1. Planning .............................................................................................................................................

9
1.1 Planning in India ................................................................................................................................... 10
1.2 Important Dates.................................................................................................................................... 10
1.3 Visvesvarayya Plan ............................................................................................................................... 10
1.4 FICCI Proposal ....................................................................................................................................... 10
1.5 Congress Plan........................................................................................................................................ 10
1.6 Important Developments .................................................................................................................... 10
1.7 Bombay Plan ......................................................................................................................................... 11
1.8 Gandhian Plan ....................................................................................................................................... 11
1.9 People’s Plan ......................................................................................................................................... 11
1.10 Sarvodaya Plan ..................................................................................................................................... 11
1.11 Planning Commission........................................................................................................................... 11
Functions .......................................................................................................................................................................... 12

1.12 Five Year Plans ...................................................................................................................................... 12

First Plan (1951-56) ......................................................................................................................................................... 12
Second Plan (1956-61) ................................................................................................................................................... 13
Third Plan (1961-66) ....................................................................................................................................................... 14
Three Annual Plans or Holiday Plan (1966-69) ............................................................................................................ 15
Fourth Plan (1969-74) ..................................................................................................................................................... 16
Fifth Plan (1974-79)......................................................................................................................................................... 16
Emergency years (1975-1977) ....................................................................................................................................... 17
Rolling Plan (1978-80) .................................................................................................................................................... 17
Sixth Plan (1980-85) ........................................................................................................................................................ 17
Seventh Plan (1985-90) .................................................................................................................................................. 18
Two Annual Plans (1990-92) .......................................................................................................................................... 19
Eighth Plan (1992-97) ..................................................................................................................................................... 20
Ninth Plan (1997-2002) .................................................................................................................................................. 21
Tenth Plan (2002-07) ...................................................................................................................................................... 22
Eleventh Plan (2007-12) ................................................................................................................................................. 23
Twelfth Five Year Plan (2012-2017)............................................................................................................................... 26
Review of Five-Year Plans .............................................................................................................................................. 28

1.13 Major challenges in the economy: ...................................................................................................... 30

1.14 Achievements of Planning: .................................................................................................................. 31
Failures of Planning: ........................................................................................................................................................ 31
1

2. FROM PLANNING TO NITI AAYOG ............................................................................................... 31

2.1 Functions and Mandates of NITI Ayog: .............................................................................................. 32
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2.2 Structure of NITI: .................................................................................................................................. 32

2.3 VEHICLE OF GOOD GOVERNANCE ...................................................................................................... 34
2.4 Niti Aayog’s Vision for New India: ..................................................................................................... 34
Challenges ........................................................................................................................................................................ 34
How to address the current challenges? ...................................................................................................................... 35
 Certain issues are ............................................................................................................................................................ 35
Guiding Principles ........................................................................................................................................................... 36

3. Money and Banking ........................................................................................................................ 36

3.1 Financial System: .................................................................................................................................. 36
3.2 Classification of financial system: ....................................................................................................... 36
Indian Financial System: ................................................................................................................................................. 36
Money Market: ................................................................................................................................................................ 37

3.3 Concept of Money Supply: .................................................................................................................. 37

3.4 Currency in Circulation: ....................................................................................................................... 38
3.5 Velocity of Circulation of Money: ....................................................................................................... 38
3.6 Quantity of Money: .............................................................................................................................. 39
3.7 Money Multiplier: ................................................................................................................................. 39
3.8 Stock of Money: .................................................................................................................................... 39
Reserve Money: ............................................................................................................................................................... 39
Narrow Money: ................................................................................................................................................................ 40
Near Money: .................................................................................................................................................................... 40
Hard Money: .................................................................................................................................................................... 40
Soft Money: ...................................................................................................................................................................... 41
Fiat Money: ...................................................................................................................................................................... 41
Hot Money: ...................................................................................................................................................................... 41

3.9 Proportional Reserve System: ............................................................................................................. 41

3.10 Minimum Reserve System: .................................................................................................................. 41
3.11 Legal Tender:......................................................................................................................................... 41
3.12 Printing of Currency Notes: ................................................................................................................. 41
3.13 Demonetisation: ................................................................................................................................... 42
3.14 Currency Notes (Bank Notes) .............................................................................................................. 42
Rs. 2000 Note .................................................................................................................................................................. 42
Rs. 500 Note: .................................................................................................................................................................... 43
Rs. 100 Note: .................................................................................................................................................................... 43
Rs. 200 Note: .................................................................................................................................................................... 43
Rs. 50 Note: ...................................................................................................................................................................... 43
Rs. 20 Note: ...................................................................................................................................................................... 43
Rs. 10 Note: ...................................................................................................................................................................... 44

3.15 Reserve Currency: ................................................................................................................................. 44

3.16 Cryptocurrency: .................................................................................................................................... 44
2

3.17 National Payments Corporation of India (NPCI): .............................................................................. 44

3.18 Reserve Bank of India (RBI) : ............................................................................................................... 44
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Functions of RBI: .............................................................................................................................................................. 46

3.19 Monetary Policy: ................................................................................................................................... 49

3.20 QUANTITATIVE INSTRUMENTS .......................................................................................................... 49
Bank Rate: ........................................................................................................................................................................ 49
 Repo Rate: ........................................................................................................................................................................ 51
Reverse Repo Rate .......................................................................................................................................................... 51

3.21 Open Market Operations: .................................................................................................................... 52

3.22 CRR and SLR .......................................................................................................................................... 52
Here comes the concept of Cash Reserve Ratio ......................................................................................................... 53
Why SLR: Statutory liquidity ratio? ............................................................................................................................... 54

QUALITATIVE INSTRUMENTS ........................................................................................................................ 55

Margin Requirement: ...................................................................................................................................................... 55
Consumer Credit Regulation: ........................................................................................................................................ 55
Guidelines: ........................................................................................................................................................................ 55
Rationing of Credit: ......................................................................................................................................................... 55
Moral Suasion: ................................................................................................................................................................. 55
Direct Action: ................................................................................................................................................................... 55

3.23 Monetary Policy Committee (MPC): ................................................................................................... 55

3.24 Monetary Policy Report (MPR): .......................................................................................................... 56
3.25 Organised Banking System: ................................................................................................................. 57
3.26 Evolution and Growth of Banking: ..................................................................................................... 57
3.27 Commercial banks: ............................................................................................................................... 57
Scheduled Banks: ............................................................................................................................................................ 57

3.28 Regional Rural Banks: .......................................................................................................................... 59

3.29 Co-Operative Banks .............................................................................................................................. 60
3.30 Development Banks in India: .............................................................................................................. 60
NABARD-National Bank for Agriculture and Rural Development:............................................................................ 60
Small Industries Development of India (SIDBI): ........................................................................................................... 60
Industrial Finance Corporation of India (IFCI): ............................................................................................................. 61
Export-Import Bank (EXIM Bank): .................................................................................................................................. 61
National Housing Bank: .................................................................................................................................................. 61
Mudra Bank ...................................................................................................................................................................... 61

3.31 Non-Banking Financial Companies (NBFCs) ...................................................................................... 62

3.32 Differentiated Banks ............................................................................................................................ 63
Small Finance Banks: ....................................................................................................................................................... 63
Payments Banks: .............................................................................................................................................................. 63

3.33 Non-Performing Assets (NPA): ........................................................................................................... 63

3.34 Capital to Risk Weighted Assets Ratio (CRAR) .................................................................................. 64
3.35 Basel Accords: ....................................................................................................................................... 64
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Basel I: ............................................................................................................................................................................... 64
Basel II: .............................................................................................................................................................................. 65
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Basel III: ............................................................................................................................................................................. 65

3.36 Foreign Currency Non-Resident (Bank) Account [FCNR(B) Account]............................................. 66

3.37 Non-Resident External Account (NRE Account)................................................................................ 66
3.38 Non-Resident Ordinary Rupee Account (NRO Account) .................................................................. 66
4. Public Finance .................................................................................................................................. 66
4.1 Fiscal Policy: .......................................................................................................................................... 66
What is meant by Fiscal Policy in India? ....................................................................................................................... 67
Main objectives of Fiscal Policy in India: ...................................................................................................................... 67
Importance of Fiscal Policy in India: ............................................................................................................................. 67

4.2 Funds of government. of India: .......................................................................................................... 67

Consolidated Fund of India ........................................................................................................................................... 68
Contingency Fund of India ............................................................................................................................................. 68
Public Account of India:.................................................................................................................................................. 68

4.3 Govt. Receipts ....................................................................................................................................... 69

Revenue Receipts: ........................................................................................................................................................... 69
Tax Revenue: .................................................................................................................................................................... 70
Non-Tax Revenue: ........................................................................................................................................................... 70

4.4 DIRECT TAXES ....................................................................................................................................... 71

Income Tax: ...................................................................................................................................................................... 71
Corporation Tax: .............................................................................................................................................................. 71
Minimum Alternate Tax: ................................................................................................................................................. 71
Dividend Distribution Tax: .............................................................................................................................................. 71
Securities Transaction Tax (STT): ................................................................................................................................... 71

4.5 INDIRECT TAXES ................................................................................................................................... 71

Goods and Service Tax: .................................................................................................................................................. 71

4.6 Govt. Expenditure: ................................................................................................................................ 73

Revenue Expenditure: ..................................................................................................................................................... 73
Capital Expenditure: ........................................................................................................................................................ 73

4.7 Deficits: .................................................................................................................................................. 73

Budgetary Deficit: ............................................................................................................................................................ 73
Revenue Deficit: ............................................................................................................................................................... 74

4.8 Deficit Financing: .................................................................................................................................. 76

4.9 Budget: .................................................................................................................................................. 76
Full Budget ....................................................................................................................................................................... 76
Vote on Account ............................................................................................................................................................. 77

4.10 Zero-Base Budgeting: .......................................................................................................................... 77

4.11 Balanced Budget: .................................................................................................................................. 77
4.12 Gender Budgeting: ............................................................................................................................... 78
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4.13 Revenue Budget:................................................................................................................................... 78

4.14 Capital Budget: ..................................................................................................................................... 78
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4.15 Outcome Budget:.................................................................................................................................. 78

4.16 FRBM Act: .............................................................................................................................................. 78
4.17 FRBM Review Committee: ................................................................................................................... 79
4.18 Developmental Expenditure: ............................................................................................................... 79
4.19 Non-Developmental Expenditure: ...................................................................................................... 79
 4.20 Charged Expenditure:........................................................................................................................... 79
4.21 Golden Rule of Public Finance: ........................................................................................................... 79
4.22 14th Finance Commission: .................................................................................................................... 79
4.23 15th Finance Commission: .................................................................................................................... 80

5. National Income .............................................................................................................................. 80

5.1 What do you mean by “Economics” ................................................................................................... 80
5.2 What exactly is “Economics” in our daily life .................................................................................... 80
5.3 Concept of Scarcity:.............................................................................................................................. 81
5.4 Microeconomics:................................................................................................................................... 81
5.5 Macro Economics: ................................................................................................................................. 81
5.6 What do you mean by “Economy” ..................................................................................................... 81
5.7 Types of Economy ................................................................................................................................ 82
Traditional economy: ...................................................................................................................................................... 82
Free market economy: .................................................................................................................................................... 82
Command economy: ...................................................................................................................................................... 82
Mixed economy: .............................................................................................................................................................. 82
Open economy: ............................................................................................................................................................... 82
Closed economy: ............................................................................................................................................................. 82
Capitalist economy:......................................................................................................................................................... 82
Socialist economy: .......................................................................................................................................................... 82

5.8 Salient Features of Indian Economy ................................................................................................... 83

Mixed Economy ............................................................................................................................................................... 83
Over-Population .............................................................................................................................................................. 83
Unbalanced Economic Development ........................................................................................................................... 83
Low rate of capital formation ........................................................................................................................................ 84
Lack of Infrastructure Facility ......................................................................................................................................... 84
Poor Economic Organisation ......................................................................................................................................... 84

5.9 Structure and Composition of Indian Economy ................................................................................ 84

5.10 National Income of India ..................................................................................................................... 85
5.11 Concepts of National Income .............................................................................................................. 85
Per Capita Income: .......................................................................................................................................................... 85
Gross National Product (GNP) ....................................................................................................................................... 85
Gross Domestic Product (GDP) ..................................................................................................................................... 86
Net National Product (NNP) .......................................................................................................................................... 86

5.12 National Income ................................................................................................................................... 87

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Personal Income .............................................................................................................................................................. 87

Personal Disposable Income.......................................................................................................................................... 88
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5.13 Methods of Measuring National Income: .......................................................................................... 88

Production Method ......................................................................................................................................................... 89
Income Method ............................................................................................................................................................... 90
Consumption Method .................................................................................................................................................... 90
 5.14 Estimates of National Income in India ............................................................................................... 91
5.15 Indicators of Economic Development ................................................................................................ 91

6. Human Development ..................................................................................................................... 92

6.1 Terminology .......................................................................................................................................... 92
6.2 Definition of Human Development .................................................................................................... 92
6.3 Concept of Human Development ....................................................................................................... 93
THE FOUR PILLARS OF HUMAN DEVELOPMENT ........................................................................................................ 94
Approaches to Human Development ........................................................................................................................... 94

6.4 Human Development Index ................................................................................................................ 95

Positive Aspects (Human Development Report): ........................................................................................................ 97

6.5 Why is India not improving its rank in HDI ? .................................................................................... 99

6.6 Inequality-adjusted HDI (IHDI) ......................................................................................................... 100
6.7 Gender related Development Index (GDI) ....................................................................................... 100
6.8 Multidimensional Poverty Index (MPI) ............................................................................................ 101
6.9 Gender Inequality Index .................................................................................................................... 101

7. Poverty ........................................................................................................................................... 102

7.1 Concept of Poverty:............................................................................................................................ 102
Types of Poverty: ........................................................................................................................................................... 103

7.2 How to measure Poverty ?? ............................................................................................................... 104

7.3 Dimensions of Poverty: ...................................................................................................................... 105
7.4 Poverty Line: ....................................................................................................................................... 106
How Poverty Line is Estimated in India? .................................................................................................................... 107

7.5 World Bank Approach for Calculating Poverty: .............................................................................. 110

7.6 Linkage between Poverty and Development:.................................................................................. 111
7.7 Causes of Poverty in India ................................................................................................................. 112
7.8 PROGRAMMES FOR POVERTY ALLEVIATION .................................................................................. 113
7.9 Why Poverty Alleviation Programmes have Failed in India? ......................................................... 115
Major reasons for failure of poverty alleviation programmes are: ......................................................................... 116

7.10 What Should be Done to Improve Poverty Alleviation Programmes? ......................................... 116
7.11 Inequality:............................................................................................................................................ 117
7.12 Lorenz Curve : ..................................................................................................................................... 117
7.13 Gini Coefficient : ................................................................................................................................. 118
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8. Unemployment.............................................................................................................................. 118
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8.1 Measure of Unemployment in India: ................................................................................................ 118

8.2 Types of Unemployment: .................................................................................................................. 119
8.3 Regional Unemployment: .................................................................................................................. 121
8.4 Technological Unemployment: ......................................................................................................... 121
8.5 Cyclical Unemployment: .................................................................................................................... 121
 8.6 Chronic Unemployment: .................................................................................................................... 122
8.7 Under Employment: ........................................................................................................................... 122
8.8 Philips Curve: ...................................................................................................................................... 122
8.9 Lorenz Curve: ...................................................................................................................................... 122
8.10 Gini Coefficient: .................................................................................................................................. 123
8.11 Kuznets Curve: .................................................................................................................................... 123
8.12 Sources of data on unemployment: ................................................................................................. 123
8.13 Labour Force: ...................................................................................................................................... 123
Measurement of Labour Force: ................................................................................................................................... 123

8.14 Labour force participation rate: ........................................................................................................ 124

9. Economic Reforms (LPG) .............................................................................................................. 124

9.1 BACKGROUND .................................................................................................................................... 124
9.2 REFORMS AND PROBLEMS DURING 1985-90 ................................................................................. 125
9.3 THE 1991 ECONOMIC CRISIS ............................................................................................................. 126
Background to the Crisis .............................................................................................................................................. 126
The Turnaround-The Reforms of 1991 ....................................................................................................................... 126
THE NEW REFORM MEASURES ................................................................................................................................... 128

9.4 The New Industrial Policy 1991 ........................................................................................................ 130

9.5 IMPACT OF THE REFORMS ................................................................................................................ 132
9.6 Limitations of LPG .............................................................................................................................. 137
Broad Indicators ............................................................................................................................................................ 137
Sectoral Share in GDP ................................................................................................................................................... 138
Employment pattern in Sectors ................................................................................................................................... 138
Impact of Reforms on Poverty ..................................................................................................................................... 139

9.7 Effects of Liberalisation and Globalisation ...................................................................................... 140

9.8 Focus Point .......................................................................................................................................... 141
Key Lines in examination point of view ...................................................................................................................... 141

10. Agriculture ..................................................................................................................................... 143

10.1 Development of Agriculture under Five Year Plans: ....................................................................... 144
10.2 Agriculture and Green Revolution .................................................................................................... 145
10.3 LAND REFORMS AND CHANGES IN THE AGRARIAN SECTOR:...................................................... 145
PRE-GREEN REVOLUTION PHASE (1951-1968): ........................................................................................................ 147
EARLY GREEN REVOLUTION PHASE (1968-1981): .................................................................................................... 148
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LATER GREEN REVOLUTION PHASE (1981-1992): .................................................................................................... 148

10.4 Land Tenure Systems: ........................................................................................................................ 149

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10.5 Major Land Reform Measures Taken after Independence ............................................................. 149
10.6 Basic Terms related to Land Use: ...................................................................................................... 150
10.7 Cropping Seasons: .............................................................................................................................. 150
10.8 Agricultural Inputs: ............................................................................................................................ 150
10.9 Public Distribution System ................................................................................................................ 150
 10.10 WTO and Agricultural Subsidies: ...................................................................................................... 151
10.11 NABARD-National bank for Agriculture and Rural Development: ............................................... 151
10.12 Infrastructure Factors Related To Agriculture: ................................................................................ 152
10.13 Cropping Pattern: ............................................................................................................................... 152
10.14 Terms related to Land Utilisation: .................................................................................................... 153
10.15 MSP ...................................................................................................................................................... 153
10.16 Commission for Agricultural Costs and Prices (CACP): .................................................................. 154
10.17 e-NAM ................................................................................................................................................. 154
10.18 APMC ................................................................................................................................................... 154
10.19 Operation Flood .................................................................................................................................. 154
10.20 Kisan Credit Card Scheme .................................................................................................................. 154
10.21 Operation Green: ................................................................................................................................ 155
10.22 Zero-Budget Natural Farming: .......................................................................................................... 155
10.23 Operational Holdings: ........................................................................................................................ 155
10.24 Contract Farming: ............................................................................................................................... 155
10.25 High yielding varieties (HYVs): ......................................................................................................... 156

11. Industry .......................................................................................................................................... 156

11.1 Industrial Development 1947-1990 .................................................................................................. 156
Industrial Policy Resolution 1948 (IPR 1948) ............................................................................................................. 156
Industrial Policy Resolution 1956 (IPR 1956) ............................................................................................................. 157
Industrial Policy Statement, 1977 ................................................................................................................................ 159
Industrial Policy, 1980 ................................................................................................................................................... 159
New Industrial Policy 1991: .......................................................................................................................................... 160

11.2 Role of Public Sector: ......................................................................................................................... 162

11.3 Industrial Licensing, Control Regime, and its Consequences ........................................................ 163
11.4 Location and Dispersal of Industries and Regional Balance .......................................................... 165

12. Inflation .......................................................................................................................................... 166

12.1 Major Problems: ................................................................................................................................. 166
12.2 Low inflation has many benefits ....................................................................................................... 166
12.3 Methods to measure Inflation:.......................................................................................................... 167
12.4 Types of Inflation (Based on Causes): .............................................................................................. 168
Cost push inflation ........................................................................................................................................................ 168
Demand Pull Inflation ................................................................................................................................................... 168
8

Structural Inflation ........................................................................................................................................................ 168

12.5 Key Terms related to Inflation .......................................................................................................... 168

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Creeping inflation.......................................................................................................................................................... 168

Galloping inflation......................................................................................................................................................... 168
Hyperinflation ................................................................................................................................................................ 168
Headline inflation .......................................................................................................................................................... 168
Stagflation ...................................................................................................................................................................... 169
 Walking Inflation ........................................................................................................................................................... 169

12.6 Core Inflation ...................................................................................................................................... 169

12.7 Factors of Inflation: ............................................................................................................................ 169
12.8 How to reduce Inflation? ................................................................................................................... 170
Measures taken by RBI to control inflation: ............................................................................................................... 170

12.9 Key Concepts related to Inflation: .................................................................................................... 170

Deflation: ........................................................................................................................................................................ 170
Disinflation: .................................................................................................................................................................... 170
Stagflation: ..................................................................................................................................................................... 171
Reflation: ........................................................................................................................................................................ 171
Skewflation: .................................................................................................................................................................... 171
CPI Inflation.................................................................................................................................................................... 171
Food Inflation ................................................................................................................................................................ 171
WPI Inflation .................................................................................................................................................................. 171
CPI Food Index:.............................................................................................................................................................. 171

13. Capital Market ............................................................................................................................... 171

13.1 Capital Market Instruments: .............................................................................................................. 172
Pure Instruments: .......................................................................................................................................................... 172
Hybrid Instruments: ...................................................................................................................................................... 172
Derivatives: ..................................................................................................................................................................... 172

13.2 Major Financial Instruments in Capital Market: .............................................................................. 172

13.3 Primary Market ................................................................................................................................... 173
13.4 Secondary Market .............................................................................................................................. 173
13.5 Gilt-Edged Market .............................................................................................................................. 173
13.6 Stock Exchange: .................................................................................................................................. 173
Bombay Stock Exchange: ............................................................................................................................................. 174
National Stock Exchange: ............................................................................................................................................. 174

13.7 Securities and Exchange Board of India (SEBI): .............................................................................. 174

14. Money Market ............................................................................................................................... 174

14.1 Money Market Instruments: .............................................................................................................. 174

1. Planning
9
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 Economic planning is the making of major the comprehensive survey of the economic sys-
economic decisions what and how much is to tem as whole. (H.D. Dickinsom)
be produced, how, when and where it is to be  Planning was adopted for the first time in
produced, and to whom it is to be allocated by the world by Soviet Union
1.1 Planning in India • Proposed the first blueprint of Indian Plan-
ning
 Planning in India starts in 1930s. • Democratic capitalism with emphasis on indus-
 Even before independence, the colonial gov- trialisation
ernment had established a planning board that • Simply, it’s a shift of labour from agri sector to
lasted from 1944 to 1946. industrial sector targeting double national in-
 Before independence private industrialists and come in a decade
economists published three development plans
in 1944. 1.4 FICCI Proposal
 India’s leaders adopted the principle of formal
economic planning soon after independence as • 1934: FICCI recommended serious need of Na-
an effective way to intervene in the economy of tional Planning
faster growth and social justice. • Reason: Laissez-Faire, Great Depression, New
Deal in USA, Soviet Experiment in National
Four decades of planning show that India’s econo-
Planning
my, a mix of public and private enterprise, is too
large and diverse to be wholly predictable or re-
1.5 Congress Plan
sponsive to directions of the planning authorities.
• National Planning Committee @ 1938 – initi-
1.2 Important Dates
ative of Subash C.Bose
• Reason to start NPC: to work out concrete
 1934: M. Visvesvaryya, in his book ‘Planned
programmes for development encompassing all
Economy of India’, advocates the necessity of
major areas of economy
planning in the country much before Independ-
• NPC under the chairmanship of J.L.Nehru
ence.
• Final report of NPC was published in 1949
 1944: Bombay Plan, published in January 1944,
prepared by eight leading industrialist of Bom-
1.6 Important Developments
bay.
 Gandhian Plan put forward by S.N. Agrawal o Post-War reconstruction committee (1941) –
(1944). To consider various plans for the reconstruction
 1944: Planning Development Council was set of the economy
up under the chairmanship of A. Dalal. o Consultative committee of economists
 Peoples Plan drafted by M.N. Roy (1945). (1941) – setup under the chairmanship of
 1946: Interim Government sets up the Planning Ramaswamy Mudaliar to advise 4 Post-War re-
Advisory Board. construction committees for executing the Na-
 1947: Economic Programme Committee was set tional Plan
10

up under the chairmanship of Jawaharlal Nehru. o Planning and Development Dept (1944) –
 1950: Planning Commission was set up. created under a separate member of Viceroy’s
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 2015: Formation of Niti Aayog. Executive council for organising planning work
in the country. Ardeshir Dalal (controller of
1.3 Visvesvarayya Plan
Bombay Plan) was appointed as acting member.
Finally this dept was abolished in 1946
1.7 Bombay Plan • Inspired from the Gandhian techniques of con-
structive works and Sarvodaya concept of
• Popular title of “A Plan of Economic Devel- Acharya Vinoba Bave
opment for India” • Major ideas of the plan were similar to Gan-
• Prepared by Capitalists dhian Plan
• Published in 1944-45 • Negative impact of Indian Planning process @
1960s → Increasing centralising nature and di-
Important Agreements between NPC and Bom-
lution of people’s participation in it
bay Plan Club
1) Agrarian restructuring • Idea of democratic decentralisation was disliked

2) Rapid industrialisation by the rulers → led to the formation of Jaypra-

3) Development of essential consumer goods kash Narayan Committee @ 1961

• JPC pointed out planning and execution of
industries
4) Promoting medium scale, small scale and plans wrt PRI

cottage industries • Disregarding the advice of JPC , central schemes

5) Social welfare
1.8 Gandhian Plan
• Sriman Narayan Agarwal formulated this plan
in 1944
• More emphasis on agriculture
• Promote cottage and village level industries
• Articulated a “Decentralised Economic Struc-
ture” for India with self-contained villages
1.9 People’s Plan
• M N Roy formulated this plan in 1945
• Plan was based on Marxist Socialism
• Focused on the need for providing “basic ne-
cessities of life”
• Agricultural and industrial sectores ➔ equally
highlighted
• “Economic reforms with the human face” –
slogan of 1990s economic reforms has the res-
like SFDA, DPAP, ITDP, IADP were introduced →
outside the purview of Panchayats
• After 73rd and 74th amendments, role of local
bodies and their importance in the process of
planned development was accepted
1.11 Planning Commission
 The Planning Commission was established in
1950, in accordance with Article 39 of the Di-
rective Principles of the Constitution of India
headed by Prime Minister.
 The Commission is independent of the Cabi-
net.
 A staff drafts plans under the guidance of the
Commission; the draft plans are presented for
approval to the National Development
Council, which consists of members of the
Planning Commission, the Chief Ministers of the
States and Administrators of UTs and All Union
Ministers.
11

onance of People’s plan  The Council can make changes in the draft plan.
 After Council approval, the draft is presented
1.10 Sarvodaya Plan
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to the Cabinet and subsequently to Parlia-

ment, whose approval makes the plan an oper-
• Jayprakash Narayan formulated this plan in ating document for Central and State govern-
1950 ments.
Jawaharlal Nehru was the first chairman of the
Planning Commission by virtue of his being the
Prime Minister of India.
Functions
1) Assessment of the material, capital and human
resources of the country, including technical
personnel and formulation of proposals for the
augmentation of such resources;
2) Formulation of plans for effective and balanced
utilization of resources;
3) Defining stages in which the plan should be car-
ried out;
4) Determination of the resources necessary for
implementation of the plans;
5) Appraisal from time to time of the progress
achieved;
6) Public co-operation in national development;
7) Perspective planning;
National Planning Council
 Advisory body attached to the Planning Com-
mission
 It was established in 1965
 It includes experts representing a cross-section
of the Indian economy.
Niti Aayog
 The government of India has replaced Planning
Commission with a new institution named Niti
Aayog (National Institution for Transforming
India).
 The institution will serve as ‘Think Tank’ of the
Government - a directional and policy dynamo.
 Niti Aayog will provide Governments at the
Central and State Levels with relevant strategic
and technical advice across the spectrum of key
elements of policy, this includes matters of na-
tional and international importance on the eco-
nomic front, dissemination of best practices
from within the country as well as from other
nations, the infusion of new policy ideas and
specific issue-based support.
Composition
Niti Aayog will have
 Prime Minister as its chairman
 1 Vice-Chairman cum chief-executive officer
 5 fulltime members
 2 part time members
 4 central government ministers
1.12 Five Year Plans
• The development plans drawn up by the Plan-
ning Commission to establish India’s economy
in five-year phases are called
• Five-Year Plan : A five-year plan is an indicative
plan of action reflecting largely the intent of the
government for that period at the national, re-
gional, and sectorial level.
First Plan (1951-56)
Reasons
✓ Influx of refugees
✓ Severe food shortage
✓ Mounting inflation
✓ Heavy dependence on imports and foreign as-
sistance
o As the economy was facing the problem of
large scale food grains import (1951) and the
pressure of price-rise, the modest overall target
of 2.1% was fixed
Major Objective
12
• Agriculture, Price Stability, Power & Transport.
• The first five year plan focused on to stimulate
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balanced economic development while cor-
recting imbalances caused by World War II and
partition various objectives were.
• It was based on Harrod Domar Model.
• Its highest priority on agriculture, irrigation
and power projects.
Goals
• Rate of investment was targeted at 7% of na-
tional income.
• Modest overall growth target of 2.1%
Outlay
1. 44.6% went in favour of public sector under-
takings (PSUs)
• Under the first five year plan provision was
made to spend a total of 2,378 crore during the
plan period. But the actual expenditure out-
come to 1960 crore only.
Achievements
• National income grew by 18% and per capita
income by 11%.
• Actual Growth Rate – 3.6%
• Food production increased by 20%.
Negative Aspect
2. Development of public sector industries was
neglected and only 6% fund was spent on this.
Positive Aspect
▪ The plan got beginner’s success with 3.6% an-
nual growth rate, actually prices came down.
Many multipurpose irrigation projects were
conceived, and rural development initiative was
taken up.
Outcome
➢ Successful plan primarily because of good har-
vests in the last 2 years of the plan
➢ Objectives of rehabilitation of refugees, food
self-sufficiency and control of prices were more
or less achieved
Second Plan (1956-61)
Reasons
✓ Lack of purchasing power
✓ Unavailability of Infrastructure
✓ Unemployment
Major objective
• Rapid Industrialisation
• It was based on Mahalnobis Model
✓ The emphasis of Mahalanobis model was on
achieving self-reliance and also to meet the
needs of our domestic economy
Goals
• Goal of establishing the socialistic pattern of
society (Industrial Policy of 1956)
• Growth target of 4.5%
• It targeted a 25% increase in national income
through rapid industrialisation
• Rate of investment planned to be raised from
7 % to 11% of national income.
• Rapid industrialization with particular emphasis
on development of basic and heavy indus-
tries.
Outlay
13
✓ Public sector – 4800 cr
✓ Pvt sector – 3100 cr
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✓ Actual outlay, however, amounted to Rs. 4,600
crores of which investment amounted to Rs.
3,650 crores and the balance Rs. 950 crores was
current developmental expenditure
Achievements
• Actual achievement was only 20%
• Achieved growth – 4.21%
• Per capita income rose by 8%.
• Large industries including steel plants (Durga-
pur, Bhilai and Rourkela) were set up.
• The locomotive factory at Chittaranjan and
Coach factory at Perambur were other major
projects of this period.
Negative Aspect
o Due to the assumption of a closed economy,
shortages of food and capital were felt during
this plan.
Positive Aspects
o Second plan was conceived in an atmosphere of
economic stability.
o This plan is known for a top-down industrialisa-
tion of the big industries creating a base for the
growth of medium and small scale industries
and going down to village and cottage indus-
tries.
o Gave birth to the concept of Public Sector of
state run enterprises based on the Russian
model of Industrialisation.
o Most of the public sector in India was set up
during this plan period and also known as the
industrialisation or the public sector plan.
Outcome
✓ Acute shortage of foreign exchange led to
pruning of development targets
✓ Price rise was also seen
✓ Plan was only moderately successful
Third Plan (1961-66)
Reason
✓ At its conception, it was felt that Indian econo-
my has entered a “takeoff stage”
Major Objective
• Self sustaining growth
• Based on John Sandy and S Chakravarthy
model
Goals
3. Make India a 'self-reliant' and 'self-generating'
economy
4. Growth target of 5.6%
5. Integrated growth of industry balanced with
agriculture
Outlay
• Total proposed outlay → Rs. 11,600 crore [ Rs.
7,500 crore was for the public sector ]
• Actual public sector outlay → Rs. 8,576 crore
Achievements
• Growth rate of only 2.2% achieved as against
a target of 5% per annum
Negative aspects
14
• Emphasis on basic industries continued but ag-
riculture and allied sectors (irrigation and
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power) were allocated 35% of the outlay
• A series of crises - China war (1962), Nehru’s
death (1964), Pakistan war (1965) and Shastri’s
death (1966), major drought (1965-66) - marred
the smooth implementation of the plan
• Inflation (36%) ate up much of the achieve-
ment; Rupee devaluation (1966)
Positive Aspects
✓ Due to conflicts the approach during the later
phase was shifted from development to de-
fence & development
✓ Engineering industries like automobiles, cotton
textile machinery, diesel engines, electric trans-
formers and machine tools, advanced according
to set-targets
✓ FCI was established to store grains imported
under USPL-480 programme and PDS was
started for rationing
Outcome
• Slowdown in industrial development
• Failure of monsoon and drought in many parts
of the country
• Only 2% growth rate in foodgrain production
• Increase in inequality in income and wealth
• Challenging balance of payment situation
• Growth rate of per capita income was almost
negligible
• It was a failed plan
Three Annual Plans or Holiday Plan (1966-
69)
Major Objectives
✓ To overcome the ill-effects of two wars
✓ To solve the food problem
✓ To control inflation
✓ To prepare the base for the 4th plan
• Failure of Third Plan that of the devaluation of
rupee (to boost exports) along with infla-
tionary recession led to postponement of
Fourth FYP, a plan holiday was declared for
three years.
Outlay
• Total → Rs. 6,625.4 cr
• Agriculture and irrigation → 25% of total in-
vestment
• 23% → Industrial Sector
• 18% each in power and transport
Positive aspects
• All available resources were mobilised for build-
ing a buffer stock and for stepping up food
production learning from the experience of
near-famine years (1965-66).
• Favourable monsoons and technological break-
through in wheat popularly known as ‘green
revolution’ reduced the inflationary pressure.
• Nationalisation of banks was another major
step during this period.
• Devaluation of currency in 1966
Negative aspect
✓ Failed to control unemployment and inflation
Outcome
o Annual growth rate touched 6.9 % per annum
o Production of food grains reached 95 million
tons in the year 1967-68
15
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Fourth Plan (1969-74)
Outlay → 15782 cr
Reason
✓ Refusal of supply of essential equipment and
raw materials from the allies during Indo Pak
war
Major objective
• Growth with stability and progress towards
self-reliance [Based on Gadgil Strategy]
• Emphasis on growth with distributive justice.
Goals
✓ self-sufficiency in agriculture and industrial
production. (In agriculture, growth rate of 5%
per annum and in industrial production growth
rate of 8% to 10% per annum were targeted)
✓ A substantial increase in the outlay for family
planning (278 crores from 25 crores in third
plan)
Achievements
• Growth rate of only 3.3% achieved as against
a target of 5.7% per annum
• National income grew by 3.3% per annum
• Per capita income by 1.2% per annum
• Agricultural production by 2.8%
• Industrial production by 3.9%
Negative Aspect
• Droughts and the Indo-Pak war of 1971-72 led
the economy to capital diversions creating fi-
nancial crunch for the plan
Positive Aspect
• Nationalisation of 14 banks in 1969
Outcome
• Agriculture and Industrial sector growth rate
was good in first two years but failed to contin-
ue momentum in the last 3 yrs
• High rate of inflation
• Sub-optimal utilization of capacities in the in-
dustrial sector
• Slowdown in new capacity creation
• Labour unrest
• Irregular monsoon
• High unemployment rate
• Higher growth rate of population
• Oil crisis in 1972-73
• Problem of refugees after 1971 war with Paki-
stan
• Growth rate of National Income was 3.2% (Ac-
tual Target --> 5.7%)
• Growth rate of per capita income was negligible
Fifth Plan (1974-79)
Outlay → 39,426 cr
Reason
✓ Economic crisis arising out of run-away inflation
fuelled by hike in oil prices and failure of the
government. takeover of the wholesale trade in
wheat
Major objective
• Twin objectives of poverty eradication and
attainment of self-reliance
• A National Programme for Minimum Needs
including elementary education, safe drinking
water, health care, and shelter for landless.
• Adequate collection and distribution system in
16
order to provide the commodities of necessary
consumption to the poor people on reasonable
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and stable prices.
• Stress on Export Promotion and Import Sub-
stitution
Achievements
• Growth rate of only 4.8% achieved as against
a target of 4.4% per annum
• Agricultural production increased by 4.2% – the
highest so far
Negative Aspects
• The plan was declared closed one year before
the schedule but later on the decision was re-
versed by the Congress government
• No improvement in unemployment situation
• Reduced targets for growth rate of national in-
come as well as different sectors
Positive Aspects
• Moderate inflation of 2.1% per annum
Outcome
• Govt. Launched the Twenty-point programme
• Due to high inflation, cost calculations for the
Plan proved to be completely wrong and the
original public sector outlay had to be revised
upwards
• The plan period was badly disturbed by 1975
emergency and a change of government in the
centre in 1977
• Havocs of inflation led the government to hand
over a new function to RBI to stabilise infla-
tion
• This plan saw an increase in the socio-
economic and regional disparities
Emergency years (1975-1977)
• The Janata Government terminated the Plan in
1978.
Rolling Plan (1978-80)
Reason
• Janata Party government ended the 5th plan one
year before schedule and started 6th plan (1978-
83)
Outlay → 12,177 cr
Positive Aspect
• Janata government launched this rolling plan
emphasising on employment in contrast to
Nehru model which the government criticised
for concentration of power, widening inequality
and for mounting poverty
Negative Aspect
• Due to political instability and change in the
government in the terminal year of the 5th plan,
6th plan could not be started on April 1, 1979
and was postponed for one year
Outcome
✓ This plan could not be completed due to fall
of ‘Janata Party’ government
✓ The year 1979-80 was declared as annual plan
and 6th plan started from April 1, 1980
Sixth Plan (1980-85)
Reason 17
✓ In 1980, there was again a change of govern-
ment at the centre with the return of the con-
gress which abandoned the 6th plan of the Jana-
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ta government in the year 1980 itself and
launched a different plan aimed at directly at-
tacking on the problem of poverty by creating
conditions of an expanding economy
Major objective
• Poverty Alleviation [Garibi Hatao] → it
marked the transformation from allocating
scarce resources in the economy to welfare ori-
entation
Goals
• To ensure faster rate of economic development
• Efficient utilization of resources
• Reduction in unemployment and poverty
• To encourage modernisation for achieving eco-
nomic and technological self-sufficiency
• Rapid development and efficient utilisation of
the energy sources
• To increase people’s participation through edu-
cation
• To minimise regional disparity
• To minimise disparity of income and wealth
• Policies for controlling the population explosion
Outlay → 1,10,468 cr
Positive aspects
• Poverty alleviation gives the top priority
• Qualitative improvement in the living standards
of people by means of Minimum Need Pro-
gramme (MNP)
• Schemes for transferring skills (TRYSEM) and
assets (IRDP) and providing slack season em-
ployment (NREP) → these were not new
schemes, all different schemes were combined
as one scheme and known as Integrated Rural
Development Programmes (IRDP)
• First plan to focus on gender issues, women
empowerment and the growing inequalities
amongst the states and also intra-regional im-
balances
Negative aspects
• Industrial growth rate was less than the target-
ed rate
Achievements
• Actual growth of national income was higher at
5.7% against a target of 5.2%
• Increase of 16% per annum in real invest-
ment in fixed asset by private sector
• Poverty declined from 48.3% in 1977-78 to
37.4% in 1983-84
Outcome
➢ Sixth Plan could be taken as a success as most
of the targets were realised even though during
the last year (1984-85) many parts of the coun-
try faced severe famine conditions and agricul-
tural output was less.
➢ “First six five-year plans were directed plans as
there was a larger role of public sector and sub-
stantially larger investment by the government
or the government could ensure investment in
specific areas as it was the major investor.
➢ The major emphasis in these plans were to-
wards industrialisation, setting-up of the public
sector, self-reliance and establishing India as a
self-generating economy, to provide employ-
ment and meeting the needs of the economy,
rather than they being provided directly by the
government.
➢ Towards 5th and 6th plans, poverty and welfare
orientation of the plans became visible.”
18
Seventh Plan (1985-90)
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Reason
• With the success of 6th FYP, government geared
up towards long term perspective planning
1985-2000 with special focus on energy sector
Major objective: Growth, Modernisation, Self- balance of payment crisis requiring India to
reliance and Social justice seek loan from IMF.

