grants: Another source of demand for foreign exchange is for sending gifts and
grants to the rest of the world.
The following are the two sources of supply of foreign exchange.
1. Receipts of Exports: A country receives foreign exchange from the export of goods and
services to the rest of the world.
2. FDI and Purchase of Financial Assets: Another source of supply is through FDI and purchase
of financial assets by the foreign countries in the domestic country.

Q.47 Distinguish between:

(a) Capital receipts and revenue receipts.
(b) Direct tax and indirect tax.
Answer
(a)
Capital Receipts Revenue Receipts
Capital receipts refer to those receipts of Revenue receipts refer to those receipts
the government which causes a of the government which neither creates
reduction in the government assets and any liability nor creates any reduction in
also creates a liability for the the assets of the government.
government.
For example, recovery of loans is a For example, Tax receipts are revenue
capital receipt. receipts.
(b)
Direct Tax Indirect Tax
Direct Taxes are those taxes which are Indirect taxes are those taxes in which
borne by the person on whom it is the burden of tax shifts from the payer to
imposed. the bearer.
The burden of such taxes cannot be The burden of such taxes can be shifted
shifted on to other. from the payer to the bearer.
For example - Income tax, wealth tax, For example, sales tax
etc.

Q.48 Indian investors lend abroad. Answer the following questions :

(a) In which sub-account and on which side of the Balance of Payments Account such lending is
recorded? Give reasons.

(b) Explain the impact of the leading on market exchange rate.

Answer
(a) In Capital account , and on debit side of BOP, the lending to abroad by Indian investors will
be recorded. Indian investors lending abroad cause an outflow of foreign exchange from the
country. Thus, it is recorded as negative item in the Capital Account of BOP.
(b) Lending to abroad by Indian investors will increase the demand of foreign currency. This
would shift the demand curve rightwards from DD to D'D'. With the shift in demand curve, the
new equilibrium is established at point E', where the exchange rate rises from OR to OR1.

Note: Lending to abroad by Indian investors affects the demand of foreign currency and not the
supply for foreign currency. This is because lending to abroad by Indian investors implies that
more foreign currency would be required leading to a rise in the demand of foreign currency in
the country.

Q.49 Explain the impact of the following factors on the foreign exchange rate:
a. Removal of export duty
b. Fall in the foreign tourism in the country
Answer
a. With the removal of export duty the exports become cheaper. Accordingly, the demand for
exports rises. This in turn leads to a rise in the supply of foreign currency. With demand
remaining constant a rise in the supply of foreign currency leads to a fall in the foreign exchange
rate (appreciation of domestic currency).

b. Fall in the foreign tourism in the country implies a fall in the supply of foreign currency in the
country. With demand for foreign currency remaining same, fall in supply of foreign currency
implies a rise in the foreign exchange rate (depreciation of domestic currency).

Q.50 Explain the concept of ‘fiscal deficit’ in a government budget. What does it indicate?
Answer
Fiscal deficit refers to the difference between the total budget expenditure and total budget
receipts of the government, other than the borrowings and liabilities. That is,
Fiscal Deficit = Budget Expenditure − Budget Receipts (other than borrowing and liabilities)
Fiscal deficit reflects the total borrowing and other liability requirements of the government.
Fiscal Deficit = Borrowings of the government + other liabilities of the government
Higher fiscal deficit implies higher borrowing requirements of the government. Higher
borrowings can have serious implications for the government of a country. The main source of
borrowings for a country is the central bank (RBI in case of India) from which the government
borrows in the form of deficit financing (i.e. printing of new currency notes). However, deficit
financing increases the circulation of money in the economy and thereby, causes inflation.
The government of a country can also borrow from the government of other countries or from
international monetary institutions (such as the World Bank, IMF, etc.). Such a borrowing,
however, is associated with economic and political interference and increases the dependence of
the borrowing country on the lending country.
Besides, a higher borrowing mounts a burden on the future generations who become liable to
repay the amount of borrowing and the interest thereon. Thus, it acts as a obstacle in the future
economic growth and development of the country. Another major problem associated with a high
fiscal deficit is that the country gets trapped in a cycle of debt (debt-trap).

PART-B: Indian Economic Development

Q.51 What are the main reasons for which reforms were necessary in the agriculture sector?
Answer
The following are the broad reasons due to which the reforms and policies were necessary in the
agriculture sector:
1. Land tenure system: The British introduced the system of land tenure namely, theZamindari
System, the Mahalwari System and the Ryotwari System in which the land was mostly cultivated
by the tenants who paid the land revenues to their landlords. This led to the exploitation of
tenants in the form of very high rents. So, for the upliftment of poor reforms were required in this
area.
2. Size of land holdings: The farmers owned a very small size of landholdings. In addition to
this, the land holdings were fragmented. So, they cannot use the modern techniques such as the
tractors could not be used on such small and fragmented land holdings. Consequently, the farm
productivity remained low. Thus, steps were taken to consolidate the land holdings so as to
improve the production and productivity in the agriculture sector.
3. Lack of initiative: Due to the prevalence of the land tenure system, there existed a gap
between the land owners and the actual cultivators. The land owners seldom took part in the
process of actual cultivation. Moreover, the landless peasants were highly exploited at the hands
of the landlords in the form of high rents and difficult working conditions. As a result, the
farmers lacked initiative for improving the production. Also, they did not have enough means to
undertake mechanisation in the methods of cultivation.
4. Traditional approach and low productivity: Indian farmers used to rely on conventional
and traditional methods of farming. Farming was highly dependent on the climatic conditions.
Thus, the productivity of the agriculture remained low. Hence, reforms and policies were
required in order to move from traditional approach of cultivation to modern techniques of
cultivation so as to boost the productivity.
5. Absence of marketing system: The agriculture sector lacked organised marketing
system. Due to absence of well developed marketing system, the farmers had to rely on the
intermediaries to sell their products in the market. These intermediaries used to exploit the
farmers in the sense that they used to purchase the farm products at a very low price and sell
them at higher price in the market. Consequently, the farmers were deprived of the correct share
in the profits. This led to the lack of finance and investment in the agriculture sector. Thus, there
was an urgent need for the abolition of intermediaries.
6. Nature of farming: The basic motive of farming in India was subsistence. That is, the farmers
grew food crops mainly for self-consumption. In other words, farming was done basically for
survival and not for sale and profit.

Q.52 What do you mean by green revolution? How did it benefit farmers. Explain by giving
valid reasons. Also, write two limitations of Green Revolution.
Answer
The word 'Green Revolution' comprises of two words ‘Green’ that is associated to crops and
‘Revolution’ that is associated to the substantial increase. Green Revolution was introduced by
'Norman Borlaug' who introduced the concept of HYV seeds which made drastic improvements
in the productivity and output.

The adoption of Green Revolution proved beneficial for the Indian agriculture. The following are
some of the points that highlight the positive impact of Green Revolution on India's agriculture
sector.
1. Rise in production and productivity: With Green revolution, the production of food crops,
particularly wheat and rice have increased considerably. The production of wheat has increased
by nearly 7 times from 1965 to 2008. Similarly, during this period the production of rice has
increased nearly 3 times. Consequently, India has been able to achieve self-sufficiency in food
grains and the prices of food grains have decreased. Besides the increase in production, the
productivity has also increased. The yield per hectare of land has increased.
2. Increase in the production of commercial crops: With the increase in the production and
productivity, marketable surplus in agriculture has increased. This implies a rise in the
disposable income of the farmers. This increased income has enabled the farmers to go beyond
the conventional production of the food grains to production of the commercial crops. The
farmers have now shifted to the production of high earning commercial crops along with the
traditional food crops. This thereby, has contributed in the higher revenue of the farmers.
3. Change in the attitude of farmers: With the increase in the production and marketable
surplus, the income of the farmers have increased considerably. Also as against earlier,
agriculture is now increasingly seen as a profitable venture. This in turn, has induced the farmers
to take up agriculture as a source of revenue and profit. Thus, the investment by the farmers in
the new and modern technology has increased considerably.
4. Self-sufficiency in food grains: Green Revolution led to a considerable increase in the
production of food grains. With the use of modern technology such as extensive use of fertilisers,
pesticides and HYV seeds, there was a significant increase in the agricultural productivity and
product per farm land. In addition, the spread of marketing system, abolition of intermediaries
and easy availability of credit has enabled farmers with greater portion of marketable surplus. All
these factors enabled the government to procure sufficient food grains to build the buffer stock
and to provide cushion against the shocks of famines and shortages.

Despite being many advantages, this program has some negative impacts as well which are
discussed below:
1. Rise in inequality: The program was based on the use of certain key inputs such as the HYV
seeds, chemical fertilisers, irrigation facilities, etc. The big farmers could easily afford such
inputs and thereby, could reap the benefits of the programme. As against this, the small and
marginal farmers who could not afford such inputs suffered. Consequently, the gap between the
big and the small farmers increased.
2. Vulnerability to pest: The HYV crops were found to be more prone to pests. Thus, the
vulnerability of the poor farmers dependent on this technology in terms of finance increased.