Goals Positive Aspects

• Establishment of a self-sufficient economy • The Plan had a 15-year perspective (1985-

• Progress towards a social system based on
equality and justice
• To prepare firm base for technological devel-
opment in agriculture and industrial sector
• Faster growth in energy sector with focus on
domestic resources
• Ecological and environment protection
• Strong emphasis on creation of productive em-
ployment on farm as well as rural subsidiary oc-
cupations.
• Stress on increasing the production of food
grains, oilseeds, sugar, textiles, domestic fuel
and housing.
• Outward-looking strategy with exports re-
ceiving high priority.
“This plan had two very important areas, one that
of larger agricultural sector orientation of increas-
ing production and productivity and the second
pertains to a steady decline in the public sector in-
vestment implying a larger contribution of private
sector ”
Negative Aspects
• Tempo of domestic and external liberalisation
hastened
• There was a severe short fall in mining sector
(5.6% against a target of 13%)
• Social sector performance fell far short of
targets– especially in housing for the landless,
2000) for removal of poverty, providing for
basic needs, achieving universal elementary ed-
ucation and total access to health facilities.
• Modernisation of various public sector units
was taken up
• Promotion to sunrise industries especially
food processing and electronics
• For the first time, share of public sector in total
plan outlay was less than 50% → 47.8%
• Jawahar Rojgar Yojana (JRY) was launched in
1989 with the motive to create wage-
employment for the rural poor
Achievements
• Average annual growth rate during the plan
period was 5.6% (target 5%).
• Agriculture grew at 4.1% against a target of
4%.
• Manufacturing industries achieved a growth
rate of 8.8% (target 8%).
Outlay → 2,18,730 cr
Outcome
✓ The plan was very successful as the economy
recorded 6% growth rate against the targeted
5% with the decade of 80’s struggling out of the
’Hindu Rate of Growth’.
19

elementary education and general poverty alle-

viation.
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• By the end of the plan, India had a highly un-

favourable balance of payment situation. It
has experienced for the first time, a problem of
imports outstripping exports resulting in the
Two Annual Plans (1990-92)
Reason
✓ Due to economic crisis and political instability at
the centre, 8th plan could not be started in 1990
Outcome
• “New Industrial Policy” was announced and it
is considered the beginning of large scale liber-
alisation in the Indian Economy
• The two consecutive annual plans were formu-
lated within the framework of the approach to
the 8th plan with the basic thrust on maximisa-
tion of employment and social transfor-
mation
“Each successive plan after 7th plan has seen a
phased reduction in public sector outlay and large
levels of private sector, changing planning from ‘di-
rected to indirected’, which is indicating which sec-
tors require investments in terms of priorities and
private sector is accordingly expected to make in-
vestment in those sectors.”
Eighth Plan (1992-97)
Key issues during the launch of the plan:
✓ Worsening balance of payment situation
✓ Rising debt burden
✓ Widening budget deficit
✓ Recession in Industry
✓ Increasing inflation
Major objective: Human resource development
Goals
• Creation of sufficient employment opportunities
and achieve full employment by the end of the
century
• To control population explosion by people’s
participation
• Modernisation and diversification of industries
to make them more competitive
• Special emphasis on areas like primary educa-
tion, drinking water, health
• Universalisation of primary education and 100%
literacy in the age group 15-35 yrs
• Diversification in agriculture sector with the ob-
jective of self sufficieny and surplus for export
Outlay
• The level of national investment proposed
was Rs. 7,98,000 crore and the public sector
outlay, Rs. 4, 34,100 crore.
• Consistent with the expected resources, the size
of the plan of the States and Union Territories
was projected at Rs. 1,86,235 cr and of the cen-
tral plan at Rs. 2, 47,865 crores.
Positive aspects
• The plan was launched in 1992 after the plan
holiday during the economically and politically
difficult days of 1990-91 and 91-92
• It was Manmohan-Rao (F.M- P.M.) Era of eco-
nomic liberalization
• Modernisation of industries was focused
• India became member of WTO to pace with
world economics
Negative aspects
• Share of the public sector in total plan outlay
was 34.3% much below the target of 45.2%
• Actual employment growth was only 2%
against a target of 2.6%.
Achievements
• Per capita national output grew by 3.9% per
annum. But, this growth masked considerable
20
distortion in the distribution front. From data
regarding inflation and price indices, there is
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evidence that the poor became poorer despite
‘the safety net’.
• Annual growth rate achieved in the Plan pe-
riod is 6.8% against the target of 5.6 %.
• Agriculture sector growth rate was 3.6%
higher than the target of 3.5%
• Industrial sector growth rate 8.5% higher
than the the target of 8.1%
Outcome
• The Eighth Plan was to walk on ‘two legs’ -
one leg of alleviating poverty and removing un-
employment; and the other ‘leg’ providing a
‘safety net’ for those who will be affected by the
structural adjustment programme. The plan had
thus built in the ‘human face’ element of ad-
justment.
• Rapid economic growth (highest annual growth
rate so far – 6.8 %)
• High growth of agriculture and allied sector,
and manufacturing sector
• Growth in exports and imports
• Improvement in trade and current account defi-
cit
Ninth Plan (1997-2002)
Reason
• 8th plan period ended in 1997. Implementation
of the 9th plan was to begin from the same
year.
• But a series of political crises in the country
delayed the formulation and approval of the
plan by two years.
• The NDC finally approved the plan in February
1999, envisaging a GDP growth rate of 6.5 per-
cent per annum. Though delayed by two years
in approval, the plan was to run its period
through to 2002
Major objective: Equitable distribution and
growth with equality
Goals
• To extend the achievements of 8th plan
• To create sufficient productive employment
• To give priority to the development of agricul-
ture for eradication of poverty
• To keep the prices under control for faster eco-
nomic development
• To ensure food and nutritional security to all,
especially the vulnerable
• To control the population growth rate
• To provide the basic minimum services like
clean drinking water, primary health care facility
, universal primary education, housing etc.
• To encourage mass participation through insti-
tutions like Panchayati Raj institutions, coopera-
tives and voluntary organisations
Outlay:
The size of the plan was estimated to be Rs.
8,59,000 crore at 1996-97 prices. This included
plans of the Centre, States and public sector under-
takings. The gross budgetary support to the plan
from the Centre was fixed at Rs. 3,74,000 crore. Re-
sources from public sector undertakings and states
were estimated to be Rs. 2, 90,000 crore and Rs. 1,
95,000 crore respectively.
Positive Aspects:
• The development strategy emphasised the role
of markets and the need for government to in-
tervene to promote a degree of competition
21
through suitable legislation. Licence Raj was to
be ended. The Plan emphasised cooperative
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federalism. It also stressed the importance of
infrastructural development.
• Aimed to depend prominently on the private
sector
• The Plan was indicative in nature, focusing on
policies. It also provided a 15-year perspective.
• It aimed to achieve a growth rate of 8% per an-
num in the medium term and a rate of 6.5%
during the plan period (1997-2002).
• It assigned priority to agriculture and rural de-
velopment with a view to generate adequate
productive employment and eradicate poverty
• Envisaged the creation of 52 million jobs as
against the demand for job opportunities for
60.5 million persons.
• The backlog of unemployment, which was 7.5
million at the close of the eighth Plan, was ex-
pected to be 6.6 million at the end of the Ninth
Plan.
Negative aspects:
• The GDP grew only by 5.35% per annum dur-
ing the plan period against the target of 6.5%.
The shortfall was due to poor performance by
agricultural and industrial sectors, as ex-
plained in the table below.
• 9th plan was launched when there was an all
round ‘slowdown’ in the economy by the South
East Asian Financial Crisis (1996-97)
• Some other development during the ninth plan,
such as cyclone in Orissa, earthquake in Gujarat,
Kargil war etc. also resulted in diversion of re-
sources from investment and consequent de-
cline in the growth rates.
Outcome:
The issue of fiscal consolidation became a top pri-
ority of the governments for the first time, which
had its focus on the following related issues:
1. Sharp reduction in revenue deficit of gov-
ernment, including centre, states and PSUs
through a combination of improved revenue
collections and control of in-essential ex-
penditures
2. Cutting down subsidies, collection of user
charges on economic services (i.e. electricity,
transportation, etc.), cutting down interest,
wages, pension, PF, etc;
3. Decentralisation of planning and implemen-
tation through greater reliance on states
and the PRIs.
9th was developed in context of 4 important di-
mensions of the government policy:
✓ Improving the quality of the life
✓ Generation of Productive employment
✓ Creation of regional balances
✓ Self-reliance
Tenth Plan (2002-07)
Reason:
• Taking note of the inabilities of the earlier Five
Years Plans, especially that of the 9th Five Year
Plan, government decided to take up a resolu-
tion for immediate implementation of all the
22
policies formulated in the past.
• Major objective: Growth with emphasis on
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human development
Goals:
• The Tenth Plan laid down an ambitious tar-
get of 8% annual growth rate for the econ-
omy, against the prevailing rate of 5.5%.
• Its long-term vision was to double the per cap-
ita income in the next ten years, to reduce the
decadal population growth from 21.3% (1991-
2001) to 16.2% by 2010-11 and to ensure that
the growth in gainful employment kept pace
with the addition to the labour force.
Total outlay: Rs. 15,92,300 crore
Positive Aspects:
• Accepting that the higher growth rates are not
the only objective – it should be translated into
improving the quality of life of the people
• For the first time the plan went to set the ‘mon-
itorable targets’ for 11 select indicators of de-
velopment for the centre as well as for the
states
• ‘Governance’ was considered a factor of the
development
• Agriculture sector declared as the priming
moving force (PMF) of the economy
• Increased emphasis on the social sector i.e. ed-
ucation, health etc.
Negative Aspects:
• For too many people still lacked the basic re-
quirements for a decent living in terms of nutri-
tional standards, access to education and basic
health, and also many other public services such
as water supply and sewage.
• The benefits did not reach fully some disad-
vantages sections like the Scheduled Castes and
Tribes and minorities.
• Regional imbalances - both across states and
even within states - were also noticed.
• Against the ambitious target of 8%, the econo-
my grew at the rate of 7.7% on an average
during the 10th Plan period.
• Evaluation by the Planning Commission noticed
that while the rate of growth was impressive,
it was lop-sided and did not benefit all peo-
ple alike.
Outcome:
✓ Poor performance of agriculture sector
✓ Critical areas like employment and social infra-
structure were neglected
✓ Foreign exchange reserves have gone up from
about $50 billion to more than $200 billion
Eleventh Plan (2007-12)
Reason:
10th plan reflected the concern that economic
growth alone may not lead to the attainment of the
long term sustainability and of adequate improve-
ment in social justice
Major objective: Faster and more Inclusive
Growth
Goals:
• The Eleventh Plan targets to resolve the re-
gional imbalance still prevailing in the coun-
try.
23
• The Plan document, sub-titled Inclusive
Growth, outlines a strategy for making growth
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both faster and more inclusive. Encouraged by
the achievement of a rate of 7.7% on an aver-
age during the 10th Plan, itself a target of 9%
growth during the Plan period, with acceleration
 during the period to reach 10% by the end of
the Plan.
• The target of 9% growth requires the average
rate of investment to rise from 32% (during
10th Plan) to 37% in the current plan, reaching
39% at the end of the plan period.
• Private investment which has contributed 78%
of the investment during the 10th Plan is ex-
pected to maintain its share.
• Public investment is expected to be maintained
at the same level of 22% as in the 10th Plan.
• Planning Commission has framed a plan for
achieving faster growth with greater inclusive-
ness which involves the following interrelated
components:
a) a continuation of the policy of economic
reform which has created a competitive pri-
vate sector capable of benefiting from the
opportunities provided by greater integra-
tion with the world;
b) more emphasis on agriculture,
c) improved access to essential services in
health and education (including skill devel-
opment);
d) special thrust on infrastructural develop-
ment;
e) special attention to the needs of disadvan-
taged groups, and
f) good governance at all level, central, state
and local.
• The broad targets fixed by the 11th Plan include
a 4% per cent growth in Agriculture sector, 10%
growth in Industries and Minerals, and invest-
ment in infrastructure to grow from 5.43% of
GDP in 06-07 to 9.43% by the end of the 11th
Plan.
Total public sector outlay in the Eleventh Plan
(both Central and States and including the PSEs) is
estimated at 36,44,718 crore. Of this total, the share
of the Centre (including the plans of Public Sector
Enterprises (PSEs) will amount to 21,56,571 crore,
while that of the States and union territories (UTs)
will be 14,88,147 crore.
27 National Targets under 11th Plan
The Plan has adopted 27 targets at the national
level to ensure inclusive growth. These are related
to:
(i) income and poverty
(ii) education
(iii) Health
(iv) women and children
(v) infrastructure
(vi) environment
a) Targeted growth of GDP at 9% per year.
b) To raise industrial growth rate from 9.2% in
10th Plan to 10% in 11th Plan.
c) To reduce unemployment among educated
youth to less than 5%.
d) To reduce Infant Moraling Rate (IMR) to 28 and
Material Morality Rate (MMR) to 1 per 1000 on
live births by the end of plan.
e) To increase sex-ratio to 935 by 2011-12 and 950
by 2016-17.
f) To ensure that all children enjoy a safe child-
hood, without any compulsion to work.
g) To ensure electricity connection to all villages
and BPL household by 2009 and 24-hour power
supply by the end of this plan.
h) To achive standards of air quality in all cities
i) To treat all urban waste water by 2011-12.
j) To increase forest and tree cover by 5%.
Negative Aspects:
• Restoring dynamism in agriculture
• Managing India’s water resources
• Problems in achieving power generation targets
24
• Issues pertaining to urbanisation
• Special problems of urban development
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• Increase in the key deficit indicators
• Issue of price stability
Positive Aspects:
• It has brought out the need for neo-liberal
policies given the changing political dynamics
and a changed face of the economy
• It gave thrust to Public Private Partnership
(PPP) model for infrastructural development in
the economy
Achievements:
• Growth rate of 8% achieved as against a target
of 9% per annum
• The shortfall in achievement of (various growth
targets) can be attributed both to internal and
external factors viz. global slowdown, fluctua-
tions in international prices, strong inflationary
pressures and negative growth in agriculture
due to drought like situation
• Domestic savings and investment averaged
33.5 % and 36.1% of GDP at market prices re-
spectively in the Eleventh Plan which is below
the target but not very far.
Outcome:
• India had emerged as one of the fastest
growing economy by the end of the Tenth
Plan
• The savings and investment rates had increased,
industrial sector had responded well to face
competition in the global economy and foreign
investors were keen to invest in India
• But the growth was not perceived as sufficiently
inclusive for many groups, specially SCs, STs &
minorities as borne out by data on several di-
mensions like poverty, malnutrition, mortality,
current daily employment etc
• Since the period saw two global crises - one in
2008 and another in 2011 – the 8% growth may
be termed as satisfactory.
• Based on the latest estimates of poverty re-
leased by the Planning Commission, poverty in
the country has declined by 1.5 percentage
points per year between 2004-05 and 2009-10.
Eleventh Plan Achievements on Inclusive
Growth:
 GDP growth in the Eleventh Plan 2007–08 to
2011–12 was 8 % compared with 7.6 % in the
Tenth Plan (2002–03 to 2006–07) and only 5.7 %
in the Ninth Plan (1997–98 to 2001–02). The
growth rate of 7.9 % in the Eleventh Plan period
is one of the highest of any country in that pe-
riod which saw two global crises.
 Agricultural GDP growth accelerated in the
Eleventh Plan, to an average rate of 3.7 %, com-
pared with 2.4 % the Tenth Plan, and 2.5 % in
the Ninth Plan.
 The percentage of the population below the
poverty line declined at the rate of 1.5 per-
centage points (ppt) per year in the period
2004–05 to 2009–10, twice the rate at which it
declined in the previous period 1993–94 to
2004–05. (When the data for the latest NSSO
survey for 2011–12 become available, it is likely
that the rate of decline may be close to 2 ppt
per year.)
 The rate of growth of real consumption per
capita in rural areas in the period 2004–05 to
2011–12 was 3.4 % per year which was four
times the rate in the previous period 1993–94 to
25
2004–05.
 The rate of unemployment declined from 8.2
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% in 2004–05 to 6.6 % in 2009–10 reversing the
trend observed in the earlier period when it had
actually increased from 6.1 per cent in 1993 –94
to 8.2 per cent in 2004–05.
 Rural real wages increased 6.8 % per year in
the Eleventh Plan (2007 –08 to 2011–12) com-
pared to an average 1.1 % per year in the previ-
ous decade, led largely by the government’s ru-
ral policies and initiatives
 Complete immunization rate increased by 2.1
ppt per year between 2002–04 and 2007–08,
compared to a 1.7 ppt fall per year between
1998–99 and 2002–04. Similarly, institutional
deliveries increased by 1.6 ppt per year between
2002–04 and 2007–08 higher than the 1.3 ppt
increase per year between 1998–99 and 2002–
04.
 Net enrolment rate at the primary level rose
to a near universal 98.3 % in 2009–10. Dropout
rate (classes I–VIII) also showed improvements,
falling 1.7 ppt per year between 2003–04 and
2009–10, which was twice the 0.8 ppt fall be-
tween 1998–99 and 2003–04.
Twelfth Five Year Plan (2012-2017)
Reasons:
 Global economy was going through a second
financial crisis, precipitated by the sovereign
debt problems of the Euro-zone
 The crisis affected all countries including India.
Our growth slowed down to 6.2% in 2011-12.
 Domestic economy has also run up against sev-
eral constraints. Macro-economic balances have
surfaced following the fiscal expansion under-
taken after 2008 to give a fiscal stimulus to the
economy. Inflationary pressures have built up.
Major objective: Faster, Sustainable and More
Indusive Growth
Planning Commission in its meeting held on April
2011, the Prime Minister, Dr. Manmohan Singh, ad-
dressed the Planning Commission concerning the
twelth Five Year Plan of India. The main point of the
Twelfth Plan are:
Resource Allocation Priorities in 12th plan
• Health and Education received less than pro-
jected in Eleventh Plan. Allocations for these
sectors will have to be increased in 12th plan.
• Health, Education and Skill Development to-
gether in the Centre’s Plan will have to be in-
creased by at least 1.2% point of GDP.
• Infrastructure,including irrigation and watershed
management and urban infrastructure, will need
additional 0.7 percentage point of GDP over the
next 5 years.
• Since Centre’s GBS will rise by only 1.3 percent-
age points over 5 years, all other sectors will
have a slower growth in allocations.
• Decrease the number of Centrally Sponsored
Schemes (CSS) to a few major schemes. For the
rest, create new flexi-fund which allow Minis-
tries to experiment in other CSS areas.
• PPP model must be encouraged, including in
the social sector, i.e. health and education. Ef-
forts on this front need to be intensified.
• Distinction between plan and non-plan being
reviewed by Rangarajan Committee.
Broad Objectives of 12th Five Year Plan
• To reduce poverty
• To improve regional equality across states and with-
in states
• To improve living conditions for SCs, STs, OBCs, Mi-
norities
• To generate attractive employment opportunities
for Indian youth
• To eliminate gender gaps
Monitorable Targets of the Plan:
25 core indicators listed below reflect the vision of
rapid, sustainable and more inclusive growth of the
26
twelfth Plan:
Economic Growth
NextGen IAS
1. Real GDP Growth Rate of 8.0 %
2. Agriculture Growth Rate of 4.0 %
3. Manufacturing Growth Rate of 10.0 %
4. Every State must have an average growth rate in
the Twelfth Plan preferably higher than that
achieved in the Eleventh Plan.
Poverty and Employment
5. Head-count ratio of consumption poverty to be
reduced by 10 percentage points over the pre-
ceding estimates by the end of Twelfth FYP.
6. Generate 50 million new work opportunities in
the non-farm sector and provide skill certifica-
tion to equivalent numbers during the Twelfth
FYP.
Education
7. Mean Years of Schooling to increase to seven
years by the end of Twelfth FYP.
8. Enhance access to higher education by creating
two million additional seats for each age cohort
aligned to the skill needs of the economy.
9. Eliminate gender and social gap in school en-
rolment (that is, between girls and boys, and
between SCs, STs, Muslims and the rest of the
population) by the end of Twelfth FYP.
Health
10. Reduce IMR to 25 and MMR to 1 per 1,000 live
births, and improve Child Sex Ratio (0 –6 years)
to 950 by the end of the Twelfth FYP.
11. Reduce Total Fertility Rate to 2.1 by the end of
Twelfth FYP.
12. Reduce under-nutrition among children aged
0–3 years to half of the NFHS-3 levels by the
end of Twelfth FYP.
Infrastructure, Including Rural Infrastructure
13. Increase investment in infrastructure as a per-
centage of GDP to 9 % by the end of Twelfth
FYP.
14. Increase the Gross Irrigated Area from 90 mil-
lion hectare to 103 million hectare by the end of
Twelfth FYP.
15. Provide electricity to all villages and reduce
AT&C losses to 20 % by the end of Twelfth FYP.
16. Connect all villages with all-weather roads by
the end of Twelfth FYP.
17. Upgrade national and state highways to the
minimum two-lane standard by the end of
Twelfth FYP.
18. Complete Eastern and Western Dedicated
Freight Corridors by the end of Twelfth FYP.
19. Increase rural tele-density to 70 % by the end of
Twelfth FYP.
20. Ensure 50 % of rural population has access to
40 lpcd piped drinking water supply, and 50 %
gram panchayats achieve Nirmal Gram Status
by the end of Twelfth FYP.
Environment and Sustainability
21. Increase green cover (as measured by satellite
imagery) by 1 million hectare every year during
the Twelfth FYP.
22. Add 30,000 MW of renewable energy capacity
in the Twelfth Plan
23. Reduce emission intensity of GDP in line with
the target of 20 % to 25 % reduction over 2005
levels by 2020.
Service Delivery
24. Provide access to banking services to 90 per
cent Indian households by the end of Twelfth
FYP.
25. Major subsidies and welfare related beneficiary
payments to be shifted to direct cash transfer
by the end of the Twelfth Plan, using the Aadhar
platform with linked bank accounts.
27
 13th Finance Commission increased the devolu-
tion to the states from 30.5 %to 32 % of divisi-
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ble pool and it covers the period up to 2014-15,
which includes the first three years of the
twelfth Plan.
 The projections of resources for the Twelfth
Plan have been made assuming 28.45 % of tax
devolutions of the Gross Tax revenue.
 This has been assumed by factoring in the sur-
charges being phased out and keeping the
same ratio beyond 13th FC period till the termi-
nal year of the Twelfth Plan.
th
 Recently 14 Finance Commission increased the
devolution to the states from 32 %to 42 % of
divisible pool and it covers the period up to
2015-16
Review of Five-Year Plans
Sectorial Growth Rate in Different Five Years
Plans
The following interferences can be drawn from
the above table
 The average growth during the period of 1st to
11th plan works out to be about 4.5%. This is
quite a considerable achievement compared
to 1% growth during the pre-Independence
period
 Agriculture has been growing at 2-3% during
the plan periods as against 0.3% growth during
the pre-Independence period
 Spectacular industrial progress has been
made during the plan periods. The industrial
growth is recorded at 6-8% which is nearly 3-4
times higher than the growth rate during the
pre-Independence period
 The trend growth rate during the first 3 decades
of the planning was extremely modest at the
rate of 3.5% per annum. In the later phase of
1981-2013, the growth rate was recorded at
5.9% per annum
 It is clear that there was a sharp acceleration
in the rate of growth since 1980. It went al-
most unnoticed. It came into limelight in the
early 2000s. A majority of scholars opined that
the structural break in the economic perfor-
mance of independent India occured around
1980. The growth was impressive, not only in
comparison with the part in India but also in
comparison with the performance of most de-
veloped countries in the world.
 In developed countries, the industrial and ser-
vice sectors contribute a major share in GDP
with agriculture accounting for a relatively lower
share. During the progress of growth over the
years, the Indian economy too experienced an
improvement in the shares of industry and
services sector in overall GDP. However, the
share of agricultural sector in GDP has been
continuously declining and it came down to
13.9% in 2013-14. It is a cause of worry as the
28
Indian agriculture has been in crisis with crop
holidays and farmers suicides
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 A significant growth rate is noticed with re-
gard to service sector. During 2008-09 to
2013-14, the contribution of services to GDP
growth was as high as 69.8%. It reflects the
structural transformation of the economy, as it
 moves to a somewhat higher level of develop-
ment. However, one should think about the sus-
tainability of this pattern of growth. The real
th
failure, throughout the second half of the 20
century, was India’s inability to tranform its
growth into development, which would have
brought about an improvement in the living
conditions of common people.
Self-Reliance:
 The 4th plan set before itself the two princi-
pal objectives of “growth with stability” and
“progressive achievement of self-reliance”
 Even in the subsequent plans, planned devel-
opment enabled India to be self sufficient in
most of the important sectors and productive
activities
 It is no small achievement to note that India is
the only country with self sufficiency to a
considerable extent among the 115 develop-
ing countries of the world
 In the field of self reliance, India has made two
achievements. First, the country is now almost
self-sufficient in food. Second, with the
growth of iron and steel; machine tools and
heavy engineering industries, India made ad-
vancement towards self-reliance in capital
equipment
Balanced regional development:
 Regional disparities in development have been
a major concern throughout the plan period.
The Planning Commission has sought to tackle
the problem of regional disparities in 3 ways:
1) The recognition of backwardness as a fac-
tor to be taken into account in the transfer
of financial resources from centre to states
2) Special area development programmes di-
rected at development of backward areas
3) Measures to promote private investment in
backward areas
 It is now well established that the inter-state
disparities in the growth of GSDP have in-
creased in the post reform period beginning
from early 90s when compared to 80s
 The general view is that the richer states have
grown faster than the poorer states.
 The regional disparities in per capita GSDP
growth is even greater because the poorer
states in general have experienced a faster
growth in population
 The states whose pre-reform conditions were
favourable in respect of infrastructure could
benefit from the opportunities opened up, es-
pecially in the service sector, by economic re-
forms and could register higher growth rates in
GSDP
 Naturally, the private investment has been
flowing basically to the high income states
where per capita outlays have been higher and
where infrastructure is well developed
 More than half of the share in FDI and foreign
technical collaborations were attracted by the
advanced states such as Maharashtra, Gujarat
and Tamil Nadu
Enhancement of employment opportunities:
➔ The extent of unemployment in the country at
the start of the planning and its reduction over
the years shows how eradication of unemploy-
ment is being undertaken
➔ As per the 68th round of NSSO;unemployment
rate according to Usual Principal Status (UPS)
was 2.7% for 2011-12; while it was 3.7% accord-
ing to Current Weekly Status (CWS) and 5.6%
according to Current Daily Status (CDS). It im-
29
plies that high degree of intermittent unem-
ployment is there in India
NextGen IAS
➔ Rural unemployment in the form of seasonal
unemployment is higher than urban unem-
ployment
➔ Over the years, government has introduced dif-
ferent employment generation programmes on
 permanent basis sometimes and on majority of
times
Reduction in Income Inequalities:
➔ During the plan period, income distribution in
India has been skewed in favour of the top
20% of people in the country
➔ In the mid 90s income disparity between the
top and bottom levels of the population was
nearly 5 times
➔ During the whole plan period, income inequali-
ties have not been reduced in India
➔ In the post reform period, especially last one
and half decades income inequalities have been
further widening
Elimination of Poverty:
➔ During the plan period, various measures have
been introduced by the government to reduce
the problem of poverty in the country.
➔ Provision of essential food items and kerosene
through the PDS at subsidised prices, rural and
urban employment programmes, free educa-
tion, health and housing facilities are some key
government programmes in this direction
➔ The government has also proposed food securi-
ty legislation according to which food at afford-
able prices would be made available to the
people below the poverty line
➔ All the estimates state that rural poverty is rela-
tively more when compared to urban poverty
Modernisation:
➔ The term modernisation means a variety of
structural and institutional changes in the eco-
nomic activities
➔ India has given importance to science, technol-
ogy and rationalization during the plan period
to improve productivities
➔ New agricultural strategy in the form of green
revolution was introduced in the 3rd five year
plan
➔ From the 7th plan onwards technological ad-
vances were given priority under modernization
Inclusiveness and sustainability of growth:
➔ Inspite of relatively satisfactory performance in
some of the macro economic variables, post-
reform period witnessed slow rate of reduc-
tion in poverty, low quality of employment of
growth, increase in rural-urban disparities, in-
crease in income inequalities across the social
groups and increase in the regional disparities.
➔ Agricultural growth was low in the last 10
yrs and farmer suicides are more evident in
the post-reform period.
➔ By keeping these imp issues in mind , 11th FYP
introduced the objective of inclusiveness and
sustainability of growth
 Inclusive growth is a broader concept cover-
ing economic, social and cultural aspects of de-
velopment.
 The major components of inclusive growth in
India are
(i) Agriculture growth
(ii) Employment generation and poverty
reduction
(iii) Reduction in regional and other dis-
parities
(iv) Achieving an equitable growth
• The objective of inclusiveness is reflected in the
adoption of monitorable targets in 12th FYP. In-
clusiveness primarily aims at providing econom-
ic benefits to hither to neglected marginalized
30
sections so that economy can move towards an
equitable growth.
NextGen IAS
1.13 Major challenges in the economy:
 Delivering essential public services to the poor
 Regaining agricultural dynamism and improving
the status of farmers with reference to perfor-
mance of human development particularly in
health and education
 Increasing manufacturing competitiveness to
face global competition
 Developing human resources
 Protecting the environment
 Improving governance
 Removing regional backwardness
 Bridging the gap between urban and rural India
 Inclusion of social and marginal groups, women,
minorities and children in growth process
 Women empowerment
1.14 Achievements of Planning:
➔ There is a considerable rise in Net Domestic
Product, savings and investment
➔ Per capita incomes have increased
➔ India has achieved self-sufficiency in almost all
basic and capital goods industries and consum-
er goods industries
2. FROM PLANNING TO NITI AAYOG
• NITI → National Institution for Transforming
India
• Established by the government of India as a re-
placement for the Planning Commission
• It is formed on the basis of extensive consulta-
tions across the stake holders – state govern-
ments, relative institutions, experts and the
people at large
• India has undergone a paradigm shift over the
past six decades - politically, economically, so-
cially, technologically as well as demographical-
ly. The role of Government in national devel-
opment has seen a parallel evolution.
• NITI has not come into existence all of a sud-
den. The document of 8th five yr plan, stand-
ing committee on finance in its report on
➔ Self-sufficiency in foodgrains production is
achieved and food security is assured
➔ There is a good deal of diversification in indus-
trial structure
➔ The plans have created significant infrastructure
particularly in the fields of transport, irrigation
and telecommunications
➔ There has been tremendous development of
educational sector and there has been a signifi-
cant growth in trained scientific and technical
manpower. India is one of the leading nations in
IT and space exploration
Failures of Planning:
 Incidence of poverty is relatively high in rural
areas
 Unemployment has risen. This is the basic rea-
son for poverty in both urban and rural areas
 Inequalities of income have not been reduced.
They have been widening in the post reform era
 There is unequal land ownership as land re-
forms are inadequately implemented
 Regional disparities still persist
demand for grants (2011-12) and Manmohan
Singh accepted in his farewell address to the
Planning Commission in 2014 have sought ap-
propriate changes in the Planning Commission
8th Five Year Plan document:
➔ The very first plan after the liberalisation of
1991 - itself categorically stated that, as the role
of Government was reviewed and restructured,
31
the role and functions of the Planning Commis-
sion too needed to be rethought.
NextGen IAS
➔ The Planning Commission needed to be re-
formed to keep up with changing trends; letting
go of old practices and beliefs whose relevance
had been lost, and adopting new ones based on
 the past experiences of India as well as other These hubs reflect the two key tasks of the
nations. Aayog.

Standing Committee on Finance of the 15th 2.1 Functions and Mandates of NITI
Lok Sabha Ayog:
➔ Observed in its 35th Report on Demand for
➔ Think tank for Government policy formulation.
Grants (2011-12) that the Planning Commis-
➔ Find best practices from other countries, partner
sion "has to come to grips with the emerging
with other national and international bodies to
social realities to re-invent itself to make itself
help their adoption in India.
more relevant and effective for aligning the
➔ Cooperative Federalism: Involve state govern-
planning process with economic reforms and its
ments and even villages in planning process.
consequences, particularly for the poor"
➔ Sustainable development
Mahatma Gandhi had said: ➔ Urban Development: to ensure cities can remain
habitable and provide economic venues to eve-
➔ "Constant development is the law of life, and a
ryone.
man who always tries to maintain his dogmas in
➔ Participatory Development: with help of private
order to appear consistent drives himself into a
sector and citizens.
false position". Keeping true to this principle
➔ Inclusive Development or Antyodaya: Ensure SC,
our institutions of governance and policy must
ST and Women too enjoy the fruits of Devel-
evolve with the changing dynamics of the new
opment.
India, while remaining true to the founding
➔ Poverty elimination to ensure dignity and self-
principles of the Constitution of India, and root-
respect.
ed in our Bharatiyata or wisdom of our civiliza-
➔ Focus on 5 crore Small enterprises– to generate
tional history and ethos.
more employment for weaker sections.
• Keeping with these changing times, the Gov-
➔ Monitoring and feedback. Midway course cor-
ernment of India has decided to set up Niti
rection, if needed.
Aayog (National Institution for Transforming In-
➔ Make policies to reap demographic dividend
dia), in place of the erstwhile Planning Commis-
and social capital.
sion, as a means to better serve the needs and
➔ Regional Councils will address specific “issues”
aspirations of the people of India
for a group of states. Example: Regional Council
• The new institution will be a catalyst to the de-
for drought, Left-wing extremism, Tribal welfare
velopmental process; nurturing an overall ena-
and so on.
bling environment, through a holistic approach
➔ Extract maximum benefit from NRI’s geo-
to development going beyond the limited
economic and Geo-political strength for India’s
sphere of the Public Sector and Government of
32

Development.
India
➔ Use Social media and ICT tools to ensure trans-
• At the core of Niti Aayog’s creation are two
parency, accountability and good governance.
NextGen IAS

hubs – Team India Hub and the Knowledge

➔ Help sorting inter-departmental conflicts.
and Innovation Hub. The Team India Hub
leads the engagement of states with the Central 2.2 Structure of NITI:
government, while the Knowledge and Innova-
tion Hub builds NITI’s think-tank capabilities. Niti Aayog will comprise:
• Chairperson: Prime Minister of India • Members: full-time
• Governing Council: comprising the Chief Min- • Part-time Members: maximum of 2, from lead-
isters of all States and Lt. Governors of Union ing universities, research organisations and oth-
Territories er relevant institutions in an ex-officio capacity.
• Regional Councils: will be formed to address Part time members will be on a rotational.
specific issues and contingencies impacting • Ex-Officio Members: maximum of 4 members
more than one state or region. Strategy and of the Union Council of Ministers to be nomi-
Planning in the Niti Aayog will be anchored nated by the Prime Minister.
from State-level; with Regional Councils con- • Chief Executive Officer: to be appointed by
vened by the Prime Minister for identified prior- the Prime Minister for a fixed tenure, in the rank
ity domains, put under the joint leadership of of Secretary to the Government of India.
related sub-groups of States (grouped around • Secretariat: as deemed necessary
commonalities which could be geographic,
Niti Aayog will aim to accomplish the following
economic, social or otherwise) and Central Min-
objectives and opportunities:
istries.
Regional Councils will  An administration paradigm in which the Gov-
✓ Have specified tenures, with the ernment is an "enabler" rather than a "provider
mandate to evolve strategy and of first and last resort."
oversee implementation  Progress from "food security" to focus on a mix
✓ Be jointly headed by one of the of agricultural production, as well as actual re-
group Chief Ministers (on a rotation- turns that farmers get from their produce.
al basis or otherwise) and a corre-  Ensure that India is an active player in the de-
sponding Central Minister. bates and deliberations on the global com-
✓ Include the sectoral Central Ministers mons.
and Secretaries concerned, as well as  Ensure that the economically vibrant middle-
State Ministers and Secretaries. class remains engaged, and its potential is fully
✓ Be linked with corresponding do- realized.
main experts and academic institu-  Leverage India's pool of entrepreneurial, scien-
tions. tific and intellectual human capital.
✓ Have a dedicated support cell in the  Incorporate the significant geo-economic and
Niti Aayog Secretariat geo-political strength of the Non-Resident Indi-
• Special Invitees: experts, specialists and practi- an Community.
tioners with relevant domain knowledge as spe-  Use urbanization as an opportunity to create a
cial invitees nominated by the Prime Minister. wholesome and secure habitat through the use
Chairperson - Prime Minister of modern technology.
33

 Use technology to reduce opacity and potential

Vice-Chairperson
(appointed by PM)
Members: Full-time for misadventures in governance.
NextGen IAS

Max. 2 Max. 4 Chief Executive

Officer
Secretariat The Niti Aayog aims to enable India to better
Part time members Ex-officio members
face complex challenges, through the following:
• Prime Minister as the Chairperson
• Vice-Chairperson: to be appointed by the Leveraging of India's demographic dividend,
Prime Minister and realization of the potential of youth, men
 and women, through education, skill develop-
ment, elimination of gender bias, and employ-
ment
Elimination of poverty, and the chance for every
Indian to live a life of dignity and self-respect
Redressal of inequalities based on gender bias,
caste and economic disparities
Integrate villages institutionally into the devel-
opment process
Policy support to more than 50 million small
businesses, which are a major source of em-
ployment creation
Safeguarding of our environmental and ecolog-
ical assets
2.3 VEHICLE OF GOOD GOVERNANCE
➢ Chanakya had mapped out centuries ago how
good governance was at the root of a nation’s
wealth, values, comfort and happiness.
➢ Niti Aayog will seek to facilitate and empower
this critical requirement of good governance,
which is people-centric, participative, collabora-
tive, transparent and policy-driven.
➢ It will provide critical directional and strategic
input to the development process, focussing on
deliverables and outcomes.
➢ This, along with being as incubator and dissem-
inator of fresh thought and ideas for develop-
ment, will be the core mission of Niti Aayog.
2.4 Niti Aayog’s Vision for New India:
➢ With the aim to transform India, NITI Ayog
has envisioned an ambitious agenda for the
country to be achieved by 2032. The five year
plan will be replaced by a three year action plan
which will be a part of a seven year strategy that
will in turn help to realise 15 year long term vi-
sion.
➢ The target set for next 15 years include 3 fold
rise in GDP, Rs. 2 lakh increase in per capita
GDP and facilities such as housing with toilets,
electricity and digital connectivity for all, a fully
literate population with unhindered access to
health care and a clean India with clean air and
water etc.
➢ What is the need of the hour ??
➢ Today, there is a need to identify and address
the challenges faced because of global envi-
ronment, consistent poverty within India, re-
gional inequalities etc.
➢ Indian economy will grow at a rapid pace pro-
vided certain preconditions are met. When
there is matter of planning and growth, the
tendency is to look into investment, capital out-
put ratio etc. but beyond that, there is a need to
look at investment in social capital, human
capital which is badly neglected. There is a
need of social harmony in country when news
such as recent killing of CRPF jawans in sukma,
unrest in Kashmir shows a warfare going on in
certain parts of country. It is not possible to
grow efficiently if there is domestic discord and
social non-harmony.
Challenges
➢ Employment- Today, India is seeing high eco-
nomic rate with almost jobless growth. Indian
workforce is increasing every month by 1 mil-
lion and the jobs getting created are in lakhs.
Without large job creation there isn’t going to
be poverty reduction. The challenge to tackle
job less growth and less employment oppor-
tunity is going to become worse even at 9%
growth with technological changes.
➢ Education- higher literate population talks
about good quality education for all, which
34
means doubling public investment in education,
health care and social protection is required.
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Lack of public expenditure in social capital will
create long term problems.
➢ Agrarian crisis is visible almost everywhere but
there is hardly any steps to protect farmers’ in-
come and building resilience for small rain fed
 farmers. Every year, knee-jerk or situation based
actions are taken.
➢ Malnutrition is related to all other inequalities,
condition of women, adolescent girls, lack of
access to clean water and sanitation, conditions
of tribal population.
How to address the current challenges?
The focus has to be on
• 3 D- demand, demography and democracy
which are inherent to India.
• Inclusiveness- need to focus on inclusiveness by
providing health facilities, education for all and
expenditure in infrastructure, agriculture etc.
• Resilience- the focus has to be on public institu-
tions by strengthening them. Regulating envi-
ronment, banking system and management of
natural resources important for resilience.
Funding the development
Earlier, lot of funds used to come to states from
central government through two ways-
o Devolution as per finance commission’s rec-
ommendation which is 42% of revenue share of
the centre.
o Through special schemes of various union min-
istries to which any eligible state can lay a claim
and get money.
➢ The NITI Ayog has a system of laying out out-
comes to be achieved in healthcare, education
and water management which are thought out
in detail.
➢ For this, secretaries of departments of state
➢ There cannot be sustenance of social capacity
that is required to generate the kind of growth
expected for 15 years.
The positive impact of Niti Aayog can be seen as
 Cooperative Federalism : The centre and states
have been brought on a single platform with
state Chief ministers heading certain commit-
tees. Eg. DBT on Kerosense in Andhra
 It has been able identify best practices of cer-
tain states and replicate them in others aban-
doning the previous top down approach eg.
UP’s seed DBT replication, Yantradoot-Farm
Machine rent scheme being replicated
 Various indices such Agri marketing index,
Health index have created competitive envi-
ronment among states to foster reforms
 The extra constitutional role of Planning com-
mission which usurped the domain of finance
commission has been done away with
Certain issues are
• Its role has become that of think thank whose
recommendations are advisory
• Centre’s domination and bias in the institution
is still persistent as some states don’t attend
center state meetings
Niti Aayog ‘s vision, action and strategy reflects the
new aspirational India as
o It has fostered the SETU and Atal Innovation
Mission to boost startup ecosystem in India
o Its 3 year and 15-year plans are in line with tan-
gible short term and long term goals for the na-
tion
35

government, chief secretaries and occasionally

o It is overseeing authority for SDG which seek to
CMs are convened by the NITI Ayog to monitor,
make India at par with developed nations
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evaluate and incentivise.

o Its reformative suggestions in the agriculture
➢ This is happening. But enough money is not go-
sector such as land leasing and land pooling
ing into it. In healthcare, India spends far less
have potential to transform rural India
than any other country, just 1% of GDP.
Though transformed role of Niti Aayog has been
much appreciated it is accused of being urban cen-
tric organisation with little focus for the rural youth
who form the bulk of the young population of the
country towards which it needs to redirect its focus.
Guiding Principles
➢ In carrying out the functions, Niti Aayog will be
guided by an overall vision of development
which is inclusive, equitable and sustainable. A
strategy of empowerment built on human
dignity and national self-respect, which lives
up to Swami Vivekananda’s idea of our duty to
encourage everyone in his struggle to live up to
his own highest idea”.
➢ Antyodaya: Prioritize service and uplift of the
poor, marginalized and downtrodden, as enun-
ciated in Pandit Deendayal Upadhyay’s idea of
‘Antyodaya’. Development is incomplete and
meaningless, if it does not reach the farthest in-
dividual. In the centuries old words of Tiru-
valluvar, the sage-poet, nothing is more dread-
fully painful than poverty”.
➢ Inclusion: Empower vulnerable and marginal-
ized sections, redressing identity-based inequal-
ities of all kinds gender, region, religion, caste
or class. As Sankar Dev wrote decades ago: "to
see every being as equivalent to one’s own soul
is the supreme means (of attaining deliver-
3. Money and Banking
3.1 Financial System:
 A financial system is an institutional mecha-
nism that intermediates between ultimate
borrowers and ultimate lenders.
ance)". Weaker sections must be enabled to be
masters of their own fate, having equal influ-
ence over the choices the nation makes
➢ Village: Integrate our villages into the devel-
opment process, to draw on the vitality and en-
ergy of the bedrock of our ethos, culture and
sustenance.
➢ Demographic dividend: Harness our greatest
asset, the people of India; by focussing on their
development, through education and skilling,
and their empowerment, through productive
livelihood opportunities.
➢ People’s Participation: Transform the devel-
opmental process into a people-driven one,
making an awakened and participative citizenry
the driver of good governance. This includes
our extended Indian family of the Non-Resident
Indian community spread across the world,
whose significant geo-economic and geo-
political strength must be harnessed.
➢ Governance: Nurture an open, transparent, ac-
countable, pro-active and purposeful style of
governance, transitioning focus from Outlay to
Output to Outcome.
➢ Sustainability: Maintain sustainability at the
core of our planning and developmental pro-
cess, building on our ancient tradition of re-
spect for the environment.
3.2 Classification of financial system:
 Broadly, on the basis of purpose, the finan-
36
cial system can be classified into industrial
finance, agricultural finance, development
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finance and government finance.
Indian Financial System:
  The Indian Financial System consists of two
markets: the Money Market and the Capi-
tal Market.
Money Market:
➢ Money market is a short term credit market
for short term funds.
➢ Money market deals in financial securities
whose period of maturity is in the range of
one day to one year.
➢ In money market, the commercial banks are
the major lenders of money.
➢ RBI is the controlling authority of the money
market.
➢ The cluster of financial institutions that deal in
short-term securities and loans, gold and for-
eign exchange are termed as money market.
Unorganized money market:
➢ The unorganized money market consists of in-
digenous bankers, money lenders and un-
regulated non-bank financial intermediaries
such as finance companies, chit funds and
nidhis.
➢ Farmers, artisans and other small time produc-
ers and traders borrow money from the unor-
ganized money market.
Organized Money Market:
➢ Organized money market is the formal market
for money regulated by RBI with commercial
banks being the main players.
➢ Foreign banks, co-operative banks, Discount
and Finance House of India, finance companies,
provident funds, Securities Trading Corporation
of India, Public Sector Undertakings and mutual
funds are the other institutions which operate in
the formal Indian money market.
➢ The Reserve Bank of India is the monetary au-
thority controlling the formal money market.
Components of Money Market in India:
3.3 Concept of Money Supply:
➔ Money supply refers to the amount of money
which is in circulation in an economy at any
given time.
➔ It is the total stock of money held by the
people consisting of individuals, firms, State
and its constituent bodies except the State
treasury, Central Bank and Commercial Banks.
➔ Simply money supply is stock of money in circu-
lation.
➔ The supply of money in a country depends up-
on the system of note issue adopted by the
37
country. For instance, India adopted the Mini-
mum Reserve System in 1957. Under this sys-
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tem, the Reserve Bank of India has to main-
tain a minimum reserve of Rs.200 Crores
consisting of gold and foreign securities. Out
of this, the value of gold should not be less
than Rs.115 Crores.
➔ There are different forms of money supply –
reserve money, narrow money, broad money
etc. But the most important indicator of all
these is reserve money. It is also called as
high powered money, base money and cen-
tral bank money.
NOTE: Bank money is considered as sec-
ondary money whereas cash money is
known as high powered money.
3.4 Currency in Circulation:
 Currency in circulation comprises currency with
the public and cash in hand with banks.
 It includes notes in circulation, rupee coins and
small coins.
 The rupee coin is a token coin made of nickel
and its face value is higher than its metallic val-
ue.
 Govt issues all coins upto Rs. 1000.
 All the paper currency of India except one
rupee note bears the signature of RBI Gov-
ernor as these are issued by RBI, but the one
rupee note bears the signature of the Fi-
nance Secretary.
 One Rupee Note doesn’t contain “I promise to
pay bearer..”
 The volume of rupee coins and small coins as
well as one-rupee notes in controlled by RBI.
 RBI can print and issue currency notes of dif-
ferent denominations from two rupee notes
to ten thousand rupee notes.
 The symbol of Indian Rupee came into use
on July 15th,2010. India is the 5th economy (af-
ter America, Britain, Japan and Europe) to ac-
cept a new currency symbol.
 New currency symbol was designed by D
Udaya Kumar. It is an amalgamation of De-
vangri ‘Ra’ and the Roman ‘R’ without the stem.
38
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3.5 Velocity of Circulation of Money:
• The average number of times a unit of mon-
ey circulates amongst the people in a given
year is known as Velocity of Circulation of Mon-
ey.
3.6 Quantity of Money:
The quantity of money in existence in a country at a
particular time or the supply of money in a spenda-
ble form consists of 2 items.
1) Currency component consisting of coins
and currency notes issued by RBI which are
in circulation
2) Deposit component consisting of deposits
of general public with banks, which they can
withdraw through bank cheques and ATM
cards.
3.7 Money Multiplier:
▪ It describes how an initial deposit leads to a
greater final increase in the total money supply.
▪ It represents the largest degree to which the
money supply is influenced by changes in
the quantity of deposits.
3.8 Stock of Money:
➢ In every economy it is necessary for the central
bank to know the stock (amount/level) of mon-
ey available in the economy only then it can go
for suitable kind of credit and monetary pol-
icy.
➢ Following the recommendations of the Second
Working Group on Money Supply (SWG) in
1977, RBI has been publishing four monetary
aggregates (component of money)– M1, M2,
M3 and M4 ( are basically short terms for the
Money-1, Money-2, Money-3 and Money-4)
besides the Reserve Money.
Monetary Aggregates:
Reserve Money:
Reserve Money (M0) = Currency in Circulation +
Bankers’ Deposits with RBI + ‘Other’ Deposits with
RBI
➔ Reserve money holds the topmost position in
the RBI’s monetary policy.
➔ RBI issues currency notes of rupees 2, 5, 10, 20,
39
50, 100, and 2000 denominations which RBI
calls as the ‘Reserve Money’
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➔ RBI issues currency of one rupee notes and
coins including coins of smaller denomina-
tions on behalf of the government of India
which accounts for around 2% of the total high
power money.
 Gross amount of the following 6 segments of ▪ Narrow money is a category of money supply
money at any point of time is known as Reserve that includes all physical money like coins and
Money (RM) currency along with demand deposits and
other liquid assets held by RBI.
1) RBI’s net credit to the government
▪ Narrow Money (M1) ➔ Currency + Bank Money
2) RBI’s net credit to the Banks
held by the people
3) RBI’s net credit to the commercial banks
▪ Narrow money excludes time deposits of the
4) Net forex reserve with the RBI
public with the banking system on the
5) Govt’s currency liabilities to the public
ground that they are income-earning assets and
6) Net non-monetary liabilities of the RBI
as such are not liquid.
Narrow Money:

Near Money: ▪ Examples of near money are: Savings account,

Money funds, Bank time deposits (certificates of
▪ Some financial assets may not be as liquid as
deposit), government treasury securities (such
the currency notes and chequable deposits. For
as T-bills), Bonds near their redemption date,
example, the time deposits, Bankers Ac-
Foreign currencies, especially widely traded
40

ceptances, Bills of Exchanges, government

ones such as the US dollar, euro or yen.
and Private Bonds, Saving certificates,
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Shares etc. though possess the power of Hard Money:

money but are not able to immediately per-
▪ Hard money is money issued with the backing
form the economic activities but still they are
of gold or other very credible assets.
highly liquid and can be easily converted in-
▪ Hard money avoids the risks of inflation.
to money. Thus, these are called “Near Money”.
Soft Money:
▪ Soft money is just paper currency backed by
government bonds. Here money is printed
without keeping adequate reserves like gold in
proportion to the newly issued money.
▪ Element of inflation is higher under soft money.
Fiat Money:
▪ Currency notes and coins are called fiat mon-
ey.
▪ They do not have intrinsic value like a gold or
silver coin.
▪ They are also called legal tenders as they can-
not be refused by any citizen of the country for
settlement of any kind of transaction.
Hot Money:
▪ Funds which flow into a country to take ad-
vantage of the favourable rates of interest in
that country.
▪ They influence the balance of payments and
strengthen the exchange rate of the recipient
country.
3.9 Proportional Reserve System:
▪ Originally, the assets of the Issue department
were to consist of not less than 2/5th of the
Gold or sterling securities, provided Gold was
NOT less than Rs. 40 Crores in value. Remain-
ing 3/5th of the assets might be rupee coins.
This was called Proportional Reserve System.
3.10 Minimum Reserve System:
▪ Proportional Reserve System changed in
1956. Since then, RBI is required to maintain a
Gold and Foreign Exchange Reserves of Rs. 200
Crore of which at least Rs. 115 Crore should be
in Gold. This is called Minimum Reserve System.
▪ Under the minimum reserve system RBI is re-
quired to keep a certain minimum ‘reserve of
gold and foreign securities and is empowered
to issue currency to any extent
▪ Sources of high power money supply ➔ RBI
and government of India
3.11 Legal Tender:
➔ RBI Act of 1934 which gives RBI the sole right
to issue bank notes, states that “Every bank
note shall be legal tender at any place in India
in payment for the amount expressed therein.”
➔ Coins function as limited legal tender.
➔ Currency notes are unlimited legal tender.
➔ When fiat money is legally valid for all debts
and transactions throughout the country, it is
called as legal tender.
3.12 Printing of Currency Notes:
▪ Currency Notes Press (Nasik Road): Since
1991 this press prints currency notes of
1,2,5,10,50 and 100
▪ Bank Notes Press (Dewas): Currency Notes of
20,50,100 and 500 are printed here
▪ Under Section 22 of the Reserve Bank of In-
dia Act, RBI issues currency notes.
▪ Indian Currency Notes have 17 languages
printed on them.
▪ The front side of the banknote contains only
two languages (English and Hindi).
▪ In back side, there is a language panel on left
side of the banknotes. There are 15 scheduled
Indian languages written inside the panel ex-
cluding Hindi and English.
41
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3.13 Demonetisation: ➔ The another one language is additional official
language English. Totally 17.
➔ Demonetisation is a situation where the Central ➔ However, the 6 scheduled languages are miss-
Bank of the country (Reserve Bank in India) ing in Indian Currency notes.
withdraws the old currency notes of certain ➔ As per RBI Act, 1934 Currency Notes can be is-
denomination as an official mode of payment. sued upto the denomination of Rs. 10,000.
th
➔ On 8 November 2016, the government of In-
dia announced the demonetisation of all 500
and 1,000 banknotes of the Mahatma Gandhi Se-
ries. It also announced the issuance of new 500 and
2,000 banknotes in exchange for the demonetised
banknotes.
➔ Govt of India had demonetised banknotes on
two prior occasions—once in 1946 and once in
1978—and in both cases, the goal was to com- Rs. 2000 Note
bat tax evasion via "black money" held outside
the formal economic system.
➔ In 1936, Rs 10,000, which was the highest
denomination note, was introduced but was
demonetised in 1946. Though, it was re-
introduced in 1954 but later, in 1978, the
then Prime Minister Morarji Desai in his in-
tensive move to counter the black money, in-
troduced The High Denomination Banks Act
(Demonetisation) and declared Rs 500 , Rs
1000 and Rs 10,000 notes illegal.