Q.53 Why the public sector was required to boost the development of the industrial sector in
India?
Answer
The public sector was required to boost the development of the industrial sector in India. The
vital role of state for the development of the industries is highlighted with the following points.
1. Need of heavy investment: It was very difficult for the private sector alone to invest such a
huge amount in the industries. Further, the risks involved in such projects were also very high
and had long gestation period. Thus, the private sector was not very keen to invest in the
development of industries. So, there is a need of some basic and heavy industries.
2. Commanding heights of the economy: Commanding heights of the economy refers to those
industries that serve as the basic input for the economic growth, such as transport, defense and
communication. These industries require a heavy initial capital and have a long gestation period.
So, these projects cannot be undertaken by the private sectors. Such projects are required to be
undertaken by the government.
3. Low level of demand: At the time of independence, the level of demand was very low due to
the low level of income.. As a result, the private sector lacked impetus to undertake investment
and production. Thus, India was trapped in a vicious circle of low demand and low investment.
The only way to enhance the level of demand was to encourage the investment of the public
sector.
4. Enhancing nation’s welfare: The main motive of the PSU's was to provide goods and
services that add to the welfare of the economy as a whole. Such goods and services include the
provision of schools, hospitals, electricity, etc. The provision of such goods and services has low
profit viability and are not taken up by the private sector. However, the provision of these
services is essential as they not only enhance the welfare of a nation but also brighten the future
prospects of economic growth and development. Thus, it is required that the public sector steps
in.
5. Basic framework: An important ideology that was inherited in the initial five-year plans was
that the public sector should lay down the basic framework for industrialisation. Such basic
framework would encourage the private sector to develop in a more systematic manner at later
stages of industrialisation .
6. Reduce inequality of income and generate employment opportunities: Private sector lacks
the incentive to develop industries in the backward regions of the country. However, for the
upliftment of such regions industrialisation was very necessary. Thus, it was the public sector
which was required to play a greater role in the development of such regions.

Q.54 Give possible reasons as to why Inwards looking trade policy was criticised?
Answer
The Inwards looking trade policy faced some problems which are discussed below due to which
it was criticised on some grounds.
1. Mounting trade deficits: Growth and development process implied that the demand for
imports increased continuously. As against this, the exports from India were not much. This
excess of imports over exports resulted in the situation of trade deficits in India.
2. Foreign exchange crisis: Increasing trade deficit implied that the country faced a continuous
shortage of foreign exchange. This implied that India faced difficulty in importing even the
essential commodities.
3. Climbing burden of debt: The only way to cover the trade deficit and exchange crisis was to
resort to borrowings from other foreign countries. As a result, India faced a high debt burden.

Q.55 “The year 1921 was the year of Great Divide with regard to the growth of population in
India.” Give reasons in support of the given statement.
Answer
The year 1921 is regarded as the defining year or the 'Year of Great Divide'. With this year, India
entered the second phase of demographic transition. After 1921 India witnessed continuous rise
in the population growth rate. In other words, after 1921, India's population growth rate never
declined and showed a consistent upward trend. For example, during the 10 year period from the
year 1921 to 1931 India witnessed an addition of 2.76 crore to its population. The next census in
1941 showed an increase of 3.96 crore in the population. After 1951, India witnessed an
immensely high population growth rate or 'population explosion'.

Q.56 Under the British Rule there were significant infrastructure developments in the country.
Give reasons in support of your answer.
Answer
The following points highlight the development of infrastructure in India during the British rule.
1.Development of roads: The British initiated the construction of roads in India but the roads
were developed only on those routes that served the economic interest of the British. The roads
served the purpose of facilitating transportation of raw materials from different parts of the
country to the ports. On the other hand, the majority of the regions suffered due to lack of
connectivity, particularly at the time of natural calamity, war, etc. Besides, there was lack of all-
weather roads.
2. Development of railways: The Colonial government introduced railways in the country.
Railways were developed mainly for two purposes, firstly, for the transportation of finished
goods of British industries to the interiors of India and secondly, for the transportation of raw
materials from different regions of India to the ports. And hence, it helped in the expansion of
markets for the finished products of British industries. The commercialisation of agriculture
helped in increasing the exports for the country. However, India could not benefit from the
increased exports, rather the self-sufficiency of the farmers in food grains got hampered.
Although railways were introduced by the British with their interest for self-economic
development, but it also had certain social benefits for India.
3. Development of inland waterways: Similar to the introduction of and development of roads
and railways, British also initiated the development of inland waterways in the country. Various
ports were developed for easy and fast exports and imports. However, the extent of waterways
remained limited as their development often proved uneconomical and costly.
4. Development of communication facilities: Besides various transportation facilities, British
also developed communication facilities in India. The most important of the communication
facilities was the post and telegraph facilities. Development of posts and telegraph services
enhanced the efficiency and effectiveness of the British administration. However, the
development of these services also served the general public.

We can conclude here that the main aim aim for developing infrastructure by the Britishers was
to serve their own interest rather than growth and development of Indian Economy.

Q.57 Why Indian farmers did not benefit from the commercialisation of agriculture?
Answer
Before the Colonial rule, the Indian farmers practiced conventional subsistence farming. They
grew food crops such as rice and wheat mainly for the purpose of self consumption. But with the
advent of British rule, the system of commercialisation was introduced in the Indian agriculture.
They forced the farmers to produce the commercial crops(particularly indigo) rather than food
crops. The cash crops grown in India served as raw material to the Britain's industrial base. For
example, indigo was required by the British industries to dye textiles. However this
commercialisation did not benefited the peasants rather pushed them into indebtedness. While
earlier they could fulfil their demand for food from their own grain production now they required
cash for the same. This implied that, while on one hand, Indian population suffered due to
shortage of food grains and growing indebtedness of the peasants, on the other hand, British
industries flourished.

Q.58 Elaborate the factors that led to a distressed state of the foreign trade sector.
Answer
The factors that led to a distressed state of the foreign trade sector are discussed below:
1. Discriminatory tariff policy: The British government followed a discriminatory tariff policy.
Under the policy, they imposed heavy tariffs (export duties) on India's export of handicraft
products, while allowing free export of India's raw material to Britain and free import of British
products to India. This made the Indian exports costlier in the international market and their
demand fell drastically. The main aim of Britishers were to convert India was into an exporter of
primary products (such as sugar, silk, jute, indigo, cotton, wool, etc.) and importer of British
finished goods (such as cotton, silk and woollen clothes, capital goods and other finished goods).
2. Monopoly control over trade: The British maintained a monopoly over India’s trade by not
affecting only the composition of trade but also the direction of trade. At that time, more than
half of India's foreign trade was restricted to Britain and the rest was directed towards China,
Persia and Sri Lanka. Export of Indian primary products served as raw material to the British
industry while, the import of finished goods provided an easily accessible market to the British
industry.
3. Opening of Suez Canal: The monopoly control by the British Government was further
intensified by the opening up of Suez canal in 1869. Suez Canal is an important artificial
waterway running from North to South across Isthmus of Suez in North-eastern Egypt. This
canal provided a direct ship route between India and Britain avoiding the need to go via the
African continent. With the opening up of this canal, the cost of transportation between India and
Britain reduced significantly. This resulted in a fast movement of goods between the countries.
As a consequence, the trade between India and Britain further intensified.

Q.59 There was a huge gap between the owners of land and cultivators of land during the
colonial rule? Why?
Answer
Agriculture, during the colonial rule exhibited a gap between the owners of land (zamindars) and
the actual cultivators of land. The agricultural system was such that while Zamindars never
participated in the actual production process they could extract a large share of output from the
actual cultivators (farmers). The poor peasants were forced to pay huge revenue (lagan) to the
Zamindars in the form of money as well as in the form of food grains. However, they never did
anything to improve the condition of the production and productivity. The high revenue reduced
the cultivators to just landless labourers. The main motive of the Zamindars was to maximise
their own gains and profits while they never contributed to the cost of output. This implied that
while the peasants and cultivators remained impoverished and in a state of absolute poverty, the
owners of the land (zamindars) prospered.

Q.60 Were there any significant contributions made by the British in India? If yes, explain the
contributions in detail.
Answer
Though the British introduced various structural changes with the exploitative purposes but,
these changes, also proved beneficial for the Indian economy to a certain extent.
Some of the positive contributions made by the British in India are highlighted in the below
mentioned points:

1. Development of railways and roadways: The introduction of roads and railways by the
British proved to be an important step in the development process of Indian economy as they
helped to reduce the geographical distances to a large extent. They improved inter-regional
connectivity. Greater connectivity helped enhance to cultural integrity in the country and also
helped in the improvement of trade. Thus, it provided greater scope for the social and economic
growth. Furthermore, good connectivity proved helpful in times of natural calamities such as
flood, famines, etc. Besides, railways also facilitated commercialisation of agriculture.
2. Commercialisation of agriculture: British forced commercialisation in agriculture in India
which was an important breakthrough in the history of Indian agriculture. Before the British era,
the Indian agriculture was of subsistence nature and mainly food crops were produced. But with
the commercialisation of agriculture, the agriculture production was carried out as per the market
requirements. Thus, commercialisation of agriculture provided greater income earning
opportunities for the farmers. This helped in improving the standard of living of the farmers..
3. Introduction of free trade: British forced India to follow free trade pattern during the
colonial rule. This is the key concept of globalisation today. The free trade provided domestic
industries with a platform to compete with the British industries. The introduction of free trade
led to a rapid increase in the volume of India’s exports.
4. Development of infrastructure: Development of various infrastructure facilities such as
transport, post and telegraph provided social benefits to the country. Such facilities improved
connectivity in the country.
5. Promoted western culture: With the advent of British rule, there emerged a new class of
people who favoured western products and western style more than the Indian products.
Gradually, this western culture spread across the country. Moreover, English as a language was
popularised by the British and promoted western form of education. The English language acted
as a window to the outside world. This helped in the integration of India with the rest of the
world. Today, India is the second largest English speaking nation in the world.
6. Administrative Structure: British under their Colonial rule followed an efficient and
effective administrative structure. The ways and techniques of the British administration acted as
a role model for the Indian politicians and planners and helped in the planning process in the
post-independence period.

Q.61 Elaborate the factors that necessitated economic reforms?

Answer
The following are the factors that necessitated the need for the economic reforms in India.
1. Huge fiscal deficit: Throughout 1980s, fiscal deficit (fiscal deficit reflects the total
borrowings and other liability requirements of the government) was getting worse due to huge
non-development expenditures. As a result, gross fiscal deficit rose from 5.7% of GDP to 6.6%
of GDP during 1980-81 to 1990-91. Subsequently, a major portion of this deficit was financed by
borrowings both from external and domestic source. The increased borrowings resulted in
increased public debt and mounting interest payment obligations. The domestic borrowings by
government increased from 35% to 49.8% of GDP during 1980-81 to 1990-91. Moreover, the
interest payments obligations accounted for 39.1% of the total fiscal deficit. Consequently, India
lost its financial worthiness in the international market and, fell in a debt trap. Thus, economic
reforms were needed urgently.
2. Weak BOP situation: Balance of Payment (BOP) represents the record of inflow of foreign
exchange into the country and the outflow of foreign exchange from the country Due to lack of
competitiveness of Indian products, India was not able to earn enough foreign exchange through
exports. As against this, the imports continued to rise. As a result, the foreign exchange earnings
fell short of the payment obligations. The current account deficit (representing the excess of
export payments over import earnings) rose from 1.35% to 3.69% of GDP during 1980-81 to
1990-91. In order to finance this huge current account deficit, Indian Government borrowed a
huge amount from the international market. Consequently, the external debt increased from 12%
to 23% of GDP during the same period. On the contrary, Indian exports were not potent enough
to earn sufficient foreign exchange to repay these external debt obligations. This BOP crisis
compelled the need for the economic reforms.
3. High level of inflation: The high fiscal deficits forced the Central government to monetise
(i.e. finance) the deficit. The government resort to borrowings from RBI in the form of deficit
financing (that is, printing of new currency notes). This deficit financing increased the level of
money supply, which resulted in a rise in the inflation rate. The rate of inflation rose from 6.7%
per annum to 10.3% per annum during 1980s to 1990-91. However, a rise in the inflation rate
made the domestic goods more expensive that hampered our exports.
4. Sick PSUs: Public Sector Undertakings (PSUs) were assigned the prime role of
industrialisation and removal of income inequality and poverty. But the subsequent years
witnessed the failure of PSUs to perform these roles efficiently and effectively. Instead of being a
revenue generator for the Central government, these became liability. The sick PSUs added an
extra financial burden on the government’s budget.

5. Fall in the foreign exchange reserves: Foreign exchange reserves of India fell to a very low
level. The foreign exchange reserves fell to such a low level that they were not enough to pay for
the imports of even two weeks. The situation became such worse that India had to mortgage its
gold reserves with the World Bank to repay the mounting debts. In such a situation, India had to
follow the path of liberalisation as suggested by the World Bank and IMF.

Q.62 Evaluate the trade and investment reforms introduced under the new economic policy.
Answer
Many reforms were implemented in the trade as well as investment sector. The following are
some of the important reforms in this sector.
a. Removal of quantitative restriction on trade: Quantitative Restrictions (QRs) refer to the
restrictions in the form of limits or quotas on the amount of commodities that can either be
imported or exported. QRs, usually on imports, refer to non-tariff measures. They are imposed to
discourage imports of foreign goods and to reduce Balance of Payment (BOP) deficits. With
reforms such restrictions were removed.
b. Reducing tariff rates: Tariffs are duties imposed on the imports. Tariffs make imports from
foreign countries relatively expensive than domestic goods, thereby, discouraging imports
indirectly. These are imposed to provide a safe and protective environment to the infant domestic
firms from their technologically advanced foreign counterparts. As a liberalisation measure,
tariffs were reduced considerably.
c. Encouragement to Foreign Direct Investment (FDI): Emphasis was laid by the planners to
encourage competition in the market and to attract the Foreign Direct Investment (FDI) from
other countries. Thus, with liberalisation in trade and investment market, the barriers on trade
and investment were removed.
d. Opening up of Special Economic Zones (SEZ): SEZ are the specific areas which are
established to encourage free manufacturing and export activities. In the year 2000-01, during
the annual EXIM policy of the government, the setting up of SEZs were announced by the
government in order to accelerate the trade process in the country.

Q.63 During 1991 reforms, why was a need for privatization felt in India?
Answer
In the process of industrialisation in India, public sector was accorded high priority. In fact, it
was the development of heavy and capital industries by the public sector that initiated the
process of industrialisation. However, the functioning of the public sector enterprises suffered
from grave inefficiencies arising out of corruption and red-tapism. As a result, a majority of the
state owned enterprises suffered huge losses. Accordingly, in the New Economic Reforms of
1991, privatisation was initiated as an important measure. It was decided to gradually phase out
the public sector and pave the way for privatisation. Except a few strategic industries such as
railways, defense, etc., all other services were decided to be opened up for the private sector.

Q.64 Do you think excess privatisation can have certain negative consequences? Give reasons in
support of your answer.
Answer
Yes, excess privatisation can have certain negative consequences. Some of the negative impacts
are given as follows:
1. Loss of socialist pattern: With privatisation, the economy moves away from the socialist
pattern. Under a socialist pattern, the government plays a dominant role with the aim of
enhancing social welfare along with growth. However, the private players work with the main
motive of earning high profits and during this process, often, the social justice and welfare is
lost.
2. Rise in inequality: Private sector operates only in those areas that are profitably viable. In
other words, they have a tendency to produce goods and services for only that section of the
society that has the purchasing capacity. In the process, the weaker section gets neglected and the
inequalities rise.
3. Neglect of strategic areas: The development of the areas that require huge investment or have
long gestation periods (such as infrastructure) are not taken up by the private sector. However,
such areas are strategic (that is, essential) from the point view of growth and development of the
country. These areas remain neglected under complete privatisation.

Q.65 What are the different reasons which make India a preferred destination for outsourcing?
Answer
India is emerging as a favourite destination for outsourcing industries. The following advantages
qualify India to be an important spot for outsourcing by various MNCs.
1. Easy availability of cheap labour: Wage rates commanded by the labour in India are much
lower as compared to that commanded by the labour having equal level of qualification in the
developed countries. Thus, MNCs find it economically feasible to outsource their business in
India.
2. Reasonable degree of skills: Indians have fairly reasonable degree of skills and techniques.
Hence, they need low training period and thus, low cost of training.
3. International worthiness: India has a fair international worthiness and also credibility. This
enhances the faith of the foreign investors in India.
4. Virgin market: India has a virgin market for produced goods and services. This not only
helps the MNCs to explore the wide domestic market of India but also conquer the international
market as the cost of production in India is relatively cheaper.
5. Stable political environment: The democratic political environment in India provides a stable
and secured environment to the MNCs to expand and grow.
6. Favourable government policies: The most important point that makes India as the most
favourite spot for outsourcing is the favourable government and tax policies. In order to attract
increasing FDI, Indian government offers various concessions to MNCs in the form of tax
holidays, low rate of tax, easy tax policies, etc. All these policies enable the MNCs to retain a
major portion of their earnings in the form of savings that they can invest to grow and expand
their business.
7. Lack of competitors: The most important advantage for the MNCs in India is that they don’t
face stiff competition from the Indian domestic industries. This almost enables them to enjoy a
monopoly status in the Indian markets.

Q.66 What are some of the important strategies followed by India in the direction of
globalisation?
Answer
1. Encouragement to foreign capital investment: With the aim of encouraging foreign capital
investment, the following steps were taken.
a. The equity limit of foreign capital was initially raised from 40% to 51% which was further
raised to 100%.
b. Foreign Direct Investment up to 100% was also allowed in high priority industries.
c. Foreign capital investment upto 100% was allowed in the export houses.
d. Special Economic Zones (SEZs) were set up for the promotion of exports. The industries in
the SEZ's were provided with infrastructure facilities such as electricity, roads, transport, storage,
etc.
e. Foreign Exchange Management Act (FEMA) was introduced with the view of attracting higher
foreign investment.
2. Partial convertibility of rupee: Under the reforms, partial convertibility of rupee was also
allowed. Partial convertibility implies that for the purpose of international transactions, foreign
currency could be bought or sold at a market determined price. This convertibility can be used
only for transactions involving import and export of goods and services, remittances to the
family and for interest or dividend payments on investment. But, this convertibility was not
applicable for capital transactions.
3. Removal of barriers: With globalisation, the various barriers on trade such as tariffs on
imports and exports, custom duties and import quotas, etc. were reduced considerably. This was
done in consideration with the WTO recommendations while benefiting India at an international
level.
4. Facilitation of international trade: With the formation of WTO, the trade in goods as well as
in services was encouraged. All the restrictions that were earlier imposed on trade were removed,
except for some specific goods. Open competition was encouraged in the trade market.