3.14 Currency Notes (Bank Notes)

➔ Colour: Magenta
➔ The number of languages on the language ➔ Release Date: 8th November 2016
panel of a currency note is 15 ➔ Size: 166mm X 66mm
➔ The front side of the banknote contains only
Front:
two languages. The denomination is written in
both official languages English and Hindi. ✓ Image of Mahatma Gandhi
➔ In back side, there is a language panel on left ✓ 2000 written in Devanagari
✓ At 45 degree angle, you can see 2000 written in
42

side of the banknotes. There are 15 scheduled

Indian languages written inside the panel watermark

excluding Hindi and English. Back:

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➔ Out of 22 languages have been accorded of-

✓ Image of Mangalyaan
ficial language status as per the eighth sched-
✓ Swachh Bharat Logo and slogan
ule of the constitution of India, gets places only
✓ Language panel
16 languages in the Indian currency notes.
Rs. 500 Note: Rs. 200 Note:
➔ Colour: Stone Gray
➔ Release Date: 10th November 2016
➔ Size: 150mm X 66mm

Front ➔ Image of Mahatma Gandhi

Back

✓ Image of Red Fort

✓ Swachh Bharat Logo and slogan
✓ Language Panel
➔ Colour: Bright Yellow
➔ Release Date: 25th August 2017
➔ Size: 146mm X 66mm
➔ Front – Image of Mahatma Gandhi in center
➔ Back – Image of the Sanchi Stupa

Rs. 100 Note:

➔ Color: Lavender
➔ Release Date: 19th July 2018
➔ Size: 142 mm × 66 mm
Front

 Image of Mahatma Gandhi in center

 100 written in Devanagari
Back

 Rani ki vav Rs. 50 Note:

 Swachh Bharat logo and slogan
Colour: Fluorescent Blue
 Language panel
Release Date: 10th November 2017
Size: 135mm X 66mm
43

Front
 Image of Mahatma Gandhi in center
 50 written in Devanagari
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Back
 Image of Hampi
 Swachh Bharat logo and slogan
 Language panel

Rs. 20 Note:
Colour: Greenish Yellow
Release Date: 26th April 2019
Size: 129 mm × 63 mm
Front
 Image of Mahatma Gandhi in center
 100 written in Devanagari
Back
 Ellora Caves
 Swachh Bharat logo and slogan
 Language panel
Rs. 10 Note:
Colour: Chocolate Brown
Release Date: 5th Jan 2018
Size: 123mm X 63mm
Front
 Image of Mahatma Gandhi in center
 10 written in Devanagari
Back
 Motif of the Konark Sun Temple
 Swachh Bharat logo and slogan
 Language panel
3.15 Reserve Currency:
➔ A currency which government and internation-
al institutions are willing to hold in their
gold and foreign exchange reserves and fi-
nance as significant proportion of international
trade.
➔ Example – SDR by IMF
3.16 Cryptocurrency:
➔ It is a digital or virtual currency designed to
work as a medium of exchange.
➔ It uses cryptography to secure and verify trans-
actions as well as to control the creation of new
units of a particular cryptocurrency.
➔ It typically does not exist in physical form (like
paper money) and is typically not issued by a
central authority
➔ Bitcoin, first released as open-source software
in 2009, is generally considered the first decen-
tralized cryptocurrency
➔ Top Cryptocurrencies → Bitcoin, Ethereum,
Ripple, NEO, Litecoin, Bitcoin Cash, Libra, Bi-
nance coin etc.
3.17 National Payments Corporation of In-
dia (NPCI):
➔ It is an umbrella organisation for operating
retail payments and settlement systems in
India.
➔ Founded in 2008
➔ NPCI is a not-for-profit organisation regis-
tered under section 8 of the Companies Act
2013
44
➔ Established by Reserve Bank of India & IBA
➔ NPCI was incorporated in December 2008 and
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the Certificate of Commencement of Business
was issued in April 2009
3.18 Reserve Bank of India (RBI) :
➔ Reserve Bank of India (RBI) is India's central
bank, which controls the issue and supply of
the Indian rupee.
➔ RBI is the regulator of entire Banking in India.
➔ RBI regulates commercial banks and non-
banking finance companies working in India.
➔ It serves as the leader of the banking system
and the money market.
➔ It regulates money supply and credit in the
country.
➔ The RBI carries out India's monetary policy
and exercises supervision and control over
banks and non-banking finance companies in
India.
➔ RBI was set up on April 1, 1935 under the
Reserve Bank of India Act,1934
➔ RBI was nationalised on January 1, 1949 un-
der RBI (Transfer of Public Ownership) Act,
1948 and thereafter it is fully owned by gov-
ernment of India.
➔ Headquarters ➔ Mumbai
➔ Reserve Bank of India has offices at 31 loca-
tions.
➔ Reserve Bank of India was conceptualized
based on the guidelines presented by Dr.
Ambedkar to the "Royal Commission on In-
dian Currency & Finance” in 1925.
➔ RBI is a leading member of the Alliance for Fi-
nancial Inclusion (AFI).
➔ RBI is also known as banker's bank and is often
referred to by the name 'Mint Street'.
➔ The bank was set up based on the recommen-
dations of the 1926 Royal Commission on Indi-
an Currency and Finance, also known as the Hil-
ton–Young Commission.
➔ The original choice for the seal of RBI was
the East India Company Double Mohur, with
the sketch of the Lion and Palm Tree. However,
it was decided to replace the lion with the
tiger, the national animal of India.
➔ The Central Office of the RBI was established in
Calcutta (now Kolkata) but was moved to
Bombay (now Mumbai) in 1937.
➔ RBI has 4 regional representations: North in
New Delhi, South in Chennai, East in Kolkata
and West in Mumbai.
➔ It has 2 training colleges for its officers, viz. Re-
serve Bank Staff College, Chennai and Col-
lege of Agricultural Banking, Pune.
➔ There are 3 autonomous institutions run by
RBI namely National Institute of Bank Man-
agement (NIBM), Indira Gandhi Institute of De-
velopment Research (IGIDR), Institute for Devel-
opment and Research in Banking Technology
(IDRBT).
➔ Tarapore committee was set up by the Reserve
Bank of India under the chairmanship of former
RBI deputy governor S. S. Tarapore to "lay the
road map" to capital account convertibility.
➔ Security Printing and Minting Corporation of
India Limited (SPMCIL), a wholly owned com-
pany of the government of India, has printing
presses at Nashik, Maharashtra and Dewas,
Madhya Pradesh.
➔ Bharatiya Reserve Bank Note Mudran Private
Limited (BRBNMPL), owned by the RBI, has
printing facilities in Mysore, Karnataka and Sal-
boni, West Bengal.
➔ For the minting of coins, SPMCIL has four
mints at Mumbai, Noida, Kolkata and Hydera-
bad for coin production.
➔ As per Indian Coinage Act 1906, Coins can be
issued upto the denomation of Rs. 1000
➔ Coins and Re.1 notes are issued by the gov-
ernment of India (GoI), the RBI works as an
45
agent of GoI for the distribution and handling of
coins.
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➔ New Rs. 500 and Rs. 2,000 notes were been is-
sued on 8 November 2016. The old series of
Rs. 1,000 and Rs. 500 notes were demonetized
from midnight on 8 November 2016.
NOTE: Under Section 22 of the Reserve Bank of • RBI adopted the minimum reserve system
India Act, RBI has sole right to issue currency for note issue since 1957.
notes of various denominations except one ru- • The currency notes issued by RBI is a legal ten-
pee notes. The One Rupee note is issued by Min- der throughout the territory of India without
istry of Finance and it bears the signatures of any limitations. It issues these currency notes
Finance Secretary, while other notes bear the sig- against the security of gold bullion, gold coins,
nature of Governor RBI. promissory notes, exchange bills and govern-
ment of India bonds etc.
➔ First Governor of RBI : Sir Obsorne Smith
(1935-1937) Advantages:
➔ First Indian Governor of RBI : C.D.Deshmukh
1) Uniformity in issue of currency notes
(1943-1949)
2) Effective state supervision
➔ Governor and Deputy Governors of RBI are
3) Easy to control and credit in accordance
nominated by government of India and have
with the requirements of the economy
tenure not more than 5 years.
➔ The Reserve Bank's affairs are governed by a
central board of directors which comprises of
21 members. The board is appointed by the
government of India in keeping with the Re-
serve Bank of India Act. The directors are ap-
pointed/nominated for a period of 4 years.

Functions of RBI:

Issue Currency Notes:

• RBI has the sole authority to issue currency

notes in India.
• Earlier all currency notes except one rupee note
and coins of smaller denomination were issued
by RBI.
• One rupee note and the coins of all denomi-
nations are minted and issued by govern-
ment of India, but they are circulated
Banker, agent and financial advisor of the gov-
through RBI.
ernment
• However, Reserve Bank of India in New Ma-
Under section 20 of Reserve Bank of India act, it
46

hatma Gandhi series has issued notes in the

acts as the banker and agent to the government.
denominations of Rs 10 and above.
Section 21 and 21A gives powers to RBI to con-
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• Reserve Bank of India has been given these ex-

clusive powers under the provisions of section
22 of Reserve Bank of India Act, 1934. This sys-
tem of issuing currency notes is known as min-
imum reserve system.
duct transactions of Central and state govern-
ments.
• It has the duty to make payments, taxes, and
deposits on behalf of the government
• It represents government of India at Interna-
tional levels like IMF and World Bank
• It gives financial advice to the government and
maintains government accounts
• It has a responsibility to manage public debt
and maintain the foreign exchange reserves
• It performs the functions of crediting loans to
the government without any interest for short
term
• It provides overdraft facilities to Central and
State government
• It acts as a banking agent to Central and State
government
• It buys and sells government. securities (G-Secs)
on government’s behalf
Banker to other banks:
• Reserve Bank of India is the apex monetary
body in the country and it controls the vol-
ume of bank reserves.
• It helps and regulates other banks to create
credit in the right proportion.
• It has obligatory powers to regulate, guide, help
and direct other banks of the country, and
hence it acts as the guardian of commercial
banks in India.
• Every commercial bank has to maintain a certain
part of the Reserves with RBI.
• Reserve Bank of India acts as the lender of last
resort and banks can approach RBI when they
need funds.
• Under the Banking Regulation Act, 1949 RBI
has extensive powers to supervise and control
the banking system of the country.
• RBI is the custodian of cash reserves of com-
mercial banks.
Exchange rate management and the custo-
dian of Foreign Exchange Reserves:
• Reserve Bank of India has the responsibility to
stabilize the external value of Indian currency.
• It keeps gold bullions and foreign currency re-
serves etc. against currency note issue and has
the responsibility to meet the adverse balance
of payment with other nations.
• RBI has the responsibility to maintain exchange
rate stability and for this, it has to bring demand
and supply of foreign currency (usually US Dol-
lar) to similar levels.
• It maintains this stability through buying and
selling of foreign currency etc.
• RBI is the custodian of country’s foreign curren-
cy reserves.
47
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RBI as the bank of Central clearance, settle-
ment, and transfer:
• RBI provides the facility of clearing house for
settling banking transactions.
• This allows other banks to settle their interbank
claims smoothly and economically.
• At places where RBI does not have its own of-
fice, this function is carried out in the premises
of State Bank of India.
• This facility is provided by Reserve Bank of India
through a cell called as the National Clearing
Cell.
Credit control function:
• RBI tries to maintain price stability in the coun-
try which is essential for economic develop-
ment.
• It regulates money supply in the economy ac-
cording to the changing circumstances of the
economy.
• It uses various measures such as qualitative and
quantitative techniques to regulate credit in the
economy.
• It uses quantitative controls such as bank rate
policy, cash reserve ratio, open market opera-
tions etc. and qualitative controls include selec-
tive credit control, rationing of credit etc.
• Credit is controlled by RBI in accordance with
economic priorities of the government.
Lender of last resort:
48
• Lender of last resort (LoLR) is an exclusive func-
tion of RBI, where it lends money to support a
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financial institution like a bank when the latter is
facing severe liquidity problems.
• LoLR facility comes only at the time of financial
stringency and this may help the bank to es-
cape from a liquidity crisis.
Regulator of Banks and Non-Banking Finan-
cial Companies:
• Opening a Bank or NBFC requires a license from
RBI.
• It ensures that financial interest of the deposi-
tors is not hampered.
• It also keeps checks that the banks and NBFCs
adhere to capital adequacy norms etc.
In addition to the above roles, the following role
has been made more prominent:
3.19 Monetary Policy:
➔ It is a macroeconomic policy.
➔ It is a policy related to money supply in the
economy.
➔ In India, RBI manages money supply through
Quantitative and Qualitative instruments.
➔ Quantitative instruments influence the total
volume of credit [Money Supply]
➔ Qualitative instruments are used to influence
availability of credit among various types of
borrowers.
➔ While managing money supply, RBI keeps pri-
marily inflation and economic growth in mind.
REASON: In times of increase in money supply,
Inflation Rate as well as Economic Growth in-
creases.
3.20 QUANTITATIVE INSTRUMENTS
Bank Rate:
• When banks borrow long term funds from
RBI, they have to pay this much interest
rate to RBI
• Collateral: NIL (Bank can borrow money with-
out pledging government securities to RBI)
• Simply bank rate refers to the official interest
at which the RBI provides loans to the banking
system.
• Such loans are given out either by lending or
by rediscounting (buying back) the bills of
commercial banks. Thus, bank rate is also
known as discount rate.
• Bank rate is also used as a signal by the RBI to
communicate interest rate levels to commercial
banks.
• Bank rate is also considered as benchmark in-
terest rate of the economy.
• Bank rate is fixed by RBI at 0.25% above the
repo rate.
What’s the use of Bank rate?
 Penal rates are linked with Bank rate. For ex-
ample, If a bank doesn’t maintain CRR, SLR as
per the prescribed limit.
 Then RBI can impose penalty interest on such
notorious bank.
 At present, Penalty rate = Bank rate + 3% (or
5% in some cases)
 Meaning if Bank rate = 7% then penalty
rate=7+3=10%
What if RBI wants to fight inflation using
bank rate as a “tool”?
▪ Obviously, they should increase bank rate.
49
That way it becomes harder (more expensive)
for banks to borrow from RBI ➔ SBI increases
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its loan rates (to keep the profit margin same).
▪ Result?
▪ Less people get home loan, bike loan, busi-
ness loans
▪ Less business expansion
 ▪ Less jobs Marginal Standing Facility (MSF):
▪ Less income
▪ Less demand • MSF is a new scheme announced by the RBI in
▪ Ultimately shopkeeper will bring down the its Monetary Policy, 2011–12 which came in-
prices to attract people into buying more to effect from May, 2011
things. • Under this scheme, banks can borrow over-
▪ Thus inflation is reduced night upto 1% of their net demand and time
liabilities (NDTL) from the RBI, at the interest
Policy Dear Mon- Cheap rate 1% (100 basis points) higher than the
ey Money current repo rate
Tool To fight in- To fight de- • MSF would be the last resort for banks once
flation flation they exhaust all borrowing options including
Reserve Ra- Increase Decrease the liquidity adjustment facility by pledging
tio (CRR, them them through government securities, which has lower
SLR)
rate (i.e. repo rate) of interest in comparison
Open Mar- RBI sells RBI buys
with the MSF
ket Opera- securities securities
• MSF would be a penal rate for banks and the
tion (OMO)
banks can borrow funds by pledging gov-
Bank Rate Increase Decrease
ernment securities within the limits of the
Significance of Bank Rate: statutory liquidity ratio
• The scheme has been introduced by RBI with
➔ Bank Rate is the interest rate charged by RBI for the main aim of reducing volatility in the over-
long term lending. night lending rates in the inter-bank market and
➔ It serves as benchmark rate or only as an indica- to enable smooth monetary transmission in the
tive rate. financial system
➔ Commercial banks do not prefer to borrow • This window was created for commercial banks
money from RBI for long term and rather prefer to borrow from RBI in certain emergency con-
low interest deposits from common people. ditions when inter-bank liquidity dries up com-
➔ Bank rate reflects the policy of RBI. When RBI pletely and there is a volatility in the overnight
increases bank rate, the cost of borrowing rises. interest rates.
Consequently, demand for credit also reduces, • To curb this volatility, RBI allowed them to
leading to reduction in money supply. Thus in- pledge government-securities and get more
crease in bank rate reflects tightening of mone- funds from RBI at a rate higher than the repo
tary policy by RBI. rate.
• Thus, overall idea behind the MSF is to contain
Liquidity Adjustment Facility:
50

volatility in the overnight inter-bank rates.

• Although, the system of lending remains same
➢ It is a tool used in monetary policy, primarily
just like under repo ➔ SBI sells Government se-
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by the Reserve Bank of India (RBI), that allows

curity to RBI, and promises to buy it back after
banks to borrow money through repurchase
sometime, at a higher rate. Difference in selling
agreements (repos) or for banks to make loans
and purchase = interest rate earned by RBI.
to the RBI through reverse repo agreements.
• Banks can borrow through MSF on all working
days except Saturdays
• The minimum amount which can be accessed
through MSF is Rs.1 crore and in multiples of
Rs.1 crore
• MSF represents the upper band of the inter-
est corridor and reverse repo as the lower
band and the repo rate in the middle
• To balance the liquidity, RBI would use the sole
independent policy rate which is the repo rate
and the MSF rate automatically adjusts to 1%
above the repo rate
• This facility is created to facilitate borrowing
from RBI by banks who do not have extra
government securities and pledging the ex-
isting securities will affect their SLR re-
quirements of 23%
• Objective was to overcome liquidity crunch with
banks i.e. shortage of funds
In short→
• Repo rate = reverse repo + 1%
• MSF rate= repo rate + 1%
Repo Rate:
• It is rate at which RBI lends to its clients
generally against government securities
• Under repo, RBI lends money to commercial
banks and commercial banks give government.
bonds to RBI with an agreement to purchase
them back.
• When SBI wants to borrow money from RBI for
short term, SBI will have to pay this much in-
terest rate.
Example:
 RBI has cash of Rs.100 lakhs.
 SBI has Government securities worth Rs.100 lakhs.
 SBI enters into Repo agreement with RBI.
 The agreement reads “I (SBI) am selling my Gov-
ernment securities worth Rs.100 lakh to RBI and I
(SBI) promise to buy back(repurchase) those secu-
rities from RBI after 6 months @Rs.107 lakhs.
Time: After 6 months
RBI’s investment: Rs.100 lakhs
After 6 months, RBI gets: Rs.107 lakhs from SBI
So profit of RBI (or interest earned by RBI or inter-
est paid by SBI)=(107-100)/100 = 7%. This is Repo
rate.
What is the difference between bank rate and repo
rate??
➢ Bank Rate ➔RBI lends money to its clients for long
term loans @this interest rate
➢ Repo Rate ➔RBI lends money to banks for short
term loans @this interest rate
Objective of Repo:
 Commercial banks borrow money from RBI by the
means of repo. Thus, repo is used to inject liquidity
(money supply) in the system.
 If RBI wants to reduce money supply, it increases
the repo rate.
 If RBI wants to increase money supply, it decreases
the repo rate.
Long Term Repo Operations:
 LTRO is a tool under which the RBI provides 1 year
to 3 year money to banks at a prevailing repo rate,
accepting government securities with matching or
higher tenure as the collateral.
 LTRO supplies Banking system with liquidity for
their 1- to 3-year needs.
 LTRO operations are also intended to prevent short-
term interest rates in the market from drifting a
long way away from the policy rate (i.e. repo rate)
 LTRO will also help bring down the yields for short-
er-term securities (in the 1-3-year tenor) in the
bond market.
Reverse Repo Rate
51
• Under the Reverse Repo or Reverse Repurchase
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Agreement, commercial banks park their excess
funds at fixed rate with RBI and RBI gives gov-
ernment. bonds to commercial banks with an
agreement to purchase them back.
• It is the rate at which banks lend funds to
RBI.
• When SBI parks its surplus money in RBI for
short term, SBI makes this much profit.
Example:
o RBI has Government securities worth Rs.100
lakhs.
o SBI has surplus Rs.100 lakhs and nobody is tak-
ing them as loans. But SBI is sure more people
will come to take loans before Makar Sankranti.
So SBI just wants to park this surplus 100 lakhs
somewhere for the short-term.
o SBI enters into Reverse Repo agreement with
RBI.
o The agreement reads “I (SBI) will give buy Gov-
ernment securities worth Rs.100 lakhs from the
RBI, and RBI promises to buy back those securi-
ties from me after 6 months @Rs.106 lakhs.
Time: After 6 months,
SBI’s investment: Rs.100 lakhs
After 6 months, SBI gets: Rs.106 lakhs
So profit of SBI (or interest earned by SBI or interest
paid by RBI)=(106-100)/100 = 6%. This is reverse repo
rate.
Objective of Reverse Repo:
➔ Commercial banks park excess funds with RBI
by means of Reverse Repo. Thus, reverse repo is
used to suck liquidity (money supply) from the
system.
➔ If RBI wants to reduce money supply, it increas-
es the reverse repo rate.
➔ If RBI wants to increase money supply, it reduc-
es the reverse repo rate.
➔ If RBI increases the reverse repo rate, banks
have more incentive to park their money with
RBI and vice versa.
NOTE: Repo Rate is always HIGHER than Re-
verse Repo Rate
3.21 Open Market Operations:
➔ Open market operations is the sale and pur-
chase of government. securities and treasury
bills by RBI or the central bank of the country.
➔ RBI by selling government. securities sucks li-
quidity from the system [reduces the money
supply] to control inflation.
➔ RBI buys back government. securities to infuse
liquidity into the system [increases the money
supply]
➔ The objective of OMO is to regulate the mon-
ey supply in the economy.
➔ When the RBI wants to increase the money
supply in the economy, it purchases the gov-
ernment securities from the market and it
sells government securities to suck out li-
quidity from the system.
➔ RBI carries out the OMO through commercial
banks and does not directly deal with the pub-
lic.
➔ OMO is one of the tools that RBI uses to
smoothen the liquidity conditions through the
year and minimise its impact on the interest
rate and inflation rate levels.
➔ OMO is a part of credit policy.
3.22 CRR and SLR
• Let’s assume there are only four people in India: 1)
common man and 2) businessmen 3) Commercial
banks (like SBI) 4) Central Bank (RBI)
• Now the Question: How do commercial banks make
money?
• Common man save their money in bank. Bank gives
them say 4% interest rate on savings.
52
• Then Bank gives that money as loan to businessmen
and charges 10% interest rate.
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• So 10-4=6% is the profit of Bank. Although that’s
technically incorrect, because we’ve not counted
bank’s input cost=staff salary, telephone-internet-
electricity bill, office rent, xerox machine etc. So ac-
tual profit will be less than 6%.
Example:

 SBI has only one branch in a small town. It was

opened on Monday.
 On the very same day, Total 100 common men de-
posited 1 lakh each in their savings accounts here
(=total deposit is 1 crore)
 SBI offered them 4% interest rate per year on their
savings

Here comes the concept of Cash Reserve Ra-

tio
✓ On Tuesday, SBI Branch manager gives away
entire 1 crore to a businessman as loan for 10%
interest rate for 5 years.
✓ From SBI’s point of view, sounds very good
right? 10-4=6% profit!
✓ But we’ve not considered the fact that on
Wednesday, some of those common men (ac-
count holders) will need to take out some mon-
ey from their banks savings account- to pay for
gas, electricity, mobile bills, college fees, writing
cheques and demand drafts etc.
✓ But SBI’s office doesn’t have a single paisa left!
= problem, protest, rioting, suicides.
✓ So condition #1: Banks must not give away
all of the deposit money to businessmen for
loans. Banks must keep some money with
aside.
✓ Ok but who’ll decide how much minimum cash
should a bank keep aside? Ans. RBI via
CRR.(Cash reserve ratio).
➢ So CRR is the certain minimum amount of de-
posit that the commercial banks have to hold as
reserves with the central bank. The percentage
of cash required to be kept in reserves, vis-a-vis
Cash reserve ratio is:
 It is also referred to as the amount of funds which
the banks have to keep with the Reserve Bank of
India (RBI).
 It’s a vice-versa process.
 If RBI increases CRR then the available amount
with the banks decreases or comes down.
 The CRR is used by RBI to wipe out excessive money
from the system.
There are two primary purposes of the Cash Re-
serve Ratio:
1) Since a part of the bank’s deposits is with the
Reserve Bank of India, it ensures the security of
the amount. It makes it readily available when
customers want their deposits back.
2) Also, CRR helps in keeping inflation under con-
trol. At the time of high inflation in the econo-
my, RBI increases the CRR, so that banks need
to keep more money in reserves so that they
have less money to lend further.
How does Cash Reserve Ratio help in times
of high inflation?
➢ At the time of high inflation, the government needs
53

a bank’s total deposits, is called the Cash Re- to ensure that excess money is not available in the
economy.
serve Ratio.
➢ To that extent, RBI increases the Cash Reserve Ra-
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➢ The cash reserve is either stored in the bank’s

vault or is sent to the RBI. Banks do not get any
interest on the money that is with the RBI under
the CRR requirements.
tio, and the amount of money that is available with
the banks reduces. This curbs excess flow of money
in the economy.
➢ When the government needs to pump funds into
the system, it lowers the CRR rate, which in turn,
 helps the banks provide loans to a large number of
businesses and industries for investment purposes.
Lower CRR also boosts the growth rate of the econ-
omy.
Why SLR: Statutory liquidity ratio?
• Continuing the same example. SBI got 1 crore
on Monday.
• But suppose, RBI gave him order, “you must
keep Rs.10 lakhs aside. (CRR)”
• Thus, SBI is left with only 1 crore – 10 lakhs = 90
lakh rupees.
• So SBI manager decides to get maximum profit
out of remaining money. Suppose ongoing rate
for business loans is 10%.
• But there is one businessman Mr.Naidu.
• No bank is offering him loan, because his past
track record is not good: his earlier business ad-
ventures were epic fail.
• This Mr.Naidu comes to SBI
• After six months, Mr. Naidu’s new business pro-
ject = BIG FAILURE
• He cannot pay back the EMIs.
• Although SBI can attach his assets and auction
them to recover the money. But it’ll take lot of
time.
• In the mean time, common-men also read this
story in local newspapers and they panic that
SBI will collapse and bank manager will shut
down the office and run away.
• So all the common men line up in front of bank
and demand back their money. Recall that SBI
still has 10 lakh left in CRR. But people want to-
tal 1 crore back!
• Again money of account holders (common
men) is stuck =problem, protest, rioting, sui-
cides.
• So, condition #2: Bank must not give away
all its loans to risky loan takers. Banks must
invest part of its money in “safe and liquid”
investment. So during emergency, bank can
sell those “liquid” investments and take out
the money.
• For example, Government securities, gold, cor-
porate bonds of reputed companies like Infosys,
reliance, TCS. These are “safe” investments.
• These are also “liquid”, because you can sell
them quickly whenever you want. (recall that
SBI could also auction Mr.Naidu’s properties,
but it’ll take lot of time in paperwork, legal is-
sues etc.)
• Ok so, bank should invest part of common-
man’s money in “safe” investments like Gov-
ernment securities, gold and corporate bonds
of highly reputed companies.
• BUT who will decide how much money should
be invested in this sector? Ans. RBI via SLR
(Statutory liquidity ratio).
• Let’s assume RBI ordered SBI to keep Rs.25
lakhs under SLR.
• Thus, out of original Rs.1 crore that SBI had, 10
lakhs (CRR) + 25 lakhs (SLR) are gone.
So SLR is the percentage of NDTL(net deposit and
time liability) that commercial bank have to keep
with themselves. It can have cash, G-secs and gold.
 Range of SLR prescribed by RBI is from 0% to
40%
 Initially the rate of SLR fixed by RBI was quite
high like 38.5% of NDTL in 1991-92. Based on
the recommendations of Narasimhan Commit-
tee on banking sector reforms, the rate of SLR
was gradually reduced.
 SLR can be seen as a mechanism used by
Scheduled Commercial Banks to provide credit
to government. through purchase of govern-
ment. securities.
 To reduce inflation, RBI increases SLR.
54
 To increase economic growth, RBI decreases
SLR.
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If the bank fails to maintain SLR, then it is liable to
pay penal interest at 3% per annum above the bank
rate, on the shortfall amount. If the shortfall contin-
ues for next succeeding day, penal interest is to be
paid at Bank Rate + 5%
Instrument To reduce In- To increase sence of this special dispensation but are im-
flation Economic portant for overall growth of economy.
Growth ➔ Priority sector lending is an important role giv-
CRR Increase CRR Decrease CRR
en by the RBI to the banks for providing a
SLR Increase SLR Decrease SLR
specified portion of the bank lending to a few
Repo Rate Increase RR Decrease RR
specific sectors such as agriculture and allied
Reverse Repo Increase RRR Decrease RRR
activities, micro and small enterprises, housing
Rate
Bank Rate Increase BR Decrease BR for poor people, education for students, social
Open Market Sell govern- Buy govern- infrastructure, renewable energy, export credit
Operations ment. securi- ment. Securi- and other low-income groups and weaker sec-
ties ties tions.

QUALITATIVE INSTRUMENTS Moral Suasion:

Margin Requirement:
➔ This refers to the difference between securities
offered and the amount borrowed from the
banks.
➔ In case the RBI mandates banks to demand
higher margin requirements, the amount of
credit given on security reduces.
Consumer Credit Regulation:
➔ This refers to the issuing of rules regarding
down-payments and maximum time period
of instalment credit for purchase of goods.
Guidelines:
➔ RBI issues oral, written statements, appeals,
guidelines, and warnings to the banks.
➔ For instance, the RBI requests commercial banks
to pass the benefits of decrease in interest rates
to the final consumers.
Rationing of Credit:
➔ A moral suasion is a persuasion tactic used by
the RBI to influence and pressure, but not force,
banks in adhering to policy.
➔ Tactics used are closed door meetings with
bank directors, increased severity of inspections,
appeals to community spirits, or vague threats.
Direct Action:
➔ This step is taken by the RBI against the banks
that do fulfill conditions and requirements.
➔ RBI may refuse to rediscount their papers or
change a penal rate of interest over and above
the bank rate, for credit demanded beyond a
limit.
3.23 Monetary Policy Committee (MPC):
 RBI Act, 1934 was amended in 2016 to pro-
vide a statutory and institutionalised frame-
work for the creation of MPC
 Monetary Policy Committee (MPC) has the re-
sponsibility to take decisions on monetary
55

policy matters to meet inflation target as de-

➔ RBI controls the credit allocated by commercial
cided between the Central government and
banks to various sectors.
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RBI.
➔ For instance, the RBI mandates banks to issue
 MPC replaced the earlier system where the RBI
40% of their credit to the priority sector re-
governor had complete control over monetary
fers to those sectors of the economy that may
policy decisions.
not get timely and adequate credit in the ab-
 As per Monetary Policy Framework Agree-
ment, RBI is responsible to contain inflation
at 4% (+ or – 2%)
 RBI is answerable to government. if inflation
exceeds the range for 3 consecutive months. To
target this inflation, Repo Rate is reviewed and
changed periodically by RBI.
 A Committee-based approach for determining
the Monetary Policy will add lot of value and
transparency to monetary policy decisions.
Composition:
6-member committee
➔ RBI Governor (Chairperson)
➔ RBI Deputy Governor in charge of monetary
policy
➔ One official nominated by the RBI Board
➔ 3 members representing the Government of
India
These 3 members of the MPC are experts in the
field of economics or banking or finance or
monetary policy and are appointed for a period
of 4 years and shall not be eligible for re-
appointment.
Decision Making:
➔ The committee meets 4 times a year. MPC de-
cisions are taken on a majority basis and the
chairman of the committee will have casting
vote only (and not veto power)
Implications of Setting up MPC:
➔ Earlier, decisions on monetary policy were taken
solely by the RBI. With the establishment of the
MPC, the central government has equal say in
deciding on monetary policy matters.
3.24 Monetary Policy Report (MPR):
➔ RBI publishes Monetary Policy Report after
every 6 months to explain the sources and
forecasts of inflation for the coming period of
6-8 months.
MCLR (Marginal Cost of funds based Lending
Rate):
From 1st April 2016, RBI has introduced a new
methodology for calculation of the Base Rates
based on marginal cost of funds rather than av-
erage cost of funds.
Calculation is based on 4 factors:
1) Marginal cost of deposits/funds
2) Cost of maintaining CRR and SLR
3) Operational Costs of Banks
4) Tenor Premium (based on the time period for
which loan is given)
Key difference between MCLR and Base Rate:
 Change of calculation of cost of deposits from
average to marginal
As per the new methodology of MCLR, the
banks must link their lending rates with the
marginal/additional cost of deposits i.e. the
rate at which they are receiving the new depos-
its
So in this situation whenever RBI reduces the
repo rate, banks reduce their deposit rate
and since the lending rate is linked to the
new deposit rate, they reduce the lending
56
rate also
Hence, because of linking the lending rate with
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marginal cost of deposits, there will be fast
transmission of repo rate into lending rate (bet-
ter monetary policy transmission). It will also
help improve the transparency in the method-
 ology followed by banks for determining the
lending rates
Every bank calculates its own MCLR rate based
on the cost of deposits, operational costs, re-
serve requirements, and tenor premium. So
MCLR is an internal benchmark.
RBI has made it mandatory for banks to link all
new floating rate personal or retail loans, and
floating rate loans to MSMEs to an external
benchmark from October 1, 2019.
Banks can choose one of the four external
benchmarks– repo, 3-month treasury bill, 6-
month treasury bill yield or any other interest
rate published by Financial Benchmarks India
Private limited
3.25 Organised Banking System:
➢ The organized banking system is classified into
three categories: the central bank known as
the Reserve bank of India which is the monetary
authority or the apex bank, commercial and co-
operative banks.
3.26 Evolution and Growth of Banking:
➔ Evolution of banking in India can be traced back
to the 4th century BC in the 'Kautilya’s Ar-
thashastra' , which contains references to credi-
tors and lenders.
➔ Banking in India started in 1770 with the es-
tablishment of Bank of Hindustan.
➔ The real roots of commercial banking in India
can be traced back to the early 18th century with
the establishment of the 3 presidency banks –
Bank of Calcutta, Bank of Madras and Bank
of Bombay.
➔ In the year 1806, Bank of Calcutta was founded;
it was later renamed to Bank of Bengal. Follow-
ing this, Bank of Bombay and Bank of Madras
were established in years 1840 and 1843 re-
spectively. These three banks were known as
the presidency banks and were incorporated as
joint-stock companies.
➔ The first bank which was exclusively set up
by Indians was Allahabad Bank, followed by
Punjab National Bank Ltd. set up in 1895 with
headquarters at Lahore.
➔ The 3 presidency banks — Bank of Bengal, Bank
of Bombay and Bank of Madras — were inte-
grated to a single large bank known as Imperial
Bank of India in 1921.
➔ In 1922, Royal Commission on Indian Curren-
cy and Finance was established under the
chairmanship of Hilton Young. This commission
recommended the operation of money man-
agement in 1926. Based on the recommenda-
tions of this commission, RBI Act was passed in
1934.
➔ Later, in the year 1935 India’s central bank —
Reserve Bank of India — was established un-
der the Reserve Bank of India act. Imperial Bank
of India was transformed into State Bank of In-
dia in 1955 — 20 years after the establishment
of RBI.
➔ State Bank of India was constituted on July 1,
1955.
3.27 Commercial banks:
➢ According to the RBI Act of 1934, commercial
banks are classified into scheduled and non-
57
scheduled banks
Scheduled Banks:
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➢ The scheduled banks are those which are en-
tered in the Second Schedule of RBI Act 1934.
➢ Scheduled banks are regulated under the provi-
sions of Banking Regulation Act, 1949.
➢ Benefits of Scheduled Banks : They can ap-
proach RBI for financial assistance at bank rate,
repo rate, MSF etc.
The banks included in this category should fulfil
two conditions
1) Scheduled Banks should have paid-up capital
and reserves not less than 5 lakhs
2) Any activity of the bank will not adversely affect
the interests of the depositors
Scheduled Banks in India are categorised in 5 dif-
ferent groups according to their ownership / nature
of operation.
(i) State Bank of India
(ii) Nationalised Banks
(iii) Regional Rural Banks
(iv) Foreign Banks
(v) Private Banks
Nationalisation of Commercial Banks in In-
dia (Historical Dimension):
➢ In 1950-51, there were 430 commercial banks in
India. In order to strengthen the banking sys-
tem, the RBI adopted a policy of mergers and
amalgamation. Accordingly, small banks were
merged with big banks.
➢ Govt of India, with the enactment of the SBI
Act, 1955 partially nationalised the 3 Imperial
Banks (mainly operating in the three past Pres-
idencies with their 466 branches) and named
them the State Bank of India—the first public
sector bank emerged in India.
➢ RBI had purchased 92% of the shares in this
partial nationalisation.
➢ On 19th July 1969, 14 major banks were nation-
alized by the government of India
➢ In 1980, the government of India took over an-
other 6 commercial banks
14 banks with deposits were more than
Rs. 50 crore of nationalised on July 19,
1969
6 banks with deposits were more than Rs.
200 crore of nationalised on April 15,
1980
➢ New Bank of India was merged with Punjab Na-
tional Bank in 1993
➢ The nationalized banks are banks in which the
central government is a major share holder
➢ Lead Bank Scheme which came into existence in
the year 1969 also contributed to the banking
development and branch expansion effort
Reasons to nationalize 14 big commercial banks
in July 1969:
58
Commercial banks in India were not functioning
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according to the development requirements of
the people of India
The banks were controlled by a group of indus-
trialists and business men who had used bank
funds to build their private industries
 Small industrial and business units were ignored
in spite of the government of India’s policy to
help the small sector
Agricultural credit was non-existent
Progress after Nationalisation:
➔ Expansion of number of branches
➔ Priority Sector Lending increased
➔ Level of deposit mobilisation and bank lending
increased
➔ Banks started financing schemes which promot-
ed entrepreneurship
3.28 Regional Rural Banks:
 The Working Group on rural banks under the
chairmanship of Mr. M Narasimham recom-
mended the setting up of regional rural banks
as part of a multi-agency approach to rural
credit
 It was found that the commercial banks and
credit co-operative societies were not ade-
quately catering to the credit requirements of
the small and marginal farmers, agricultural la-
bourers and artisans in the rural areas
 The small income groups required low cost
credit
 Accordingly, in the year 1975, five RRBs were
set up
 First set up on 2 October, 1975 with the for-
mation of a Prathama Grameen Bank
 Legislative backing of Regional Rural Banks
Act 1976
 RRBs are joint venture between Central gov-
ernment (50%), State government (15%) and
a Commercial Bank (35%)
 Every RRB was to be sponsored by a “Public
Sector Bank”
 RRB concept was based upon the policy that
they would lend only to the weaker sections of
rural society, charging lower interest rates,
opening branches in remote and rural areas and
keep a low cost profile.
 But the commercial motivation was absent
 The RRBs can be set up when a public sector
bank sponsors them
 RRBs have played a significant role in mobilizing
rural savings
 In 1991, the Narasimham Committee had rec-
ommended that RRB may be given a choice to
maintain a separate identity or to get merged
with the sponsor banks as rural subsidiaries
▪ General Bank of India was founded in 1786
(now defunct) was the first ever bank in India
▪ The oldest surviving bank in the country is
State Bank of India (SBI), which was estab-
lished as “The Bank of Bengal” in 1806
Progress of Commercial Banks in the Post Re-
forms period:
➢ By 1995, the liberalization policy of the gov-
ernment allowed private sector participation in
banking industry. This was followed by foreign
direct investment (FDI) in banks.
➢ Reserve Bank of India (RBI) is India’s central
bank and it is the ultimate authority for control
of banking operations.
➢ The performance of the banking system has
substantially improved in the post-reforms pe-
riod in India.
➢ Deregulation of interest rates, increased compe-
tition and greater accountability has improved
the profitability of commercial banks in spite of
the fall in interest rates and resultant fall in in-
terest spreads.
➢ The capital adequacy ratio or the capital to risk-
59
weighted assets ratio (CRAR = Total capi-
tal/RWAs) reflects financial soundness of banks.
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➢ The ratio of non-performing assets (NPA) to
total assets indicates the quality of assets of a
commercial bank. A lower ratio indicates better
quality and vice-versa.
3.29 Co-Operative Banks
➔ Co-operative banks in India are registered un-
der the States Cooperative Societies Act.
➔ Co-operative banks are also regulated by the
Reserve Bank of India (RBI) and governed by
Banking Regulations Act 1949 and Banking
Laws (Co-operative Societies) Act, 1955.
➔ They work under the "No Profit No Loss"
model.
➔ They function with the rule of “One Member
One Vote”.
➔ Co-operative banks mainly focus on agricul-
tural and rural sector lending.
➔ Co-operative banks are the first government.
sponsored, government. supported and gov-
ernment. subsidised financial agency in India.
SHORT TERM CREDIT: Co-operative banks have a
3 tier structure —
1) Primary (agriculture or urban) credit societies
2) District central co-operative banks and at the
apex level
3) State co-operative banks
LONG TERM CREDIT:
1) Land Development Banks
2) Cooperative and Rural Development Banks
3.30 Development Banks in India:
NABARD-National Bank for Agriculture and
Rural Development:
➔ It is an Apex Development Financial Institu-
tion in India
➔ Entrusted with "matters concerning Policy Plan-
ning and Operations in the field of credit for Ag-
riculture and other Economic activities in Rural
areas in India".
➔ NABARD is active in developing Financial Inclu-
sion policy.
➔ Established on the recommendations of
B.Sivaramman Committee on July 12, 1982
to implement the National Bank for Agriculture
and Rural Development Act 1981.
➔ Replaced the Agricultural Credit Department
(ACD) and Rural Planning and Credit Cell (RPCC)
of Reserve Bank of India, and Agricultural Re-
finance and Development Corporation (ARDC).
➔ NABARD is India's specialised bank for Agri-
culture and Rural Development in India.
➔ Initial Corpus – 100 cr
➔ NABARD is the most important institution in the
country which looks after the development of
the cottage industry, small scale industry and
village industry, and other rural industries.
➔ Headquarters : Mumbai
➔ NABARD is also known for its 'SHG Bank Link-
age Programme' which encourages India's
banks to lend to self-help groups (SHGs).
➔ Largely because SHGs are composed mainly of
poor women, this has evolved into an important
Indian tool for microfinance.
➔ In 2019, RBI sold its stake in NABARD to gov-
ernment. of India. Now NABARD is fully owned
by government. of India.
Small Industries Development of India (SID-
BI):
➔ It was established on April 2, 1990 as an inde-
pendent financial institution.
➔ SIDBI was designated as apex organisation in
60
the field of Small Scale Finance.
➔ Aim: To aid the growth and development of
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micro, small and medium scale enterprises
(MSMEs) in India.
➔ Headquarters: Lucknow, Uttar Pradesh
➔ Though it was a wholly owned subsidiary of In-
dustrial Development Bank of India, presently
 the ownership is held by Government of India
owned / controlled institutions.
➔ In order to promote and develop MSME sector,
SIDBI adopted “Credit Approach”
Industrial Finance Corporation of India
(IFCI):
➔ IFCI was established on 1st July, 1948 under
the Industrial Finance Corporation Act of 1948.
➔ IFCI became a Public Limited Company in
1993.
➔ IFCI was the first specialized financial institu-
tion set up in India to provide term finance
to large industries in India.
➔ It is also a Systematically Important Non-
Deposit Taking Non Banking Financial Compa-
ny.
Key functions of IFCI:
Granting long-term loans(25 years and above)
Guaranteeing rupee loans floated in open mar-
kets by industries
Underwriting of shares and debentures
Providing guarantees for industries
Export-Import Bank (EXIM Bank):
➔ Export-Import Bank of India is a wholly owned
government. of India entity established in
1982.
➔ Its main aim is financing, facilitating and
promoting foreign trade of India.
➔ EXIM Bank extends Line of Credit (LoC) to
overseas financial institutions, regional devel-
opment banks, sovereign governments and
other entities abroad.
➔ It is regulated by the Reserve Bank of India.
➔ HQ : New Delhi
Key functions of EXIM Bank:
Provides direct financial assistance to exporters
of plant, machinery and related services in the
form of medium term credit.
It rediscounts the export bills for a period not
exceeding 90 days against short-term export
bills discounted by Commercial Banks.
It facilitates in developing and financing export-
oriented industries.
National Housing Bank:
➔ It was setup as a statutory organization in 1988
under National Housing Bank Act, 1987
➔ It is an apex financial institution for housing
➔ Objective: To operate as a principal agency to
promote housing finance institutions both at
local and regional levels
➔ HQ: New Delhi
➔ It registers, regulates and supervises Housing
Finance Companies (HFCs)
➔ NHB is regulated by RBI
➔ RBI sold its stake in NHB in 2019 – NHB is now
100% owned by government. of India [On
recommendations of Narasimham Panel]
Mudra Bank
▪ MUDRA stands for Micro Units Development
and Refinance Agency
▪ It was setup in 2015 by government. of India to
provide loans at low rates to Micro-Finance In-
stitutions and Non-Banking Financial Institu-
tions which then provide credit to MSMEs
▪ It also provides refinance support to RRBs for
enhancing their liquidity
▪ Eligible Borrowers ➔ Small Manufacturing
Units, Shopkeepers, Artisans, Fruit and Vegeta-
ble Vendors
61
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3.31 Non-Banking Financial Companies
(NBFCs)
➔ It is a company which is engaged in the busi-
ness of loans and advances, acquisition and
selling of shares, bonds, debentures etc.
➔ 2016: government allowed 100% FDI on
‘other financial services’ carried out by NBFCs
➔ As per the changed FDI policy 2017, under sec-
tion 47 of the Foreign Exchange Manage-
ment Act, 100 percent FDI through automat-
ic route is permitted for NBFCs.
➔ NBFCs financial assets should constitute more
than 50% of the total assets and income from
financial assets should constitute more than
50% of the gross income.
➔ NBFCs cannot accept demand deposits from
public.
➔ Liquid Debt Mutual Funds is a primary source
of short-term funds to NBFC sector.
[Liquid Funds: Liquid funds belong to the debt cat-
egory of mutual funds. They invest in very short-
term market instruments like treasury bills, gov-
ernment securities and call money. They are getting
popular with retail investors due to their higher
than savings bank account returns and easy liquidi-
ty]
Classification of NBFCs based on liability struc-
ture:
 Deposit-taking NBFCs (NBFC-D)
 Non-deposit taking NBFCs (NBFC-ND)
NBFCs exempted from the regulatory control of
the RBI:
 Venture capital fund, merchant bank,
stock broking firms ➔ registered and reg-
ulated by SEBI
 Insurance company ➔ registered and reg-
ulated by IRDA
 Housing finance company ➔ regulated by
National Housing Bank
 Nidhi company ➔ regulated by Ministry of
Corporate Affairs under Companies Act,
1956
 Chit fund company ➔ by respective state
government. under Chit Funds Act, 1982
Differences between Banks and NBFC:
62
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3.32 Differentiated Banks nies (NBFCs), micro finance companies, local ar-
ea banks are eligible to set up SFBs.
 There are two kinds of banking licences that are ▪ SFBs can accept all types of deposits like a
granted by the Reserve Bank of India – Univer- commercial bank (Current A/c, Savings A/c,
sal Bank Licence and Differentiated Bank Li- Fixed Deposit etc.)
cence. ▪ Conditions: 25% branches in rural areas and
 The concept of differentiated banking was 50% of the loans to be given to MSME sector.
introduced by RBI, based on the recommen-
dations of Nachiket Mor Committee in 2013.
 Differentiated Banks (niche banks) are banks
that serve the needs of a certain demographic
segment of the population.
 Small Finance Banks and Payment Banks are
examples of differentiated banks in India.