Q.67 Why was the performance of industrial sector very dismal during the reform process?
Answer
The dismal performance of industrial sector can be attributed to the following reasons.
1. Cheaper imports: Complying with the commitments of WTO, India had to remove tariffs and
other import duties on the industrial products. As a result, the domestic industrial products faced
stiff competition from the cheap imported goods. The foreign products were not only cheap but
also were superior in quality as compared to the domestic industrial products. As a result, the
domestic industrial production suffered a setback.
2. Lack of investment: Due to lack of investment in infrastructural activities such as power
supply, the domestic firms could not compete with their foreign counterparts in terms of cost and
quality of goods. The inadequate infrastructural investment pushed up the cost of production of
the domestic producers and consequently, led to the non-feasibility of their growth prospects in
the industrial sector.
3. High non-tariffs barriers by the developed countries: Although, the trade and other barriers
were removed from the Indian market, many other developed nations did not remove such
barriers from their own market. Thus, it was very difficult for the developing nations to have
access over the market of developed countries. For instance, US did not remove quota
restrictions on imports of textiles from India and China. This implied that the domestic producers
could not benefit by increasing the exports.
4. Vulnerable and infant domestic industries: During the pre-reform period, the domestic
industries were provided a protective environment to grow and expand. As a result, the domestic
industries were still not developed to the extent it was expected and thus, were unable to compete
with the multinational companies (MNC's). Further, the dependence of domestic industries on
traditional technologies which were neither cost-effective nor quality-effective was another
important factor for their dismal growth.

Q.68 Government of India has adopted a three dimensional approach for poverty alleviation.
What are the three aspects of this approach?
Answer
The following are the three aspects of the three dimensional approach:
1. Trickle-down approach: This approach is based on the expectation that the positive effects of
economic growth will trickle down and benefit all sections of society, including the poor people.
2. Poverty alleviation programs: This approach aimed at the creation of income-earning assets
and employment generation opportunities.
3. Providing basic amenities: This approach aimed at providing the basic amenities such as
proper medical and health care facilities, better education, proper sanitation, etc. to the poor
people. These basic amenities positively affect health, productivity, income-earning opportunities
and, thereby, alleviate poverty.

Q.69 Why calorie based norm is not the adequate measure for measuring poverty?
Answer
The calorie based norm is not the adequate measure for measuring poverty because of the
following reasons:
1. Does not indicate the extent of poverty: This mechanism does not differentiate a poor from
very poor. It categorises them into just one category that is, 'poor'. This poses a problem in the
formulation and implementation of policies as it does not make clear who among the poor is the
neediest.
2. Inappropriate proxies: This mechanism uses Monthly Per Capita Expenditure (MPCE) on
food as a proxy for income. However, this does not prove to be a good and sufficient proxy for
the identification of poor.
3. Ignores other related factors: This mechanism does not consider various important factors
such as health care, clean drinking water, proper sanitation, basic education etc. that are
associated with poverty. Such factors must also be considered for a proper estimation of poverty
line.
4. Fails to consider social factors: Another shortcoming of calorie-based norm is that it fails to
account for social factors that exaggerate and worsen poverty, such as ill health, lack of access to
resources, lack of civil and political freedom, etc.

Q70. Write a short note on MNREGA.

Answer
Mahatma Gandhi National Rural Employment Guarantee Act was enacted in the year 2005. It
aimed at enhancing the livelihood of the rural people by guaranteeing the adult members (who
are willing to work) of each rural family one hundred days of wage employment every year. This
act was implemented in all the states of India except Jammu and Kashmir. This act provided a
minimum per day wage of Rs 120 (in 2009 prices). NREGA facilitated rural development by
emphasising on dual objective of achieving development by developing rural infrastructure and
simultaneously providing employment opportunities to the rural unskilled labour. The act aimed
at creation of infrastructure such as water conservation, canal irrigation facilities, afforestation,
flood control and embankments, etc. Thus, it served the dual objective of infrastructure
development and providing employment opportunities.

Q.71 Analyse the three dimensional approach adopted by the government.

Answer
1. Lack of basic amenities: Although there has been a reduction in the percentage of absolute
poor in some of the states still the poor people lack basic amenities, literacy, and nourishment.
2. Insignificant change in the ownership of resources: There has not been significant change
in the ownership of income-earning assets and productive resources.
3. Failiure of land reforms: The land reforms initiated by the government did not show
successful results (except in the states of West Bengal and Kerala) .
4. Lack of capital and technology: Lack of capital and availability of easy credit, lack of
modern technology and poor access to information and marketing became the major bottlenecks
for the small productive houses like cottage industries and other small scale industries.
5. Improper implementation of programmes: Improper implementation of poverty alleviation
programmes by ill-motivated and inadequately trained bureaucrats further worsened the
situation.
6. Corruption: Corruption along with the inclination towards interest of elites led to inefficient
and misallocation of scarce resources.

Q72. How relative and absolute poverty are different from each other?
Answer
Absolute poverty is the one which is expressed in terms of income needed to sustain the basic
necessities of life such as food, clothing and shelter. Those who are not able to earn such
minimum amount of income are known as absolute poor. Absolute poverty can change over the
time as the amount of money required to buy the minimum requirements of life changes due to
the rise in the price levels while relative poverty refers to the poverty of one set of people in
relation to the other. In other words, it implies the poverty of one class in relation to other
classes, regions or countries. The class of people having low standard of living are treated as
poor (in relative terms) in comparison to the other class of people having high standard of living.
Such kind of poverty is not the absence of basic requirements of life but is based on the
environment in which an individual resides.

Q.73 Explain any two Poverty Alleviation Programmes (PAPs) initiated by the government.
Answer
1. Swaranjayanti Gram Swarozgar Yojana (SGSW)- This programme was launched in the
rural areas in April 1999. This programme emphasised on the establishment of small-scale
enterprises in the rural areas on individual and collective basis commonly known as Self Help
Groups (SHGs). The yojana forwarded grants in the form of loans and subsidies to the poor. The
rate was fixed at 30 % of the cost of project for individual and 50 % for the collective (SHGs).
The progress of the project is monitored by the banks associated with this scheme. The
expenditure on this scheme is to be shared by the central and the state government in the ratio of
75:25.

2. Sampoorna Gramin Rozgar Yojana (SGRY)- This programme was launched in September
01, 2001. The main objective of this yojana was to provide employment opportunities to the
surplus workers with aview to developing regional, economic and social conditions. This
particular yojana targets to provide employment by creating 100 crore man-days (capacity of
worker per day) for labour. The expenditure on this scheme is to be shared by the central and the
state government in the ratio of 87.5:12.5.

Q.74 Write the points of difference between Human Capital Formation and Physical Capital
Formation.
Answer
The difference between human capital formation and physical capital formation are explained
below:
Basis of Human Capital Formation Physical Capital Formation
Difference

Meaning Human capital formation refers to the
additions to the skills, knowledge and
capacity of the individuals, so that they
could contribute more efficiently to the
production process.
Physical capital formation refers to
the additional investment made in
form of sophisticated and advance
tools, machinery and other
physical productive tangible assets
used in the production process.

Result/Outcome Human capital formation leads to the all- It results in the mechanisation of
round development, which further results the economy as a whole.
in high status of all the human beings in
the country.

Contribution to It indirectly aids in the process of It directly affects the productivity

Production production via employing physical and production process. This
capital. It implies use of advanced implies use of advanced machines
 machines and latest technology in the and modern mechanics in the
production process by the qualified and production process.
skilled personnel.

Interrelationship The formation of human capital can itself Formation of physical capital need
lead to improvement in physical capital. not necessarily imply human
In this sense, physical capital formation is capital formation.
a derivative of the human capital
formation.

Q.75 How human capital and economic growth are interrelated to each other?
Answer
Economic growth shares a positive relation with improvements in human capital. Higher the
growth of human capital or better the state of human capital, higher will be the economic growth.
The positive contribution of human capital to economic growth is highlighted in the below
mentioned points.
1. Increase in the productivity of physical capital: Skilled workers are better able to utilise the
machines, production plants, tools and equipments. They handle the productive assets in such a
manner that these not only enhance their productivity, but also lead to an efficient utilisation of
the physical capital. When the productivity increases, the pace of growth is automatically
accelerated.
2. Innovation of skills: An educated person is more productive and skillful. He has the potential
to develop new skills and create new and innovative techniques that can be more efficient and
productive. Also the adaptability to the new techniques and innovation is higher for an educated
person. Greater the number of skilled and trained personnel, greater will be the probabilities of
innovations.
3. High participation rate and equality-Human capital endowed with higher technical skills
and better health is more productive and efficient. This increases the participation of more people
in the process of economic growth and development. Higher the participation rate, higher is the
degree of social and economic equality in the country.
4. Increase in output levels: The formation of human capital in a country leads to increase in
skills and capacity of the individuals. With increased capacity and skills, people are able to
contribute more towards the process of production. Higher contribution of people with greater
skills and knowledge, results in increased in output levels in the economy.
5.Increase in competitiveness: Higher level of human capital helps the country to leave its mark
on other countries of the world (especially the developed countries). This not only improves the
overall country's image but also raises the demand for the human capital of that particular
country. For example, Indian doctors have a great demand in the developed nations. Thus, in this
way, a good level of human capital enhances a country's competitiveness in the world.
6. Change in social outlook: Enhancement in the human capital leads to improvement in the
thinking pattern of the human beings. Education imparts a modern and holistic outlook to human
thinking. This change in the social outlook helps in the development of the country as a whole.

Q.76 How human capital in the form of improved education and health status plays an important
role in the growth and development process.
Answer
The importance of health and education in the growth process is explained below.
1. Rise in standard of living: A healthy and educated population enjoys a better standard and
quality of life. That is, their overall well being improves.
2. Greater participation rate: With improvements in the health and education, the participation
rate of the people in the production process increases. A healthy labour force proves to be more
effective. Similarly, education enhances their acceptability of modernisation. Thus, health and
education improves the overall participation rate in the country.
3. Eradication of other macroeconomic problems: Various macro economic problems such as
poverty, income inequalities, population, investment bottlenecks, under utilisation of productive
resources, etc can be overcome with the improvements in education and health.

Q.77 How does migration contribute to human capital formation?

Answer
Migration facilitates the utilisation of inactive or underdeveloped skills of an individual of an
underdeveloped country. Migration of human capital from underdeveloped to developed
countries helps the underdeveloped countries to acquire technical skills, effort reducing methods
and efficient ways of performing tasks. These skills and know-how are transmitted by the
migrated people to their home country that not only add to the economic growth and
development but also enhance the human capital of the home country.

Q78. “The rate of human capital formation is still very low despite being various efforts taken by
the government” Do you agree? Give reasons.
Answer
Despite various efforts by the government for improving the human capital formation in India,
the rate of human capital formation is still very low. Some of the major problems faced in
context of human capital formation in India are as follows.
1. High population growth rate: A rapid increase in population becomes a hindrance in the way
of human capital formation. Population explosion exerts pressure on the available limited
resources. Rising population reduces the per capita availability of facilities such as housing,
water, drainage, etc provided to people. Thus, the standard of living remains low.
2. Brain drain: Migration not only takes place within the country from rural to urban areas, but
it also takes place from one country to another. If educated and skilled human capital moves
from domestic country to foreign country, it results in economic loss to the country in terms of
loss of quality people having high caliber. It is often seen that professionals such as doctors,
engineers, etc. migrate to another country in search of better job opportunities. This migration of
quality human capital from the LDCs to the developed countries is termed as brain-drain.
3. Improper manpower planning: With population rising continuously the demand-supply
balance of the resources gets disturbed. Absence of any major efforts to maintain the demand-
supply balance of the rising labour force has led to the wastage and misallocation of human
skills.
4. Low priority to primary education: In India, secondary and higher education have been
assigned comparatively higher priority than the free and compulsory primary education.
Consequently, India is experiencing high rate of primary school drop-outs.
5. Low academic standards: In the recent years, many government and private educational
institutes have been set up. However, often it is found that these institutions impart inferior
quality education and skills which in turn impedes the productivity and efficiency.
6. Problem in measurement: The physical capital can be measured easily. However, in case of
human beings it becomes very difficult to measure the skills and productivity. That is, there is
lack of scale of measurement of human capital formation.

Q79. Do you think there is a need of government intervention in the field of education and
health? If yes, state reasons.
Answer
The following points explain the need for government intervention in the field of education and
health.
1. Profit motive of the private institutions: Private institutions are guided by the profit motive
and the demand-supply relation. Consequently, the price of education and health facilities
provided by these institutions remains high. Thus, government intervention becomes essential to
regulate the fees and make these facilities accessible to the masses.
2. Interest of the weaker section: Owing to the widespread poverty, a majority of the people
cannot afford to avail services rendered by the private institutions. Therefore, to protect the
interest of the weaker and the underprivileged section of the society, the interference of the
government is required.
3. Lack of information: People do not have complete information about the quality of services
and various relevant costs. Consequently, government interference becomes necessary so as to
protect the interest of the society.
4. Neglect of rural and backward areas: The private institutions confine their operations to the
urban areas due to greater profit viability of these regions. Thus, the rural and backward regions
remain neglected. The government must step in to develop health and education facilities in these
areas.
5. Long gestation periods: Education and health sectors have long gestation periods. However,
their benefits are far reaching. Therefore, the government cannot completely rely on the private
sector to develop these important sectors.

Q.80 Explain some of the important schemes for primary education launched by the
government?
Answer
For Universalisation of education at primary level, the Government of India has launched various
schemes given as follows:
1. Sarva Shiksha Abhiyan (SSA): This scheme was launched by the Government of India in the
year 2001-02 to accomplish the target of universalisation of elementary education within the age
group of 6-14 years.
2. National Programme for Education of Girls at Elementary Level: This programme was
started in July 2003 with the aim of providing support to the under-privileged girls of
educationally backward districts.
3. Kasturba Gandhi Balika Vidhyalaya (KGBV): For establishing residential schools for girls
belonging to the minority communities, this scheme was initiated in July 2004. However, in the
later years, this scheme was merged with SSA.
4. National Programme of Mid-day Meals in Schools: This scheme, popularly known as mid-
day meal scheme was launched on 15thAugust 1995. The aim of this programme was to improve
the nutritional status of students at primary level along with imparting quality education.

Q.81 Explain the main factors that add to the low literacy rates in India?
Answer
The following are the important reasons consequent to which India is suffering from a low
literacy rate.
1.Extreme poverty and huge drop-out rates: India, like any other underdeveloped country is
featured by extreme poverty level. Poverty is the cause and derivative of low literacy rate. That
is, on one hand, it obstructs one to acquire education and on the other hand, illiteracy pushes up
the poverty level. There is still 22.15% of population living below poverty line (as per 2004-05).
In order to sustain livelihood, people often engage themselves in marginal and low paid casual
jobs. These jobs not only make them more vulnerable but also impede them to be literate.
2. Gender biasness: In India, male literacy rate is relatively much better than that of the
female’s. The main reason for this difference is gender biasness. Female education is accorded a
secondary priority over the male education in the same family. Often, it can be analysed that the
male child is sent to school at the cost of the female child. This has made women more
vulnerable, thereby, undermining their social and economic status.
3. Lack of infrastructural development and facilities: India substantially lacks significant
infrastructural development and facilities. The student teacher ratio in primary education is as
low as 34:1. This implies availability of one teacher for 34 students. Further, the lack of
sufficient number of schools and colleges has further impeded the development of higher
education in India.
4. High population growth rate: India has been experiencing an annual average population
growth rate of 1.7%. This has not only resulted in shortage of existing education facilities but
also has simultaneously led to the rise in poverty rates. People, being ignorant, regard an
additional child as an additional income earning hand. Further, the preference for male child has
further added to high population growth rate.
5. Low women socio-economic status of women: The poor female literacy rate has lowered the
socio-economic status of the women in India. The role of a literate mother cannot be neglected in
the process of economic growth. A literate mother is more aware and can well take care of
education and health issues of her children.
6. Less educational provisions for underprivileged population: There is a considerable
portion of underprivileged population such as ST, SC, OBC and rural population. Although the
Government of India has made special provisions and policies to provide education to them, this
relatively falls short of the actual requirement.
7. Low government expenditure: According to the Education commission, atleast 6 percent of
the GDP should be spent on education so as to improve the educational status. However, at
present only about 4 percent of the GDP is being spent on education. Thus, the government
expenditure falls short of what is actually required.

Q.82 Highlight those areas that require attention for improving the educational status of our
country.
Answer
The following are the areas that require attention for improving the educational status of our
country.
1. Universalisation of education: Although the literacy rate in India has significantly increased,
the absolute number of illiterates in India is still very high. In fact, the number of illiterates today
is equal to the total population of India at the time of independence. There are many children
who are either not enrolled in the school or even if enrolled, they drop out after some years.
Emphasis should be laid on the improving the access of education for all. Various plans and
policies focussing on education (such as free and elementary education, implementation of 2%
education cess on the union taxes) must be formulated.
2. Improvement in gender equality: The access to education has always been lopsided towards
India’s male population. Women have always been neglected in the field of education. The
weaker and lower status of women in India can be attributed to the negligence of their education.
However, the role of women in the economic and social spheres cannot be neglected in order to
achieve overall economic development and growth. Therefore, there arises a need to promote
women’s education.
3. Few beneficiaries of higher education: The number of people attaining higher education is
very few. And even those who are having the access to higher education are unable to get jobs.
This has resulted in the situation of educated unemployment. Unemployment among the
educated population could be because of lack of quality of educational institutes. There arises a
need to impart more technical, vocational and job-oriented education.
4. Regional differences in education: There exists a wide difference across different states in
terms of educational attainment. On one hand, we have Kerala with 100% literacy rate, while on
the other hand, we have Bihar with only 63.8% literacy rate. Even the per capita expenditure on
education differs from state to state. While for Lakshadweep the per capita education expenditure
is Rs 3,440, on the other hand for Bihar it is just Rs 386. Efforts are required to reduce these
regional differences and make education accessible to all.
5. Regulation of fee structure: Nowadays, privatisation in education has increased. A number of
private schools, colleges and other educational institutes have opened up. Private players, guided
by the profit motive, render education services at a high price. This has further widened the
difference in the access to education by the rich and the poor. Government interference, thus
becomes necessary for regulating the fees structure and operations of private institutions.
6. Spread of awareness: Efforts should be made to increase awareness among people regarding
the benefits of education. In addition to this, special programmes and projects to check the
growing difference between the Gross Enrolment Ratio and School Drop-out Rate must be
initiated.