Small Finance Banks:

▪ The objectives of setting up of small finance Payments Banks:
banks will be to further financial inclusion by (1)
▪ The objectives of setting up of payments banks
provision of savings vehicles (2) supply of credit
will be to further financial inclusion by providing
to small business units; small and marginal
(1) small savings accounts (2) pay-
farmers; micro and small industries; and other
ments/remittance services to migrant labour
unorganised sector entities, through high tech-
workforce, low-income households, small busi-
nology-low cost operations.
nesses, other unorganised sector entities and
▪ SFBs are private financial institutions estab-
other users.
lished as a Public Limited Company under
▪ They will not lend to customers and will have
Companies Act, 2019.
to deploy their funds in government papers and
▪ SFBs are licensed under Banking Regulation Act,
bank deposits.
1949 and are governed by RBI Act, 1934
▪ Acceptance of demand deposits-Payments
▪ In 2019, RBI started “On Tap Facility” under
bank will initially be restricted to holding a max-
which RBI can accept applications and grant li-
imum balance of Rs. 100,000 per individual cus-
cense for SFBs throughout the year.
tomer.
▪ Capital Small Finance Bank is the first SFB. It
▪ Issuance of ATM/debit cards-Payments banks,
started in 2016.
however, cannot issue credit cards.
▪ Minimum Paid Up Capital for SFBs shall be
▪ Payments bank cannot undertake lending ac-
100 cr.
tivities.
63

▪ Small finance banks will be required to extend

▪ Payments Bank can invest depositor’s money in
75 per cent of its Adjusted Net Bank Credit
government. Securities (G-Secs) only.
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(ANBC) to the sectors eligible for classifica-

tion as priority sector lending (PSL) by the 3.33 Non-Performing Assets (NPA):
Reserve Bank.
▪ Individuals/professions with 10 years of experi- ➔ An asset becomes non-performing when it is not
ence in finance, Non-Banking Financial Compa- producing any income for the bank.
➔ Reserve Bank of India defines NPA as any advance
or loan that is overdue for more than 90 days.
Categories of NPA:
o Sub-Standard Assets ➔ Age of NPA <= 12
Months
o Doubtful Assets ➔ Age of NPA > 12 Months
o Loss Assets ➔ Identified as a loss by Bank, but
it has not been written off
STRESSED ASSETS = NPAs + Restructured Loans + Writ-
ten-off Assets
3.34 Capital to Risk Weighted Assets Ratio
(CRAR)
▪ Also known as Capital Adequacy Ratio
▪ It is a measure of a bank’s ability to absorb
losses
▪ Formula: value of its capital divided by the value
of risk-weighted assets
▪ Simply CAR= bank’s capital / bank’s risky assets
▪ A low capital adequacy ratio (CAR) = bank
has a limited ability to absorb losses (mean-
ing bank is more likely to collapse if people
start defaulting on their loans
▪ High CAR= bank has good ability to absorb
losses
▪ In public sector banks, government of India
(GOI) has regularly infused capital to keep
the CAR high
▪ RBI introduced CRAR system for the banks
operating in India in 1992 in accordance with
the standards of the BIS—as part of the finan-
cial sector reforms
Technically, CAR= Total of the Tier 1 & Tier 2
capitals ÷ Risk Weighted Assets
Tier I Capital (Core Capital)
 It includes pure equity capital
 Equity means share thus it includes Share
Capital (Paid up Capital)
 It also includes Undistributed Profits (Re-
serves)
 It includes Preference shares
Tier II Capital (Supplementary Capital)
 Mixture of equity & Debt Capita
 E.g. - subordinated debt
3.35 Basel Accords:
▪ Basel Accords (i.e. Basel I, II and now Basel III)
➔ Prescribed by Bank for International Settle-
ments (BIS)
▪ Bank for International Settlements (BIS) as a set
of global standards prescribes for assets to min-
imum capital requirements for commercial
banks, foreign banks or even RRBs.
▪ BIS was established in 1930 and it is the world’s
oldest international financial orgnanisation.
▪ Basel Accords is a Set of agreements set by
the Basel Committee on Bank Supervision
(BCBS), which provides recommendations on
banking regulations in regards to capital risk,
market risk and operational risk
▪ Purpose ➔ To ensure that financial institutions
have enough capital on account to meet obliga-
64
tions and absorb unexpected losses
▪ Bank for International Settlements (BIS) Accords
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were the outcome of a long-drawn-out initiative
to strive for greater international uniformity in
prudential capital standards for banks’ credit
risk
Basel I:
▪ First Basel Accord, known as Basel I, was issued
in 1988
▪ Focused only on CREDIT RISK
▪ Categorises the assets of financial institution
into five risk categories (0 per cent, 10 per
cent, 20 per cent, 50 per cent, 100 per cent)
Basel II:
▪ Published by BCBS in 2004
▪ The second Basel Accord, known as Basel II, is
to be fully implemented by 2015.
▪ It focuses on 3 main areas, including minimum
capital requirements, supervisory review and
market discipline, which are known as the three
pillars.
Basel III:
▪ Basel III is an internationally agreed set of
measures developed by the BCBS in response
to the financial crisis of 2007-09.
▪ Operational from Jan 1, 2013
▪ Banks that operate internationally are re-
quired to have a risk weight of 8% or less
▪ India adopted Basel I norms in 1999
▪ RBI issued guidelines to maintain a CRAR or
CAR of 9% by every SCB
▪ Minimum Capital requirement of 8% of risk
assets
▪ The focus of this accord is to strengthen inter-
national banking requirements as well as to
supervise and enforce these requirements
▪ As per RBI, all SCBs were bound to comply with
Basel-II norms
65
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▪ Aim: To strengthen the regulation, supervision
and risk management of the banking sector.
▪ Required to maintain Tier I capital ratio of
4.5%
▪ Maintain capital conservation buffer of 2.5%
▪ Counter cyclical buffer to be maintained in the
range of 0% to 2.5% to prevent excess credit
growth in the banking sector
▪ Total CRAR proposed to be maintained in
9.5%
▪ Basel 3 measures are based on three pillars:
Pillar 1: Improve the banking sector's
ability to absorb ups and downs arising
from financial and economic instability
Pillar 2: Improve risk management ability
and governance of banking sector
3.37 Non-Resident External Account (NRE Account)
 Can be opened by NRIs and OCBs with author-
ised dealers and with banks authorised by RBI
3.38 Non-Resident Ordinary Rupee Account (NRO Account)
 Can be opened by any person resident outside
India with an authorised dealer or an authorised
bank for collecting their funds from local bo-
nafide transactions in Indian Rupees
 When a resident becomes an NRI, his existing
Rupee accounts are designated as NRO.
4. Public Finance
Pillar 3: Strengthen banks' transparency
and disclosures
3.36 Foreign Currency Non-Resident
(Bank) Account [FCNR(B) Account]
 Can be opened by NRIs and Overseas Corpo-
rate Bodies (OCBs) with an authorised dealer
 Can be opened in the form of term deposits
 Deposits of funds are allowed in Pound Sterling,
US Dollar, Japanese Yen and Euro
 These can be in the form of savings, current,
recurring or fixed deposit accounts
 Deposits are allowed in any permitted currency
 These accounts can be in the form of current,
savings, recurring or fixed deposit accounts.
 Deposits in NRO accounts are included in
India’s external debt.
 PUBLIC FINANCE → Public Money ➔ Money
a government. gets, spends, borrows, lends,
raises or prints
 Historical Reference ➔ Kautilya’s Arthasastra
 Budget ➔ Annual Financial Statement of In-
come and Expenditure
4.1 Fiscal Policy:
66
• Fiscal (Greek word) Meaning – BASKET ➔ It
NextGen IAS
symbolizes Public Purse
• J. M. Keynes ➔ first economist who developed
a theory linking fiscal policy and economic per-
formance.
• It is the Policy of the government. with regard
to the level of government. purchases, the
level of transfers, and the tax structure.
• Fiscal policy is the guiding force that helps the
government. decide how much money it should
spend to support the economic activity, and
how much revenue it must earn from the sys-
tem, to keep the wheels of the economy run-
ning smoothly.
What is meant by Fiscal Policy in India?
➔ Through the fiscal policy, the government. con-
trols the flow of tax revenues and public ex-
penditure to navigate the economy.
➔ If the government. receives more revenue than
it spends, it runs a surplus, while if it spends
more than the tax and non-tax receipts, it runs a
deficit.
➔ To meet additional expenditures, the gov-
ernment. needs to borrow domestically or
from overseas. Alternatively, the government.
may also choose to draw upon its foreign ex-
change reserves or print additional money.
Example:
➢ During an economic downturn, the government
may decide to open up its coffers to spend
more on building projects, welfare schemes,
providing business incentives, etc.
➢ The aim is to help make more of productive
money available to the people, free up some
cash with the people so that they can spend it
elsewhere, and encourage businesses to make
investments.
➢ At the same time, the government. may also
decide to tax businesses and people a little less,
thereby earning lesser revenue itself.
Main objectives of Fiscal Policy in India:
 Economic growth: Fiscal policy helps maintain the
economy’s growth rate so that certain economic
goals can be achieved.
 Price stability: It controls the price level of the
country so that when the inflation is too high, prices
can be regulated.
 Full employment: It aims to achieve full employ-
ment, or near full employment, as a tool to recover
from low economic activity.
Importance of Fiscal Policy in India:
✓ In a country like India, fiscal policy plays a key role
in elevating the rate of capital formation both in the
public and private sectors.
✓ Through taxation, the fiscal policy helps mobilise
considerable amount of resources for financing its
numerous projects.
✓ Fiscal policy also helps in providing stimulus to ele-
vate the savings rate.
✓ The fiscal policy gives adequate incentives to the
private sector to expand its activities.
✓ Fiscal policy aims to minimise the imbalance in the
dispersal of income and wealth.
Components of Fiscal Policy:
 Govt. Receipts (Money received by govern-
67
ment.)
 Govt. Expenditure (Money spent by govern-
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ment.)
 Public Debt
4.2 Funds of government. of India:
➢ There are 3 types of funds of the Central gov-
ernment. – Consolidated Fund of India (Article
266), Contingency Fund of India (Article 267)
and Public Accounts of India (Article 266) men-
tioned in the Indian Constitution. All the re-
ceipts and expenditure of government. is cred-
ited and debited from these 3 funds.
Consolidated Fund of India
➢ Article 266 of the Constitution of India man-
dates that Parliamentary approval is required
to draw money from the Consolidated Fund
of India
➢ Besides, Article 114 (3) of the Constitution
stipulates that no amount can be withdrawn
from the Consolidated Fund without the en-
actment of a law (appropriation bill).
➢ Consolidated Fund of India is the most im-
portant of all government. accounts.
➢ All the Revenues, Borrowings, Receipts against
loans and advances etc. are credited to Consol-
idated Fund of India.
➢ All government. expenditure is made from
this fund, except exceptional items which are
Fund Consolidated Fund of Contingency Fund of
India India
Income Taxes and non-tax Fixed corpus of Rs. 500
revenue crores
met from the Contingency Fund or the Public
Account.
Contingency Fund of India
➢ This fund was constituted by the government.
under Article 267 of the Constitution of India.
➢ Purpose: To meet any urgent or unforeseen
emergency expenditure of the government.
➢ Example: Contingency fund of India is used at a
time when there is a crisis in the nation — a
natural calamity, for instance — and money is
required to deal with it.
➢ Corpus: Rs. 500 crores [In 2005, the amount of
the fund was raised from Rs 5 crore to Rs 500
crore]
➢ The Secretary, Finance Ministry holds this
fund on behalf of the President of India.
➢ Each state can have its own contingency fund.
➢ After the emergency has been dealt with, the
fund is reimbursed to its full capacity of Rs 500
crore. This required money comes from the
Consolidated Fund of India.
Public Account of India:
➢ Public Account of India accounts for flows for
those transactions where the government. is
merely acting as a banker.
➢ This fund was constituted under Article 266 (2)
of the Constitution.
➢ Examples: Provident funds, Small savings
➢ These funds do not belong to the govern-
ment.. They have to be paid back at some time
to their rightful owners. Because of this nature
of the fund, expenditures from it are not re-
quired to be approved by the Parliament.
68
➢ The audit of all the expenditure from the Public
Account of India is taken up by the CAG.
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Public Account of India
Public money other than those under consoli-
dated fund
 Expenditure All expenditure Unforeseen expendi- Public money other than those under consoli-
ture dated fund

Parliamentary Required prior to ex- Required after expendi- Not required

Authorisation penditure ture

Articles of Con- 266(1) 267(1) 266(2)

stitution

4.3 Govt. Receipts ➢ No asset reduction: Revenue receipts do not

lead to any reduction in the government.’s as-
sets. So, the government. cannot show its earn-
ings from sale of stake in a public-sector under-
taking as revenue receipts because the stake
sale resulted in reduction of its assets.

Revenue Receipts:
➔ Revenue receipts can be defined as those re-
ceipts which neither create any liability nor For the government., there are two sources of
cause any reduction in the assets of the gov- revenue receipts — tax revenues and non-tax rev-
ernment.. enues.
➔ They are regular and recurring in nature and
the government. receives them in the normal Direct and Indirect Taxes:
course of activities.
➔ Revenue receipts include the proceeds from
taxes and other duties levied by the Centre; the
interest and dividend it receives on its invest-
ments; and the fees and charges the govern-
69

ment. receives for its services.

Revenue receipts must satisfy 2 basic conditions:

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➢ No liability: Revenue receipts do not create

any liability for the government.. For example,
taxes received by the government., unlike bor-
rowings, do not create any liabilities for it.
Tax Revenue:
• Taxes collected from both direct and indirect
taxes are considered in Tax Revenue
• It gives a detailed report on revenue collected
from different items like corporation tax, in-
come tax, wealth tax, customs, union excise,
service, taxes on UTs like land revenue, stamp
registration etc.
Taxes levied and collected by Central gov-
ernment
➢ Income tax
➢ Customs duty
➢ Excise duty
➢ Service tax
Taxes levied by the central government but
collected by the state government
 Central sales tax levied on inter-state movement
of goods
Taxes levied and collected by the respective
state government
 Sales tax
 Octroi
 Municipal taxes
 Road tax
 Entertainment tax
 Agriculture tax
Additional Taxes – Surcharge and Cess
➢ Surcharge: Imposed for additional revenue
considerations by imposing an additional per-
centage on the absolute amount of tax pay-
able.
➢ Suppose surcharge on a tax is 5 per cent and
the tax payable is Rs.100 then the total tax liability
including surcharge would be Rs.105
Cess:
 Similar in application as the surcharge except
that the amount collected by way of cess is
meant solely for specific funding/cause like
education cess, the amount collected would go
for funding of education only.
Non-Tax Revenue:
 Money earned by the government. from
sources other than taxes like
✓ Profits and Dividends from PSUs
✓ Interests received from loans through ex-
ternal and internal lending
✓ Fiscal services like currency printing, stamp
printing, coinage and medals minting etc.
✓ General services like power distribution, ir-
rigation, banking, insurance, community
services etc.
✓ Fees, penalties and fines
✓ Grants
Capital Receipts:
 All non-revenue receipts of a government
Includes
✓ Loan Recovery ➔ Money lent to states,
PSUs, UTs and abroad ➔ Interest received
70
from these loans
✓ Internal Borrowings like RBI, Banks, Finan-
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cial Institutions etc.
✓ External Borrowings like loans from World
Bank, IMF, Foreign Banks etc.
✓ Long-term capital accruals through Provi-
dent Fund (PF), Postal Deposits, various
 small saving schemes (SSSs) and govern-
ment bonds sold to public (Kisan Vikas Pa-
tra, Market Stabilisation Bond, etc.)
4.4 DIRECT TAXES
Income Tax:
➔ Income Tax Act, 1961 imposes tax on the in-
come of the individuals or Hindu undivided
families or firms or co-operative societies
(other than companies) and trusts (identified
as bodies of individuals associations of persons)
or every artificial juridical person.
➔ The inclusion of a particular income in the total
incomes of a person for income-tax in India is
based on his residential status.
Corporation Tax:
➔ The companies and business organizations in
India are taxed on the income from their
worldwide transactions under the provision
of Income Tax Act, 1961.
➔ A corporation is deemed to be resident in India
if it is incorporated in India or if it’s control and
management is situated entirely in India.
➔ In case of non resident corporations, tax is lev-
ied on the income which is earned from their
business transactions in India or any other Indi-
an sources depending on bilateral agreement of
that country.
Minimum Alternate Tax:
➔ It was created to bring these ‘zero-tax paying
companies’ within the ambit of income tax and
make them pay a minimum amount in tax to
the government.
➔ It was introduced in the budget of 1986-87
when the applicable rate was 15.75 %
➔ Introduced by the Finance Act, 1987, MAT
came into effect from assessment year 1988-89.
➔ Discontinued from 1990-91 and reintroduced in
1996-97 when the effective rate was 11.87%
➔ MAT credit is the difference between the tax
the company pays under MAT and the regular
tax.
Dividend Distribution Tax:
➔ The Dividend Distribution Tax is a tax levied on
dividends that a company pays to its share-
holders out of its profits.
➔ Dividend Distribution Tax has been abolished
from April 1, 2020.
Securities Transaction Tax (STT):
➔ STT is a tax being levied on all transactions
done on the stock exchanges.
➔ STT is applicable on purchase or sale of equity
shares, derivatives, equity oriented funds and
equity oriented Mutual Funds.
➔ It was introduced in 2004.
➔ Reason behind levying STT is to curb evasion
of capital gains tax on profits earned by trans-
acting in securities.
4.5 INDIRECT TAXES
Goods and Service Tax:
71
➔ Launched on July 1, 2017
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➔ It is applicable throughout India.
➔ It is a multi-stage, comprehensive, destination-
based tax that is levied on every value addition.
➔ It is a consumption based tax → Taxes are
paid to the State where the goods or services
 are consumed (NOT the State in which goods or
services are produced)
➔ Under GST, taxable event is supply of goods
or services
➔ Introduced in the constitution as 101st Consti-
tutional Amendment Act, following the passage
of 122nd Constitutional Amendment Bill.
➔ GST is governed by GST council.
Provisions:
➢ Central GST to cover Excise duty, Service tax etc,
State GST to cover VAT, luxury tax etc.
➢ Integrated GST to cover inter-state trade. IGST per
se is not a tax but a system to co-ordinate state and
union taxes.
➢ Article 246A – States have power to tax goods and
services.
➢ Article 269A – In case of Inter-State trade where
GST is levied and collected by the Union govern-
ment. the tax revenue proceeds to be apportioned
by the Centre between Centre and States in a man-
ner as may be provided by Parliament by law on the
recommendations of GST council.
➢ Article 279A - GST Council to be formed by The
President to administer & govern GST. Its Chairman
is Union Finance Minister of India with ministers
nominated by the state governments as its mem-
bers.
➢ In order to address the complex system in India, the
Government introduced 3 types of GST which are
given below.
1) CGST (Central Goods and Service Tax)
2) SGST( State Goods and Service Tax)
3) IGST(Integrated Goods and Services Tax)
CGST (Central Goods and Service Tax):
CGST is applicable only on Intra-state trade of goods
and services
Revenue under CGST is collected by the Central
Government. CGST subsumes the below given cen-
tral taxations and levies.
▪ Central Excise Duty
▪ Services Tax
▪ Central Sales Tax
▪ Excise Duty
▪ Additional Excise Duties Countervailing Duty
(CVD)
SGST (State Goods and Service Tax):
It is applicable only on Intra-state trade of goods and
services.
Revenue under SGST is collected by the State Govern-
ment. SGST subsumed the following state taxations.
▪ Luxury Tax
▪ State Sales Tax
▪ Entry tax
▪ Entertainment Tax
▪ Levies on Lottery
IGST (Integrated Goods and Services Tax):
➢ It is levied on Inter-state trade of goods and ser-
vices.
➢ It is levied and collected by Central government. but
the revenue is shared between centre and state.
➢ Import of goods or services also attracts IGST
Input Tax Credit:
 It is the tax that a business pays on a purchase and
that it can use to reduce its tax liability when it
72
makes a sale.
 In simple terms, input credit means at the time of
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paying tax on output, you can reduce the tax you
have already paid on inputs and pay the balance
amount.
 Exceptions: A business under composition scheme
cannot avail of input tax credit. ITC cannot be
 claimed for personal use or for goods that are ex-
empt.
4.6 Govt. Expenditure:
 It is also referred as public expenditure.
 It is the expenditure incurred by Central gov-
ernment. or State government. on various wel-
fare schemes and economic development.
 It is classified into 2 types – Revenue Expendi-
ture and Capital Expenditure
Revenue Expenditure:
➔ This expenditure basically refers to expenditure
by government to maintain its assets.
➔ Broadly it encompasses expenditure made by
government on salaries for employees, pen-
sions, maintenance of infrastructure, buying ac-
cessories of various equipment which are part
of government asset , subsidies on education,
PDS, loan that has been repaid by government
etc.
➔ This type of expenditure is recurring in nature.
➔ High revenue expenditure indicates poverty
and backwardness of the economy.
➔ Revenue expenditure does not impact the as-
set liability status of the government.
Revenue Expenditure includes
✓ Interest Payments on external and internal
loans
✓ Salaries, pension and PF
✓ Subsidies
✓ Defence Expenditure
✓ Postal Deficits
✓ Law and Order expenditures
✓ Expenditure on social services
✓ Grants given to states and foreign countries
Capital Expenditure:
➔ This expenditure basically associated with gov-
ernment’s asset creation activity.
➔ Example: Building roads, airports, or buying
defence equipments, loans given by centre to
state government. etc.
➔ Capital expenditure impacts the asset liability
status of the government.
➔ This type of expenditure is non-recurring in
nature.
➔ High capital expenditure indicates lack of pri-
vate investment in the economy.
Capital Expenditure Includes
✓ Internal loans to States, UTs, PSUs etc.
✓ External loans to World Bank, IMF, Foreign
Banks etc.
✓ Internal or External loan repayments → only the
capital part of the loan repayment as the ele-
ment of interest on loans are shown as a part of
the revenue expenditure
✓ All the expenditures incurred by the govern-
ment. to finance the planned development of
India
✓ Central government. financial supports to the
states for their plan requirements
✓ All kinds of capital expenses to maintain the
defence forces
✓ General services like railways, postal dept. , wa-
73
ter supply, education etc.
✓ Pension and PF liabilities
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4.7 Deficits:
Budgetary Deficit:
➔ It is the difference between all receipts and ex-
penses in both revenue and capital account of
the government.
➔ It is the sum of revenue account deficit and
capital account deficit.
➔ If revenue expenses of the government exceed
revenue receipts, it results in revenue account
deficit.
➔ Similarly, if the capital disbursements of the
government exceed capital receipts, it leads to
capital account deficit.
➔ Budgetary deficit is usually expressed as a per-
centage of GDP.
➔ Budgetary Deficit = Budgeted Expenditure
(Revenue + Capital) – Budgeted Receipts (Reve-
nue + Capital)
Revenue Deficit:
 It is the difference between the revenue re-
ceipts (RR) and the revenue expenditure (RE)
 Revenue deficit arises when the government's
actual net receipts is lower than the projected
receipts.
Example:
 If a country expects a revenue receipt of Rs
100 and expenditure worth Rs 75, it can result
in net revenue of Rs 25.
 But the actual revenue of Rs 90 is realised
and an expenditure is Rs 70. This translates in-
to net revenue of Rs 20, which is Rs 5 lesser
than the budgeted net revenue and called as
revenue deficit.
Effective Revenue Deficit:
• It is defined as the difference between the
revenue deficit and creation of capital assets.
• Effective Revenue Deficit excludes those reve-
nue expenditures which were done in the
form of grants for the creation of capital as-
sets.
• There are several grants which the Union Gov-
ernment gives to the state / UTs and some of
which do create some assets, which are not
owned by union government. but by the
state government.
Example:
➢ Under the MGNREGA programme, some capital as-
sets such as roads, ponds etc. are created thus the
grants for such expenditure will not strictly fall in
the revenue expenditure
Primary Deficit:
• It is the difference between fiscal deficit and inter-
est payments
• Primary deficit is measured to know the amount of
borrowing that the government can utilize, exclud-
ing the interest payments.
• The total government expenditure constitutes of
(the need for government borrowings) as follows:
Purchase of goods and services for public con-
sumption
Public investment
Income transfer payments (pensions, social
benefits)
Capital transfer payments
National defence
Infrastructure
74
Health and welfare benefits
Example:
1. Revenue Receipts = Rs. 3,00,000
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2. Capital Receipts = Rs. 1,60,000
a) Loan recoveries + other receipts = Rs.
10,000
b) Borrowings & Other liabilities = Rs.
1,50,000
 3. Total Receipts (1 +2) = Rs. 4,60,000 some year. So people will invest their money
4. Revenue Expenditure = Rs.3,50,000 in government schemes, so liquidity of the
5. Capital Expenditure = Rs. 1,10,000 money will come down. Before we have 5 car
6. Total Expenditure (4+5) = Rs. 4,60,000
buyer for 1 car, now we have 2 car buyer for 1
7. Budget Deficit (3-6) =NIL
car, so car price will go down. Price of every-
8. Fiscal Deficit [1+2(a) - 6 =3- 2(b)-6=7 + 2 (b)]=
thing will go down, people will buy less things.
Rs. 1,50,000
It will slow down the industrial growth and it
Simply
 If government expenditure is more than it collects will be deflation in the country. It will make
then deficit occurs and its known as fiscal deficit economic growth sluggish. And in the situation
and to finance the deficit it borrows money . of the deflation, Government has to pay high
 If it borrows the amount equals to fiscal deficit interest to the people.
,then the budget deficit becomes zero and if it bor- • Third case, government has to borrow money
rows less than the fiscal deficit amount, then budg- from world bank or from some other coun-
et deficit occurs. try. Because of that Government has to devalue
Primary deficit = Fiscal deficit- Interest payments it’s currency.
Interest payment is a part of Revenue expenditure. In
• As government has no money, government
the above example suppose out of total revenue ex-
can’t bring any new development scheme. It will
penditure is Rs.3,50,000 and interest payment is Rs.
become difficult to tackle any crisis over coun-
1,20,000.
Then Primary deficit = 8 - Interest Payment part of 4 = try.
Rs.1,50,000 – Rs.1,20,000= Rs.30,000
What is meant by “Govt to target fiscal deficit at
3% of GDP”?
Fiscal Deficit:
• Fiscal deficit is the difference between the gov-
• Fiscal deficit is the difference of government
ernment’s expenditures and its revenues (ex-
expenditure and government reve-
cluding the money it’s borrowed)
nue.(assume that government expenditure is
• A country’s fiscal deficit is usually communicat-
more than revenue).
ed as a percentage of its gross domestic
• More fiscal deficit means government has no
product (GDP).
money, he has to borrow money from central
• If a country's income is 100 rupees and expens-
bank or through some bond/scheme.
es are 104 rupees ,then fiscal deficit is 4.
• If government is borrowing from RBI, in
• Let's say GDP of the nation is 400 rupees : total
other words RBI has to print more money, so
value of goods and services produced in the
it will increase the liquidity of money in the
country in an year .Then the deficit of the nation
market. So people will have more money in
is 1%.[F.D. → 1% of 400 = 4]
their hand, but we have limited resources. For
75

example, before there was 5 car buyers for 1 Same way in this case the deficit is 3% of the GDP
car, now there is 10 car buyer for 1 car. So de-
mand for car will increase and it will increase • More fiscal deficit means more borrowing.
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the price of car. So price of everything will go • When the government earns more than it
up. Ultimately Inflation will go up. spends, it's called fiscal surplus.
• If government is borrowing money from • When the government spends more than it

people as bond or some scheme through, earns, it's called fiscal deficit.

government has to pay high interest after

Monetised deficit:
➢ Borrowings made from RBI through printing fresh
currency
➢ The printed money is called high power money
➢ FRBM act disallow RBI to do this under normal con-
ditions
➢ It increases the level of inflation in the economy
due to increased money supply in the economy.
4.8 Deficit Financing:
 Financing/supporting a deficit budget
 Total Expenditure > Total Receipts → gov-
ernment. enacts financial policies to sustain the
burden of deficits
 Period of deficit financing: 1970-1991
Resources of Deficit Financing
✓ External aids
✓ External grants
✓ External borrowings
✓ Internal borrowings
✓ Printing currency
Govt. may cover the deficit in the following ways:
➔ By running down its accumulated cash reserves
from RBI
➔ Issue of new currency by the government. itself
➔ Borrowing from the RBI and RBI gives the loans
to the government. by printing more currency
notes
Objectives:
▪ To act as a remedy for depression
▪ For granting subsidies
▪ To increase aggregate demand
▪ For payment of interest
▪ To overcome the losses of public sector enter-
prises
▪ For implementing anti-poverty programmes
Effects:
 Leads to inflation
 Adverse effect on savings and investment
 Rise in level of inequality
 Deficit in balance of payments
 Increases the cost of production
4.9 Budget:
➔ Budget comes from the old French bou-
gette, meaning 'little bag'
➔ Budget Circular is issued in the month of
September during the Budget cycle. It
marks the beginning of the Budget process.
➔ Made through a consultative process involv-
ing Ministry of Finance, Niti Aayog and
spending Ministries
➔ Prepared by the Budget Division Depart-
ment of Economic Affairs of the Ministry
of Finance annually. The Finance Minister
is the head of the budget making com-
mittee.
➔ Nodal body responsible for producing
the Budget ➔ Budget Division of the De-
partment of Economic Affairs
➔ The printing process of the Union Budget
papers is marked by the customer 'Halwa
Ceremony' held at North Block in Delhi
➔ Before presentation of the Budget, Presi-
dent's recommendation is obtained under
Article 117(1) and 117(3) for introduction
and consideration in the lower house of Par-
liament.
➔ Presented by Finance Minister
➔ According to Article 112 of the Constitution
of India, the Union Budget of a year is a
statement of the estimated receipts and
76
expenditure of the government. for that
particular year.
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Full Budget
 A Full Budget is not just the presentation of an-
nual finances of the government but an occasion
to change existing tax slabs, announce new
 schemes and sops for different sectors of the
economy.
 A Full Budget includes the passage of a fi-
nance bill to get Parliament's approval for
any tax related changes.
 In an election year, the outgoing government
doesn't tinker with the taxes or announce
new schemes and sops as these are left at
the disposal of the new government.
 In order to manage it its expenditure for the
interim period till a new government takes
over and announces the Budget, the out-
going government presents what is called a
vote on account or an interim budget to get
the Parliament's approval for expenditure to be
incurred for the next few months

Vote on Account
➢ In the absence of presentation of a Full
Budget, the outgoing government seeks a
vote on account from the Parliament for
proposed expenditure to be incurred in the
next few months till the new government takes
over.
➢ There are no major announcements related to
any new schemes or sops during a vote on ac- 4.10 Zero-Base Budgeting:
count as the new government's stance could
differ from that of the outgoing government.  First proposed by Peter Phyrr
 First to introduce → Jimmy Carter
Important Articles:  Starts from the zero base
 Every function of the government. is analysed
➢ Article 266 of the Constitution of India man- for its needs and cost
dates that Parliamentary approval is required  All expenses are evaluated each time a Budget
to draw money from the Consolidated Fund is made and expenses must be justified for each
of India new period
➢ Besides, Article 114 (3) of the Constitution
77

stipulates that no amount can be withdrawn 4.11 Balanced Budget:

from the Consolidated Fund without the en-
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actment of a law (appropriation bill).  When total public-sector spending equals

total government. income (revenue receipts)
during the same period from taxes and charges
for public services
 Budget with zero revenue deficit is balanced
budget
4.12 Gender Budgeting:
 A general budget by the government which al-
locates funds and reponsibilities on the basis of
gender
 It is done in an economy where socio-economic
disparities are chronic and clearly visible on a
sex basis
4.13 Revenue Budget:
 Deals with the income and expenditure of
revenue by the government.
 Presents the annual financial statement of
the total revenue receipts and the total reve-
nue expenditure
 If the balance emerges to be positive it is a rev-
enue surplus budget, and if it comes out to be
negative, it is a revenue deficit budget
4.14 Capital Budget:
 Deals with the receipts and expenditures of
the capital by the government.
 It shows the means by which the capital is man-
aged and the areas where capital is spent
4.15 Outcome Budget:
 Introduced in 2005
 Analyses the progress of each ministry and
department and what the respected ministry
has done with its Budget outlay
 Measures the development outcomes of all
government. programs
4.16 FRBM Act:
 Set targets for the Government of India to es-
tablish financial discipline, improve the man-
agement of public funds, strengthen fiscal pru-
dence and reduce its fiscal deficits
 First introduced in the parliament of India in the
year 2000 by Vajpayee Government
 Passed in the year 2003
 Legal step to ensure fiscal discipline and fiscal
consolidation in India
 In 2016, N.K.Singh Committee was constituted
to review the implementation of FRBM Act
Features:
Following things must be placed along with the
Budget documents annually in the Parliament
1) Macroeconomic Framework Statement
2) Medium Term Fiscal Policy Statement
3) Fiscal Policy Strategy Statement
4 Fiscal Indicators:
To be projected in the medium-term fiscal policy
statement viz.
1) Revenue deficit as a percentage of GDP
2) Fiscal deficit as a percentage of GDP
3) Tax revenue as a percentage of GDP
4) Total outstanding liabilities as a percentage
of GDP
Objectives:
✓ Impose fiscal discipline on government
✓ To institutionalise fiscal discipline
✓ Reduce Fiscal Deficit
✓ Improve Macroeconomic Management
✓ The law aims at promoting Fiscal Stability for
the country on a long-term basis
✓ It emphasises a Transparent Fiscal Management
System and a more equitable distribution of
debts over the years
78
FRBM Act of 2003 had mandated that, apart
from limiting the fiscal deficit to 3% of the
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nominal GDP, the revenue deficit should be
brought down to 0%
Revenue deficit and fiscal deficit may exceed
the targets specified in the rules only on
grounds of national security, calamity etc.
 As per the Union Budget 2016-17, the gov-
ernment. constituted a Committee to review the
implementation of the FRBM Act
4.17 FRBM Review Committee:
 5 member committee
Recommendations @ Union Budget 2017-18:
 Sustainable debt path must be the principal
macro-economic anchor
 Favoured Debt to GDP of 60 % for the Gen-
eral government. by 2023— consisting of 40%
for Central Government and 20 % for State
Governments
 3 % fiscal deficit for the next three years
 Escape Clauses, for deviations upto 0.5% of
GDP, from the stipulated fiscal deficit target
4.18 Developmental Expenditure:
 Expenditures of productive nature ➔ INVEST-
MENTS
 Example: New factories, dams, bridges, roads,
railways
4.19 Non-Developmental Expenditure:
 Expenditures of consumptive nature
 Do not involve any production
 Example: paying salaries, pensions, interest
payments, subsidies, defence expenses
NOTE: Since 1987-88 developmental and non-
developmental expenditure were replaced by plan
and non-plan expenditure ➔ Suggested by SU-
KHOMOY CHAKRAVARTHI COMMITTEE
“Output” and “Outcome Budgeting” ➔ In-
troduced in 2005-06 Budget
Ministry of Finance is responsible for fiscal
consolidation, containing the fiscal deficit and
abiding to FRBM act
4.20 Charged Expenditure:
 Public expenditure which is beyond the vot-
ing power of the Parliament
 Directly withdrawn from Consolidated Fund of
India
 Example: Emoluments of President, Speaker
and Deputy Speaker of Lok Sabha etc.
4.21 Golden Rule of Public Finance:
 The proposition that a government should bor-
row only to invest (plan expenditure) and not
to finance current spending (revenue expendi-
ture)
4.22 14th Finance Commission:
➔ Constituted on January 2, 2013
➔ The commission's chairman was former Reserve
Bank of India governor Y. V. Reddy
➔ Members were Sushma Nath, M. Govinda Rao,
Abhijit Sen, Sudipto Mundle, and AN Jha
➔ Recommendations of the commission entered
force on April 2015
➔ Govt. of India on February 24, 2015 accepted
the recommendations of the 14th finance com-
mission for increasing share of states in cen-
tral taxes to 42% ,the single largest increase
ever recommended. This is 10% more com-
pared to 32% target set by 13th finance
commission.
➔ The Commission recommended that distribution
of grants shall be given to the States using 2011
population data with weight of 90 % and area
79
with weight of 10 %
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➔ The commission followed the method adopted
by the 12th commission and put the floor limit
 at 2 % for smaller States and assigned 15 % states, income distance had been computed
weight. from the third, Haryana. Goa, Sikkim and Harya-
➔ The commission assigned 50% weight to in- na are assigned the same distance as obtained
come distance as it is the only measure of fiscal for Haryana.
capacity. It is the distance of actual per capita
income of a state from the state with the high-
est per capita. The commission calculated the
income distance following the method used the
12th commission.
➔ Income distance has been computed by tak-
ing the distance from the state having high-
est per capita GSDP. Goa had the highest, fol-
lowed by Sikkim. Since these two are very small
4.23 15th Finance Commission:

➔ Article 280 of the Constitution of India pro-

vides for a quasi-judicial body, the Finance
Commission.
➔ It is constituted by the President of India
every 5th year or at such earlier time as he con-
siders necessary.
➔ 15th Finance commission makes recommenda-
tions for the period of 2020-2025 (5 years)
➔ Recommended a one percentage point reduc-
tion in the vertical split of the divisible pool
of tax revenues accruing to States to 41%.

5. National Income

5.1 What do you mean by “Economics” Let’s make it simple

Study of human activity ➔ satisfy needs and
• The word ‘Economics’ originates from the wants
Greek word ‘Oikonomikos’; Oikos (means
‘Home’) + Nomos (means ‘Manage- 5.2 What exactly is “Economics” in our
ment’)’means Home management. daily life
80

• Economics is the study of how people and so-

ciety end up choosing, with or without the
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use of money, to employ scarce productive re-

sources that could have alternative uses to pro-
duce various commodities over time and dis-
tributing them for consumption, now or in the
 future, among various persons or groups in so-
ciety.
• It analyses costs and benefits of improving pat-
terns of resource allocation.
• How the overall economy works
• Studies - employment, GDP, inflation , govern-
ment policy debates
• Studies economy as a whole and its features
like national income, Employment, poverty, bal-
ance of payments and inflation

For better understanding of economics ➔ need

to understand "THE CONCEPT OF SCARCITY" and
"MICRO AND MACRO ECONOMICS"

5.3 Concept of Scarcity:

• Scarcity- tension b/n limited resources and in-

dividual's unlimited wants and needs
• Individual - resources ➔ time, money and skill
• Country- resources ➔ natural resources, capital
labour forces and technology

5.6 What do you mean by “Economy”

5.4 Microeconomics: • The term Economy means the state of country

or region in terms of the production and con-
• Supply and demand interaction in individual sumption of goods and services and the sup-
81

markets for goods and services ply of money.

• Examines the economic behaviour of indi-
vidual actors → consumers, business-man,
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households in the face of scarcity and what ef-

fects they have

5.5 Macro Economics:

 • Ex: Former Soviet Union, Cuba, North Korea etc.