Q.83 What do you mean by Agricultural marketing?

Answer
Agricultural marketing refers to all those processes that come up between harvesting and final
sales of the products by the farmers. These processes include assembling, storage, transportation,
packaging, grading, distribution, etc.

Q.84 What are the key issues involved in the rural development?
Answer
Rural development involves the following key issues:
1. Human capital formation: Quality human capital is missing from rural areas. The reason for
this is the absence of basic health and education facilities that are necessary for human capital
formation. People in rural areas often have to resort to far-flung places for these facilities. This
has the effect of reducing the quality of human capital. Thus, an important part of rural
development is production of quality human capital out of the human resources available in rural
areas. For this, it is important to invest in such areas as education, technical skills development
through on-the-job training and healthcare.
2. Development of productive resources: Agriculture is the main occupation of people in rural
areas. There is, thus, an excess burden on the agricultural sector. This sector also suffers from
low productivity, lack of infrastructure and disguised unemployment. Hence, there is the need to
develop productive resources to help generate alternative employment opportunities for the rural
people. This would increase the productivity and income of the rural people and also reduce the
strain on the agricultural sector. Therefore, creation of alternative sources of income via growth
of productive resources is an important part of rural development.
3. Development of rural infrastructure: Infrastructure such as banking, credit societies,
electricity, means of transport, means of irrigation and facilities for agricultural research are
crucial to the development of rural areas. These facilities provide the necessary support to all
production activities. Absence of these facilities makes economic growth and social development
a difficult task. Thus, infrastructure development is of critical importance in rural development.
4. Land reforms: Agriculture is the primary occupation in rural areas. The agricultural sector
has several shortcomings such as small land size, presence of intermediaries, dependence on
moneylenders, employment of traditional techniques of farming and lack of a marketing system.
These shortcomings can be removed through various land reforms and technical reforms. Land
reforms include abolishing intermediaries, consolidating land holdings, imposing land ceiling
and regulating rent. Technical reforms include encouraging the use of HYV seeds, fertilisers and
pesticides, providing irrigation facilities and promoting modern techniques of production. Land
reforms and technical reforms together lead to efficient and optimum use of land, thereby
resulting in large scale production and leads to increase in income.
5. Reducing poverty: Poverty is one of the main causes of rural underdevelopment. While not a
problem in itself, poverty does give rise to many interrelated problems such as unemployment,
inferior human capital, underdevelopment, backwardness and inequalities. Poverty alleviation
should be integral to government plans and policies. Increasing number of schemes should be
launched by the government for the upliftment of the rural poor.
6. Generation of new employment opportunities: Agriculture is the primary source of income
of the rural people. Low productivity and output characterises the agricultural sector. For this
reason, the income of farmers remains low. Moreover, as agriculture is a seasonal occupation,
there exists a time lag of approximately 5 to 7 months between the cultivation of two crops.
During this time, due to the lack of alternative employment opportunities, farmers remain
without any job. Thus, emphasis must be laid on the development of alternative means of income
such as cottage industries, fisheries and handicrafts. The greater the employment opportunities,
the higher would be the income generated. This increase in income would help reduce the
poverty persisting in the rural economy, thereby making the people of rural areas self-sufficient.

Q.85 What is the importance of credit in rural development?

Answer
The importance of rural credit is given as follows:
1. Promotes commercialisation of farming: The produce of small and marginal farmers is
hardly enough for their own subsistence. They are unable to generate sufficient surplus to
reinvest on their lands. Influx of funds helps these farmers to upgrade their productivity and,
thereby, commercialise their farming. Easy and cheap availability of rural credit enables the
farmers to invest in modern techniques of farming, which in turn helps them generate surplus for
the market. Consequently, their income increases.
2. Helps finance farming inputs:A long gestation period exists between the sowing of seeds
and the harvesting of crops. In other words, the time lag between the investment made by
farmers on farming inputs and the receipt of income from the sale of their output is very long. As
a result, farmers often fail to finance the initial requirements such as seeds, fertilisers and tools.
Here, credit plays a crucial role by enabling farmers to meet the initial requirements of farming
inputs.
3. Keeps farmers out of the vicious circle of poverty: Credit saves farmers from the vicious
circle of poverty. Farmers require funds to meet their general and specific needs. These needs can
be fulfilled via credit.
4. Protects farmers against natural calamities and dynamic market environment: Indian
agriculture has always been at the mercy of the vagaries of climate. Farmers are the worst hit in
the event of poor rains and crop failure. This pushes them into debt traps, thereby preventing
them from undertaking any farming in the subsequent period. In such a scenario, crop insurance
and farm credit play a significant role. They cushion the impact of an unfavourable market
environment or a natural calamity such as flood, and enable farmers to survive.
Q.86 Cooperative credit societies have certain drawbacks that prevent them from becoming a
popular source of credit in rural areas. Explain those limitations.
Answer
Cooperative credit societies have certain drawbacks that prevent them from becoming a popular
source of credit in rural areas. Some of these limitations are given as follows:
i. Insufficient financial resources: Cooperative credit societies do not have sufficient financial
resources to cater to the demands of the rural regions.
ii. Huge overdue amount: Many cooperative credit societies have huge amount of overdue,
which has made them virtually defunct.
iii. Delay in advancing credit: Most cooperative credit societies are unable to advance timely
credit.
iv. Inclination towards large farmers: Cooperative credit societies have mostly benefitted big
farmers. These societies have failed to solve the fund problems of small and marginal farmers.
v. Uneven growth: Cooperative credit societies have come up unevenly in different parts of the
country. Only certain regions seem to have benefitted from this initiative.

Q.87 Explain the functions performed by NABARD.

Answer
NABARD was established in 1982. It controls and regulates the activities of rural banking
institutions. Some of its functions are discussed below.
i. To act as the apex rural credit institute: NABARD serves as the apex agency for financial
institutions that advance credit for various rural developmental activities.
ii. To take necessary steps for improving the credit delivery system: NABARD takes
appropriate steps or measures to improve the credit delivery system. These measures include
monitoring, formulation, restructuring of institutions and training of manpower.
iii. To coordinate the rural financing activities: NABARD coordinates the rural financing
activities of all credit institutions engaged in developmental work at the grass-roots level.
iv. To refinance and monitor other financial institutions: NABARD refinances institutions
that are involved in financing the rural sector. In addition, it also monitors and evaluates the
projects that it refinances.

Q.88 The system of agricultural marketing in India has only been partly successful. What do you
think were the obstacles in the way of a successful agricultural marketing system?
Answer
The following are some of the obstacles in the way of a successful agricultural marketing system.
1. Defective weighing techniques and misappropriation of accounts: Being illiterate and
ignorant, farmers fall prey to defective weighing techniques and misappropriation of accounts.
2. Ignorance: Lack of knowledge of market prices and market conditions forces farmers to sell
their produce at a lower price.
3. Lack of proper storage facilities: Lack of access to proper storage facilities forces farmers to
sell their produce at a lower price right after harvesting. Also, improper storage makes the
agricultural produce vulnerable to damage due to pests and bad weather. Huge amounts of food
grains and other products are wasted every year due to improper storage.
4. Difficulty in obtaining agricultural credit: Lack of institutional sources of finance forces
farmers to fall back on local moneylenders for obtaining credit. Such credit is subject to various
conditions. For example, credit might be advanced to farmers on the condition that they would
sell their produce only to the moneylender at whatever price he sets.
5. Lack of transportation facilities: Farmers are unable to sell their produce in far-off places
because of lack of proper roads and transportation facilities. They are forced to sell in local
markets at a lower price.
6. Large number of intermediaries: Farmers are separated from the actual consumers of their
produce by a large number of intermediaries. These intermediaries purchase the produce from
farmers at a low price and sell the same at a much higher price. This implies that farmers receive
a very small share of the actual return on their produce.

Q.89 Why there exists a need of proper agricultural marketing in India?

Answer
The existence of a proper agricultural marketing system has the following advantages.
i. Agricultural marketing system helps farmers fetch the maximum price for their produce in the
market. Often, farmers are ill-informed and unaware of the prevailing market prices. As a result,
they incur loss on their sale. Agricultural marketing system aims at safeguarding farmers’
interests in this regard.
ii. The availability of proper storage and transportation facilities encourages farmers to increase
their level of output.
iii. The supply of raw materials from the agricultural sector to the industries becomes smoother
and more efficient.
iv. Agricultural marketing system reduces the role of middlemen in the sale and purchase of
agricultural produce. Thus, it helps in reducing the exploitation faced by farmers.

Q.90 Compare the pros and cons of the organic farming.

Answer
Organic farming refers to a system of farming that sustains and enhances the ecological balance.
In other words, this system of farming relies upon the use of organic inputs for cultivation. This
type of farming has the following advantages over the conventional farming:
a. Discards Use of Chemicals- Unlike conventional farming, organic farming avoids the use of
synthetic chemicals. The chemicals present in the chemical fertilisers penetrate into the ground
water and raises its nitrate content. These causes health hazards and also pollutes the
environment. Therefore, organic farming is an environment friendly method of farming.
b. Sustains Soil Fertility- The use of chemical fertilisers leads to erosion of soil fertility. Organic
farming discards the use of chemical fertilisers. Therefore, this farming is practised to produce
poison-free food for the consumers and simultaneously maintaining the fertility of the soil.
c. Healthier Food- Organically grown crops have high nutritional value than the conventional
grown crops. Also, the demand for organic farming is high even at a comparatively higher price.
d. Inexpensive Technology for Small and Marginal Farmers- The small and marginal farmers
constitute the bulk of the farming community. Organic farming offers an inexpensive farming
technique to these small and marginal farmers.
e. Generates Income from Exports- It generates comparatively higher income from the exports as
there is huge international demand for the organic crops.
Limitations of Organic Farming
Despite the above mentioned benefits, Organic Farming suffers from the following limitations:
a. Lesser Yield- Organic Farming offers lesser yield than the conventional farming. Therefore,
the productivity of the Organic Farming is comparatively lower than that of the conventional
farming.
b. Less Popular-The popularity of organic farming depends on the awareness and willingness of
the farmers to adopt this technology. Due to lower productivity, farmers lack initiative to adopt
Organic Farming techniques.
c. Infrastructural and Marketing Bottlenecks- The inadequate infrastructure and problem of
marketing are the major concerns that need to be addressed to promote Organic Farming.
d. Less Viable-As Organic Farming offers lesser yield than conventional farming, therefore, this
farming is not financially viable for the small and marginal land-holdings farmers.

Q.91 What steps can be taken to counter the problem of unemployment?

Answer
The following are some of the steps that can be taken to counter the problem of unemployment.
1. Increase production: It is of prime importance to increase production in the agricultural and
industrial sectors in order to increase employment. For this purpose, small-scale and cottage
industries should be promoted. This will not only generate new employment opportunities but
also assist the industrial sector, since small-scale and cottage industries act as subsidiaries to the
industrial sector. Similarly, production for the purpose of foreign trade should be promoted.
2. Increase productivity: The demand for labour and productivity of labour are directly related
to each other. Higher productivity generates higher profits. This, in turn, results in higher
investment and higher demand for labour. The productivity of workers should be increased by
imparting technical know-how.
3. Control population: Population explosion is a serious concern for any country as it hinders
the prospects of economic growth. Uncontrolled rise in population leads to rise in unemployment
and, consequently, rise in poverty. Thus, people should be made aware of various birth control
measures and the benefits of family planning and having a nuclear family.
4. Create non-agricultural employment: In an agrarian economy like India, the majority of the
workforce is employed in the agricultural sector. The Indian agricultural sector suffers from
several ills, especially disguised unemployment. Moreover, since agriculture is a seasonal
occupation, many farmers remain unemployed for three to four months in a year. It is necessary
to engage these people in non-agricultural sectors during this time period. Creation of non-
agricultural jobs like pottery and handicrafts not only reduces disguised unemployment but also
enhances the income of a farmer during the off-season. This income could then be used by the
farmer to improve the farm productivity.
5. Make available easy credit and finance: Lack of sufficient financial institutions in several
rural areas makes it difficult for the rural folk to obtain credit. Where available, the credit is
advanced at high lending rates. This lack of credit acts as a bottleneck to rural growth. Thus,
financial institutions and banks should be set up to provide easy credit to the rural people. This
will encourage them to engage in self-employment activities.
6. Provide health-care facilities: Lack of sufficient and proper health-care facilities
characterises the rural regions. This not only impedes rural productivity but also reduces rural
life expectancy. Poor health lowers the ability of an individual to engage in gainful employment.
Thus, stress should be laid on establishing proper health-care facilities such as dispensaries,
hospitals and nursing homes in rural areas. Also, the people in these areas should be made aware
of the health implications of hygiene and sanitation.

Q.92 Health care in India is a challenge in the social infrastructure. Justify the statement.
Answer
In the recent years, India has set up its feet in the development of vast health infrastructure and
man power at different levels. This is evident from the fall in the death rate, birth rate and infant
mortality rate and rise in the life expectancy. But a lot more need to be done in the field of health
care. The following are some of the deficiencies in the Indian health care services:
a. Unequal Distribution of Health Care Services: The health care services are unequally
distributed across the rural and the urban areas. The rural areas that supports 70 % of the
population, has only 1/5 th of the hospitals. Further, the doctor-population ratio is as worse as
1:2,000. This implies that for every 2,000 people, there is only one doctor in India. Only half of
the dispensaries are set up in villages. Most of the health care facilities have been confined
mostly to the urban areas.
b. Communicable Diseases: India has been frequently affected by various communicable
diseases like AIDS (Acquired Immune Deficiency Syndrome), HIV (Human Immune Deficiency
Syndrome), and SARS (Severe Acute Respiratory Syndrome). All these deadly diseases pose a
serious threat to the human capital, thereby, to the economic growth.
c. Poor Management: The health care centres in our country lack trained and skilled personnel
in the rural areas. Therefore, rural people have to rush to the urban health care centres. This
becomes worse in absence of proper roads and other cost-effective means of transportation.
d. Lack of Modern Techniques and Facilities: The government health centres are usually
devoid of the basic facilities like blood testing, X-rays, etc. These centres lack modern
techniques and medical facilities like CT-scan, sonography, etc. In order to avail these services,
people need to depend on the private medical clinics and hospitals that charge high fees.
e. Privatisation: The inability of the government to provide sufficient health care centres and
other medical facilities paved the way for the private sector to step in. The private sectors are
governed by the price signals, thereby, catering to the need of the higher income group, leaving
the low income group and the poor at their own mercy. This is due to the privatisation of the
health care services. The private hospitals are taking the place of government hospitals as
government hospitals are devoid of facilities.

Q.93 The production process in a country cannot be smooth and efficient in the absence of
proper economic infrastructure. Support this statement by giving valid reasons.
Answer
1. Increases productivity: Infrastructure facilitates the process of production. The availability of
quality infrastructure guarantees increase in production and productivity. In the absence of
infrastructure, the production process cannot be smooth and efficient. Infrastructure acts as an
input as well as a support system for production. For example, if the industrial sector is lacking
in infrastructure such as transportation and communication, then there may be delays in the
movement of raw materials and finished goods from one place to another. Consequently, the
process of production is hampered. The process of distribution is also adversely affected in the
absence of sound transportation. Social infrastructure such as health and education helps
accelerate the production process by increasing productivity. A healthy and educated workforce
is of great value in the production process. Thus, we can say that infrastructure helps pace the
production process and productivity.
2. Encourages investment: Investment plays an important role in stimulating the growth
process of a country. Infrastructure builds an environment conducive to investment. Regions that
have sound infrastructure exhibit fast growth and development. This is because the presence of
quality infrastructure attracts investors to these regions. The presence of infrastructure such as
transport, communication, banking and power in a region facilitates the establishment of
production units and industries in that region. Infrastructure makes a region profit viable by
eliminating the bottlenecks in the production process and by improving productivity.
Consequently, investors are compelled to invest in such a region. Similarly, a country that has
sound infrastructural facilities is able to attract investments from foreign countries. However, a
country that lacks in such facilities finds it hard to attract foreign investments.
3.Generates linkages in production: Linkage refers to a situation wherein growth in one
production sector propels growth in another sector. The presence of such linkages enhances the
development process. Infrastructure promotes economic development by way of two types of
linkages: forward linkages and backward linkages. For example, if irrigation facilities boost
agricultural production, then industries that depend on agriculture for the supply of raw materials
will simultaneously experience increased production. Similarly, an increased production in the
manufacturing sector will boost the distribution and services sectors. Thus, economic growth
becomes a dynamic process in the presence of sufficient infrastructural facilities.
4. Enhances size of the market: Infrastructure such as transport and communication widens the
size of the market. It makes the movement of raw materials and finished goods fast and cost-
effective. Goods can be transported in bulk and in less time from one place to another. This
enables a producer to offer his products across the country and even across international
boundaries.

Q.94 What are the strategies used for sustainable development in India?
Answer
The various strategies used for sustainable development in India are:
1. Population control measures: India has taken various measures to arrest population
explosion. These include increasing awareness about birth-control measures, promoting literacy,
launching family planning programmes and formulating policies for population control.
2. Use of environment-supportive fuel: Petrol and diesel are fuels that emit huge amounts of
carbon dioxide, which leads to global warming. So, the Indian government has promoted the use
of CNG and LPG. These are clean, eco-friendly fuels that emit less smoke.
3. Use of solar and wind energy: Sunlight and wind are two natural resources that are
inexhaustible. The use of such natural resources is in line with the objective of sustainable
development. India has taken steps to harness solar and wind energy.
4. Recycling and ban on plastic bags: Industrial and household wastes should be accumulated
and managed properly. Further, recycling of non-biodegradable products such as plastics needs to
be promoted in order to sustain environment. Biodegradable wastes such as animal waste can be
used as manure for farming. A very recent initiative taken by the government is the ban on the
use of plastic bags.
5. Use of input-efficient technology: Various input-efficient methods have been devised that
increase not only production and productivity, but also the efficiency with which the inputs are
used. Efficient use of inputs leads to lesser exploitation of natural resources. It also enhances the
future economic growth prospects of our country.
6. Encouraging the use of public transport: To counter the increasing level of private
vehicular pollution, the government has promoted the use of public transport such as public
buses and metro rails. Further, the government needs to improve the quality and safety of public
transport so that more people are encouraged to use the same.