Mixed economy:
• Combination of public sector and private
sector units
• Govt is the decision maker for the public sector
• Individuals and businesses for private sector
• Basically incorporates governmental in-
volvement in a market based economy
• Ex: India, Russia and UK

5.7 Types of Economy Open economy:

Traditional economy: • Trade with other economies

• Market is mostly free from trade barriers >>
• Very little government involvement
exports and imports form of a large percentage
• Allocation of resources based on rituals, habits
of the GDP
or customs
• The degrees of the openness of an economy
• Economic roles → family and people work to-
determines government's freedom to pursue
gether for the common good
economic policies of its choice and the suscep-
• Very little individual choice in this system
tibility of the country to international economic
• Ex: tribes in Amazon, Aborigines in Australia etc
cycles
Free market economy:
Closed economy:
• Very little government control
• No trade or trade area with other economies
• Economic decisions based on market principles
• Consumer get everything within the economic
• Lot of competition between firms >> many
borders and government act as the arbitrator,
choices to consumers
articulator and facilitator
• Resources for production are under private
ownership and they make their decisions with Capitalist economy:
the desire to maximise profits.
• Capitalism - basic economic system based on
• There are no pure free market economies,
private or corporate ownership of production
United States and Australia come close to this
and distribution of goods.
type
• Capitalists favour a system of free enterprise
Command economy: which means the government does not inter-
fere in the economy that the laws of supply
82

• Resources of production are completely under

and demand will make sure that the economy
government control
runs most efficiently in meeting people's needs.
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• These economies are run based on central

• Capitalism is characterised by competition in
planning
which there is rivalry in supplying or getting an
• Due to lack of competition, resource allocation
economic service or good
is inefficient and consumers have very little
choices Socialist economy:
• Socialism is an economic theory or idea that
states the government or the state should be
in-charge of economic planning , production
and distribution of goods
• Socialism tends to favour cooperation whereas
capitalism is characterised by competitions
• Communism advocates class struggle and revo-
lution to establish a society of cooperation with
strong government control
• Communism predominated in the former Soviet
Union and much of eastern Europe at one time.
• Today it predominates in China and Cuba, but
its influence has lessened
5.8 Salient Features of Indian Economy
Mixed Economy
• India is a mixed economy.
• In a mixed economy, public sector (govern-
ment-owned) business enterprises exist
alongside the private sector to achieve a wel-
fare state with socialistic pattern of society.
• Ever since independence, India’s economic de-
velopment has been guided by the twin objec-
tives of developing:
(a) a rapidly and technologically progressive econ-
omy by democratic means; and
(b) a social order based on justice, offering equal
opportunity to every citizen of the country.
Dominance of Agriculture and Heavy Population
Pressure on Agriculture
➢ In India, almost 60-70% of the total population
still resides in rural areas and hence they de-
pend on agriculture for their livelihood.
Over-Population
• India is over populated.
• In every decade Indian population gets in-
creased by about 20%
• During 2001- 11, population increased by
17.6%. With this high growth rate of population
about 1.7 crore new persons are added to In-
dian population every year.
• According to 2011 census, the total Indian pop-
ulation stands at a high level of 121.02 crore
which is 17.5% of the world’s total popula-
tion which is second largest population of the
world.
• To maintain this 17.5% of world population In-
dia holds only 2.42% of total land area of the
world.
Unbalanced Economic Development
83
➢ India has not yet achieved the goal of balanced
economic development. According to latest da-
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ta available about 64% of total labour force is
dependent on agriculture, 16% on industries
and the rest about 20% on trade, transport and
other services.
Low rate of capital formation ✓ There are 3 major sectors of Indian economy-
primary sector, secondary and the tertiary sec-
➢ Another basic characteristic of the Indian econ-
tor.
omy is the existence of capital deficiency which
is reflected in two ways –
➢ firstly, the amount of capital per head available Manufactured goods used as Inputs
is low; and secondly, the current rate of capital
formation is also low.

Lack of Infrastructure Facility

➢ There is a lack of physical infrastructure (i.e.
road electricity, banking, transportation, insur-
ance, energy) and social infrastructure(i.e. edu-
cation, health, housing, drinking water, sanita-
tion) that hinders the development process of a
country.

Poor Economic Organisation

• Another important feature of the Indian econ-
omy is poor economic organisation.
• Certain institutions necessary for economic de-
velopment are not adequately developed.
• For instance, to mobilise savings and more es-
pecially the savings of the rural sector, the crea-
tion and development of financial institutions is
essential.
• India suffers from inadequacy of financial insti-
tutions in rural areas.
• Similarly, India being a country of a large num-
ber of small farmers, the development of certain
agencies of credit for granting loans to farmers
on easy terms is needed.
• Likewise, to provide medium and long-term
loans to industries for the development of in-
dustrial finance corporation is quite necessary.
• There is a great scarcity of skilled and efficient
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administrators and managers.

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5.9 Structure and Composition of Indian

Economy
5.10 National Income of India Gross National Product (GNP)
• The word “national” here refers to all the citi-
• National income measures the net value of
zens of a country
goods and services produced in a country
• Gross National Product refers to the money
during a year and it also includes net earned
value of total output or production of final
foreign income.
goods and services produced by the nationals
• In other words, a total of national income
of a country during a given period of time,
measures the flow of goods and services in
generally a year.
an economy. National income is a flow not a
• In the calculation of GNP, we include the money
stock.
value of goods and services produced by na-
• As contrasted with national wealth which
tionals outside the country.
measures the stock of commodities held by the
• Hence, income produced and received by na-
nationals of a country at a point of time, na-
tionals of a country within the boundaries of
tional income measures the productive pow-
foreign countries should be added in Gross
er of an economy in a given period to turn
Domestic Product (GDP) of the country.
out goods and services for final consump-
• Similarly, income received by foreign nation-
tion.
als within the boundary of the country
should be excluded from GDP.. let’s make it
simple
It considers income of both resident and
non -resident citizens of a country while
the income of foreigners who reside
within the geographical boundary of the
country is excluded

5.11 Concepts of National Income

The various concepts of national income are as fol-

lows:

Per Capita Income:

It is a measure of the amount of money that is be-
ing earned per person in a certain area.
PCI = National Income / Population In equation form: GNP = GDP + X – M, or GNP =
GDP + NFIA
85

Where➔
X = Income earned and received by nationals within
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the boundaries of foreign countries

M = Income received by foreign nationals within
the country
If X = M, then GNP = GDP
Similarly, in a closed economy
X=M=0
then also GNP = GDP
In equation form : GNP = GDP + NFIA
Where ➔
NFIA = Net Factor Income from abroad
also NFIA = Factor incomes received from abroad
— Factor income paid to abroad.
It is to be noted here that in a closed economy
which does not deal with outside world, has no
NFIA, i.e. its NFIA is equal to Zero. Hence, for such
countries, GDP = GNP
Example –
1. 125 crores Indian earns 100 crores in Indian Terri-
tory.
2. Five crore foreigners (USA) earn 10 crores in Indi-
an Territory and send their money to USA.
3. Five crore Indians earn 20 crores in Saudi Arabia
and send their earnings to India.
According to formula the GNP would be 120 crores
= 110 + (20 – 10) crores = 120 cr
Gross Domestic Product (GDP)
• It is the total money value of all final goods
and services produced within the geograph-
ical boundaries of the country during a given
period of time.
• Domestic product emphasis the total output
which is raised within the geographical bounda-
ries of the country
• National product focuses not only on the do-
mestic product but also on goods and services
produced outside the boundaries of a nation.
• Simply, It considers production by both resident
citizens as well as foreign nationals who reside
within country.
• National Statistical Office (NSO), Ministry of
Statistics and Programme Implementation re-
leases the estimates of Gross Domestic Prod-
uct(GDP) at constant (2011-12) and current
prices.
• The components of expenditure on Gross
Domestic Product, namely, consumption ex-
penditure and capital formation, are normally
measured at market prices
GDP (FC) = GDP (MP) – Indirect taxes - Sub-
sidies
In equation form GDP = Q*P
• Q is total quantity of final goods and ser-
vices produced in the country
• P is price of final goods and services
Example –
1. 125 crores Indian earns 100 crores in Indian Terri-
tory.
2. Five crore foreigners (USA) earn 10 crores in Indi-
an Territory and send their
money to USA.
3. Five crore Indians earn 20 crores in Saudi Arabia
86
and send their earnings to India.
So, now GDP of India will be 100+10 = 110 crores
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only (why not 130 crores? Because we have to in-
clude only those earnings or income which had
been earn in Indian Territory)
Net National Product (NNP)
➢ NNP is obtained by subtracting depreciation Adding of subsidies and deduction of in-
value (i.e. capital stock consumption) from GNP. direct taxes from NNP-MP is called as
NNP-FC. This is done to find payments
In equation form : NNP = GNP – Depreciation
made to factors of production (land, la-
Question arises why we have deducted deprecia-
bour, capital, entrepreneurship)
tion?
• The obtained value is known as NNP at factor
➢ Because the part, which replaces the depreciat- cost or National income. So,
ed parts of the product, already, produced, does • NNP at factor cost or National Income
not add value to current year’s total produce. It
= NNP at market price – (Indirect Taxes –
is just keeping the already produced product in-
Subsidy)
tact
= NNP(mp) – Indirect Tax + Subsidy
➢ NNP with market prices includes indirect
taxes and excludes subsidies, which are given
to produce goods and services.
➢ Example - The cost of production of LPG gas is
600 rupees for 15 kg but after government pro-
vides subsidy of 200 rupees then the price of
product came to 400 rupees. This is called as
NNP-MP i.e. NNP at market price

5.12 National Income
GNP is based on market prices of produced
goods which includes indirect taxes and subsidies.
NNP can be calculated in two ways-
(i) at market prices of goods and services
Personal Income
• Personal income is that income which is actu-
ally obtained by nationals.
• Sometime part of national income is not availa-
ble to individuals and sometimes payments
made to some individuals are not included in
national income.
• So, while calculating national income- parts of
national income that are not available to indi-
viduals of the country is deducted from the na-
tional income. The monetary payments made to
individuals but not included in national income
are added to the national income
87

(ii) at factor cost

• Personal income is obtained by subtracting
• When NNP is obtained at factor cost, it is
corporate taxes and payments made for social
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known as National Income.

securities provision from national income and
• National Income is calculated by subtracting
adding to it government transfer payments,
net indirect taxes (i.e. total indirect tax sub-
business transfer payments and net interest
sidy) from NNP at market prices.
paid by the government. So,
• Personal Income = National income – undis-
tributed profits of corporation – payments for
social security provisions – corporate tax + gov-
ernment transfer payments + Business transfer
payments + Net interest paid by government.
• It should always be kept in mind that personal
income is a flow concept.
When personal direct taxes are subtracted from
personal income, the obtained value is called dis-
posable personal income (DPI).
So,
➢ Disposable personal income DPI = [Personal
income] – [Direct Taxes] or
➢ Personal Disposable Income (PDI) = PI – Per-
sonal tax payments – Non-tax payments
➢ Personal tax payments : example – income tax
➢ Non-tax payments : like fines

Undistributed profits - A portion of corporates

profit which is for future expenditure and
expansion and it is not share with shareholders and
factors of production.
Graphical Representation of relationship be-
Corporate Tax - It is imposed on the earnings
tween various measures
made by the firms
Net interests paid by the households - The
households do receive interest payments from
private firms or the government on past loans ad-
vanced by them. Households may have to
pay interests to the firms and the government as
well, in case they had borrowed money
from either
Transfer payments - The households receive trans-
fer payments from government and firms 5.13 Methods of Measuring National In-
(pensions, scholarship, prizes, for example). come:

Personal Disposable Income National Income of a country is calculated by fol-

88

• Definition – Income available to individuals that lowing three methods :

can be spent at their will
Example – suppose your father’s income is
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•
50000 rupees per month. After paying direct tax
payments and fines, the remaining income is
disposable personal income.
Production Method ✓ The net contribution made by firm is called its
value added
• In this method net value of final goods and
✓ Value added of a firm = value of production
services produced in a country during a year is
of the firm – value of intermediate goods
obtained and the total obtained value is called
used by firm
total final product. This represents Gross Do-
✓ Value added by firm is distributed among fac-
mestic Product (GDP) (OR )
tors of production i.e. land, labor, capital and
• In this method, National income is calculated by
entrepreneurship
aggregate annual value of goods and ser-
✓ So, wages + interest + profits + rent must be
vices produced in a country in one year.
equal to value added of firm
• Now question arises do we calculate aggregate
of all goods and services produced by all the Let’s understand this with an example
firms such as Reliance, Vodafone, Maruti, HP Farme Weav- Tai- Flying
etc. in an economy? r er lor Machine
• Example – Suppose Flying machine company Total Pro- 500 300 200 1500
buys some cotton from farmer and give it to duction
weaver who weaves the cotton into cloth and Intermedi- 0 0 0 500
return it to company. ate Goods
• Now company gives this cloth to tailor to stitch used
a shirt. Tailor stitches it and return it to compa- Value Add- 500 300 200 1500-
ny. Company added some more things in it, ed 500=100
package it and sold in market for 1500 rupees. 0
• This shirt produced by firm is not entirely of its
• Here intermediate goods used by firm is of 500
own contribution, it also has contribution of tai-
rupees for cotton while 1000 rupees is value
lors, weavers, farmers etc.
added, out of which 500 is paid to weaver and
• To calculate net contribution of firm we have to
tailor as wages.
subtract the contributions made by famers,
• Value added is a flow variable i.e. measured
weaver and tailors. If we do not do that then it
over a period of time (weekly, monthly, annual-
will lead to double counting.
ly)
✓ Net income earned in foreign boundaries by
nationals is added and depreciation is subtract-
ed from GDP.

Gross Value Added and Net Value Added

• Here we have to understand about “Deprecia-
tion”
89

• It is also known as “Consumption of fixed cap-

ital”. But why is it called so?
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• Capital goods gradually undergo wear and

tear and so producer has to invest in repair or
replacing of weared parts to keep the value of
capital constant
• This replacement investment is same as de-
preciation of capital. In other words, it is same
as using up of capital
• If we add depreciation into value added, then
we get Gross value added. Gross value added
= value added + Depreciation
• If we deduct depreciation from Gross value
added, then we get Net value added.
Net Value added = Gross value added –
Depreciation
Income Method
• The calculation of National Income by compil-
ing income of factors of production is called
as Income method.
• In this method, a total of net incomes earned
by working people in different sectors and
commercial enterprises is obtained.
Symbolically : National Income = Total Rent + To-
tal Wages + Total Interest + Total Profit
In our country it is calculated by following formula
(this formula sometimes appear in economic sur-
vey) –
Compensation of employees – Salaries paid in
cash and other benefits to employees. In simple
words – ‘wage’
Consumption of fixed capital – Wear and tear of
machinery. These are replaced with new parts or
machinery. It adds to income of the machinery and
spare parts producers.
Net tax production = other taxes on Production
– subsidies on production
Other taxes on Production – There is a differ-
ence between Tax on product and Tax on
production.
 Tax on product – It includes taxes like Sales tax
and Excise duty. It is the tax imposed as it was
produced and sold.
 Tax on production - Tax imposed irrespective
of production like license fees and land tax
Gross operating surplus – balance of value add-
ed after deducting above 3 components. It goes
to pay rent of land and interest of capital.
Roughly analogous to profit.
Consumption Method
• It is also called expenditure method.
• Income is either spent on consumption or
saved.
• Hence national income is the addition of to-
tal consumption and total savings. [summing
up all of the expenditures made on final goods
and services]
• There are four main aggregate expenditures
that go into calculating GDP: consumption by
households, investment by businesses, govern-
ment spending on goods and services, and net
exports, which are equal to exports minus im-
ports of goods and services.
• In India a combination of production method
and income method is used for estimating na-
tional income.
➢ Symbolically : N.I = C + I + G + (X – M)
➢ Where, C= Total consumption expenditure
➢ I = Total Investment Expenditure
➢ G = Total government. Expenditure
➢ X = Export; M = Import
Main components under Expenditure meth-
od
Consumer spending
 Most dominant component in calculation of
GDP under expenditure method.
 It accounts for the majority of India’s GDP.
 It is about 59% and consumption expenditure is the
90
reason that our economy is less affected by up
and downs in global world. The economies,
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which export a lot, are affected by global winds.
 It includes purchasing of durable goods, non-
durable goods and services.
Government spending
• It is the spending by central, state and local
governments on basic services (like education,
health care etc.) and defence.
• Dominant after consumer spending
Business investment
• Most volatile component
• It includes capital expenditure by firms on capital
goods.
Net exports
• It represents the effect of foreign trade of goods
and services on the economy
5.14 Estimates of National Income in India
• In 1868, the first attempt was made by Dada
Bhai Naoroji. He, in his book ‘Poverty and Un-
British Rule in India’ estimated Indian per capi-
ta annual income at a level of Rs. 20.
• Some other economists followed it and gave
various estimates of Indian national income,
some of these estimates are as follows :
➢ Findlay Shirras ( 1911) - Rs. 49
➢ Wadia & Joshi ( 1913-14) – Rs. 44.30
➢ Dr. V.K.R.V. Rao (1925-29) – Rs. 76
• After Independence, the Government of India
appointed the National Income Committee in
August 1949 under the chairmanship of Prof.
P.C. Mahalanobis, to compile authoritative es-
timates of national income.
• For further estimation of national income, the
government established National Statistical
Office (CSO) which now regularly publishes na-
tional income data.
CSO & NSSO Merged :
‘Chief of Statistician of India’ and will be having the
rank of Chief Secretary.
5.15 Indicators of Economic Development
The major indicators to increase the levels of devel-
opment are :
Net National Product (NNP)
• It is defined as the total output produced by a
country in one financial year.
• It can be computed by subtracting depreciation
from GNP.
• NNP is also called as National Income.
Per Capita Income
• A high per capita income indicates a better
standard of living and thus, economic develop-
ment on the whole.
• Further, a rise in per capita income will al-
ways mean a rise in aggregate real output.
Quality of Life Index (QLI) :
➢ The Index of Quality of life depends upon main-
ly three factors, i.e. life expected, Basic Liter-
acy ad Infant Mortality Rate. Most of the
countries with low per capita GNP tends to have
to QLI and vice-a-versa.
Human Development Index (HDI):
➢ It is one of the most recent and significant indi-
cator of economic development of a country.
➢ It is a composite of three indicators, i.e. Life
Expectancy Index (LEI); Education Attain-
ment Index (EAI) and Standard of Living In-
dex. (HDI) ranks countries in relations to each
other.
91

The government merged Central Statistical Or- ➢ It can be computed by using following formula:
ganisation (CSO) and National Sample Survey
Organisation (NSSO) for promoting statistical
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network in the country. The newly merged unit was

named as National Statistical Office (NSO). The
head of the organisation will be designated as
 6. Human Development

6.1 Terminology  Physicians: Number of medical doctors (physi-

 Infants exclusively breastfed: Percentage of
children ages 0–5 months who are fed exclu-
sively with breast milk in the 24 hours prior to
the survey
 Infants lacking immunization against DPT:
Percentage of surviving infants who have not
received their first dose of diphtheria, pertussis
and tetanus vaccine.
 Infants lacking immunization against mea-
sles: Percentage of surviving infants who have
not received the first dose of measles vaccine.
 Child malnutrition (stunting moderate or se-
vere): Percentage of children ages 0–59 months
who are more than two standard deveiations
below the median height-for-age of the World
Health Organization Child Growth Standards.
 Infant mortality rate: Probability of dying be-
tween birth and exactly age 1, expressed per
1,000 live births
 Under-five mortality rate: Probability of dying
between birth and exactly age 5, expressed per
1,000 live births.
 Adult mortality rate: Probability that a 15-
year-old will die before reaching age 60, ex-
pressed per 1,000 people
 Deaths due to malaria: Number of deaths due
to malaria from confirmed and probable cases,
expressed per 100,000 people.
 Deaths due to tuberculosis: Number of deaths
due to tuberculosis from confirmed and proba-
cians), both generalists and specialists, ex-
pressed per 10,000 people
 Public health expenditure: Current and capital
spending on health from government (central
and local) budgets, external borrowing and
grants (including donations from international
agencies and nongovernmental organizations)
and social (or compulsory) health insurance
funds, expressed as a percentage of GDP.
6.2 Definition of Human Development
➢ Human development is defined as the pro-
cess of enlarging people’s freedoms and
opportunities and improving their well-
being.
➢ Human development is about the real free-
dom ordinary people have to decide who
to be, what to do, and how to live.
➢ Human development grew out of global discus-
sions on the links between economic growth
and development during the second half of the
20th Century.
➢ By the early 1960s there were increasingly loud
calls to “dethrone” GDP: economic growth had
emerged as both a leading objective, and indi-
92

ble cases, expressed per 100,000 people.

cator, of national progress in many countries
 HIV prevalence, adult: Percentage of the pop-
➢ Even though GDP was never intended to be
ulation ages 15–49 that is living with HIV.
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used as a measure of wellbeing; in the 1970s

 Life expectancy at age 60: Additional number
and 80s development debate considered using
of years that a 60-year-old could expect to live
alternative focuses to go beyond GDP, including
if prevailing patterns of age-specific mortality
putting greater emphasis on employment, fol-
rates stay the same throughout the rest of his
or her life.
 lowed by redistribution with growth, and then
whether people had their basic needs met.
➢ These ideas helped pave the way for the human
development approach, which is about expand-
ing the richness of human life, rather than
simply the richness of the economy in which
human beings live.
➢ It is an approach that is focused on creating
fair opportunities and choices for all people.
So how do these ideas come together in the
human development approach?
People:
✓ The human development approach focuses on
improving the lives people lead rather than
assuming that economic growth will lead, au-
tomatically, to greater opportunities for all.
✓ Income growth is an important means to de-
velopment, rather than an end in itself.
Opportunities:
o Human development is about giving people
more freedom and opportunities to live lives
they value.
o In effect this means developing people’s abili-
ties and giving them a chance to use them.
o For example, educating a girl would build her
skills, but it is of little use if she is denied access
to jobs, or does not have the skills for the local
labour market
Choices:
• Human development is, fundamentally, about
more choice.
It is about providing people with opportunities,
• crease in freedom (or decrease in unfree-
not insisting that they make use of them.
• No one can guarantee human happiness, and
the choices people make are their own concern.
• The process of development – human devel-
opment - should atleast create an environment
for people, individually and collectively, to de-
velop to their full potential and to have a rea-
sonable chance of leading productive and crea-
tive lives that they value.
6.3 Concept of Human Development
➔ The concept of human development was intro-
duced by Dr Mahbub-ul-Haq.
➔ Dr Haq has described human development as
development that enlarges people’s choices
and improves their lives. People are central to
all development under this concept.
➔ These choices are not fixed but keep on chang-
ing. The basic goal of development is to create
conditions where people can live meaningful
lives.
➔ A meaningful life is not just a long one. It must
be a life with some purpose.
➔ This means that people must be healthy, be
able to develop their talents, participate in soci-
ety and be free to achieve their goals.
 Dr Mahbub-ul-Haq and Prof Amartya Sen
worked together under the leadership of Dr
Haq to bring out the initial Human Develop-
ment Reports. Both these South Asian econo-
mists have been able to provide an alternative
view of development.
 Dr Mahbub-ul-Haq created the Human De-
velopment Index in 1990. According to him,
development is all about enlarging people’s
choices in order to lead long, healthy lives with
dignity. The United Nations Development Pro-
gramme has used his concept of human devel-
opment to publish the Human Development
Report annually since 1990.
 Nobel Laureate Prof Amartya Sen saw an in-
93
dom) as the main objective of development.
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Interestingly, increasing freedoms is also one of
the most effective ways of bringing about de-
velopment. His work explores the role of social
and political institutions and processes in in-
creasing freedom.
 ✓ Leading a long and healthy life, being able
to gain knowledge and having enough
means to be able to live a decent life are the
most important aspects of human devel-
opment
✓ Therefore, access to resources, health and
education are the key areas in human de-
velopment
THE FOUR PILLARS OF HUMAN DEVELOP-
MENT
Idea of human development is supported by the
concepts of
1) Equity
2) Sustainability
3) Productivity
4) Empowerment
Equity :
o Equity refers to making equal access to oppor-
tunities available to everybody.
o The opportunities available to people must be
equal irrespective of their gender, race, income
and in the Indian case, caste
Example: In any country, it is interesting to see
which group the most of the school dropouts be-
long to. This should then lead to an understanding
of the reasons for such behaviour. In India, a large
number of women and persons belonging to so-
cially and economically backward groups drop out
of school. This shows how the choices of these
groups get limited by not having access to
knowledge
Sustainability:
▪ Sustainability means continuity in the availabil-
ity of opportunities.
▪ To have sustainable human development, each
generation must have the same opportunities.
▪ All environmental, financial and human re-
sources must be used keeping in mind the fu-
ture.
▪ Misuse of any of these resources will lead to
fewer opportunities for future generations.
Example: Importance of sending girls to school ➔
If a community does not stress the importance of
sending its girl children to school, many opportuni-
ties will be lost to these young women when they
grow up. Their career choices will be severely cur-
tailed and this would affect other aspects of their
lives. So each generation must ensure the availabil-
ity of choices and opportunities to its future gener-
ations.
Productivity:
✓ Productivity here means human labour produc-
tivity or productivity in terms of human work.
✓ Such productivity must be constantly enriched
by building capabilities in people.
✓ Ultimately, it is people who are the real wealth
of nations. Therefore, efforts to increase their
knowledge, or provide better health facilities ul-
timately leads to better work efficiency
Empowerment:
➢ Empowerment means to have the power to
make choices.
➢ Such power comes from increasing freedom
and capability.
➢ Good governance and people-oriented policies
are required to empower people.
➢ The empowerment of socially and economically
disadvantaged groups is of special importance
94
Approaches to Human Development
a) Income approach
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b) Welfare approach
c) Minimum needs approach
d) Capabilities approach
Income approach:
• This is one of the oldest approaches to human
development.
• Human development is seen as being linked to
income.
• The idea is that the level of income reflects the
level of freedom an individual enjoys.
• Higher the level of income, the higher is the
level of human development.
Welfare approach:
• This approach looks at human beings as benefi-
ciaries or targets of all development activities.
• The approach argues for higher government
expenditure on education, health, social sec-
ondary and amenities.
• People are not participants in development but
only passive recipients.
• The government is responsible for increasing
levels of human development by maximising
expenditure on welfare.
Minimum needs approach:
• This approach was initially proposed by the In-
ternational Labour Organisation (ILO).
• Six basic needs i.e.: health, education, food, wa-
ter supply, sanitation, and housing were identi-
fied.
• The question of human choices is ignored and
the emphasis is on the provision of basic needs
of defined sections.
Capabilities approach:
• This approach is associated with Prof. Amartya
Sen.
Building human capabilities in the areas of
•
health, education and access to resources is the
key to increasing human development.
6.4 Human Development Index
➔ The HDI was created to emphasize that people
and their capabilities should be the ultimate
criteria for assessing the development of a
country, not economic growth alone.
➔ The HDI can also be used to question national
policy choices, asking how two countries with
the same level of GNI per capita can end up
with different human development outcomes.
➔ These contrasts can stimulate debate about
government policy priorities.
➔ The Human Development Index (HDI) is a
summary measure of average achievement
in key dimensions of human development: a
long and healthy life, being knowledgeable
and have a decent standard of living.
➔ The HDI is the geometric mean of normalized
indices for each of the three dimensions.
➔ The health dimension is assessed by life expec-
tancy at birth, the education dimension is
measured by mean of years of schooling for
adults aged 25 years and more and expected
years of schooling for children of school enter-
ing age.
➔ The standard of living dimension is measured
by gross national income per capita.
➔ The HDI uses the logarithm of income, to re-
flect the diminishing importance of income with
increasing GNI.
95
➔ The scores for the three HDI dimension indices
are then aggregated into a composite index us-
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ing geometric mean.
➔ The HDI simplifies and captures only part of
what human development entails. It does not
reflect on inequalities, poverty, human secu-
rity, empowerment, etc.
➔ A fuller picture of a country's level of human
development requires analysis of other indica-
tors and information presented in the statistical
annex of the report.
 Human Development Index (HDI) is a sum-
mary measure of achievements in three key
dimensions of human development: a long
and healthy life, access to knowledge and
a decent standard of living.
 The HDI is the geometric mean of normal-
ized indices for each of the three dimen-
sions.
Steps to calculate the Human Development In-
dex
Step 1: Creating the dimension indices
Minimum and maximum values (goalposts) are set
in order to transform the indicators expressed in
different units into indices on a scale of 0 to 1.
sistence and nonmarket production in econo-
mies close to the minimum
 The maximum is set at $75,000 per capita.
Kahneman and Deaton (2010) have shown that
there is virtually no gain in human development
and well-being from income per capita above
$75,000.
 Currently, only four countries (Kuwait, Liech-
tenstein, Qatar and Singapore) exceed the
$75,000 income per capita ceiling
Having defined the minimum and maximum
values, the dimension indices are calculated as
For the education dimension, this equation is
first applied to each of the two indicators, and
then the arithmetic mean of the two resulting
indices is taken.
Step 2: Aggregating the dimensional indices to
produce the Human Development Index
HDI is the geometric mean of the three dimen-
sion indices:

 Life expectancy at 20 years is based on histor-

ical evidence that no country in the 20th centu-
ry had a life expectancy of less than 20 years
 Societies can subsist without formal education,
justifying the education minimum of 0 years
 The maximum for expected years of school-
ing, 18, is equivalent to achieving a master’s
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degree in most countries. The maximum for

mean years of schooling, 15,is the projected
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maximum of this indicator for 2025

 The low minimum value for gross national
income (GNI) per capita, $100, is justified by
the considerable amount of unmeasured sub-
Country Groupings:
Positive Aspects (Human Development Re-
port):
➔ In India, between 1990 and 2015, life expectan-
cy has improved by 10.4 years.
➔ Child malnutrition declined by 10% points from
2015.
➔ There were some modest gain in infant and un-
der-five mortality rates.
➔ The report praised India’s reservation policy,
saying even though it has not remedied caste-
based exclusions, it has had substantial positive
effects.
➔ It also hailed the MGNREGA, Right to Infor-
mation, National Food Security, and Right to
Education Acts.
➔ It commended the Indian grassroots group
Mazdoor Kisan Shakti Sanghatan for popularis-
ing social audits of government schemes.
What needs to be done?
After 1990, the rise in incomes that came with a
more open economy has not translated into a
higher quality of life for many Indians.
Significant inequalities persist, particularly be-
tween States and regions, which act as major
barriers to improvement.
A central focus on social indicators is necessary
for India to break free from its position as an
underachiever.
More should be done to eliminate subsidies for
the richest quintile.
The rise in revenues should go towards making
public education of high standards accessible to
all and delivering on the promised higher
budgetary outlay for health care.
One crucial metric that gets insufficient atten-
tion in the measurement of development is the
state of democracy, reflected among other
things in access to justice.
It is relevant to point out that India has not rati-
fied UN conventions on torture, rights of mi-
grant workers and their families, and protection
against enforced disappearance.
Sustaining and improving the quality of life will
depend on policies crafted to handle major
emerging challenges such as urbanisation, the
housing deficit, access to power, water, educa-
tion and health care.
What does the Human Development Index tell
us?
o The Human Development Index (HDI) was cre-
ated to emphasize that expanding human
choices should be the ultimate criteria for as-
sessing development results.
o Economic growth is a mean to that process, but
is not an end by itself.
o The HDI can also be used to question national
policy choices, asking how two countries with
the same level of Gross National Income (GNI)
per capita can end up with different human de-
velopment outcomes.
o For example, Malaysia has GNI per capita higher
than Chile, but in Malaysia, life expectancy at
birth is about 7 years shorter and expected
years of schooling is 3 years shorter than in
Chile, resulting in Chile having a much higher
HDI value than Malaysia.
o These striking contrasts can stimulate debate
about government policy priorities.
97
What are the criteria for a country to be includ-
ed in the HDI?
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o The Human Development Report Office strives
to include as many UN member countries as
possible in the HDI.
o To include a country in the HDI they need re-
cent, reliable and comparable data for all three
dimensions of the Index.
o For a country to be included, statistics should
ideally be available from the national statistical
authority through relevant international data
agencies.
Why is it important to express GNI per capita in
purchasing power parity (PPP) international dol-
lars?
o The HDI attempts to make an assessment of
188 diverse countries and territories, with very
different price levels.
o To compare economic statistics across coun-
tries, the data must first be converted into a
common currency.
o Unlike market exchange rates, PPP rates of ex-
change allow this conversion to take account of
price differences between countries.
o In that way GNI per capita (PPP $) better reflects
people's living standards uniformly.
o In theory, 1 PPP dollar (or international dollar)
has the same purchasing power in the domestic
economy of a country as US$1 has in the US
economy.
o The current PPP conversion rates have been in-
troduced in May 2014 they were based on the
2011 International Comparison Programme
(ICP) Surveys, which covered 199 economies
from all geographical regions and from the
OECD.
Can GNI per capita be used to measure human
development instead of the HDI?
o No. Income is a means to human development,
and not the end.
o The GNI per capita only reflects average nation-
al income.
o It does not reveal how that income is spent, nor
whether it translates to better health, education
and other human development outcomes.
o In fact, comparing the GNI per capita rankings
and the HDI rankings of countries can reveal
much about the results of national policy choic-
es.
Can the HDI alone measure a country’s level of
human development?
o No. The concept of human development is
much broader than what can be captured by
the HDI, or by any other composite index in the
Human Development Report (Inequality-
adjusted HDI, Gender development index, Gen-
der Inequality Index or Multidimensional Pov-
erty Index).
o The composite indices are a focused measure of
human development, zooming in on a few se-
lected areas.
o A comprehensive assessment of human devel-
opment requires analysis of other human de-
velopment indicators and information present-
ed in the statistical annex of the report
Can the HDI indicators be adapted to compute
the HDI at the country level?
o Yes, the HDI indicators can be adapted to coun-
try-specific indicators provided they meet other
aspects of statistical quality.
o For example, some countries have used under-5
mortality rates at sub-national levels instead of
life expectancies and some have used average
disposable income per capita instead of GNI per
capita.
o The HDI can also be disaggregated at sub-
national level to compare levels and disparities
among different subpopulations within a coun-
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try, provided that appropriate data at the level
of disaggregation are available or can be esti-
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mated using sound statistical methodology.
o The highlighting of internal disparities using
HDI methodology has prompted constructive
policy debates in many countries.
Why is geometric mean used for the HDI rather
than the arithmetic mean?
o In 2010, the geometric mean was introduced to
compute the HDI.
o Poor performance in any dimension is directly
reflected in the geometric mean. That is to say,
a low achievement in one dimension is not an-
ymore linearly compensated for by high
achievement in another dimension.
o The geometric mean reduces the level of substi-
tutability between dimensions and at the same
time ensures that a 1 percent decline in index
of, say, life expectancy has the same impact on
the HDI as a 1 percent decline in education or
income index.
o Thus, as a basis for comparisons of achieve-
ments, this method is also more respectful of
the intrinsic differences across the dimensions
than a simple average.
What is the effect of fixing the maximum of GNI
per capita at $75,000?
o Income is instrumental to human development,
but the contribution diminishes as incomes rise.
o Also a high income without being translated
into other human development outcomes is of
less relevance for human development.
o Fixing the maximum at $75,000 means that for
countries with GNI per capita greater than
$75,000, only the first $75,000 contributes to
human development.
o In this way the higher income is prevented from
dominating the HDI value. Currently only 4
countries with GNI pc above the cap – Liechten-
stein, Kuwait, Qatar and Singapore. The projec-
tions based on fairly realistic growth rates have
shown that by 2018 not more than five coun-
tries will exceed the limit.
Are the HDI dimensions weighted equally?
o The HDI assigns equal weight to all three di-
mension indices; the two education sub-indices
are also weighted equally.
o The choice of weights is based on the norma-
tive assumption that all human beings value
three dimensions equally.
o The choice of minima and maxima for transfor-
mation of component indicators into indices
gives more equal ranges of variation of dimen-
sion indices - implying that the effective
weights are more equal than it was before.
Why does the HDI not include dimensions of
participation, gender and equality?
o As a simple summary index, the HDI is designed
to reflect average achievements in three basic
aspects of human development – leading a long
and healthy life, being knowledgeable and en-
joying a decent standard of living.
o Participation and other aspects of well-being
are measured using a range of objective and
subjective indicators and are discussed in the
Report.
o Measurement issues related to these aspects of
human development demonstrate the concep-
tual and methodological challenges that need
to be further addressed.
6.5 Why is India not improving its rank in
HDI ?
 1.5 billion people worldwide still live in multidi-
mensional poverty, 54% of them concentrated
in South Asia. While poverty fell significantly
from 1990 to 2015, inequalities sharpened in
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the region. India shares major portion of this
population
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 Due to lesser spending on health , India shares
a huge burden of NCDs & other diseases. Out
of pocket expenditure , lack of awareness , fo-
cus on curative rather than preventive low in-
surance penetration all these causes high IMR &
 MMR . Thus India scored poorly in life expec-
tancy
 Prevalent discrimination in society holds the
women, disabled & other marginalised sections
to enroll in schools & colleges. People opt for
informal employments earlier in the life due to
poverty thus resulting in exodus from schools &
colleges.
 Huge population is a burden on India . Though
Economic reforms, distributive policies of gov-
ernment have resulted in increase in Per capita
income, though the increase in insignificant due
to huge population. Unemployment, lack of in-
frastructure, skills. Rising NPAs catch the
growth, thus there is a reduction in per capita
income.
 The success of national development programs
like Skill India, Digital India, Make in India and
Beti Bachao Beti Padhao, aimed at bridging
gaps in human development, will be crucial in
ensuring the success of Agenda 2030.
 Human development is crucial in order to be
benefitted from demographic dividend hence
work on improving it must be done on war
footing level.
6.6 Inequality-adjusted HDI (IHDI)
• The Inequality-adjusted Human Development
Index (IHDI) adjusts the Human Development
Index (HDI) for inequality in distribution of
each dimension across the population.
• The IHDI accounts for inequalities in HDI di-
mensions by “discounting” each dimension’s
average value according to its level of ine-
quality.
• If there is no inequality across people, HDI is
equal to IHDI. However, in case of inequalities,
the value of IHDI is always less than HDI. This
implies that the IHDI is the actual level of
human development (accounting for this ine-
quality), while the HDI can be viewed as an
index of “potential” human development (or
the maximum level of HDI) that could be
achieved if there was no inequality.
• The “loss” in potential human development due
to inequality is given by the difference between
the HDI and the IHDI and can be expressed as a
percentage.
6.7 Gender related Development Index
(GDI)
The Gender related Development Index (GDI)
measures gender inequalities in achievement in
three basic dimensions of human development as
follows:
✓ Health, which is measured by female and male
life expectancy at birth
✓ Education, which is measured by female and
male expected years of schooling for children
and female and male mean years of schooling
100
for adults ages 25 and older
✓ Command over economic resources, meas-
ured by female and male estimated earned in-
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come
✓ The index shows the loss in human develop-
ment due to inequality between female and
male achievements in these dimensions. It
ranges from 0, which indicates that women and
 men fare equally, to 1, which indicates that
women fare as poorly in comparison to their
male counterparts as possible in all measured
dimensions.
✓ In order to address shortcomings of the GDI, a
new index Gender Inequality Index (GII) was
proposed. This index measures three dimen-
sions viz. Reproductive Health, Empowerment,
and Labor Market Participation.
6.8 Multidimensional Poverty Index (MPI)
➔ Multidimensional Poverty Index (MPI) identifies
multiple deprivations at the individual level
in health, education and standard of living.
➔ It uses micro data from household surveys, as
basis of deprivation of Cooking fuel, Toilet, Wa-
ter, Electricity, Floor, Assets.
➔ Each person in a given household is classified as
poor or non-poor depending on the number of
deprivations his or her household experiences.
➔ These data are then aggregated into the na-
tional measure of poverty.
➔ The indicator thresholds for households to be
considered deprived are as follows:
Education
✓ School attainment: no household member has
completed at least six years of schooling.
✓ School attendance: a school-age child (up to
grade 8) is not attending school.
Health
✓ Nutrition: a household member (for whom
there is nutrition information) is malnourished,
as measured by the body mass index for adults
(women ages 15–49 in most of the surveys) and
by the height-for-age z score calculated using
World Health Organization standards for chil-
dren under age 5.
✓ Child mortality: a child has died in the house-
hold within the five years prior to the survey.
Standard of living
✓ Electricity: not having access to electricity.
✓ Drinking water: not having access to clean
drinking water or if the source of clean drinking
water is located more than 30 minutes away by
walking.
✓ Sanitation: not having access to improved sani-
tation or if improved, it is shared.
✓ Cooking fuel: using ‘dirty’ cooking fuel (dung,
wood or charcoal).
✓ Having a home with a dirt, sand or dung floor.
✓ Assets: not having at least one asset related to
access to information (radio, TV, telephone) and
not having at least one asset related to mobility
(bike, motorbike, car, truck, animal cart, motor-
boat) or at least one asset related to livelihood
(refrigerator, arable land, livestock).
Computation of the Multi-Dimensional Poverty In-
dex (MDPI) reveals that, despite recent progress in
poverty reduction, more than 2.2 billion people are
either near or living in multidimensional poverty.
101
6.9 Gender Inequality Index
✓ Gender inequality remains a major barrier to
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human development.
✓ Girls and women have made major strides since
1990, but they have not yet gained gender eq-
uity.
✓ The disadvantages facing women and girls are a
major source of inequality.
✓ Women and girls are discriminated against in
health, education, political representation, la-
bour market, etc.—with negative consequences
for development of their capabilities and their
freedom of choice.
 The GII is an inequality index. It measures gen-
der inequalities in three important aspects of
human development
1) Reproductive health, measured by mater-
nal mortality ratio
2) Adolescent birth rates; empowerment,
measured by proportion of parliamentary
seats occupied by females and proportion
of adult females and males aged 25 years
and older with at least some secondary ed-
ucation;
3) Economic status, expressed as labour mar-
ket participation and measured by labour
force participation rate of female and male
populations aged 15 years and older.
 The GII is built on the same framework as the
IHDI—to better expose differences in the dis-
7.
7.1 Concept of Poverty:
 Poverty can be defined as a social phenome-
non in which a section of the society is una-
ble to fulfill even its basic necessities of life
 When a substantial segment of a society is de-
prived of minimum level of living and continues
at a bare subsistence level, that society is
plagued with mass poverty
 The countries of the third world exhibit invaria-
bly the existence of mass poverty.
 Attempts have been made in all societies to de-
fine poverty, but all of them are conditioned by
the vision of minimum or good life obtaining in
society
tribution of achievements between women and
men. It measures the human development costs
of gender inequality. Thus the higher the GII
value the more disparities between females and
males and the more loss to human develop-
ment.
 The GII sheds new light on the position of
women in 159 countries; it yields insights in
gender gaps in major areas of human develop-
ment. The component indicators highlight areas
in need of critical policy intervention and it
stimulates proactive thinking and public policy
to overcome systematic disadvantages of wom-
en.
Poverty
 The UN Human Rights Council has defined
poverty as “A human condition characterized by
the sustained or chronic deprivation of the re-
sources, capabilities, choices, security and pow-
er necessary for the enjoyment of an adequate
standard of living and other civil, cultural, eco-
nomic, political and social rights”.
102
Three percepts are often used to define pov-
erty
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I. The amount of money required by a person to
subsist
II. The life below a ‘minimum sub­sistence level’
and ‘living standard’ prevalent at a given time in
a given place
III. The comparative state of well-being of a few
and the deprivation and destitution of the ma-
jority in society ➔ social concept in terms of the
share of the total national income received by
those at the bottom
Types of Poverty:
Absolute Poverty:
➔ In the absolute standard, minimum physical
quantities of cereals, pulses, milk, butter etc.
are determined for a subsistence level and then
the price quotations are converted monetary
terms for the physical quantities
➔ Aggregating all the quantities included, a figure
expressing per capita consumer expenditure
is determined
➔ The population whose level of income or ex-
penditure is below the figure is considered to
be the absolute poverty of a person whose in-
come or consumption expenditure is so meagre
that he lives below the minimum subsistence
level is called absolute poverty
➔ As per ICMR, these physical quantities should
lead to the provision of 2,400 calories per cap-
ita for the rural areas and 2,100 calories per
capita in urban areas on daily basis
level of subsistence and hence it is known as
relative poverty
 It is the absolute poverty with which we are
concerned when we talk of the problem of
poverty in India
 Advanced countries such as USA, UK have suc-
ceeded in removing absolute poverty for their
people, but relative poverty prevails even in
these countries because of uneven distribution
of income
Behaviouristic concept of poverty:
➔ Along with absolute and relative poverty, a be-
haviouristic concept of poverty has been at-
tracted with great interest of the academicians
in recent years.
➔ The first studies of household show that, more
income was spent on consumption of food
which is rather known as Engle's Law

Relative Poverty:

 According to the relative standard, income dis-

tribution of the population in different frac-
tile groups is estimated and a comparison of
the levels of living of the top 5 to 10% with
bottom 5 to 10% of the population is called
relative poverty or those who are in the lower
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income groups receive less than those in the

higher income groups
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 The people with lower income groups receive

less than those in the higher income groups
 The people with lower income groups are rela-
tively poor compared with higher incomes, even
though they may be living above the minimum
➔ Poverty can be defined objectively as well as
poverty is because of lack of resources to obtain
diet, lack of participation in activities by the
poor and the negligence of economic resource
like capital assets, fringe benefits, public social
services, income in kind etc.

Always poor: 7.2 How to measure Poverty ??

 These people are never having income above

✓ Head count ratio (HCR) is the proportion
poverty line in their lifetime
of a population that exists, or lives, be-
Usually poor: low the poverty line
✓ Poverty headcount ratio at national poverty
 Those people who are generally poor but who line (percentage of population) in India was
may sometimes have a little more money. ex: last reported at 21.9% in 2011-12
casual workers ✓ Definition:-When the number of poor is
estimated as the proportion of people be-
Chronic poor:
low the poverty line, it is known as 'head
 Always poor and usually poor together are cat- count ratio'.
egorised under chronic poor.

Churning poor:

 Those people who regularly move in and out of

poverty. ex: small farmers and seasonal workers

Occasionally poor:
Poverty gap index:
 Those who are rich most of the time but may
sometimes have a patch of bad luck. ✓ Poverty gap is the difference between the
poor’s expenditure or income and the pre-
Transient poor:
determined poverty line
 Churning poor and occasionally poor are cate- ✓ Poverty gap index is a measure of the intensi-
gorised under this. ty of poverty
✓ Defined as the average poverty gap in the pop-
Non – Poor: ulation as a proportion of the poverty line
✓ Poverty gap index is an improvement over the
104

 Those who are never poor in their lifetime

poverty measure headcount ratio which
simply counts all the people below a poverty
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line, in a given population, and considers them

equally poor
✓ Poverty gap index estimates the depth of
poverty by considering how far, on the aver-
age, the poor are from that poverty line
✓ The most common method of measuring and
reporting poverty is the headcount ratio,
given as the percentage of population that is
below the poverty line.
✓ One of the undesirable features of the head-
count ratio is that it ignores the depth of pov-
erty; if the poor become poorer, the headcount
index does not change
✓ Poverty gap index provides a clearer perspec-
tive on the depth of poverty. It enables poverty
comparisons. It also helps provide an overall
assessment of a region's progress in poverty
alleviation and the evaluation of specific
public policies or private initiatives
Squared Poverty Gap Index:
✓ Weighted PGI is squared poverty gap index
✓ Here more weight is given to the poorest
among the poor
✓ Squared Poverty Gap Index determines the
degree of poverty for a given area.
✓ This method squares the poverty gap for each
individual/household, and thus puts more em-
phasis on observations that fall far short of the
poverty line rather than those that are closer.
✓ This measure is a member of the FGT (Foster,
Greer, Thorbecke) family of poverty measures
✓ Squared Poverty Gap Index is very similar to
the Poverty Gap Index because it also weights
the poor based on how poor they are.
✓ The difference between them is that the short-
falls of people below the poverty line are
squared giving the very poor much more
weight than those falling only a few cents short
of the poverty line
✓ Squared Poverty Gap Index is more benefi-
cial to the poor who are further away from
the poverty because they will not receive the
same amount of aid from the government.
7.3 Dimensions of Poverty:
▪ Although household expenditure levels remain the
main measure of living standard by which incidence
of poverty is measured, and the Human Consump-
tion Rate has become the main indicator of poverty.
▪ But the UN Human Development Index (HDI)
captures the multidimensional nature of deprivation
in living standards. Income should be regarded as a
means to improve human welfare, not as an end in
itself.
▪ Further Human and gender development indicators
have been used successfully for advocacy, for rank-
105
ing of geographical spaces and to capture im-
provements in human well-being more reliably than
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per capita income.
▪ The HDI is a simple average of three dimension
indices, which measure average achievements in a
country with regard to ‘a long and healthy life’,
‘knowledge’ and ‘a decent standard of living’

▪ Related to this only the Ministry of Women and
Child Development uses the
infant mortality rate (IMR) and life ex-
pectancy at age 1 to estimate a long and
healthy life
7+ literacy rate and mean years of edu-
cation for the 15+ age group to estimate
knowledge
estimated earned income per capita per
year to capture a decent standard of living.
▪ Alkire and Santos in 2010 presented the Multi-
dimensional Poverty Index (MPI), which reflects
the deprivations that a poor person faces simulta-
neously with respect to education, health and living
standards. This reflects the same three dimensions
of welfare as the HDI but the indicators are different
in each case and are linked to the MDGs.
▪ The components of MPI are:
1. Education(each indicator is weighted equally
at 1/6)
➢ Years of Schooling:deprived if no household
member has completed five years of schooling
➢ Child Enrolment:deprived if any schoolaged
child is not attending school in yrs 1 to 8
2. Health(each indicator is weighted equally at
1/6)
➢ Child Mortality: deprived if any child
has died in the family
➢ Nutrition: deprived if any adult or child
for whom there is nutritional infor-
mation, is malnourished
3. Standard of Living(each indicator is
weighted equally at 1/18)
➢ Electricity: deprived if the household has no
electricity.
➢ Drinking water: deprived if the household
does not have access to drinking water or
clean water is more than 30 minutes walk
from home
➢ Sanitation: deprived if they do not have an
improved toilet or if their toilet is shared
➢ Flooring: deprived if the household has dirt,
sand or dung floor
➢ Cooking Fuel: deprived if they cook with
wood, charcoal and dung
➢ Assets: deprived if the household does not
own more than one of: radio, TV, telephone,
bike and do not own a car or tractor
• Hence poverty is determined with regard to not
only income or expenditure but also access to a
number of other necessities. Based on this
measure 55% of India’s population in 2005 was
classified as poor
7.4 Poverty Line:
Niti Aayog (earlier planning commission) esti-
mates poverty using NSSO data
Every 5 years, NSSO conducts surveys to col-
106
lect household consumption expenditure
Monthly per capita consumption expendi-
ture is used to determine poverty line
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Poverty line estimates vary depending on the
methodologies developed by various expert
panels
Ministry of Rural Development conducts BPL
census

How Poverty Line is Estimated in India?
• The history of counting the poor in India can be
dated back to the 19th century.
• The earliest effort to estimate the poor was Da-
dabhai Naoroji’s “Poverty and Un-British
Rule in India” in which he estimated a subsist-
ence-based poverty line at 1867-68 prices.
• Using the diet prescribed to “supply the neces-
sary ingredients for the emigrant coolies during
their voyage living in a state of quietude”, which
includes “rice or flour, dhal, mutton, vegetables,
ghee, vegetable oil and salt”, he came up with a
subsistence cost based poverty line, ranging
from Rs. 16 to Rs. 35 per capita per year in
various regions of India.
• Next, in 1938, the National Planning Commit-
tee (NPC) estimated a poverty line ranging
from Rs 15 to Rs 20 per capita per month.
Like the earlier method, the NPC also formulat-
ed its poverty line based on ‘a minimum stand-
ard of living perspective in which nutritional re-
quirements are implicit’.
• In 1944, the authors of the ‘Bombay Plan’ (Tha-
kurdas et al 1944) suggested a poverty line
of Rs 75 per capita per year.
• Whereas after independence the Planning
Commission has been estimating the number
of people below the poverty line (BPL) at both
the state and national level based on consumer
expenditure information collected as part of
the National Sample Survey Organization
(NSSO) since the Sixth Five Year Plan.
• In 1962, the Planning Commission constituted a
working group to estimate poverty nationally,
and it formulated separate poverty lines for
rural and urban areas – of Rs 20 and Rs 25
per capita per year respectively.
• The estimation of the poverty is done by the
planning commission on the basis of large
sample survey of the consumer expenditure car-
ried out by the National Sample Survey office
(NSSO) carried out after an interval of 5 years.
• The Ministry of Rural development conducts
the Below Poverty Line(BPL) Census with the
objective of identifying the BPL households in
rural areas, who could be assisted under various
programmes of the ministry.
The recommendations of different committees for
estimation of poverty:
VM Dandekar and N Rath
o Made the first systematic assessment of poverty in
India in 1971, based on National Sample Survey
(NSS) data from 1960-61.
o They argued that the poverty line must be derived
from the expenditure that was adequate to provide
2250 calories per day in both rural and urban areas.
o This generated debate on minimum calorie con-
sumption norms while estimating poverty and vari-
ations in these norms based on age and sex
Lakdawala Committee (1993)
✓ The Lakdawala Committee defined the poverty
line based on per capita consumption ex-
penditure as the criterion to determine the
persons living below poverty line.
✓ The per capita consumption norm was fixed at
Rs.49.09 per month in the rural areas and
Rs.56.64 per month in the urban areas at
1973-74 prices at national level, corresponding
to a basket of goods and services anchored in a
norm of per capita daily calorie intake of
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2400 kcal in the rural areas and 2100 kcal in
the urban areas.
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Suggestions:
1) Consumption expenditure should be calculat-
ed based on calorie consumption as earlier
2) State specific poverty lines should be con-
structed and these should be updated using the
 Consumer Price Index of Industrial Workers
(CPI-IW) in urban areas and Consumer Price In-
dex of Agricultural Labour (CPI-AL) in rural areas
3) Discontinuation of ‘scaling’ of poverty esti-
mates based on National Accounts Statistics.
This assumes that the basket of goods and ser-
vices used to calculate CPI-IW and CPI-AL re-
flect the consumption patterns of the poor.
Tendulkar Committee (2009) Report to Review
the Methodology for Estimation of Poverty
▪ The Planning Commission constituted an Ex-
pert Group in December 2005 under the
Chairmanship of Professor Suresh D. Tendul-
kar to review the methodology for estimation
of poverty.
▪ The Expert Group submitted its report in De-
cember 2009.
▪ While acknowledging the multidimensional na-
ture of poverty, the Expert Group recommend-
ed moving away from anchoring poverty
lines to the calorie - intake norm to adopting
MRP based estimates of consumption ex-
penditure as the basis for future poverty
lines and MRP equivalent of the urban pov-
erty line basket (PLB) corresponding to 25.7
% urban headcount ratio as the new reference
PLB for rural areas.
▪ On the basis of the above methodology, the all-
India rural poverty headcount ratio for 2004-05
was estimated at 41.8 %, urban at 25.7 %, and
all- India at 37.2 %
Saxena Committee Report to Review the Meth-
odology for Conducting BPL Census in Rural Ar-
eas
▪ An Expert Group headed by Dr N.C. Saxena was
constituted by the Ministry of Rural Devel-
opment to recommend a suitable methodology
for identification of BPL families in rural areas.
▪ The Expert Group submitted its report in August
2009 and recommended doing away with
score-based ranking of rural households fol-
lowed for the BPL census 2002.
▪ The Committee recommended automatic ex-
clusion of some privileged sections and au-
tomatic inclusion of certain deprived and
vulnerable sections of society, and a survey
for the remaining population to rank them on a
scale of 10.
Other Imp committees:
o Alagh Committee (1979)
o Dr. Arjun sengupta committee for poverty re-
lated to unorganised sector (Rs. 20 per day
criteria)
o Rangarajan Committee
o World Bank's “money metric” approach
Alagh Committee (1979):
• In 1979, a task force constituted by the Planning
Commission for the purpose of poverty estima-
tion, chaired by YK Alagh, constructed a pov-
erty line for rural and urban areas on the ba-
sis of nutritional requirements.
• As per the recommendations poverty line was
devised to be 2400 calories for rural and
2100 calories for urban
Automatic Exclusion
Households that fulfil any of the following con-
ditions will not be surveyed for BPL census:
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1. Families who own double the land of the district
average of agricultural land per agricultural
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household if partially or wholly irrigated (three
times if completely unirrigated).
2. Families that have three or four wheeled motor-
ized vehicles, such as, jeeps and SUVs.
3. Families that have at least one mechanized farm
equipment, such as, tractors, power tillers,
threshers, and harvesters.
4. Families that have any person who is drawing a
salary of over Rs. 10,000 per month in a non-
government/ private organization or is em-
ployed in government on a regular basis with
pensionary or equivalent benefits.
5. Income taxpayers
Automatic Inclusion
The following would be compulsorily included in
the BPL list:
1) Designated primitive tribal groups.
2) Designated most discriminated against SC
groups, called Maha Dalit groups.
3) Single women-headed households.
4) Households with a disabled person as bread-
winner.
5) Households headed by a minor.
6) Destitute households which are dependent pre-
dominantly on alms for survival.
7) Homeless households.
8) Households that have a bonded labourer as
member.
• Poverty Line Basket (PLB) is a socially ac-
ceptable minimal basket of inter-dependent
basic human needs that are satisfied through
the market purchases.
• The all India rural and urban PLB are derived
separately for urban and rural areas based on
per capita calorie norms of 2400 (rural) & 2100
(urban). It is specified in terms of required per
capita total household consumer expenditure
to achieve this level of calorie intake.
• The amount required for this has to be deter-
mined and those who earn less than this level is
considered to be living below poverty line. The
first stage to identify the poor is to fix the
poverty line.
• This is an imaginary line. The usual procedure in
India is to decide the poverty line keeping that
as the yardstick.
• On the basis of this, in 2004-2005, it was decid-
ed that a person earning less than Rs. 356.30 in
rural areas and Rs.538.60 in urban areas, in a
month, falls below the poverty line.
• Poverty ratio can be found out by dividing the
number of poor by the total population.
• Poverty ratio shows the percentage of people
living below the poverty line.
➔ It is important to understand that a poverty
line is essentially a monetary value.
➔ The idea is to collect data on people’s con-
sumption expenditure, and to ascertain how
many people surveyed fall below that poverty
line.
➔ In India, there were two main ways of collect-
109
ing data: Uniform Reference Period (URP)
and Mixed Reference Period (MRP)
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➔ Up until 1993-94, the poverty line was based
on URP data. This involved asking people
about their consumption expenditure across
a 30-day recall period. In other words, the in-
 formation was based on the recall of consump-
tion expenditure over the last month alone.
➔ Since 1999-2000, however, data are being
collected according to MRP. Under this
method, data on five less-frequently used
items are collected over a one-year period,
while sticking to the 30-day recall for the
rest of the items. The low-frequency items in-
clude expenditure on health, education, cloth-
ing, durables etc.
➔ Currently, all poverty line data are compiled
using the MRP method. These include the
most recent estimates by the Suresh Tendulkar
and Rangarajan Committees.
✓ World Bank has used a new method for col-
lecting data, called the modified mixed ref-
erence period, or MMRP for estimating
2011-12 poverty rates
✓ In this method, for some food items, instead
of a 30-day recall, only a 7-day recall is col-
lected. Also, for some low-frequency items,
instead of a 30-day recall, a 1-year recall is
collected. This is believed to provide a more ac-
curate reflection of consumption expenditures.
✓ When such data was collected, consumption
expenditures for people in both urban and rural
areas went up by 10 % to 12 %
✓ This happened essentially because people could
better recall their food expenditure over a
shorter, 7-day period than what they might
have done over the longer 30-day period. The
higher expenditures, combined with the high
population density around the poverty line, es-
sentially meant that the poverty rate for India
(for 2011-12) came down sharply.
✓ MMRP method was first used in 2009-10,
alongside MRP
MMRP was used by Rangarajan Commit-
tee for the first time in India to estimate
poverty
Mixed Reference Period (MRP) → refer-
ence period for 5 non-food items (educa-
tion, institutional medical expenses, cloth-
ing, footwear and durable goods) changed
to 1 year
Uniform Reference Period (URP) → used
by Niti Aayog to estimate poverty line
7.5 World Bank Approach for Calculating
Poverty:
 The World Bank uses the “money metric” ap-
proach, whereby it converts the “one dollar per
day” international poverty line into local curren-
cies using “purchasing power parity” conversion
factors.
 It then uses national household surveys to
identify the number of persons whose local in-
come is lower than the national poverty lines.
 Both the dollar a day and $1.25 measures indi-
cate that India has made steady progress
against poverty since the 1980s, with the pov-
erty rate declining at a little under one percent-
age point per year.
 This means that the number of very poor
people who lived below a dollar a day in
2005 has come down from 296 million in
1981 to 267 million in 2005.
 However, the number of poor people living un-
der $1.25 a day has increased from 421 million
in 1981 to 456 million in 2005.
 This indicates that there are a large number of
people living just above this line of deprivation
(a dollar a day) and their numbers are not fall-
ing.
There have been many criticisms against the
110
World Bank’s approach to measuring poverty.
✓ Firstly, the Bank’s method is unreliable be-
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cause its results are excessively dependent on
the chosen PPP base year. The Bank compares
the consumption expenditure of a person in
one country and year with that of another per-
son from another country and year, by using
 national CPIs that deflate or inflate the two na-
tional currency amounts into “equivalent”
amounts of a common base year, and then us-
ing PPPs for this base year to compare the re-
sulting national- currency amounts. PPPs of dif-
ferent base years and the CPIs of different
countries each weigh prices of underlying
commodities differently, as they reflect distinct
global and national consumption patterns. As a
result, comparisons over space and time to-
gether are path dependent: if they are under-
taken in different ways they may lead to differ-
ent results.
✓ Secondly, consumption patterns vary from
country to country for reasons of tastes, as ac-
tual consumption patterns are strongly influ-
enced by prices and by the existing income dis-
tribution.
✓ Thirdly, the Bank’s estimates of global pov-
erty involve errors due to measurement prob-
lems associated with the data used under the
Bank’s preferred approach.
7.6 Linkage between Poverty and Devel-
opment:
• Economic growth is the most powerful in-
strument for reducing poverty and improv-
ing the quality of life in developing coun-
tries.
• Thus Poverty is inter-related to problems of un-
derdevelopment.
• In rural and urban communities, poverty can be
very different. In urban areas people often have
access to health and education but many of the
problems caused by poverty are made worse by
things like overcrowding, unhygienic conditions,
pollution, unsafe houses, etc.
• In rural areas there is often poor access to edu-
cation, health and many other services but peo-
ple usually live in healthier and safer environ-
ments.
• Growth can generate virtuous circles of pros-
perity and opportunity.
• Strong growth and employment opportunities
improve incentives for parents to invest in their
children’s education by sending them to school.
• This may lead to the emergence of a strong and
growing group of entrepreneurs, which should
generate pressure for improved governance.
• Strong economic growth therefore advances
human development, which, in turn, promotes
economic growth.
• A typical estimate from cross-country studies
reveal that a 10 % increase in a country’s aver-
age income will reduce the poverty rate by be-
tween 20% and 30 %.
Some examples:
1. China alone has lifted over 450 million people
out of poverty since 1979. Evidence shows that
rapid economic growth between 1985 and 2001
was crucial to this enormous reduction in pov-
erty.
2. India has seen significant falls in poverty since
the 1980s. This has been strongly related to In-
dia’s impressive growth record over this period.
3. Mozambique illustrates the rapid reduction in
poverty associated with growth over a shorter
period. Between 1996 and 2002, the economy
grew by 62 per cent and the proportion of peo-
ple living in poverty declined from 69 % to 54 %
 A successful strategy of poverty reduction must
have at its core measures to promote rapid
and sustained economic growth.
 The challenge for policy is to combine growth
111
promoting policies with policies that allow
the poor to participate fully in the opportu-
nities unleashed and so contribute to that
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growth.
 This includes policies to make labour markets
work better, remove gender inequalities and in-
crease financial inclusion.
 Thus, India’s most recent development plan has
the main objective of raising economic growth
and making growth more inclusive.
Sustainable development in the developing
countries should include the following:
o Increases in real income especially for the
‘wretched of the earth’. This implies poverty al-
leviation
o Improvements in health and nutritional status
especially children and young mothers who are
vulnerable to most preventable diseases
o Education achievement
o Access to resources
o A fairer equitable distribution of income. The
basic salary of the least paid worker should be
adequate to maintain his nuclear family
o Increases in basic freedoms and guaranteed se-
curity of all citizens; respect and responsible re-
lationship with ecosystem
7.7 Causes of Poverty in India
All types of poverty and deprivation in India are
caused by the following factors.
Colonial Exploitation:
• Colonial rule in India is the main reason of
poverty and backwardness in India.
• The Mughal era ended about 1800.
• The Indian economy was purposely and severe-
ly de-industrialized through colonial privatiza-
tions.
• British rule replaced the wasteful warlord aris-
tocracy by a bureaucratic- military establish-
ment.
• However, colonial exploitation caused back-
wardness in India. In 1830, India accounted
for 17.6 % of global industrial production
against Britain's 9.5%, but, by 1900, India's share
was down to 1.7 % against Britain's 18.5 %.
• This view claims that British policies in India,
exacerbated by the weather conditions led to
mass famines, roughly 30 to 60 million deaths
from starvation in the Indian colonies.
• Community grain banks were forcibly disabled,
land was converted from food crops for local
consumption to cotton, opium, tea, and grain
for export, largely for animal feed.
Lack of Investment for the Poor:
➢ There is lack of investment for the development
of poorer section of the society.
➢ Over the past 60 years, India decided to focus
on creating world class educational institutions
for the elite, whilst neglecting basic literacy for
the majority.
➢ This has denied the illiterate population - 33 %
of India - of even the possibility of escaping
poverty.
➢ There is no focus on creating permanent in-
come-generating assets for the poor. Studies
on China (2004) also indicated that since univer-
sal and free healthcare was discontinued in
1981, approximately 45 million (5 per cent of its
900 million rural population) took on
healthcare-related debts that they could not re-
pay in their lifetimes.
➢ Since then, the government has reintroduced
universal health care for the population.
➢ Given India's greater reliance on private
healthcare spending, healthcare costs are a sig-
nificant contributor to poverty in India.
Social System in India:
• The social system is another cause of poverty in
India.
112
• The social subsystems are so strongly inter-
locked that the poor are incapable of overcom-
ing the obstacles.
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• A disproportionally large number of poor peo-
ple are lower caste Hindus.
• According to S. M. Michael, Dalits constitute the
bulk of poor and unemployed.
• Many see Hinduism and its structure, called the
caste system, as a system of exploitation of
poor, low ranking groups by more prosperous,
high ranking groups.
• In many parts of India, land is largely held by
high ranking property owners of the dominant
castes that economically exploit low ranking
landless labourers and poor artisans, all the
while degrading them with ritual emphasis on
their so-called, God-given inferior status.
Over-reliance on Agriculture:
• In India there is high level of dependence on
primitive methods of agriculture.
• There is a surplus of labour in agriculture.
• Farmers are a large vote bank and use their
votes to resist reallocation of land for higher-
income industrial projects.
• While services and industry have grown at dou-
ble digit figures, the agriculture growth rate has
dropped to single digit.
• About 60 % of the population depends on agri-
culture, whereas the contribution of agriculture
to the GDP is minimal.
• The agricultural sector has remained very un-
productive.
• There is no modernization of agriculture despite
some mechanization in some regions of India.
Heavy Population Pressures:
• Although demographers generally agree that
high population growth rate is a symptom ra-
ther than cause of poverty and add to poverty.
• Mahmood Mamdani aptly remarked "people
are not poor because they have large families.
Quite contrary, they have large families because
they are poor".
• However this is a general argument in develop-
ing countries that population growth is a major
obstacle to development and cause of poverty.
High Unemployment:
• There is high degree of underutilization of re-
sources.
• The whole country suffers from a high degree
of unemployment.
• India is marching with jobless economic growth.
• Employment is not growing, neither in the pri-
vate sector, nor in the public sector.
• The IT sector has become elitist, which does not
improve the poverty situation in the country.
• Disguised unemployment and seasonal unem-
ployment is very high in the agricultural sector
of India. It is the main cause of rural poverty in
India.
7.8 PROGRAMMES FOR POVERTY ALLE-
VIATION
MGNREGA
 This flagship programme of the Government of
India aims at enhancing livelihood security of
households in rural areas of the country by
providing at least 100 days of guaranteed
wage employment in a financial year to every
household whose adult members volunteer to
do unskilled manual work.
 It also mandates 1/3rd participation for
women.
 The primary objective of the scheme is to aug-
ment wage employment.
 This is to be done, while also focusing on
strengthening natural resource management
through works that address causes of chronic
poverty like drought, deforestation, soil erosion
and thus encourage sustainable development.
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Deendayal Upadhyay Antyodaya Yojana (DAY)
 To reduce poverty and vulnerability of the
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urban poor households by enabling them to
access gainful self-employment and skilled
wage employment opportunities, resulting in an
appreciable improvement in their livelihoods on
 a sustainable basis, through building strong
grassroots level institutions of the poor.
 NULM aims at universal coverage of the ur-
ban poor for skill development and credit fa-
cilities
 The mission would aim at providing shelters
equipped with essential services to the urban
homeless in a phased manner.
 It focuses on organizing urban poor in their
strong grassroots level institutions, creating op-
portunities for skill development and helping
them to set up self-employment venture by en-
suring easy access to credit
 In addition, the mission would also address live-
lihood concerns of the urban street vendors by
facilitating access to suitable spaces, Institution-
al credit, social security and skills to the urban
street vendors for accessing emerging market
opportunities.
 Funding will be shared between the Centre and
the States in the ratio of 75:25. For North East-
ern and Special Category - the ratio will be
90:10
National Health Mission
 The National Health Mission (NHM)with its two
Sub-Missions, namely the National Urban
Health Mission (NUHM) and National Rural
Health Mission (NRHM) covering both the rural
and urban areas came into effect with Cabinet
approval of 1st May,2013.
 The main programmatic components of NHM
include Health System Strengthening in both
rural and urban areas, Reproductive-Maternal-
Neonatal-Child and Adolescent Health
(RMNCH+A) interventions, and control of
Communicable and Non-Communicable Dis-
eases.
Pradhan Mantri Suraksha Bima Yojna
 Pradhan Mantri Suraksha Bima Yojana is availa-
ble to people between 18 and 70 years of age
with bank accounts.
 It has an annual premium of Rs. 12 excluding
service tax, which is about 14% of the pre-
mium. The amount will be automatically debit-
ed from the account.
 In case of accidental death or full disability,
the payment to the nominee will be Rs.2 lakh
(US$3,000) and in case of partial Permanent
disability Rs.1 lakh (US$1,500).
 Full disability has been defined as loss of use in
both eyes, hands or feet. Partial Permanent dis-
ability has been defined as loss of use in one
eye, hand or foot.
 This scheme will be linked to the bank accounts
opened under the Pradhan Mantri Jan Dhan
Yojana scheme.
 Most of these accounts had zero balance initial-
ly.
 The government aims to reduce the number of
such zero balance accounts by using this and
related schemes
Atal Pension Yojana
 Under the Atal Pension Yojna Scheme (APY), the
subscribers, under the age of 40, would re-
ceive the fixed monthly pension of Rs. 1000
to Rs. 5000 at the age of 60 years, depending
on their contributions.
 To make the pension scheme more attractive,
government would co-contribute 50% of a
subscriber’s contribution or Rs. 1,000 per an-
num, whichever is lower to each eligible sub- 114
scriber account for a period of 5 years from
2015-16 to 2019-20.
 The benefit of government’s co-contribution
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can be availed by those who subscribe to the
scheme before December 31, 2015.
Pradhan Mantri Jeevan Jyoti Bima Yojana
 Pradhan Mantri Jeevan Jyoti Bima Yojana is low
cost life insurance policy provided by gov-
ernment of India.
 Maximum sum offered under this scheme is Rs.
2 Lakh Premium payable for this insurance
scheme is Rs. 330 per year or less than 1 ru-
pee per day.
 It is Available to people in the age group of 18
to 50 and having a bank account.
 People who join the scheme before completing
50 years can, however, continue to have the risk
of life cover up to the age of 55 years subject to
payment of premium.
Pradhan Matri Awaas Yojana
The Mission will be implemented during 2015-
2022 and will provide central assistance to Urban
Local Bodies (ULBs) and other implementing agen-
cies through States/UTs for:
✓ In-situ Rehabilitation of existing slum dwellers
using land as a resource through private partic-
ipation
✓ Credit Linked Subsidy
✓ Affordable Housing in Partnership
✓ Subsidy for Beneficiary-led individual house
construction/enhancement.
Credit linked subsidy component will be imple-
mented as a Central Sector Scheme while other
three components will be implemented as Centrally
Sponsored Scheme (CSS).
Jawaharlal Nehru National Urban Renewal Mis-
sion (JNNURM)
➔ It aims at integrated development of slums
through projects for providing shelter, basic
services and other related civic amenities with a
view to providing utilities to the urban poor.
➔ It has two components - Basic Services for Ur-
ban poor (BSUP) and Integrated Housing and
Slum Development Programme (IHSDP).
➔ Cities identified based on urban population
(Census 2001), cultural and tourist importance
was covered under BSUP and the remaining cit-
ies were covered under IHSDP.
Reforms taken under JNNURM
1. Earmarking of 25% of municipal budget for
the urban poor for provision of basic services
including
2. affordable housing to the urban poor.
3. Implementation of 7- Point Charter, namely
provision of land tenure, affordable housing,
water, sanitation, education, health, and social
security to the poor in a time -bound manner
ensuring convergence with other programmes.
4. Reservation of 25% of developed land in all
housing projects, public or private, critical for
slum improvement.
7.9 Why Poverty Alleviation Programmes
have Failed in India?
▪ The government. of India has many schemes for
the poor and for their welfare.
▪ Overall assessment of the CAG and other gov-
erning bodies has found, the scheme that has
been implemented by the Indian Government
has many loopholes where the executives and
operatives take the benefit.
▪ Govts, international agencies and donors have
spent billions of dollars to address poverty.
▪ For example, in rural India, the government
spends significant funds on subsidies (for elec-
tricity, fertilizer, fuels, etc.), food rations, price
supports, land allocation/distribution, job train-
115
ing and financial assistance for initiatives in ag-
riculture and small businesses.
▪ Loans from the World Bank and other interna-
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tional agencies and bilateral aid supplement
domestic government resources.
▪ But who has benefited from all these pro-
grammes and assistance? The beneficiaries are
usually corrupt officials who manage and dis-
 tribute funds, and landlords and powerbrokers
who directly or indirectly extract benefits for
themselves. In India, over 90% of the agricultur-
al land is owned and partly cultivated by less
than 10% of the rural population who are
termed farmers; others are mostly labourers.
▪ Govts allocate land to the poor, but they are
unable to utilize it because of limited water re-
sources, bad soil conditions, and/or the inability
to secure credit.
▪ Larger subsidies benefit bigger farmers, but the
poor do not gain much directly from any gov-
ernment programs.
▪ The presumption that with more money, cor-
rupt and inefficient governments and bureau-
cratic institutions will utilize funds efficiently
and improve the deplorable conditions of the
poor is an illusion.
▪ There are too many impediments to poverty
reduction: bribery, political influence in the allo-
cation of land and/or credit, diffused focus and
priorities, poor execution, a shortage of rural in-
frastructure, and social inequality, among other
factors.
▪ Corruption and misallocation of development
funds are ultimately the result of failed govern-
ance
Major reasons for failure of poverty allevia-
tion programmes are:
Planning process is faulty:
o Identifying the ‘poor’
o Defining ‘poor’
o Processing of the identification involves too
many stages.
o Lack of technology upgradation.
o Ideally the programme should be broad based.
(benefitting the large number of people)
o Disjointed programmes- not integrated.
Implementation of programmes:
o Corrupt officials/ staffs.
o Lack of involvement of people
o Local politics. (selection of beneficiaries)
o Improper follow up of programmes/ review or
revision.
Lack of support from the credit and marketing
system:
o Role of local money lenders and banks.
o Inability to sustain income generated from the
asset credited.
7.10 What Should be Done to Improve
Poverty Alleviation Programmes?
▪ Poverty alleviation programmes have been de-
signed to address different facets of rural pov-
erty.
▪ Micro credit-linked programmes provide a
package of services, including credit and subsi-
dy to set up micro enterprises.
▪ Wage employment programmes address the
issue of transient poverty.
▪ Besides, schemes for infrastructure develop-
ment and provision of basic services contribute
to the wellbeing of the rural people.
▪ Thus, successful implementation of these pro-
grammes requires appropriate policy frame-
work, adequate funds, and effective delivery
mechanism.
The success of these programmes ultimately
depends on the capability of the delivery sys-
tem to absorb and utilise the funds in a cost-
effective manner.
An effective and responsive district level field
machinery with a high degree of commitment,
116
motivation, professional competence and,
above all, integrity has been recognized as one
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of the prerequisites for successful implementa-
tion of an anti poverty strategy.
An effective governance system has to ensure
people’s participation at various stages of for-
mulation and implementation of the pro-
 grammes, transparency in the operation of the
schemes and adequate monitoring.
International experience shows that greater
functional and financial devolution to local gov-
ernments results in higher allocation of re-
sources for social sectors which are accompa-
nied by efficiency gains in resource use. Such
trends in social spending have been witnessed
in many Indian States as well.
Panchayati Raj Institutions (PRIs) have been giv-
en a constitutional role in the governance of the
country. Functional responsibilities for subjects
that are central to the well being of the com-
munities have been devolved on the PRIs by the
Constitution.
Truly empowered PRIs can play an important
role in improving the efficiency and effective-
ness of the schemes and reducing leakages.
The Non Governmental Organisations (NGOs)
and Community Based Organizations (CBOs)
have been playing an active role in building up
people’s awareness and providing support to
the governmental agencies and the Panchayati
Raj Institutions in executing projects for devel-
opment in rural areas.
The NGOs can play an important role in capaci-
ty building, access to information, organisation
of rural poor in self help groups and increasing
their awareness and capabilities.
All these initiatives have good governance as
their ultimate goal. It is expected that through
the accelerating convergence of all these fa-
vourable factors it will be possible for the coun-
try to achieve the goals of inclusive growth as
envisaged in XIIth FYP
7.11 Inequality:
• Inequality is observed both in urban and rural
areas and because of inequality population is
experiencing the poverty.
• The study of inequality did not determine the
level of poverty line.
• Therefore, it is difficult to measure the poverty
only on the basis of analysing the inequality in
income.
• Some mathematical and statistical techniques
have been used to measure the inequality
7.12 Lorenz Curve :
 The Lorenz curve shows the percentage of in-
come received by the bottom x % of the pop-
ulation with x varying from 0 to 100.
 In Lorenz Curve, the size of items and the fre-
quencies are both cumulated and taking the
total as 100 percentages are calculated for the
various cumulated values.
 If there is proportionately equal distribution of
the frequencies over various values of a variate,
the points would lie in a straight line.
 If the distribution of items is not proportionate-
ly equal, it indicates variability and the curve
would be away from the line of equal distribu-
tion
 Lorenz curve just explains the inequality but it
does not give the numerical value of the ex-
tent of inequality. It merely gives a picture of
the extent to which a series pulled away from
an actual line of equality.
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7.13 Gini Coefficient :
 The Gini Coefficient means a welfare function.
 In this weighted average of the different peo-
ple's income level with the weights being de-
termined by the rank order position of the per-
son in the ranking by income levels.
 The higher value of Gini coefficient (G)
shows greater inequality, which leads to less
welfare
 Gini Coefficients are aggregate inequality
measure vary anywhere from 0 to 1
8. Unemployment
• A state of unemployment appears when a la-
bourer does not obtain employment oppor-
tunity despite his willingness to work on ex-
isting wage rate.
• India is a developing economy where the nature
of unemployment is different from that of de-
veloped nations
• J.M.Keynes diagnosed unemployment in de-
veloped economies to be the result of a defi-
ciency in effective demand
• International Labour Organization ➔ Unem-
ployment occurs when people are without jobs
but are willing and able to work for pay and
have actively searched for work
• The most frequent measure of unemployment is
unemployment rate.
• The unemployment rate is defined as a number
of unemployed people divided by the number
of people in the labour force.
• Labour Force: Persons who are either working
(or employed) or seeking or available for work
(or unemployed) during the reference period
together constitute the labour force.
8.1 Measure of Unemployment in India:
Usual Status Approach: [Unemployed for majority
of the year]
✓ Usual Status approach records only those per-
sons as unemployed who had no gainful work
for a major time during the 365 days preced-
ing the date of survey and are seeking or are
available for work.
✓ The status of activity on which a person has
spent the relatively long time of the preceding
365 days prior to the date of survey is consid-
ered to be the usual principal activity status
of the person
✓ The Usual Status captures long-term unem-
ployment in the economy.
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✓ The Usual Principal Activity status (UPS), written
as Usual Status (PS), is determined using the
majority time criterion and refers to the ac-
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tivity status on which he/she spent longer
part of the year.
✓ Principal usual activity status is further used
to classify him in/out the labour force.
✓ For instance, if an individual was ‘working’
and/or was ‘seeking or available for work’ for a
major part of the year preceding the date of the
survey then h/she is considered as being part of
the ‘Labour Force’.
✓ For example, if an individual reports as having
worked and sought/available for work for seven
months during the year or having sought or
available for work for seven months then he/she
is classified as being in the Labour Force.
Weekly Status Approach:
• The weekly status approach records only those
persons as unemployed who had no gainful
work for a major time during the seven days
preceding the date of survey.
• The weekly status approach captures both the
long-term open chronic unemployment and
the seasonal unemployment.
• A person is considered to be employed if he or
she pursues any one or more of the gainful ac-
tivities for at least one-hour on any day of the
reference week. On the other hand, if a person
does not pursue any gainful activity, but has
been seeking or available for work, the person
is considered as unemployed.
Daily Status Approach:
▪ In the Daily status approach, current activity
status of the person with regard to whether
employed or unemployed or outside labour
force is recorded for each day in the refer-
ence week. The measure adopts half day as a
unit of measurement for estimating employ-
ment or unemployment.
▪ The approach is most inclusive than the other
two. Since it also captures the days of unem-
ployment of those who are recorded as employed
on the weekly status approach.
▪ A person who works for 4 hours or more but
up to 8 hours on a day is recorded as em-
ployed for the full day.
▪ A person who works for 1 hour or more but
less than 4 hours is recorded as employed for
the half day.
▪ Accordingly, a person having no gainful work
even for 1 hour in a day is described as un-
employed for a full day.
8.2 Types of Unemployment:
Structural Unemployment:
o This type of unemployment is associated with
economic structure of the country
o Demand for labour falls short to the supply of
labour due to rapidly growing population and
their immobility
o This type of structural unemployment is of long
run nature
o Indian Unemployment is basically related to
Structural Unemployment
o Due to growing population, rate of capital for-
mation limits the employment opportunities
o “According to Nurks surplus labour can be
withdrawn from agriculture and utilized for cap-
ital formation activities like road building , irri-
gation projects, railway construction, building of
houses , factories etc.” → Nurks recognized
disguised unemployment as a saving poten-
tial.
o That is in Nurks’s view there is a hidden saving
in disguised unemployment which can be
used for capital formation in the under- de-
veloped countries
Lets make it simple
119
✓ Occurs due to structural changes in the econo-
my
✓ Structural changes ➔ change in technology or
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change in pattern of demand
Example: An economy transforms itself from a
Labour intensive economy to a Capital intensive
economy.
✓ Occurs when a labour market is unable to pro-
vide jobs for every person who wants one be-
cause there is a mismatch between the skills of
the unemployed workers and the skills needed
for the available jobs
Example: Due to advance technological pro-
gress, the production of cars is done through
robotic machines rather than traditional Ma-
chines. As a result, those workers who do know
how to operate the new and advanced ma-
chines will be removed.
✓ Arises when the qualification of a person is not
sufficient to meet his job responsibilities
✓ In India structural employment exists in rural
and urban areas
From an individual perspective, structural un-
employment can be due to:
➢ Inability to afford or decision not to pursue fur-
ther education or job training
➢ Choice of a field of study which did not produce
marketable job skills
➢ Inability to afford relocation
➢ Decision not to relocate, in order to stay with a
spouse, family, friends
Technological Advancement, Robotics, Artifi-
cial Intelligence, Mechanisation and Auto-
mation are the main causes of Structural un-
employment.
Voluntary Unemployment:
➢ In every economy, there are some people who
are unwilling to work at the prevailing wage
rate.
➢ Jobs are available to them but they do not
accept them.
➢ Voluntary unemployment is attributed to the
individual's decisions, but involuntary unem-
ployment exists because of the socio-
economic environment (including the market
structure, government intervention, and the
level of aggregate demand) in which individuals
operate.
➢ Voluntary unemployment includes workers
who reject low-wage jobs, but involuntary
unemployment includes workers fired be-
cause of an economic crisis, industrial de-
cline, company bankruptcy, or organization-
al restructuring.
Reasons for Voluntary Unemployment:
✓ Generous unemployment benefits, which make
accepting a job less attractive.
✓ High marginal tax rates, which reduce effective
take home pay.
✓ Unemployed hoping to find a job more suited
to skills/qualifications.
✓ Some jobs are seen as ‘demeaning’ or too tedi-
ous. Example: Security guard
Open Unemployment:
➢ Open unemployment is a situation in which
people have no work to do.
➢ They are able and willing to work, but there is
no job for them in the country.
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Frictional Unemployment:
➢ Frictional unemployment occurs when workers
lose their current job and are in the process
of finding another one.
➢ It is also called search unemployment.
➢ It is time spent between jobs when a worker is
searching for a job or transferring from one job
to another
➢ Disguised Unemployment occurs when
marginal productivity of labour becomes
zero or negative.
➢ More workers are employed on a single
piece of work than actually required.
➢ Simply, the persons who are employed and
remains unproductive throughout the work
is said to be disguisedly unemployed.

Casual Unemployment: Classical Unemployment:

➢ Casual Unemployment is when the worker is
employed on a day-to-day basis for a con-
tractual job and has to leave it once the con-
tract terminates.
➢ Classical Unemployment is caused when wages
are too high.
➢ It is also called as real wage unemployment.
➢ For example, if a company is willing to pay 24
lakhs per year for a job but potential employees
will not accept less than 50 lakhs, the job will go
unfilled.

8.3 Regional Unemployment:

➢ When structural unemployment affects local

Seasonal Unemployment:
➢ Seasonal Unemployment exists because certain
industries or sectors only produce or distrib-
ute their products only at certain times of
the year.
➢ Seasonal Unemployment is common in agri-
culture and tourism.
areas of an economy, it is called regional un-
employment.
8.4 Technological Unemployment:
➢ Technological Unemployment is the loss of
jobs caused by technological change in the
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economy

8.5 Cyclical Unemployment:

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➢ Cyclical Unemployment exists when individuals

lose their jobs as a result of a down turn in ag-
gregate demand.
Disguised Unemployment:
➢ It is called either demand deficient or Keynesian
unemployment.
➢ Demand for most goods and services falls, less
production is needed and consequently fewer
workers are needed, wages are sticky and do
not fall to meet the equilibrium level, and un-
employment results.
Reasons why India’s economic growth has not
increased employment in the country:
Secondary sector neglected structural transfor-
mation
Jobless growth
Less focus on MSMEs
Stringent labour laws
Delay in official paper works
Slow infrastructural development
Import oriented economy than export dominat-
ed

8.8 Philips Curve:

➢ Philips Curve shows the inverse relationship be-

tween unemployment and inflation in an
➢ One suggested intervention involves deficit economy
spending to boost employment and goods
demand. Another intervention involves an ex-
pansionary monetary policy to increase the
supply of money, which should reduce interest
rates, which, in turn, should lead to an increase
in non-governmental spending.