Q.95 What were the key features of the development strategy followed by India?
Answer
The key features of the development strategy followed by India are as follows:
1. Path of mixed economy: India followed the path of mixed economy. It implied the co-
existence of the public sector and the private sector. Although India laid a strong emphasis on
public sector, it also stressed on the active participation of the private sector in a democratic
framework.
2. Heavy reliance on public sector in the initial years: In the initial years of planning, public
sector was accorded a dominant role in the growth and development process. The public sector
controlled the development of strategic and basic industries in the country such as iron and steel
industry, railways, etc.
3. Industrial Policy Resolution (IPR), 1956: Industrial Policy Resolution was passed in the
year 1956 with the objective of increasing the industrial base of the country.
4. Inward looking trade policy during 1951-1991: During the initial seven years of planning,
India followed an inward-looking trade policy in the form of import substitution. The policy of
import substitution implies substituting imports with domestically produced goods. This strategy
emphasised on reducing the dependence of Indian economy on foreign goods and also aimed at
providing impetus to the budding domestic firms.
5. Export promotion policy: Emphasis was laid by the policymakers on the promotion of
exports with the aim of increasing the volume of foreign exchange reserves. Another purpose of
this policy was to make India a self reliant nation in the world market.
6. Reforms in the agriculture sector: India introduced various reforms in the agriculture sector
such as the abolition of intermediaries, regulation of rent, the imposition of land ceilings and
consolidation of landholdings. Besides the land reforms, technical reforms were also introduced
in the form of the Green Revolution. Such reforms greatly increased the production and
productivity in the agriculture sector and helped India to achieve self-sufficiency in food grain
production.
7. New Economic Policy of 1991: By the year 1991, due to the industrial and trade policies
followed by India, faced a serious economic crisis. India faced mounting foreign debt. To
overcome the situation, India initiated the economic reforms in the year 1991, which are
collectively known as New Economic Policy (NEP). The New Economic Policy replaces
liberalisation (L) in place of licensing; privatisation (P) in place of quotas; and globalisation (G)
in place of permits for exports and imports.

Q.96 What were the key features of the development strategy followed by Pakistan?
Answer
The following are the key features of the development strategy followed by Pakistan.
1. Mixed economy pattern: With the objective of economic development, Pakistan adopted the
path of mixed economy with the co-existence of both private and public sectors.
2. Regulated policy framework in trade: During 1950s and 1960s, Pakistan introduced a
variety of regulated policy framework for import substitution and industrialisation. Through
import substitution, it encouraged domestic production of imported goods and thereby,
substituting imported goods with domestic goods. With such a policy it discouraged imports and
simultaneously encouraged the development of domestic industries. Protection was provided to
the domestic consumer industries through various measures such as tariffs and quotas.
3. Introduction of Green Revolution: Similar to India, Pakistan also introduced Green
Revolution in the agriculture sector to enhance the efficiency and productivity. This infused
mechanisation of the agriculture sector and led to the increase in the production of food grains.
4. Nationalisation of capital goods industries: The mechanisation of agriculture was followed
by the nationalisation of capital good industries in 1970s.
5. Policy orientation in 1970's and 1980's: In order to encourage the private sector, Pakistan
shifted its policy orientation by denationalising the thrust areas in the late 1970s and early 1980s.
For their encouragement and active participation, various incentives were offered by the
government to the private sector.
Q.97 Explain the major objectives of the ‘Great Leap Forward’ program. What were the major
problems faced by it?
Answer
With the view of attaining rapid growth, China initiated the Great Leap Forward (GLF) program
in 1958. GLF aimed at country’s industrialisation on massive scale and simultaneously
transforming the economy from an agrarian to an industrialised economy. The following were
the major objectives of Great Leap Forward Program.
i) Large scale industrialisation: The major objective of the campaign was to initiate large scale
industrialisation in the country. The expanse of the program can be judged from the fact that the
people in the urban areas were motivated to set up industries even in their backyards.
ii) Commune system in agriculture: Under the commune system, the farmers were encouraged
to cultivate land collectively and not individually. That is, the farmers were encouraged to
combine their individual plots of land and perform farming collectively. According to the
estimates, in the year 1958, there were about 26,000 communes that covered almost the entire
farming population. The basic objective of the system was to enable the farmers to reap the
benefits of large scale production.
However, the GLF faced serious problems in the later years. The following were the two major
problems that hindered the success of GLF.
i) Failure of agriculture policies: In 1960, due to the failure of agricultural policies and bad
monsoon, China was badly hit by a massive famine. The drought claimed the lives of nearly 30
million people.
ii) Withdrawal of professionals by Russia: Due to certain border conflicts with China, Russia
withdrew the professionals that it had sent to China. These professionals were important and
aided the industrialisation process in China. Thus, their withdrawal greatly hampered the
industrialisation process.

Q.98 What were the major areas where both India and Pakistan faced failure?
Answer
The following were the areas where both India and Pakistan got failure:
i) Failure of trade policies: Both the countries, in the initial years of planning followed an
inward looking trade policy. Although the policy provided protection to the domestic producers,
it hampered their long term growth and made them incompetent to face the foreign competition.
Also, such a policy deprived them of the advantages of globalisation.
ii) Heavy reliance on public sector: In the initial years of planning, both the nations accorded
greater priority to the public sector with the private sector playing only a subsidiary role.
However, the public sector was plagued with inefficiencies and hampered the growth rate.
iii) High fiscal deficit: Both India and Pakistan faced a heavy debt burden and continuously
rising fiscal deficit. The average fiscal deficit has been around 7% of the GDP in both the
nations.
iv) Corruption and bureaucracy: Both the nations suffer from high degree of corruption at all
levels of the system. As a result, the growth plans and policies suffered from improper
implementation.

Q.99 Explain with valid reasons as to why China scores over India.
Answer
The following are the reasons which suggests that China scores over India:
i) Early start of the reform process: In China, the reform process started in 1980's. As against
this, India initiated the reforms in 1990's.
ii) Difference in the objective: One of the major objectives of the reform process in China has
been the reduction of poverty. As a result, during the period 1978 to 1989, China has been able to
reduce the rural poverty by 85%. On the other hand, the sole focus of the reforms in India has
been achieving high growth rate with stability and thereby, lagged behind in terms of other areas
such as poverty, unemployment,etc.
iii) Better impact of the agricultural reforms: Reforms in the agriculture sector in China,
particularly the Commune System, yielded high positive results. The agriculture production and
productivity as well as the status of the farmers have improved greatly in China. As against this,
in India, agriculture reforms could not yield much fruitful results.
iv) Opening up of economy: China was more liberal in terms of international trade than India.
Besides allowing 100% equity investment, it also allowed 100% FDI in retail. Moreover, the
manufacturing in China has been export driven. As a result, China has been able to reap the
benefits of globalisation, while India lags behind.

Q.100 Different countries can be ranked on the basis of their performance on HDI indicators.
Compare India, China and Pakistan on the basis of these indicators.
Answer
1. Life expectancy rate: Life expectancy refers to the number of years one is expected to live.
Higher life expectancy rate reflects better access to health facilities in the country. As per the
Human Development Report 2016, life expectancy for China is approximately 76 years, whereas
for India and Pakistan it is approximately 68 years.
2. Adult literacy rate: Adult literacy rate refers to that percentage of population (above the age
of 15 years) who can read and write. In China, adult literacy rate is approximately 96.4%, while
in India and Pakistan it is 71.4% and 59.9% respectively.
3. Infant mortality rate: Infant mortality rate refers to the number of deaths of infants under the
age of one year per 1000 live births. China has the lowest level of infant mortality among the
three nations at 9 per thousand, while India and Pakistan has infant mortality of 38 and 66 per
thousand respectively.
4. Maternal mortality rate: Maternal mortality rate refers to the number of maternal deaths
perone lakh live births. For China, the rate of maternal mortality is very low at 27 per lakh as
compared to India and Pakistan where maternal mortality rate is 174 and 178 per lakh
respectively.
5. Percentage of population below poverty line: China has 32% of population living below
poverty line while for India and Pakistan it is 37% and 44% respectively.
6. Per capita GDP: In terms of Purchasing Power Parity, China has highest per capita GDP of
$14,400. As against this, the per capita GDP in India and Pakistan is $6,092 and $4,886
respectively.
7. Percentage of the population having access to improved sanitation: India has least
percentage of population among the three nations who have access to improved sanitation. China
ranks first with 77% of population having access to improved sanitation. On the other hand, in
Pakistan and India 64% and 40% population respectively has access to proper sanitation
facilities.
8. Percentage of the population having access to improved water sources: China has the
highest percentage of population (96%), which has access to improved water sources. On the
other hand, India has 94%, while Pakistan has 91% of population having access to improved
water sources.
9. Percentage of the population undernourished: India has 39% of the undernourished
population, while China and Pakistan has 9% and 45% respectively of undernourished
population.