8.6 Chronic Unemployment:

➢ Chronic Unemployment is caused due to long 8.9 Lorenz Curve:

term unemployment persisting in the econ-
➢ Lorenz Curve maps the relationship between
omy.
percentage of income or wealth earned or
8.7 Under Employment: appropriated and percentage of people
earned that particular percentage of income
➢ It is a situation in which someone or something or wealth
is not used as much as they should be.
Types of Under Employment:
122

1) Visible Under Employment: It is when people

get work for less than the normal hours of work
like 2 hours a day
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2) Invisible Under Employment: It is the situation

in which people work full time, but their income
is very low or they work in jobs, in which they
cannot make full use of their ability like MBA
person working as a driver
8.10 Gini Coefficient:
➢ Gini Coefficient measures the inequality using
Lorenz curve
➢ It is the ratio between area above the Lorenz
Curve and area below the Lorenz Curve
8.11 Kuznets Curve:
➢ Kuznets Curve says that in a developing econ-
omy initially the inequality will increase and
with increase in growth the inequality will
come down
8.12 Sources of data on unemployment:
 Reports of Census of India
 National Sample Survey Organisation’s Reports
of Employment and Unemployment Situation
 Directorate General of Employment and Train-
ing Data of Registration with Employment Ex-
changes
8.13 Labour Force:
➢ It includes all people in the working age
group (15-59 yrs) who are able and willing to
work
➢ Labour force equals the workforce plus the
number of unemployment people
➢ So, unemployment refers to only involuntary
unemployment
Measurement of Labour Force:
Usual Principal Status (UPS) Approach:
➢ The major time criterion based on the 365
days is used to determine the activity pursued
by a person under the Usual Principal Status
(UPS) Approach
➢ Accordingly, the major time spent by a person
123
(183 days or more) is used to determine
whether the person is in the labour force or out
of labour force
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➢ A person found unemployed under this ap-
proach reflects the chronic unemployment
Usual Principal and Subsidiary Status (UPSS)
Approach:
➢ The other important approach to measure the
labour force parameters is the Usual Principal
and Subsidiary Status (UPSS) Approach
➢ This approach is a hybrid one which takes into
consideration both the major criterion and
shorter time period (30 days or more in any
economic activity)
➢ Thus a person who has worked even for 30
days or more in any economic activity during
the reference period of last 12 months is con-
sidered as employed under this approach
➢ In this approach, the reference period is same
as taken in the Usual Principal Status (UPS)
Approach
8.14 Labour force participation rate:
➢ The labour force participation rate is the meas-
ure to evaluate working-age population in an
economy.
➢ The participation rate refers to the total num-
ber of people or individuals who are current-
ly employed or in search of a job.
9. Economic Reforms (LPG)
9.1 BACKGROUND
• From all accounts, 1991 was one of the most
significant turning points for the Indian
economy.
• The nation charted a new path moving towards
a liberalized and market-driven economy and
greater integration with the global economy.
The country was then on the brink of a deep
crisis on many fronts.
• The balance of payments position was precar-
ious and international confidence in our econ-
omy had eroded considerably.
• Despite large external borrowings, there was
sharp reduction in foreign exchange reserves
and there were strong inflationary pressure.
Before examining the various aspects of the
➢ People who are not looking for a job such as
full-time students, homemakers, individuals
above the age of 64 etc. will not be a part of
the data set.
➢ This is an important metric when the economy
is not growing or is in the phase of recession.
➢ It is that time when people look at the unem-
ployment data.
➢ At the time of recession, it is generally seen
that the labour force participation rate goes
down. This is because, at the time of recession,
the economic activity is very low which results
in fewer jobs across the country.
➢ When there are fewer jobs, people are discour-
aged to focus on employment which eventually
leads to lower participation rate.
➢ The participation rate is also important in un-
derstanding the unemployment rate in the
economy.
➢ Analysing consistently the unemployment rate
in the economy is very important.
critical position in which the country found itself
and the measures taken to tackle them, it is
necessary to look at its genesis and the factors
which led to the crisis.
Reasons for economic crisis and need for new
set of policy measures
The origin of the financial crisis can be traced from the
inefficient management of the Indian economy in
124
the 1980s. Government’s expenditure was more than
its income.
What happens when expenditure is more than in-
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come?
 Govt borrows to finance the deficit from banks and
also from people within the country and from inter-
national financial institutions.
 Govt had to overshoot its revenue to meet prob-
lems like unemployment, poverty and population
 explosion (revenues were very low; no chance of
generating immediate returns)
 No generation of additional revenue even via taxa-
tion.
 Income from public sector undertakings was not
very high to meet the growing expenditure.
 Govt borrowed foreign exchange and spent the
money on meeting consumption needs.
Govt neither made any attempt to reduce such
profligate spending nor sufficient attention was giv-
en to boost exports to pay for the growing imports.
In the late 1980s
o Government expenditure began to exceed its reve-
nue by such large margins that meeting the ex-
penditure through borrowings became unsustain-
able
o There was sharp rise in the prices of many essential
goods
o Imports grew at a very high rate without matching
growth of exports
o Foreign exchange reserves declined to a level that
was not adequate to finance imports for more than
two weeks
o No sufficient foreign exchange to pay the interest
that needs to be paid to international lenders.
9.2 REFORMS AND PROBLEMS DURING
1985-90
• The decade starting from 1980 was relatively
better for the economy. While the annual rate
of growth of GDP for the preceding 30 years
(1950 to 1980) was only 3.52% while is cyni-
cally referred to as The Hindu rate of growth
during the decade 1980-81 to 1989-90, the an-
nual rate of growth was 5.13 %. Also, while the
per capita GDP increased at an annual rate of
1.37 % during 1950-51 to 1980-90, the same
increased during the period 1980-81 to 1989-90
at an annual rate of 3.09 %.
• Food grains production which stood at 50.8
million tones (MT) in 1950-51 had reached
129.5 MT by 1980-81 and 145.5 MT by 1984-85.
In the 1980’s, the industrial sector was impres-
sive compared to the 70’s. The annual growth
rate of manufacturing sector was 7% and of
registered manufacturing 8.1 %. Against such
benign growth environment, the Seventh Plan
(1985-90) started on an optimistic note.
• The government under Rajiv Gandhi (1984-
89) initiated several reform measures. These in-
cluded reducing state control and regulation
of the private sector, greater freedom to im-
port even capital goods, liberalization in the
application of FERA, and the operation of
companies under MRTP Act. In short, it aimed
at replacing government control by market
forces.
• But there were also many ominous signs on the
fiscal front which became visible during this pe-
riod. Prudent fiscal management required that
revenue receipts not only meet revenue ex-
penditure, but also generate surplus the finance
the Plan and other capital and development
outlays. But all through the 1980’s, the gov-
ernment revenues fell short of expenditure.
The gross fiscal deficit as a proportion of GDP
increased from 5.4 % in 1981-82 to 8.0 % in
1989-90. The fiscal imbalance persisted and
worsened during the 1980’s, as the gross fiscal
deficit, on an average, rose from 6.3 %in the
Sixth Plan Period (1980-85) to 8.2 %in the Sev-
enth Plan Period (1985-90).
• Another distributing trend was that almost
throughout the 1980s, non development ex-
penditure increased faster than development
outlays. While the non development expendi-
ture in 1990-91 was about 5.5 times the
1980-81 level, development outlays increased
only 4.4 times. It indicates that long-term de-
125
velopment of the country received less priority.
• Another adverse factor was that the relative
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share of direct taxes in the total tax revenue
continued to decline while the share of indi-
rect taxes, the burden of which falls mostly on
the masses, showed increase.
9.3 THE 1991 ECONOMIC CRISIS
Background to the Crisis
• The process to reform the economy had begun
from the mid-eighties under the Rajiv Gandhi
government (1984-89) whose vision was to take
India to the 21th Century.
• With a view to modernize the economy, boost
investment, and achieve rapid industrial growth,
many controls and restrictions were removed,
industrial licensing policy was revamped, and
greater role was accorded to the private corpo-
rate sector.
• Import controls were relaxed to upgrade indus-
trial technology and improve capacity utilization
and productivity.
• However, towards the late 1980s, macroeco-
nomic imbalances began to emerge.
• The fiscal deficit of the Central Government,
which is a measure of the difference between
revenue receipts and total expenditure, was
over 8 % of the GDP in 1990-91 as compared
with 6 % at the beginning of 1980s and 4 % in
mid-1970s.
• This deficit had to be about 55 % of GDP. By
1990, the deficit of the Central Government
had mounted to Rs. 13,000 crore as a result
of revenue shortfalls and expenditure over-
runs.
• Productivity of investment was low and there
were poor rates of return on past investments.
• On the foreign exchange front, the balance of
payments position came under severe stress.
• During the eighties, India’s imports were more
than what could be covered by the exports and
normal aid on concessional terms.
• The current account deficits had to be fi-
nanced by borrowing from abroad on commer-
cial terms both from the capital market and
non-resident Indians (NRI’s).
• External debt which was $22.8 billion in
1983-84 had risen to $69.3 billion in 1990-
91.
• The burden of servicing the accumulated inter-
nal and external debt became onerous.
• This was further exacerbated by the steep in-
crease in oil prices and disruptions caused by
the Iraqi invasion of Kuwait in August 1990.
• With the disintegration of Soviet Union in
December 1991, India lost a major trading part-
ner.
• The persistent fiscal imbalances accentuated
inflationary pressures.
• That inflation was concentrated in essential
commodities, despite good monsoons and
good harvests in the three preceding years, was
of greater concern as it hurt the poorer sections
the most.
• Besides all these, there was political instability
at home-there were two changes in the Gov-
ernment at the Centre between December 1989
and June 1991.
• All these led to considerable erosion of inter-
national confidence in our economy. Despite
large borrowings from the International
Monetary Fund (IMF) in July 1990 and January
1991, the foreign exchange reserves had
touched rock bottom, and it was barely enough
to meet the needs of two weeks of imports.
• Foreign commercial banks had stopped lending
to India and NRI’s were withdrawing their de-
posits. Shortage of foreign exchange forced
massive import squeeze which further imped-
ed the industrial growth.
• Due to the combined effect of all these, the na-
126
tion was on the brinks of a major crisis which
called for drastic remedial measures.
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The Turnaround-The Reforms of 1991
• It was against this grim background that a new-
ly elected Government headed by P.V. Nara-
simha Rao took over in June 1991.
• He at once set about the task of pulling the
economy back from the brink, and appointed
Manmohan Singh as the Finance Minister.
• The new Government initiated a number of rad-
ical measures to bring about macroeconomic
stability and address the balance of payments
crisis through fiscal consolidation and tax re-
forms.
• Urgent steps were taken to avert default in in-
ternational debt obligations and to control in-
flation.
• A decision taken earlier to use part if the gold
held by the Reserve Bank of India to mobilize
temporary liquidity abroad was implement-
ed, but as planned the gold was redeemed as
soon as the foreign exchange position stabi-
lized.
• The situation also called for credible fiscal ad-
justment followed by fiscal consolidation.
• This involved progressively reduction the fiscal
and revenue deficits of the Central Government
and reduction of current account deficit in the
balance of payments.
• The aim was to contain the unfettered rise in
internal and external debt and thus limit the
burden of debt servicing.
• Efforts were made to raise more resources in-
ternally without burdening the poor.
• The steps taken by the new government to
tackle the balance of payments crisis involved
both short-term and long-term measures.
• Devaluation of the Rupee by about 18 % was
effected in two steps on July 1 and 3, 1991.
• International Monetary Fund (IMF) and the
World Bank which had to be approached for a
major loan had stipulated that economic re-
forms be undertaken to revive the economy.
• As a result of short-term measures proposed to
be put in place, the country was able to raise
funds from the IMF and other aid agencies.
• It helped to tide over the crisis and restore in-
ternational confidence in the country’s econom-
ic management.
• At this juncture, concerns had been expressed
whether the country implemented these reform
measures at the dictates of IMF and the World
Bank who were approached for financial assis-
tance to tide over the crisis.
• The Government had clarified that the discus-
sion held with the lending institutions were only
on the amount and type of assistance and the
valid down and accepted for the assistance was
sought.
• The conditions laid down and accepted for the
assistance were only in consonance with the re-
form programme already envisaged and drawn
up by the Government, and which formed part
of the party’s election manifesto.
• Thus, it was contended that the country’s na-
tional interests or sovereignty had in no way
been compromised.
India’s strategy to tackle BOP crisis:
✓ India approached the International Bank for Re-
construction and Development (IBRD)—World
Bank and the International Monetary Fund (IMF)
and received $7 billion as loan to manage the
crisis
How to avail the loan?
International agencies expected India to liberalize
and open up the economy by
➢ Removing restrictions on the private sector
➢ Reducing the role of the government in many
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areas
➢ Removing trade restrictions
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Here comes the move towards New Economic
Policy:
India agreed to the conditionality’s of World Bank
and IMF —announced the New Economic Policy
(NEP) which consisted of wide-ranging economic
reforms, such as:
✓ Creating a more competitive environment in the
economy by removing the barriers to entry and
growth of firms
✓ Introduced liberalization with a view to inte-
grate the Indian economy with the world econ-
omy
✓ To remove restrictions on direct foreign invest-
ment as also to free the domestic entrepreneur
from the restrictions of Monopolies and Restric-
tive Trade Practices (MRTP) Act
✓ To unshackle the Indian industrial economy
from the cobwebs of unnecessary bureaucratic
controls
✓ To shed the load of public sector enterprises
which have shown a very low rate of return or
which were incurring losses over the years
THE NEW REFORM MEASURES
New Trade Policy
• As part of the reform measures, a new Trade
Policy was drawn up in 1991.
• It marked a radical shift from the Import Sub-
stitution policy which India had relied on far
the last four decades.
• While it may have been necessary in the very
early stages of development to protect our nas-
cent industries from foreign competition, in the
long-term it provided to be neither efficient nor
one that helped the industry for its robust
growth.
• In fact, in contrast, the East Asian economics
which took to the path of ‘Export Promotion’
strategy in 1970’s forged far ahead of India in
development.
• It was, therefore, realized rather quite belatedly,
that the time had come to open up the econo-
my and expose Indian industry to competition
from abroad in a phased manner.
• With this in view, the Government introduced
changes in Import-Export policy, liberalized
import licensing, optimally reduced imports,
and aimed at vigorous export promotion.
• The two-step devaluation of the Rupee effect-
ed in July 1991, referred to above, and easing
of the replenishment licence system were two
major steps in Trade Policy reform.
• It involved a transition from a regime of Quan-
titative restrictions (QR’s) to one of price-
based mechanism.
Measures to Promote Exports
• The trade policy was further revamped in 1992.
• A system of partial convertibility of the Ru-
pee on the Current Account was introduced.
• Under this system, all foreign exchange earned
through exports of goods or services, or remit-
tances, could be converted into rupees.
• 40 % of the foreign exchange could be convert-
ed at the official exchange rate while the re-
maining 60 % was to be converted at a market-
determined rate.
• The foreign exchange surrendered at official
exchange rate could be used to meet the for-
eign exchange requirements of essential im-
ports like petroleum, oil products, fertilizers, de-
fense, and life-saving drugs.
• Imports of raw materials and capital goods were
made freely importable on Open General Li-
cence (OGL) but the foreign exchange required
for these had to be obtained from the market.
• There was only a specified ‘negative list of raw
materials and capital goods which available also
128
to Indian workers working abroad who were
making considerable number of remittances
and thus making valuable contribution to In-
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dia’s foreign exchange earnings.
• Earlier, to provide incentive for exports, a com-
plex scheme of import replenishment was in
vogue under which an exporter was allowed to
 import certain raw materials and components
equal to the actual import content of exports.
• Also, there was a components cash support
scheme to compensate for taxes not refund-
ed under a duty drawback scheme (i.e., re-
funds of indirect taxes including import duties
on inputs used in exports) and losses incurred
on exports when domestic demand was inade-
quate to use installed capacity fully.
• By eliminating import licensing and intro-
ducing partial convertibility of the Rupee,
the reforms got rid of these complex webs of
incentives with varying rates for different com-
modities which prevailed under the import re-
plenishment and compensatory cash support
schemes.
Removal of Import Controls
• These reforms removed import controls which
had earlier resulted in inefficiency, bureaucratic
delays, and left scope for corrupt practices.
• Trade policies were further modified and re-
fined in subsequent years. Import licences were
further modified and refined in subsequent
years. Import licences were eliminated on
most items of capital goods, raw materials,
and components.
• These items became freely importable against
foreign exchange purchased in the market.
• The system had worked fairly well and the mar-
ket exchange rate had remained remarkably
stable.
• It created an environment in which Indian en-
trepreneur had the flexibility needed to com-
pete with other developing countries in the
world markets.
• However, the existence of a dual rate hurt ex-
porters and other foreign exchange earners
who had to surrender 40 % of their earnings at
the official rate and getting the benefit of high-
er market rate on only 60 %.
• Exporters represented that this amounted to a
tax on exporters at a time when they needed
full support.
• The Government considered this and finding
that the balance of payments could be reason-
ably managed with a unified exchange rate, the
dual rate arrangement was dispended with.
• All exporters as well as foreign exchange
earners like Indian workers abroad were al-
lowed to convert 100 % of their earnings at
the market rate.
• All imports were also liable to be paid for the
market rate.
Other Important Measures
• Several other steps were also taken in 1993-94
to promote exports various restrictions on
items of export were removed.
• Reserve bank of India took steps to ensure
availability of adequate credit for export.
• Banks were asked to see that credits given for
exports amounted to at least 10 percent of
their total advances. The interest rate on rupee
export credit was reduced by one percentage
point.
• Further, banks were exempted from levying
interest tax on export credit provided by
them.
• In order to promote new investment in indus-
try, the customs duty levied on capital goods
and import items for projects such as general
machinery was progressively reduced from
1993-94.
• These duties were quite high compared to what
129
was prevailing in competitive countries.
• This was to benefit critical sectors like power,
coal mining, and petroleum refining.
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• At the same time, to ensure that the lower du-
ties on imported machinery did not hurt the
domestic capital goods industry, import duty on
components were also lowered to enable our
domestic manufactures to compete effectively.
• Duties on many other capital goods, metals,
and chemicals were also reduced and rational-
ized to help domestic industries.
• To promote the electronics industry which
was a major provider of employment and with
much potential for export, and to make it world
class, rates of duty for project imports, raw ma-
terials, and components were brought down.
9.4 The New Industrial Policy 1991
Introduction
• Another major plank of the structural reform
was opening up the industrial sector to infuse
new dynamism into the economy.
• It was felt that the industrial sector faced many
constraints and there was much scope for up-
gradation of technology, improving quality
standards and reduction in costs which would
increase the efficiency and competitiveness of
the Indian industry and benefit both the pro-
ducers and the consumers
• Restrictive policies like barriers to entry and
limits on the size of firms had shackled industry
and led to a degree of monopoly in the sector
by facilitating foreign investment and infusing
foreign technology to increase productivity.
Main Characteristics:
Delicensing
• Industrial licensing was abolished for all in-
dustries except for a short list of 18 industries
involving security and strategic factors, social
considerations, hazardous and environmental
aspects and those producing items of elitist
consumption.
• Later, more industries were delicensed and
presently compulsory licensing applies only
to 6 industries. Coal and lignite have also been
removed from the list of industries reserved for
the public sector.
PRELIMS: Only 6 industries were kept
under licensing scheme
• Industries reserved for the small scale sector
continued to be so reserved.
• The removal of licensing was to benefit particu-
larly the many dynamic small and medium en-
trepreneurs who had been hampered by the li-
censing system.
• Also, this was to make industry more competi-
tive, more efficient and modern, and take its
rightful place in the world not to apply to the
small-scale units taking up the manufacture of
any of the items reserved for exclusive manu-
facture in the small-scale sector.
Promotion of foreign investment
• For promoting foreign investments in high
priority industries, requiring large investments
and advanced technology, direct foreign in-
vestment up to 51 % foreign equity in such
industries was allowed.
• Also, foreign equity up to 51% was allowed
for trading companies primarily engaged in
export activities.
• Foreign investment would facilitate technology
transfer, help to enhance productivity, nurture
better management practices, and provide
greater access to world markets.
• High priority industries could get automatic ap-
proval for entering into technology agreements
and were allowed to negotiate the terms of
technology transfer directly with their foreign
counterparts according to their own commercial
judgement.
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Promotion of exports
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• For promoting exports of Indian products,
which required interaction with some of the
world’s largest international manufacturing and
marketing firms, services of foreign trading
 companies were to be availed to assist us in the
export activities.
MRTP Act
• The Monopolies and restrictive Trade Prac-
tices Act (MRTP Act) which came into force in
1970 had over the years hampered industrial
growth and expansion.
• To foster healthy competition, achieve econo-
mies of scale, and enhance productivity, it was
imperative to remove interference by the Gov-
ernment, through the provisions of this Act, in
decisions of large companies regarding invest-
ment, capacity addition, etc. the legal provisions
for getting prior government approval for ex-
pansion of existing undertaking and setting up
new ones was removed.
• The accent was to be only on controlling unfair
and restrictive business practice and the MRTP
Commission was empowered to investigate and
act on such practices.
• The MRTP Act was later repealed and replaced
by the Competition Act, 2002.
Strengthening the Public Sector
• The Industrial Policy Resolution of 1956 had
given the public sector a strategic role in the
economy.
• Public sector enterprises have been set up in
key sectors such as steel, power, heavy engi-
neering and heavy electrical, telecom, defence,
aircraft manufacture, etc. massive investments
were made over the past four decades to ex-
pand the public sector which has come to oc-
cupy a commanding role in the economy.
• However, while some of the public sector units
have played a notable role in the country’s de-
velopment process, many of them face a pleth-
ora of problems such as lagging productivity,
lack of R & D and technological upgradation,
low returns on capital invested, and HR and la-
bour issues which have retarded their progress.
• Many of them were also considered sick units
which called for some drastic measures. The
government considered the need to reinvigor-
ate them and hence took certain steps under
the Industrial Policy of 1991.
• Specified sectors of the economy were re-
served for the public sector. These were:
1) Essential infrastructure goods and services;
2) Exploration and exploitation of oil and min-
eral resources;
3) Technology development and building of
manufacturing capabilities in areas crucial
for the long-term development of the
economy and where private sector invest-
ment is inadequate; and,
4) Manufacture of products where strategic
considerations predominate such as de-
fence equipment.
• Government would strengthen those public en-
terprises which fall in the reserved or high prior-
ity areas that have successfully expanded pro-
duction, built up technical competence, or are
generating profits.
• Such enterprises would be given much greater
degree of autonomy. Competition will also be
induced in these areas by allowing private sec-
tor to participate.
• And in the case of enterprises which have been
chronically sick and incurring heavy losses, part
of Government holding in their equity share
capital would be disinvested in order to provide
market discipline to their performance.
131
Disinvestment:
• Disinvestment was carried out in many public
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sector enterprises
Liberalisation of Foreign Policy:
• The limit of foreign equity was raised to
100% in many activities i.e. NRI and foreign
investors were permitted to invest in Indian
Companies
Liberalisation in Technical Area:
• Automatic permission was given to Indian com-
panies for signing technology agreements with
foreign companies
Setting up of Foreign Investment Promotion
Board:
• This board was setup to promote and bring for-
eign investment in India
➔ Due to economic reforms of 1991, India wit-
nessed a wide and tremendous changes across
the country in every sector specially in industrial
sector.
➔ The foreigners got more autonomy on their in-
vestment, which gradually helped India to re-
cover its economic crisis.
9.5 IMPACT OF THE REFORMS
The impact of economic reforms can be catego-
rised in 3 major components → Liberalisation, Pri-
vatisation and Globalisation
LIBERALISATION
• The term “liberalization” in this context implies
economic liberalization.
• The essence of this policy is that greater free-
dom is to be given to the entrepreneur of
any industry, trade or business and that gov-
ernmental control on the same be reduced
to the minimum
• Rules and laws which were aimed at regulating
the economic activities became major hindranc-
es in growth and development.
• Hence, Liberalisation was introduced to put an
end to these restrictions and open up various
sectors of the economy.
• The main purpose of the process to economic
liberalization is to set business free and to run
on commercial lines. The underlying belief is
that commerce and business are not matter to
be contained to fixed national boundaries; they
are global phenomena.
• Here, artificial government. restrictions which
hinder economic and commercial activities and
flow of goods and services were removed.
• The liberalization intended to liberalize com-
merce and business and trade from the clutches
of controls and obstacles.
KEY FEATURES OF THE POLICY OF LIBERALISA-
TION:
 Lessened Government control and freelance to
private Enterprises.
 Capital Markets opened for private Entrepre-
neurs
 Simplification of Licensing policy
 Opportunity to purchase foreign exchange at
market prices
 Right To Take Independent Decisions Regarding
The Market
 Better opportunity for completion
 Widened Liberty in the Realm of Business and
Trade
Important Measures :
Removal of Industrial Licensing:
▪ All industrial licensing was abolished except
a shortlist of 18 industries related to security
and strategic concerns, social reasons, hazard-
ous chemicals and over-riding environmental
reasons and items of elitist consumption indus-
tries reserved for the small scale sector which
were to continue under the reservation list.
132
▪ Subsequently, all industries except for a
small group of 5 industries [alcohol, ciga-
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rettes, hazardous chemicals industrial explo-
sives, electronics, aerospace and drugs and
pharmaceuticals], industrial licensing require-
ments have been done away with.
▪ Reservations for Public sector: defence equip-
ment, atomic energy generation and railway
transport.
▪ Deregulation of goods produced in small scale
industries.
▪ Market mechanism to determine the prices.
Financial Sector Reforms:
▪ Financial sector which includes financial institu-
tions such as commercial banks, investment
banks, stock exchange operations and foreign
exchange market - are regulated by the Re-
serve Bank of India (RBI)
▪ All the banks and other financial institutions in
India are regulated through various norms and
regulations of the RBI. RBI decided the amount
of money that the banks can keep with them-
selves, fixed interest rates, nature of lending to
various sectors etc.
▪ One of the major aims of financial sector re-
forms is to reduce the role of RBI from regu-
lator to facilitator of financial sector i.e., the
financial sector was allowed to take decisions
on many matters without consulting the RBI.
▪ For instance, the reform policies led to the es-
tablishment of private sector banks, Indian as
well as foreign.
Liberalization of Foreign Investment:
▪ While earlier prior approval was required by
foreign companies, now automatic approvals
were given for Foreign Direct Investment
(FDI) to flow into the country.
▪ A list of high-priority and investment-
intensive industries were de-licensed and
could invite up to 100% FDI including sectors
such as hotel and tourism, infrastructure, soft-
ware development etc.
▪ Use of foreign brand name or trademark was
permitted for sale of goods
Public Sector Reforms:
▪ Greater autonomy was given to the PSUs
(Public Sector Units) through the MOUs
(Memorandum of Understanding) restricting in-
terference of the government officials and al-
lowing their managements greater freedom in
decision-making
MRTP Act :
▪ The Industrial Policy 1991 restructured the Mo-
nopolies and Restrictive Trade Practices Act.
▪ Regulations relating to concentration of eco-
nomic power, pre-entry restrictions for setting
up new enterprises, expansion of existing busi-
nesses, mergers and acquisitions etc. have been
abolished.
In a NUTSHELL:
➔ Liberalisation refers to end of license, quota
and many more restrcitions and controls
which were put on industries before 1991.
➔ Indian companies got liberalisation in the fol-
lowing way:
a) Abolition of license except in few
b) No restriction on expansion or contraction
of buisness activities
c) Freedom in fixing prices
d) Liberalisation in import and export
e) Easy and simplifying the procedure to at-
tract foreign capital in India
f) Freedom in movement of goods and ser-
vices
g) Freedom in fixing the prices of goods and
services
PRIVATISATION
Privatisation has to be viewed in two ways:
• In a narrow sense, it implies the induction of
private ownership in a public sector undertak-
ing.
• In a broader sense, it implies the enlargement
of the scope of the private sector in the growth
133
of the economy.
o Privatization is closely associated with the phe-
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nomena of globalization and liberalization.
o Privatization is the transfer of control of own-
ership of economic resources from the public
sector to the private sector. It means a decline
in the role of the public sector as there is a shift
 in the property rights from the state to private
ownership.
o The public sector had been experiencing vari-
ous problems, since planning, such as low effi-
ciency and profitability, mounting losses, exces-
sive political interference, lack of autonomy, la-
bour problems and delays in completion of pro-
jects. Hence to remedy this situation with Intro-
duction of National Industrial Policy 1991 pri-
vatization was also initiated into the Indian
economy
CONCEPT OF DISINVESTMENT:
✓ Another term for privatization is Disinvestment.
✓ The objectives of disinvestment were to raise
resources through sale of PSUs to be directed
towards social welfare expenditures, raising effi-
ciency of PSUs through increased competition,
increasing consumer satisfaction with better
quality goods and services, upgrading technol-
ogy and most importantly removing political in-
terference.
Prelims:
 In the initial phase of development planning in
India, more especia lly after the Industrial Policy
of 1956, the socialisation of the economy was
measured by the size of the public sector in the
national economy. The greater the share of the
public sector, the greater was the degree of so-
cialisation of the economy.
 Under economic reforms after 1991, the main
thrust is that the private sector is considered as
the engine of growth. By placing restrictions on
the public sector and by reducing its role in
several areas where it earlier enjoyed a monop-
olistic position, the new environment assigned
an increasing role for the private sector.
Key Objectives of Privatisation:
• The process of Privatization has been triggered
with the main intention of improving industri-
al efficiency and to facilitate the inflow of
foreign investments.
• It also wants to make the public sector under-
takings strong able efficient companies.
• It recommends a change in the role of the
government from that of the “owner manager”
to that of a mere “controller” or “regular”.
• It also intends to ensure efficient utilization of
all types of resources including human re-
sources.
• Privatization insists on the government to con-
centrate on the area such as education admin-
istration and infrastructure and to give up the
responsibility of looking after business and run-
ning industries.
• It is expected to strengthen the capital market
by following appropriate trade policies.
Main Aspects:
Autonomy to Public sector:
o Greater autonomy was granted to nine PSUs
referred to as ‘navaratnas’ (ONGC, HPCL, BPCL,
VSNL, BHEL) to take their own decisions
De-reservation of Public Sector
o The numbers of industries reserved for the pub-
lic sector were reduced in a phased manner
from 17 to 8 and then to only 3 including Rail-
ways, Atomic energy, specified minerals
o This has opened more areas of investment for
the private sector and increased competition for
the public sector forcing greater accountability
and efficiency
Disinvestment Policies
o Till 1999-2000 disinvestment was done basically
through sale of minority shares but since then
the government has undertaken strategic sale
of its equity to the private sector handing over
complete management control such as in the
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case of VSNL , BALCO etc
Joint Venture
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o This implies partial induction of private owner-
ship from 25 to 50 %or even more in a public
sector enterprise, depending upon the nature of
the enterprise and state policy in this regard.
Three kinds of proposals have been put forward:
1) 26 % ownership by the private sector (banks,
mutual funds, corporations, or individuals) and
workers also to be included to the extent of 5 %
equity to be transferred to them. However, in
this situation, veto power remains with the pub-
lic sector against the private sector.
2) Government retains 51 % equity and sells 49 %
equity to the private sector. Although the basic
character of the enterprise remains unaltered
and it continues to be a public sector unit, it in-
troduces a big share for the private sector.
3) 74% of the equity is transferred to the private
sector and the Government retains 26 % with
the added provision of Government veto power
and minority control over major corporate deci-
sions.
• These three variants of privatization indicate
different degrees of ownership by the private
sector in the joint venture. The basic aim of
the transfer of ownership is that it will ena-
ble the joint venture to improve productivity
of assets and convert them into profitable
concerns.
ARGUMENTS IN FAVOUR OF PRIVATIZATION
• Privatization is Necessary to Revitalize the
State-Owned Enterprises
• Privatization is Necessary to Face Global Com-
petition
• Privatization is Needed to Create More Em-
ployment Opportunities in Future
• Helpful for Mobilizing and Investing Resources
• Recognition of Talents and Good Performance
of work
ARGUMENT AGAINST PRIVATIZATION
• Profitability Alone Should Not Become the Sole
Yardstick to Measure Efficiency
• Role of Public Sector Undertaking From the so-
cio-Economic Angle Also Cannot be ignored
• Protection of the Interests of the Weaker Sec-
tion
• Price –fixing Policy Here is Not Profit- Oriented
• Argument that the Private Sector Is More Effi-
cient than the Public Sector is Not Right
In a NUTSHELL
Privatisation refers to giving greater role to pri-
vate sector and reducing the role of public sec-
tor.
To execute the policy of pivatisastion government.
took the following steps:
a) Disinvestment of public sector i.e. transfer
of public sector enterprise to private sector
b) Setting up of board of Industrial and Fi-
nancial Reconstruction (BIFR)→ This board
was setup to revive sick units in public sec-
tor enterprises suffering loss
c) Dilution of stake of the government → If
in the process of disinvestment private sec-
tor acquires more than 51% shares then it
results in transfer of ownership and man-
agement to the private sector
GLOBALISATION:
• Globalization essentially means integration of
the national economy with the world econ-
omy.
• It implies a free flow of information, ideas, tech-
nology, goods and services, capital and even
people across different countries and societies.
• It increases connectivity between different mar-
kets in the form of trade, investments and cul-
tural exchanges
Key elements:
 To open the domestic markets for inflow of
foreign goods, India reduced customs duties
on imports. The general customs duty on most
goods was reduced to only 10% and import li-
censing has been almost abolished. Tariff barri-
135
ers have also been slashed significantly to en-
courage trade volume to rise in keeping with
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the World trade Organization (WTO) order un-
der (GATT) General Agreement on Tariff and
Trade.
 The amount of foreign capital in a country is
a good indicator of globalization and growth.
 The FDI policy of the GOI encouraged the inflow
of fresh foreign capital by allowing 100 % for-
eign equity in certain projects under the auto-
matic route. NRIs and OCBs (Overseas Corpo-
rate Bodies) may invest up to 100 % capital with
repatriability in high priority industries. MNCs
and TNCs were encouraged to establish them-
selves in Indian markets and were given a level
playing field to compete with Indian enterprises.
 Foreign Exchange Regulation Act (FERA) was
liberalized in 1993 and later Foreign Exchange
Management Act (FEMA) 1999 was passed to
enable foreign currency transactions
 India signed many agreements with the WTO
affirming its commitment to liberalize trade
such as TRIPs (Trade Related Intellectual Proper-
ty Rights), TRIMs (Trade Related Investment
Measures) and AOA (Agreement on Agriculture)
Advantages of Globalization:
✓ There is a decline in the number of people living
below the poverty line in developing countries
due to increased investments, trade and rising
employment opportunities.
✓ There is an improvement in various economic
indicators of the LDCs (Less Developed Coun-
tries) such as employment, life expectancy, liter-
acy rates, per capita consumption etc.
✓ Free flow of capital and technology enables de-
veloping countries to speed up the process of
industrialization and lay the path for faster eco-
nomic progress.
✓ Products of superior quality are available in the
market due to increased competition, efficiency
and productivity of the businesses and this
leads to increased consumer satisfaction.
✓ Free flow of finance enable the banking and fi-
nancial institutions in a country to fulfill fin an-
cial requirements through internet and elec-
tronic transfers easily and help businesses to
flourish.
✓ MNCs bring with them foreign capital, technol-
ogy, know-how, machines, technical and mana-
gerial skills which can be used for the develop-
ment of the host nation
Disadvantages of Globalisation:
o Domestic companies are unable to withstand
competition from efficient MNCs which have
flooded Indian markets since their liberalized
entry. It may lead to shut down of operations,
pink slips and downsizing.
o Moreover skilled and efficient labours get ab-
sorbed by these MNCs that offer higher pay
and incentives leaving unskilled labour for em-
ployment in the domestic industries. Thus there
may be unemployment and underemployment.
o Payment of dividends, royalties and repatriation
has in fact led to a rise in the outflow of foreign
capital.
o With increased dependence on foreign tech-
nology, development of indigenous technology
has taken a backseat and domestic R and D de-
velopment has suffered.
o Globalization poses certain risks for any country
in the form of business cycles, fluctuations in in-
ternational prices, specialization in few export
tables and so on.
o It increases the disparities in the incomes of the
rich and poor, developed nations and LDCs. It
leads commercial imperialism as the richer na-
tions tend to exploit the resources of the poor
nations.
o Globalization leads to fusion of cultures and
inter-mingling of societies to such an extent
that there may be a loss of identities and tradi-
tional values. It gives rise to mindless aping of
western lifestyles and mannerisms however ill-
suited they may be.
136
o It leads to overcrowding of cities and puts pres-
sure on the amenities and facilities available in
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urban areas
In a NUTSHELL
Globalization refers to integration of various econ-
omies of the world. Till 1991 Indian government
was following strict policy in regard to import and
foreign investment with regard to licensing of im-
ports, tariff, restrictions etc. but after new policy
government adopted globalization by following
measures:
(i) Import liberlisation → government removed
many restrcitions from import of capital
goods
(ii) Foreign Exchange Regulation Act (FERA) was
replaced by Foreign Exchange Management
Act(FEMA)
(iii) Rationalisation of tariff structure
(iv) Abolition of export duty
(v) Reduction if import duty
9.6 Limitations of LPG
Low Growth of Agriculture Sector
 Agriculture has been and still remains the back-
bone of the Indian economy.
 It plays a vital role not only in providing food
and nutrition to the people, but also in the sup-
ply of raw material to industries and to export
trade
 In 1991, agriculture provided employment to
72% of the population and contributed 29.02
% of the gross domestic product.
 However, in 2014 the share of agriculture in the
GDP went down drastically to17.9 per cent.
 This has resulted in a lowering the per capita
income of the farmers and increasing the rural
indebtedness
Threat from foreign competition
 Due to opening up of the Indian economy to
foreign competition through Liberalization and
FDI policy more MNC’s are attracted towards
India after 1991 reforms and they are com-
peting local businesses and companies
 Since, these MNC’s have lots of financial capaci-
ty or those are big organizations with advanced
foreign technology so, they have large produc-
tion capacity and huge money for promotion
and other research activities they are easily de-
feating our Indian local companies.
 And they had acquired many Indian companies
as well.
 Because of financial constraints, lack of ad-
vanced technology and production inefficien-
cies our Indian companies are facing problem in
this globalization period
Adverse Impact on Environment
 Globalization has also contributed to the de-
struction of the environment through pollu-
tion and clearing of vegetation cover.
 With the construction of companies, the emis-
sions from manufacturing plants are causing
environmental pollution which further affects
the health of many peoples.
 The construction also destroys the vegetation
cover which is important in the very survival of
both humans and other animals
Increase in Income disparity
 Globalization leads to widening income gaps
within the country. Globalization benefits only
to those who have the skills and the technology
in the country.
 The higher growth rate achieved by an econo-
my can be at the expense of declining incomes
of people who may be rendered redundant.
 Globalization has widened the gap between the
rich and poor, rises inequalities
Growth and Employment:
 Though the GDP growth rate has increased in
the reform period, scholars point out that the
reformed growth has not generated sufficient
employment opportunities in the country
137
Broad Indicators
• Some of the indicators of the progress of the
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economy are the growth rate of Gross Domestic
Product (GDP), the changing sectoral compo-
sition of the GDP, and the standards of living
of the people as reflected in the quality of life.
• The growth rate of the economy had fallen to
less than one %in the crisis year 1991-92 but
rebounded to 5 %per annum in 1992-93 and
1993-94. It further accelerated to 6.3 %in 1994-
95.
• While the annual average growth rate during
the decade 1980-81 to 1989-90, the pre-reform
period, was 5.18 per cent, the average rate for
the period 1993-94 was 6.8 %based on the new
series of GDP
Sectoral Share in GDP
• The sectoral share in GDP of the three sectors –
primary which includes agriculture, fisheries,
and forestry, secondary which includes industry,
manufacturing, and mining and tertiary which
includes all services such as banking, insurance,
transport and communications, constructions
and real estate, hotels, trade, etc is an indication
of the progress of the economy.
• Between 1980-81 and 1990-91 (pre-reform pe-
riod), share of primary sector declined from
38.1 %to 34.0 per cent, that of secondary de-
clined marginally from 25.9 %to 24.9 per cent,
while the tertiary sector showed perceptible
increase.
• While the share of agriculture has been steadily
declined and that of services rising consistently,
the share of industry had been sluggish and
fluctuating which had fallen below one %in
1991-92 to 2000-01).
• Industrial growth which had fallen below one
%in 1991-92, showed broad based recovery by
1994 and rose to 8.7 per cent.
• Manufacturing sector grew even faster at 9.2
%in 1991-92 and at 10.6 %in 1996-97.
• The growth rate of agriculture and allied sector
was 3.6 %in the Eleventh Plan (2007-12) as
against 2.5 % and 2.4 %respectively in the Ninth
Plan (1997-2002) and Tenth Plan (2002-07).
• As for the industrial growth rate, after a decline
of 0.8 %in 1991-92, it rose to 2.2 %in 1992-93,
8.6 %in 1994-95, and 10.6 %in 1996-97.
• During the Ninth Plan, industrial growth de-
clined to 4.3 %but recovered to touch 9.4 %in
the Tenth Plan.
• And again, it recorded only 7.9 %in the Eleventh
Plan.
• The deceleration and fluctuation in industry
is due to structural and cyclical factors affecting
business, lack of domestic demand in case of
failure of monsoon which adversely affects the
rural sector, which is a major source of demand
for manufactured items, and lack of demand for
items of exports.
• But it can be said that the New Industrial Policy
has helped to reinvigorate and energize the in-
dustrial sector.
• The services sector has shown steady growth
both in regard to its share in GDP as well as rate
of growth.
• Its share in GDP which was 48.5 %in 2000-01
has risen to an estimated 59 %in 2013-14.
• It recorded a growth rate of 7.9 %in the Ninth
Plan, 9.3 %in the Tenth Plan, and 10.1 %in the
Eleventh Plan.
• India’s GDP growth rate increased.
• During 1990 -91 India’s GDP growth rate was
only 1.1% but after 1991 reforms due LPG policy
India’s GDP growth rate is increased year by
year → Because of the Abolition of Industrial li-
censing, privatisation, advanced foreign tech-
nology and Reduction of taxes India’s GDP is in-
creased after 1991 reforms
138
Employment pattern in Sectors
• From the above account, it will be seen that
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there have been significant changes in the sec-
toral composition of GDP which is a positive in-
dication of economic development.
• Though a vital sector in the economy, the share
of agriculture has steadily come down and the
 contribution of industry and services to GDP
has been going up.
• However, the declining share of agriculture in
the national income has not been accompanied
by corresponding decline in the workforce has
still not removed to non-agricultural occupa-
tions and the pressure of population on land
continues.
• It also indicates that there is disguised and un-
der-employment in the sector resulting in low
productivity per person engaged.
• In 1991 unemployment rate was 4.3% but
after India adopted new LPG policy more em-
ployment is generated
• The percentage share of agriculture in total
workforce declined only marginally from 72 %
in 1951 to 69.8 % in 1971, 66.7 % in 1981, and
64.75 % in 1993-94.
• Though it has further declined, it still provides
employment to about 55 % of the workforce in
the country. Employment in industry has also
been hovering from 12.43 % in 1993-94 to 12.1
% in 1999-2000.
• In 2012-13, it stood at 11.9 %.
• Whereas it is the services sector which has pro-
vided more additional employment the shares
of the services (including construction sector) in
employment increased from 22.82 % in 1993-94
to 34.90 % in 2009-10.
• Though employment levels have gone up, it has
not kept pace with the increase in the labour
force resulting in creeping unemployment.
• Also, the qualitative nature of jobs in the unor-
ganized sector where labour laws and working
conditions may be lax.
• All this part, a major challenge confronting
the country is the huge number of youth en-
tering the labour force.
• An estimated 12 million persons will be entering
the job market each year an average of one
million every month for the next ten years who
have to be provided employment.
• This is a major challenge for the present and
future governments.
Foreign Direct Investment (FDI)
▪ India has already marked its presence as one of
the fastest growing economies of the world.
▪ It has been ranked among the top 3 attractive
destinations for inbound investments.
▪ Since 1991, the regulatory environment in terms
of foreign investment has been consistently
eased to make it investor friendly.
▪ India has also firmly established itself as a lucra-
tive foreign investment destination.
▪ Foreign direct investment inflows hit an all-time
high of $60.1 billion in 2016-17.
▪ India’s forex reserves have been rising with a
total accretion of $4.389 billion to the kitty since
14 July 2017.
▪ It had touched a record high of $393.448 billion
after it rose by $581.1 million in the week to 4
August 2017.
▪ India has allowed 100% FDI in medical services,
Telecom sector, and single brand retail etc.
Per capita income
▪ Per capita income or average income measures
the average income earned per person in a giv-
en area (city, region, country, etc.).
▪ It is calculated by dividing the area's total in-
come by its total population.
▪ In 1991 India’s Per capita Income was Rs.
11,235 but in 2014-15 Per Capita Income is
reached to Rs. 85,533.
▪ Per Capita income is increased due to Increase
in Employment, due to new economy policy of
139
globalization and privatization many job oppor-
tunities are created so, and people’s income
was increased.
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Impact of Reforms on Poverty
• One of the primary aims of India’s economic
policy right after Independence has been to
 achieve growth with equity and social jus- ments in the social sector education, public
tice. health, and housing directed to benefit partic-
• This was natural considering the all pervasive ularly the lower sections of the population, and
poverty and widespread inequality which per- redistributive measures through fiscal policies.
sisted in the country.
• Though several measures such as rural devel- 9.7 Effects of Liberalisation and Globali-
opment and anti-poverty schemes have been sation
implemented to remedy this, both poverty and
inequality continue to be a challenge. Increasing Competition:
• There have been different studies and surveys
• After the new policy, Indian companies had to
on ascertaining number of people who live be-
face all round competition which means com-
low the ‘poverty line’.
petition from the internal market and the com-
• According to data released by National Sample
petition from the MNCs
Survey Organization (NSSO) and erstwhile Plan-
• The companies which could adopt latest tech-
ning Commission, the percentage of population
nology and which were having large number of
below the poverty line was increasing day by
resources could only survive and face the com-
day.
petition
• Economic reforms measures coupled with pov-
• Many companies could not face the competi-
erty alleviation programmes like Mahatma
tion and had to leave the market
Gandhi Rural Employment Guarantee Scheme
(MNREGS) have helped to lift a significant sec- More demanding customers:
tion of the population above the poverty line.
• Prior to new economic policy there are very few
• The extent and spread of it, however, has not
industries or production units
been uniform.
• As a result, there was shortage of product, in
• As a result of much of the reform measures be-
every sector
ing directed at the organized sector, its effects
• Because of this shortage the market was pro-
are felt first on the urban organized sector, next
ducer-oriented i.e. producers became key per-
on the urban informal sector, and then on the
sons in the market
rural sector.
• Nut after new economic policy, many more
• The rural sector is influenced more by the anti-
businessmen joined the production line and
poverty schemes which make a direct impact
various foreign companies also established their
on the income and living conditions of the rural
production units in India
poor.
• As a result, there was surplus of products in
• Another significant factor impacting the rural
every sector. This shift from shortage to surplus
population is the state of agriculture which
140

brought another shift in the market i.e. produc-

again is largely dependent on the monsoon and
er market to buyer market
various other factors.
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• There is also concern that following the imple-
mentation of reforms, inequality between dif-
ferent segments of society has widened.
• This can be remedied only through a vigorous
process of growth with equity, more invest-
Rapidly changing technological environment:
• Prior to new economic policy there was a small
internal competition only
• But after the new economic policy the world
class competition started and to stand this
 global competition the companies need to
adopt world class technology
• To adopt and implement world class technology
the investment in R & D dept has to increase
Necessity for change:
• Prior to 1991 business enterprises could follow
stable policies for a long period of time but af-
ter 1991 the business enterprises have to modi-
fy their policies and operations from time to
time
Need for developing Human resources:
• Before 1991 Indian enterprises were managed
by inadequately trained personnel’s
• New market conditions require people with
higher competence skill and training
Market orientation:
• Earlier firms were following selling concept i.e.
produce first and then go to market but now
companies follow marketing concept i.e. plan-
ning production on the basis of market re-
search, need and want of customer
Loss of Budgetary support to Public Sector:
• Prior to 1991 all the losses of public sector were
used to be made good by government by sanc-
tioning special funds from budgets
• But today the public sectors have to survive and
grow by utilising their resources efficiently oth-
erwise these enterprises have to face disinvest-
ment
• On a whole LPG brought positive impacts on
Indian business and industry
Export a matter of survival:
• Indian businessman was facing global competi-
tion and the new trade policy made the external
trade very liberal
• As a result to earn more foreign exchange many
Indian companies joined the export business
and got lot of success in that
• Many companies increased their turnover more
than double by starting export division
9.8 Focus Point
• To sum up, the result of 1991 reforms has been
a mixed one. While it has certainly opened up
the economy after decade of keeping India as a
‘protected and virtually closed economy’ on
the plank of Import Substitution policy, and has
helped to integrate it with the global economy,
India has not been able to realize the full poten-
tial.
• This is despite having a large technically skilled
workforce and opportunities of building a ro-
bust manufacturing base as China did over the
last two decades.
• In hindsight, precious time and ground has
been lost and now India has to compete with
other developing countries in East Asia and Lat-
in America.
• There is urgent need to push for another round
of major reforms which the present government
has embarked upon.
• But in the democratic framework in which the
country is placed, there are many legislative and
political roadblocks which are already playing
out and due to delays caused by them, the
country may be forced to pay a heavy price.
Key Lines in examination point of view
➢ In 1991 was a major turning point for Indian
141
economy; precarious balance of payments posi-
tion and inflationary pressures.
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➢ New Industrial Policy, 1991 was announced on
July 24, 1991
➢ 1980s started on a good note – higher GDP
growth rate, comfortable food position and in-
dustrial sector looking up; liberalization
 measures undertaken by Rajiv Gandhi govern-
ment.
➢ But problems were building up; considerable
increase in gross fiscal deficit and worsening fis-
cal imbalance persisted; increase in non devel-
opmental expenditure added to the problems.
➢ Factors which led to the 1991 economic crisis
higher fiscal deficit and unsustainable internal
public debt; foreign exchange position became
critical resulting in erosion of international con-
fidence; inflation was hurting the poorer sec-
tions.
➢ Radical reforms were initiated in 1991 by the
government under Narasimha Rao to achieve
macroeconomic stability; measures included
containing fiscal deficit, improving balance of
payments position; rupee was devalued in two
steps and funds raised the IMF and other
sources.
➢ New trade policy drawn up replacing the ‘im-
port substitution’ policy followed hitherto; im-
ports were liberalized and several measures
were taken to vigorously promote exports; the
economy was steadily opened up.
➢ New Industrial Policy was introduced which in-
cluded industrial delicensing, except in strategic
sectors; foreign investment was promoted to
help industries upgrade technology and en-
hance their competitiveness; the MRTP Act was
repealed and Competition Act of 2002 enacted;
public sector units performing well were to be
strengthened while sick units were to be sub-
jected to disinvestment.
➢ Growth rate of the economy improved by 1992-
93 and again in 1994-95; there were fluctua-
tions in industrial growth due to cyclical factors,
but overall, industry benefited from the new
policy; services sector also made steady ad-
vances with its share in GDP touching 48.5 %in
2000-01.
➢ Significant changes were taking place in sec-
toral shares in GDP; share of agriculture was de-
clining and that of industry and services were
going up; but these changes were not reflected
in a commensurate way in their shares in em-
ployment; agriculture continued to support 55
%of the work force while employment in the
services sector showed substantial increases;
that in industry was rather stagnant.
➢ Providing employment to the huge numbers of
youth joining the labour force, a major chal-
lenge.
➢ Impact of reforms on poverty; despite many ru-
ral development and antipoverty programmes
launched, poverty continues to persist through
the number of those below the poverty lines
has been coming down; there is also concern
about widening inequities in society following
the reform measures.
➢ While India did integrate with the global econ-
omy, she has not been able to realize the full
potential from it unlike Chain could do over the
last two decades; India lost precious time in the
process and has now to compete with other
emerging nations; India’s legislative and politi-
cal roadblocks also hamper rapid development.
Important One Liners:
➢ In the Industrial Policy 1991, except 18 indus-
tries, all others were exempted from compulso-
ry licensing
➢ In 1993, government announced the exemption
of 3 more industries – automobiles, white
goods, leather and leather products
➢ In December 1996, electronic goods were ex-
empted
142
➢ In July 1997, 5 more industries were exempted
➢ In the budget 1998-99, coal and petroleum
were exempted from compulsory licensing →
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after this only 6 industries are under compulso-
ry licensing
1) Alcohol
2) Tobacco
3) Hazardous chemicals
 4) Electronic Aerospace and Defence equip-
ments
5) Industrial explosives
6) Drugs and Pharmaceuticals
➢ In 1956 industrial policy, 17 industries were re-
served for the public sector. In 1991, this num-
ber was reduced to 8 industries
1) Arms and ammunition
2) Atomic energy
3) Atomic minerals
4) Coal and lignite
5) Mineral oils
6) Mining of iron ore, manganese ore, chrome
ore, gypsum, sulphur, gold and diamond
7) Mining of copper, lead, zinc, tin, molyb-
denum
8) Mining of wolafarm
➢ In 1993, 3 industries were de-reserved
I. Atomic energy
II. Atomic minerals
III. Rail transport
➢ FDI upto 51% foreign equity in high priority in-
dustries requiring large investments and ad-
vanced technology was permitted
➢ With a view to inject technological dynamism in
the Indian Industry, government provided au-
tomatic approval for technological agreements
related to high priority industries and eased
procedures for hiring of foreign technical exper-
tise
➢ Policy of Disinvestment → In order to raise re-
sources and ensure wider public participation of
PSUs, it was decided to offer is shareholding
stake to mutual funds, financial institutions,
general public and workers
10. Agriculture
➔ The history of Agriculture in India dates back to
Indus Valley Civilization and in some parts of
Southern India, it was found to be practised
even before the Harappans.
➢ Policy of MoU → In order to revive and rehabili-
tate chronically sick PSUs, it was decided to re-
fer them to the Board for Industrial and Finan-
cial Reconstruction. The policy also provided for
greater managerial autonomy to the Boards of
PSUs
➢ Realizing the increased import competition with
the removal of quantitative restrictions since
April 2001, the government has adopted a poli-
cy of dereservation and has pruned the list of
items reserved for Small Scale Industries Sector
gradually
➢ FDI upto 100% has been allowed under auto-
matic route for most manufacturing activities in
SEZs.
➢ In 2004, the FDI limits were raised in the private
banking sector (upto 74%), oil exploration (upto
100%), petroleum product marketing (upto
100%), petroleum product pipelines (upto
100%), natural gas and LNG pipelines (upto
100%) and printing of scientific and technical
magazines, periodicals and journals (upto
100%)
➢ In February 2005, FDI ceiling in telecom sector
in certain services were increased from 49% to
74%
➢ Equity participation upto 24% of the total
shareholding in small scale units by other indus-
trial undertakings has been allowed → enable
small sector to access the capital market and
encourage modernization, technological up-
gradation etc.
➢ Foreign equity participation upto 100% has
been allowed in construction and maintenance
of roads and bridges.
143
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➔ Today agriculture is the backbone of Indian
Economy and nearly 50% of the population
dependent on it for livelihood.
➔ Agriculture has the highest share in employ- ➔ It is the largest unorganised sector of India.
ment.
10.1 Development of Agriculture under Five Year Plans:

Major Features
Five year Plan

1st (1951-56) • Launch of the Community Development Programme, abolition of Zamindari system, cam-
paigns for growth in food and other related areas like fisheries, forestry, animal husband-
ry, soil conservation, etc. were the major features.
• Growth in agriculture was 2.71%.
2nd (1956-61) • Industrial sector was given more importance in this plan.
• Agricultural Expenditure was only 20% of the actual plan expenditure.
• The agricultural growth, however, was high at 3.15%.
3rd (1961-66) • Achieving self- sufficiency in foodgrains and increase in agricultural production was one
of the main aims of this plan.
• Higher priority was given to agriculture and allied areas as compared to industrial devel-
opment.
• However, the plan did not achieve its goals and agricultural growth fell to 0.73%.
• Land reforms, Land ceiling and Green Revolution were some of the major initiatives in this
plan.
Annual Plans • Priority was given to minor irrigation projects and High Yielding Variety of seeds was pre-
(1966-69) ferred so as to increase agricultural productivity.
• Agricultural growth was high at 4.16%.
4th (1969-74) • The results of the introduction of Green revolution and HYV seeds were good.
• Expenditure on agriculture was 22% of annual expenditure.
• Agricultural growth was 2.57%.
5th (1974-79) • Emphasis was laid on spread of HYV seeds, use of fertilizers, pesticides and insecticides
to increase production.
• Expenditure on agriculture was around 21% of annual expenditure.
• Agricultural growth was 3.28%.
6th (1980-85) • It was realised by this plan that growth of Indian economy depends on rural and agricul-
tural development.
• The growth rate in agricultural production was a high 4.3% against a target of 3.8%.
• Overall growth in agricultural sector was 2.52%.
144
• It was realised by this plan that growth of Indian economy depends on rural and agricul-
tural development.
• The growth rate in agricultural production was a high 4.3% against a target of 3.8%.
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• Overall growth in agricultural sector was 2.52%.

7th (1985-90) • Expenditure on agriculture was 22% of annual expenditure.
• Growth in agriculture was 3.47%
8th (1992-97) • The growth target was 4.1% but the agricultural sector showcased an impressive growth
of 4.68%. 9th (1997-2002)
 • This plan was a failure in the agricultural sector, and it registered an agricultural growth
rate of 2.44%.
th
10 (2002-07) • Against a target of 4%, the average agricultural growth rate was only 2.3%.
• The major emphasis was on increasing agricultural productivity and profitability by mak-
11th (2007-12) ing available affordable institutional credit, farm mechanisation, biotechnology, cold
storages, and marketing.
• Growth in agriculture was 3.5%.
th
12 (2012-17) • This plan, like its predecessors, has a target of 4% agricultural growth rate, with growth in
food-grains at 2% and non- food grains at 5.6%.
• The plan puts an emphasis on improvement in technology, use of public- private part-
nership, greater road connectivity, development of horticulture, dairying, and other re-
lated agricultural fields.
10.2 Agriculture and Green Revolution • This was attempted mainly through institutional
changes by way of land reforms and various
• At the time of Independence in 1947, India was strategies to boost production.
predominantly an agrarian economy with over
80 percent of the population living in rural areas 10.3 LAND REFORMS AND CHANGES IN
and about 70 percent of the population living in THE AGRARIAN SECTOR:
rural areas and about 70 percent of the work-
force engaged in agriculture. ▪ In 1947, India inherited a highly iniquitous sys-
• In 1950-51, the share of agriculture in na- tem of land tenure with bulk of the cultivable
tional income was 56.5 percent. Yet, produc- land held by a relatively small section if the
tivity and yields were very low. population and the rest forming a large seg-
• It was realized that rapid progress in the agri- ment of small peasants and landless labour.
cultural sector was imperative for eradication of ▪ One of the first tasks undertaken by the gov-
widespread poverty and malnutrition prevalent ernment after independence was to implement
in the country, and for ameliorating the living land reforms. Considering the highly skewed
standards of the people. and unequal distribution of agriculture land
• The developments in Indian agriculture from perpetuated over centuries, effecting land re-
the beginning of the First Five-Year Plan (1951) forms was the urgent need of the hour.
to the early 1990s can be studies in three dis- ▪ This lop-sided system was perpetuated by the
tinct phases: colonial rulers. It had adverse consequences on
1. Pre-Green Revolution phase (1951-68) agriculture in colonial rulers. It had adverse
2. Early Green revolution phase (1968-81) consequences on agriculture in colonial India.
3. Later Green Revolution phase (1987-92) ▪ Insecurity of tenure and indeterminable
145

rights over land impacted on agricultural oper-

• In the initial phase from 1950 to ’67, firm foun- ations and output.
dations were laid through various steps initiated
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▪ Land records were not maintained systemat-

in the first three Five-Year Plans (1951-1966) ically which made mortgaging of land to raise
which enabled kickstarting the agricultural sec- funds difficult for the farmer who had to de-
tor in subsequent decades. pend on usurious moneylenders.
▪ All these placed crushing burdens on the peas-
antry and sporadic riots and peasant uprisings
broke out in different parts of India, particularly
Bengal, Andhra and Malabar
Key Features of Land Reforms:
 The land reform was to be achieved by elimi-
nating or reducing exploration of small and
marginal farmers, affording security of tenure
to sharecroppers and tenants, and providing
land to the landless through redistribution of
land.
 It involved abolition if intermediaries and allot-
ting surplus land among the tillers and the
landless.
 The Indian government was committed to land
reforms and consequently laws were passed by
all the State Governments in 1950’s touching
upon the following aspects:
1. Abolition of intermediaries.
2. Tenancy reforms to regulate fair rent and
provide security of tenure to cultivators.
3. Ceiling on holding and distribution of sur-
plus land among the landless.
4. Consolidation of fragmented landholding
and prevention if their further fragmenta-
tion,
5. Development of co-operative framing.
 The land reforms had to be implemented by the
states.
 The legislative initiatives for land reforms met
with resistance from vested interests in many
states.
 It was argued that tenancy changes and putting
ceilings on landholding would come in conflict
with constitutional guarantees.
 Another argument was that reducing the size of
holdings and distributing land among many
small cultivators would affect the efficiency of
operations and adversely impact agricultural
output.
 It would also prevent the adoption if modern
methods of farming and mechanization of agri-
culture.
 The fact that redistribution of land resulting in
smaller holdings would affect productivity has
been contested and some studies have shown
that even if such redistribution does not in-
crease the gross produce, it does not result in a
decrease in the produce.
 It is further argued that redistribution of land
cannot be seen merely from the economic ben-
efits it may confer, but also on considerations if
social justice in view of the wide disparities and
inequities prevalent in the rural sector
Abolition of Intermediaries:
 Abolition of intermediaries was one significant
step. The intermediaries were abolished within a
few years after the independence covering
about 40 percent of the cultivated area.
 About 20 million, who were hitherto tenants,
became owners of the land and were brought
in direct relationship with the State
 This acted as an incentive for investment and
progress of agriculture. Also, considerable ar-
eas of cultivable wastelands and private forests
came under the management of government.
 As to the other major objective of imposing
ceilings on landholdings and distributing the
surplus land among the landless, there were
two rounds of legislation, one in 1950’s and
another in the early 70’s.
 The state legislatures passed the radical laws
imposing ceiling in landholdings.
 However, the land reforms were implemented in
a half-hearted manner and due to various fac-
146
tors such as pressure exerted by vested inter-
ests, exemptions granted in many cases, and di-
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vision of large holdings by families into smaller
holdings among the family members to circum-
vented land ceiling laws, the reform measures
fell short of the avowed objectives.
 Especially, it did not meet where erstwhile land-
lords continued to hold on to large holdings.
Payment of Compensation:
• While abolishing the intermediaries, the gov-
ernment decided to pay them compensation
but as the basis and rate of compensation was
not clearly spelt out, the Zamindari Abolition
Acts were contested by the landowners in High
Courts and finally in the Supreme Court.
• The Court, while upholding the rights of the
State to acquire lands for public purpose, ruled
that just and reasonable compensation be paid
to those divested of their lands.
• As a result, the rates and ceiling of compensa-
tion and methods of determining them were re-
vised, and landlords greatly benefitted by the
higher compensation paid.
• The compensation was paid in cash to small
landowners while big landowners were paid in
bonds.
• Also, as a result of the tenancy reforms, tenant-
farmers were able to get security of tenure,
have their rents reduced, or buy up the land
from the landlords at less than market price.
• If they did not buy the land, they could continue
perpetually as tenants on that property.
• Thus, security of tenure was guaranteed.
• However, this was also achieved uniformly all
over the country and absentee ownership of
land and insecure tenancy reform were mainly
achieved in Kerala, West Bengal, Maharashtra,
Karnataka, Himachal Pradesh, Gujarat, and As-
sam.
PRE-GREEN REVOLUTION PHASE (1951-
1968):
➔ One of the major objectives in the initial years
of planning was to augment agricultural pro-
duction, more specifically the output of food
grains, to meet the needs of the growing
population.
➔ A major challenge to this was the existence of a
large number of small and uneconomic hold-
ings.
➔ Though some farm studies had shown an in-
verse relationship between the size of the hold-
ing and the yields under traditional agriculture,
this could not be generalized, as yield of crops
depended on a variety of factors other than the
size of the farm.
➔ A contrary view held by some economists in the
context of land reforms was that reducing
large holdings into smaller units would
hamper production and yields which again
was open to debate.
➔ In the light of these different perspectives, the
government conceived a policy of consolida-
tion if holding by trying to group small farms
and promoting co-operative farming.
➔ Though government attempted this in all ear-
nestness backed by an intensive Community
Development programme in the first three
Plans, the idea of co-operative farming was
not a success and did not take off. One of the
rights to land which they got following the land
reforms.
Steps to Boost Output:
▪ Nonetheless, the Government accorded priority
to agriculture and undertook several other
measures in the first three Plans (1951-66) to
enhance production.
▪ These included implementing large and small
irrigation projects, steps for soil conservation,
dry farming and land reclamation, supply of fer-
tilizers and manures, distribution of improved
seeds, measures for plant protection, use of im-
147
proved ploughs and agricultural implements,
and adoption if scientific agricultural practices.
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▪ The gross area under food grains crops (ce-
reals and pulses) increased from 101.19 mil-
lion (mn.) hectares (ha) in 1950-51 to 124.91
mn. Ha. In 1970-71.
▪ These steps did not yield results and food
grains output increased steadily during the first
two decade of planning.
▪ Despite all these favourable trends, the years
through 1950’s and the 60s were very challeng-
ing for Indian agriculture.
▪ Due to acute shortage of food in some years,
India had to depend on food imports from oth-
er countries including the U.S. under the PL 480
programme.
▪ These imports helped to meet the shortages
and prevent the incidents of runaway food-
price inflation.
▪ Two back-to-back droughts in 1965-66 and
1966-67 made matters even more difficult.
▪ Food grains output dipped to 72.3 mn. tones in
1965-66 and 74.2 mn. tones in 1966-67 but
again recovered to 95.1 mn. Tones in 1967-68.
▪ During this period, there was considerable
pressure from the U.S. government on India,
during the Presidency of Lyndon B. Johnson, by
discouraging dependence on the U.S. for food
aid, and goading India to take effective steps to
adopt scientific.
▪ As mentioned earlier, India had already been
taking various steps under the three Plans to in-
crease food output. A new strategy was initiated
from the Third Plan beginning in 1961, and an
institutional credit.
▪ They took to the improved farm practices readi-
ly and positively, and these initiatives were
gradually expanded to cover more parts of the
country.
▪ In fact, it may be said that the seeds for the
Green revolution, which was to occur in the
coming years, were sown in the early sixties.
EARLY GREEN REVOLUTION PHASE (1968-
1981):
▪ The breakthrough came in the mid-sixties with
the adoption of New Agricultural Strategy
(NAS).
▪ The main elements of this strategy were the
adoption of new technology in the form of high
yielding variety (HYV) seeds for wheat, rice,
and coarse cereals, better application of fertiliz-
ers, and increased use of modern inputs such as
pump sets and tractors.
▪ Public and private investment in agriculture was
steeped up resulting in higher capital for-
mation.
▪ The irrigation facilities were augmented and the
net and gross area under irrigation expanded
significantly between 1960-61 and 1980-81.
▪ The area under high-yielding varieties for rice
and wheat cultivation also increased steadily
from the mid-sixties until the end of the nine-
ties.
▪ Use of hybrid seeds, which had been initiated as
early as 1960, began to be widely adopted by
1963.
▪ For wheat and rice cultivation, HYV seeds were
tried experimentally to began with and were in-
troduced over fairly large areas as a full-fledged
programme from 1966 onwards.
▪ It may be noted that the yields per hectare did
increase between 1950-51 and 1960-61 which
covers the first phase of the Green revolution,
fell short of the growth rate of 3.1 per cent
recorded during the per-Green revolution
period.
▪ This shortfall was made up by a strong recovery
during the later phase of the Green revolution
in the eighties. It is also to be noted to wheat
than rice.
▪ As these new varieties matured quicker and
could be harvested at shorter interval, farmers
148
could do double cropping in a year and thus
put the land to more intensive use.
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▪ With higher yields per hectare and more output,
there was greater incentive and profitability for
the farmers.
LATER GREEN REVOLUTION PHASE (1981-
1992):
▪ In the second phase of the Green revolution,
the focus shifted from intensification of
Green revolution in the best areas to its
spread to new areas.
▪ Food grains production continued to rise during
this phase.
▪ As stated earlier, the growth rate of output at
3.4 percent during the second phase of the
Green revolution was higher than the rate of
2.3 per cent recorded in the earlier phase.
▪ During the earlier phase, breakthrough in crop
production was achieved in the north-west In-
dia and parts of the southern region.
▪ However, the eastern region, comprising Madh-
ya Pradesh, Bihar, Orissa, West Bengal, and As-
sam, were not impacted much during this
phase.
▪ But during the second phase, i.e., the eight-
ies, the eastern and western regions showed
greater progress than the north and the
south.
Impact of Green Revolution
▪ The Green Revolution has resulted in phenome-
nal increase in the production of ‘wheat’ gain
maximum benefit from green Revolution.
▪ This revolution led to prosperity of farmers, es-
pecially those who were having more than 10
hectares of land.
▪ Increased production of food grains resulted in
reduction in imports. Also, sometimes India ex-
ported foodgrains.
▪ This revolution increased farmer’s income and
farmer’s invested surplus income to increase
agriculture productivity.
10.4 Land Tenure Systems:
1) Zamindari System
2) Mahalwari System
3) Ryotwari System
Zamindari System or Landlord-Tenant System:
✓ In this system ownership of land is separated
from the managerial and labouring function.
✓ Here the landlord acts as an intermediary be-
tween the State and the actual tiller, and is re-
sponsible for the payment of land revenue to
the State.
✓ As long as the zamindar assured the remittance
of the settled revenue to the government he
was free to fix and extort any revenue from the
tenant. This led to gross abuses and exploita-
tion and spread of rural poverty in Bengal and
Bihar.
Mahalwari System or Communal System of
Farming:
✓ Under this system the ownership of land is
maintained by a collective body usually the vil-
lage serves as a unit of management, land is
distributed among individual peasants, revenue
is collected from them and paid to the govern-
ment by the body.
✓ Simply the village community was jointly re-
sponsible for payment of rent.
Ryotwari System or Owner-Cultivator System:
✓ Under this system, the bulk of the rights of use
and control of land are held by the family which
provides the primary labour force on the farm.
✓ The owner-cultivator is directly responsible for
the State and pays land revenue.
✓ Simply the cultivator paid the revenues directly
to the state without an intermediary.
10.5 Major Land Reform Measures Taken
after Independence
149
Several important land reform measures were
brought about by the government after Independ-
ence, like.
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▪ Abolition of intermediaries like zamindars,
jagirdars, etc. - It resulted led in several states
promulgating laws for putting an end to ‘absen-
tee landlordism’.
▪ As a result, about 30 lakh tenants acquired land years for forage, including natural and cultivat-
ownership over an area of 62 lakh acres ed crops.
throughout the country. ➔ Irrigated land – It refers to areas purposely
▪ Imposition of ceiling laws - It laid down the provided with water, including land irrigated by
maximum land that can be owned by a land controlled flooding.
holder (which was subsequently amended to ➔ Cropland – It refers to arable land and perma-
‘holding’ by a family with effect from 1972). nent cropland.
▪ The excess land was to be surrendered to the ➔ Land under cereal production – It refers to
government. harvested areas, although some countries re-
▪ Consolidation of holding - It was introduced port only sown or cultivated area.
as a measure of improving farming efficiency. It
made considerable progress in Punjab, Haryana 10.7 Cropping Seasons:
and Western U.P.
▪ However, it did not have much effect in the
southern and eastern states.
▪ The land reforms are included in the Ninth
Schedule of the Constitution, thereby making
these laws immune to judicial challenge.
▪ However, implementation of these laws requires
far stronger political will than is required in in-
cluding them in the Ninth Schedule.
10.8 Agricultural Inputs:
10.6 Basic Terms related to Land Use:

➔ Agricultural land - It refers to the share of land

area that is arable, under permanent crops, or
under permanent pastures
➔ Arable land – It includes land defined by the
FAO as land under temporary crops (double-
cropped areas are counted once), temporary 10.9 Public Distribution System
meadows for mowing or for pasture, land under
market or kitchen gardens, and land temporarily Objectives of Public Distribution System
fallow. Land abandoned as a result of shifting ➔ To protect the low income groups by guaran-
cultivation is excluded. teeing the supply of certain minimum quantity
➔ Land under permanent crops – It is land culti- of food grains at affordable price.
150

vated with crops that occupy the land for long ➔ To ensure equitable distribution of food grains.
periods and need not be replanted after each ➔ To control price fluctuation of essential com-
modities in the open market.
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harvest, such as cocoa, coffee, and rubber. This

category includes land under flowering shrubs, Features
fruit trees, nut trees, and vines, but excludes ➔ PDS is a system of distribution of selected es-
land under trees grown for wood or timber. sential commodities through ‘fair price shops’
Permanent pasture is land used for five or more which are operated by private dealers.
➔ Items which are distributed through PDS are
rice, wheat, Sugar, edible oil and kerosene
➔ The purpose of PDS is to offer basic minimum
quantity of essential commodities at lowest
price to poorer sections of society.
➔ The required commodities are acquired by the
government through procurement or import
and a buffer stock is maintained.
➔ Public Distribution System (PDS) was conceived
as a primary social welfare and poverty allevia-
tion programme of the government to ensure
price stabilisation in the grain market.
10.10 WTO and Agricultural Subsidies:
• WTO Agreement on Agriculture (AoA), 1995
permitted the developed countries to continue
to provide farm subsidies, but under certain re-
strictions.
• In WTO terminology, agricultural subsidies have
been segregated into various ‘boxes’:
Green Box subsidies
▪ It includes amounts spent on research, disease
control, infrastructure and food security.
▪ These also include direct payments made to
farmers such as income support that do not
stimulate production.
▪ These are not considered trade distorting and
are encouraged.
Blue Box subsidies
▪ It includes direct payments to farmers to limit
production and certain government assistance
to encourage agriculture and rural development
in developing countries.
▪ Blue Box subsidies are seen as being trade dis-
torting.
Amber Box subsidies
▪ It includes all agricultural subsidies that do not
fall into either blue or green boxes.
▪ These include government policies of Minimum
support Prices (MSP) for agricultural products
or any help directly related to production quan-
tities (e.g. power, fertiliser, seeds, pesticides, ir-
rigation, etc.).
▪ These are subject to reduction commitment to
the de-minimus level of agricultural outputs- to
5% for developed and 10% for developing
countries.
10.11 NABARD-National bank for Agricul-
ture and Rural Development:
➔ It is an Apex Development Financial Institu-
tion in India
➔ Entrusted with "matters concerning Policy Plan-
ning and Operations in the field of credit for Ag-
riculture and other Economic activities in Rural
areas in India".
➔ NABARD is active in developing Financial Inclu-
sion policy.
➔ Established on the recommendations of
B.Sivaramman Committee on July 12, 1982
to implement the National Bank for Agriculture
and Rural Development Act 1981.
➔ Replaced the Agricultural Credit Department
(ACD) and Rural Planning and Credit Cell (RPCC)
of Reserve Bank of India, and Agricultural Re-
finance and Development Corporation (ARDC).
➔ NABARD is India's specialised bank for Agri-
culture and Rural Development in India.
➔ Initial Corpus – 100 cr
➔ NABARD is the most important institution in the
country which looks after the development of
the cottage industry, small scale industry and
village industry, and other rural industries.
➔ Headquarters : Mumbai
151
➔ NABARD is also known for its 'SHG Bank Link-
age Programme' which encourages India's
banks to lend to self-help groups (SHGs).
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➔ Largely because SHGs are composed mainly of
poor women, this has evolved into an important
Indian tool for microfinance.
10.12 Infrastructure Factors Related To Ag-
riculture:
Seed:
 Seed is a fertilized matured ovule together cov-
ered with seed coat.
 Hybrid seeds are obtained by cross pollination
of different varieties of related plants.
 Genetically Modified seeds, are the ones in
which the genetic material (DNA) has been al-
tered in such a way as to get the required quali-
ty.
Fertilizers:
 Fertilizers are chemical compounds applied to
promote plant and fruit growth.
 Organic fertilizers are fertilizers derived from
animal matter, human excreta or vegetable
matter. (e.g. compost, manure).
 Naturally occurring organic fertilizers include
animal wastes from meat processing, peat, ma-
nure, slurry, and guano.
 Inorganic fertilizers contain simple inorganic
chemicals. Some of the common nutrients pre-
sent in fertilizers are nitrogen, phosphorus and
potassium (NKP).
 They also contain secondary plant nutrients
such as calcium, sulphur and magnesium.
Irrigation:
 Irrigation is an artificial application of water to
the soil. It is usually used to assist in growing
crops in dry areas and during periods of inade-
quate rainfall.
 Additionally, irrigation also has a few other uses
in crop production, which include protecting
plants against frost, suppressing weed growing
in rice fields and helping in preventing soil con-
solidation.
 There are large reserves of underground water
in the alluvial plains of north India. Digging and
constructing wells and tube-wells is easy and
cost of their construction is also comparatively
less. Therefore irrigation by wells and tube-wells
here is popular.
 An irrigation canal is a waterway, often man-
made or enhanced, built for the purpose of car-
rying water from a source such as a lake, river,
or stream, to soil used for farming or landscap-
ing.
 A tank consists of water storage which has been
developed by constructing a small bund of
earth or stones built across a stream. The water
impounded by the bund is used for irrigation or
other purposes.
 Localized irrigation is a system where water is
distributed under low pressure through a piped
network, in a pre-determined pattern, and ap-
plied as a small discharge to each plant or adja-
cent to it. Drip irrigation, spray or micro-
sprinkler irrigation and bubbler irrigation be-
long to this category of irrigation methods.
10.13 Cropping Pattern:
Cropping pattern refers to the proportion of land
under cultivation of different crops at different
points of time. This indicates the time and ar-
rangement of crops in a particular land area.
Mono-Cropping or Single Cropping:
➔ It refers to growing only one crop on a particu-
lar land year after year.
➔ Monocropping reduces soil fertility and de-
stroys the structure of the soil.
➔ Chemical fertilizers are required to upgrade
152
production.
➔ This practice allows the spread of pests and dis-
eases.
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Multi-Cropping or Poly-Cropping:
➔ In this system, 2 or more than 2 crops are
grown annually on the same piece of land using
 high inputs, without affecting the basic fertility
of the soil.
➔ For example, growing wheat and gram on the
same land at the same time is mixed cropping.
➔ This practice minimizes the risk of failure of one
of the crops and insures against crop failure due
to abnormal weather conditions.
Ratoon Cropping:
➔ Under this method, the root or lower part of the
crop is left uncut at the time of harvest.
➔ The crop regrows out of the root.
➔ In this pattern, the productivity decreases after
every cycle.
Crop Rotation:
➔ In this pattern, different crops are grown on the
same land in pre-planned succession.
➔ The crops are classified as one-year rotation,
two-year rotation, and three-year rotation, de-
pending upon their duration.
Jhum:
➔ It is also known as slash and burn agriculture.
➔ It is the process of growing crops by first clear-
ing the land having trees and vegetation and
burning them thereafter.
10.14 Terms related to Land Utilisation:
 Net Sown Area – It is the area sown with
crops but is counted only once
 Gross Cropped Area – It is the total area sown
once, as well as more than once in a particu-
lar year. When the crop is sown on a piece of
land for twice, the area is counted twice in GCA.
 Current Fallow Lands - This represents
cropped area which is kept fallow (unsown)
during the current year
 Forest Area - This includes all land classified
either as forest under any legal enactment, or
administered as forest, whether State-owned or
private, and whether wooded or maintained as
potential forest land.
 Land put non-agricultural uses : This includes
all land occupied by buildings, roads and
railways or under water, e.g. rivers and canals,
and other land put to uses other than agricul-
ture
 Barren and uncultivable land: This includes all
land covered by mountains, deserts, etc.
Land which cannot be brought under cultivation
except at an exorbitant cost is classified as un-
cultivable whether such land is in isolated
blocks or within cultivated holdings
 Fallow land: This includes all land which was
taken up for cultivation but is temporarily out of
cultivation for a period of not less than one year
and not more than five years
10.15 MSP
▪ A Minimum Support Price (MSP) is a form of
market intervention by the Government of India
to insure agricultural producers against any
sharp fall in farm prices.
▪ The minimum support prices are announced by
the government of India at the beginning of
the sowing season for certain crops on the
basis of the recommendations of the Com-
mission for Agricultural Costs and Prices
(CACP).
▪ MSP is price fixed by Government of India to
protect the producer - farmers - against ex-
cessive fall in price during bumper produc-
tion years.
▪ The minimum support prices are a guarantee
153
price for their produce from the Government.
▪ The major objectives are to support the farm-
NextGen IAS
ers from distress sales and to procure food
grains for public distribution.
▪ In case the market price for the commodity falls
below the announced minimum price due to
bumper production and glut in the market,
 government agencies purchase the entire quan-
tity offered by the farmers at the announced
minimum price.
10.16 Commission for Agricultural Costs
and Prices (CACP):
➔ It is a decentralized agency of the Govern-
ment of India.
➔ It was established in 1965 as the Agricultural
Prices Commission, and was given its present
name in 1985.
➔ It is an attached office of the Ministry of Agri-
culture & Farmers Welfare, Government of In-
dia.
➔ The commission was established to recom-
mend Minimum Support Prices (MSPs), to
motivate cultivators and farmers to adopt the
latest technology in order to optimise the use
of resources and increase productivity.
10.17 e-NAM
▪ Department of Agriculture & Cooperation
formulated a Central Sector scheme for Promo-
tion of National Agriculture Market through
Agri-Tech Infrastructure Fund (ATIF) through
provision of the common e-platform.
▪ Electronic National Agriculture Market (e-
NAM) platform seeks to create a common na-
tional market, for enhancing farmer’s access to
buyers
▪ NAM is an online platform with a physical
market or mandi at the backend
▪ It will make price discovery and trading trans-
parent.
▪ It seeks to leverage the physical infrastructure
of mandis through an online trading portal, en-
abling buyers situated even outside the state to
participate in trading at the local level
10.18 APMC
▪ Agricultural Produce Market Committee
(APMC)
▪ Statutory market committee constituted by a
State Government in respect of trade in certain
notified agricultural or horticultural or livestock
products, under the Agricultural Produce Mar-
ket Committee Act issued by that state gov-
ernment
▪ One main function of which is basically to pro-
vide a platform for farmers to sell their pro-
duce
▪ In simple terms, the APMC (Agricultural Produce
Market Committees) is a relic of the past that
forces the farmers to sell their produce only
to middlemen approved by the government
in authorized Mandis (markets)
▪ If you are a vegetable producer and I’m a su-
permarket, I cannot directly buy from you. Both
of us need to go through a broker. This increas-
es prices for the end buyer and unnecessarily
adds redtape.
10.19 Operation Flood
▪ Launched in 1966
▪ Project of National Dairy Development Board
(NDDB)
▪ World's biggest dairy development program
▪ Transformed India from a milk-deficient nation
into the world's largest milk producer, surpas-
sing the USA in 1998
▪ It was launched to help farmers direct their own
development, placing control of the resources
they create in their own hands.
▪ Anand pattern experiment at Amul, a single,
154
cooperative dairy, was the engine behind the
success of the program.
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▪ Operation Flood is the program behind "the
white revolution"
10.20 Kisan Credit Card Scheme
▪ Kisan Credit Card (KCC) scheme was intro-
duced in August 1998 by NABARD and RBI
▪ This model scheme was prepared by the Na-
tional Bank for Agriculture and Rural Develop-
ment (NABARD) on the recommendations of
R.V.GUPTA to provide term loans and agricul-
tural needs.
▪ Credit delivery mechanism that is aimed at ena-
bling farmers to have quick and timely access to
affordable credit
▪ The scheme aims to reduce farmer depend-
ence on the informal banking sector for credit
– which can be very expensive and suck them
into a debt spiral.
▪ The card is offered by cooperative banks, re-
gional rural banks and public sector banks.
10.21 Operation Green:
➔ Tomato, onion and potato are basic vegeta-
bles consumed throughout the year.
➔ Seasonal and regional production of these per-
ishable commodities pose a challenge in con-
necting farmers and consumers in a manner
that satisfies both.
➔ To reduce the fluctuation in pricing of Onion,
Tomatoes and Potatoes the scheme has been
launched.
➔ ‘‘Operation Greens’’ on the lines of ‘‘Opera-
tion Flood’’
➔ The operation aims to aid farmers and help
control and limit the erratic fluctuations in the
prices of onions, potatoes and tomatoes.
➔ ‘‘Operation Greens’’ shall promote Farmer Pro-
ducers Organizations (FPOs), agri-logistics, pro-
cessing facilities and professional management.
➔ The idea behind Operation Greens is to dou-
ble the income of farmers by the end of 2022.
➔ Operation is essentially a price fixation
scheme that aims to ensure farmers are given
the right price for their produce.
10.22 Zero-Budget Natural Farming:
➔ It is a method of farming where the cost of growing
and harvesting plants is zero.
➔ This means that farmers need not purchase fertiliz-
ers and pesticides in order to ensure the healthy
growth of crops.
➔ It was originally promoted by Maharashtrian agri-
culturist and Padma Shri recipient Subhash Pale-
kar, who developed it in the mid-1990s as an alter-
native to the Green Revolution’s methods driven by
chemical fertilizers and pesticides and intensive irri-
gation.
10.23 Operational Holdings:
➔ All land which is used wholly or partly for ag-
ricultural production and is operated as one
technical unit by one person alone or with
others without regard to the title, legal form,
size or location is known as operational holding.
➔ Operational holdings are also classified in three
social groups, viz., Scheduled Castes, Sched-
uled Tribes and Others
➔ In agriculture Census, the operational holdings
are categorised in five size classes as follows:
155
10.24 Contract Farming:
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➔ Contract farming is an arrangement between
the farmer producer and agri-business firms
to sell the produce at a pre-fixed Price or
Quantity or Time or All Three.
➔ The farmer undertakes to supply agreed
quantities of a crop or livestock product,
based on the quality standards and delivery re-
quirements of the purchaser.
➔ In return, the buyer, usually a company,
agrees to buy the product, often at a price
that is established in advance.
➔ The company often also agrees to support the
farmer through, e.g., supplying inputs, assisting
with land preparation, providing production ad-
vice and transporting produce to its premises.
➔ The term "outgrower scheme" is sometimes
used synonymously with contract farming, most
commonly in Eastern and Southern Africa.
10.25 High yielding varieties (HYVs):
11. Industry
11.1 Industrial Development 1947-1990
• After being under the British rule for over 200
years and having suffered utter neglect in re-
gard to industrial development, India, on at-
tainment of independence in 1947, didn’t do
any delay in embarking on industrialization.
• Even prior to Independence, India had planned
and initiated steps for developing industries.
• The Statement of Industrial Policy issued in
1945 has stressed the need to set up basic and
heavy industries such as iron and steel, heavy
engineering, machine tools, and chemical in-
dustries.
• The idea of industrial licensing and establishing
key industries under government control found
mention in the statement.
• After Independence, further thrust was given
when the Industrial Policy resolution was is-
sued in 1948 followed by the passing of the In-
dustrial (Development and regulation) Act of
1951.
➔ Green Revolution in the late 1960s introduced
the Indian farmer to cultivation of wheat and
rice using high yielding varieties (HYVs) of
seeds.
➔ Compared to the traditional seeds, the HYV
seeds promised to produce much greater
amounts of grain on a single plant.
➔ As a result, the same piece of land would now
produce far larger quantities of foodgrains than
was possible earlier.
➔ HYV seeds needed plenty of water and also
chemical fertilizers and pesticides to produce
best results.
➔ Higher yields were possible only from a combi-
nation of HYV seeds, irrigation, chemical fer-
tilisers, pesticides etc.
• The 1948 resolution emphasized the responsi-
bility of Government in promoting, assisting,
and regulating the development of industries in
the national interest and it envisaged an in-
crease in production and its equitable distribu-
tion and laid down a certain demarcation of
fields for the public and private sectors in the
industrial sphere.
Industrial Policy Resolution 1948 (IPR 1948)
• IPR 1948 provided for the setting up of a mixed
economy. It had outlined the respective rate of
the public and the private sectors. IPR 1948 di-
vided industries into 4 broad categories.
a) The first category was considered to be
156
the Exclusive Monopoly of the Central
government. It covered the manufacturing
of arms and ammunitions, the production
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and control of atomic energy and the own-
ership & management of rail transport
b) The second category was the mixed sec-
tor. It included 6 industries viz. coal, miner-
al oils, iron and steel, manufacture of air-
 craft, ship building and manufacture of tele-
phone, telegraph and wireless apparatus.
The state was to have exclusive right to set
up new undertakings in this category. All the
existing private sector enterprises in this
category were permitted to develop for a
period of 10 years, after which the govern-
ment would review the situation and take
further decisions regarding acquiring any of
the undertaking by paying compensation on
a "fair and equitable basis".
c) The third category covered industries of
basic importance and the central govern-
ment would regulate them if found neces-
sary to do so. The government. did not take
responsibility of developing such industries.
The third category covered 18 industries
such as salt, automobiles, heavy chemicals,
fertilizers, power, cotton and woolen textile,
cement, sugar, paper, newsprint, minerals
etc.
d) The fourth category included remaining
industries, was left open to private enter-
prise, industrial as well as co-operative
Other major aspects of IPR-1948 were:
a) Cottage and Small Scale Indus-
tries were given importance as
they were best suited for village
enterprises, utilization of local
resources and employment gen-
eration.
b) The need for foreign capital and
enterprise was recognized in the
industrial development of the
economy for technological ad-
vancement but at the same time re-
taining the native control. The IPR-
1948 made it clear by saying ―as a
rule, the major interest in owner-
ship, and effective control should
always be in Indian Land
c) For the purpose of labour
welfare, the IPR-1948, in-
sisted on better working
conditions, payment of
wages and labour participa-
tion in management.
Industrial Policy Resolution 1956 (IPR 1956)
• The 1948 Resolution was further reviewed with
the experience gained during the First Plan
(1951-56) and a new Industrial Policy Resolution
was issued in 1956.
• The 1956 resolution was an important state-
ment of industrial policy to be followed.
• While the State would play a dominant role in
industrialization, the resolution recognized the
importance of the private sector and outlined
steps to facilitate their healthy development.
• Financial institutions would provide the neces-
sary resources to the private sector. It also laid
stress on promoting small-scale and cottage
industries and on ensuring balanced devel-
opment of all regions to reduce regional dis-
parities and imbalances.
• While welcoming foreign capital and collabo-
ration for industrialization, it enjoyed that own-
ership and control of industries would rest with
Indian hands.
• 1948 policy remained in vogue for full 8
years and determined the nature and pattern of
industrial development in the country. Signifi-
cant development took place in the country
during First Five Year Plan (1951-56).
• Industries (Development and Regulations)
Act, was passed in 1951 and gave the gov-
157
ernment. the necessary experience and exper-
tise in regulating and controlling industries in
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the private sector.
• Government accepted "The Socialist Pattern
of Society" as the objectives of socio econom-
ic policy.
• Because of these developments, a new declara-
tion of industrial policy seemed essential. This
came in the form of Industrial Policy resolution
of 1956.
Key objectives:
1. To accelerate the rate of economic growth
and to speed up industrialisation
2. To expand the public sector to develop stra-
tegically important industries
3. To increase employment opportunities
4. To prevent monopolies and concentration
of economic power
5. To reduce inequalities of income
6. To encourage private sector
7. To expand the cottage, village and small
scale industries
8. To attain balanced industrial development
Other important features of IPR-1956 were:
1. The State would provide fair and
non-discriminatory treatment to
the private sector by providing in-
frastructural facilities.
2. Village and Small Scale Industries
would be encouraged through var-
ious concessions and subsidies to
improve their competitive strength.
3. Balanced Regional
development was fo-
cused to spread the
benefits of industrial-
ization all over the
country.
4. Labour welfare was given im-
portance (improvement in working
conditions and standard of living of
workers)
In the 1956 IPR, Industries were classi-
fied into 3 categories:
Schedule A:
The first category included industries of 'basic' and
'strategic' importance. There were 17 such indus-
tries. These industries can be grouped into follow-
ing 5 classes
1) Defense industries
2) Heavy industries
3) Minerals
4) Transport and Communication
5) Power of these four industries - arms and com-
munication, atomic energy, railways and air
transport were to be the government. monopo-
lies
• In the remaining 13 industries, all new units
were to be established by the state. However,
existing units in the private sector were allowed
to subsist and expand. The state could also elicit
the co-operation of private sector in establish-
ing new units in these industries 'when the na-
tional interest so required'
Schedule B:
The second group of 12 industries was listed in
Schedule B.
1) All other minerals (except minor minerals)
2) Road transport, Sea Transport
3) Machine tools, ferro alloys and tool steels
4) Basic and Intermediate products required by
chemical industries such as manufacture of
drugs
5) Dyestuffs & plastics
6) Antibiotics and other essential drugs
7) Fertilizers
8) Synthetic rubber
9) Chemical pulp
10) Carbonization of coal
11) Aluminum
158
12) Other non-ferrous metals not included in the
first category
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• In these industries, state would increasingly es-
tablish new units and increase its participation
but would not deny the private sector opportu-
nities to set up units or expand existing units
Schedule C:
• It included all the remaining industries, and
their future development was left to the initia-
tive and enterprise of the private. government.
could also start any industry in which it was in-
terested.
• However, the main role of the State in the cate-
gory was to provide facilities to the private sec-
tor to develop itself.
Industrial Policy Statement, 1977
• When the Janata Government came to power,
it issued an Industrial Policy Statement in 1977
which emphasized the development of the
small-scale sector which had potential for cre-
ating employment opportunities on a large
scale.
• It also assigned a wider role for the public sec-
tor not only as a producer of strategic items,
but also as a facilitator expertise to the small-
scale and cottage industries.
• It also sought to encourage medium size en-
terprises even in capital-intensive sectors
with a view to ensure that there would be no
concentration of economic power in the hands
of large, dominant business houses.
• Large business houses were required to raise
resources internally, and not depend on banks
or financial institutions, for starting new units or
expanding their existing units.
• Some of the provisions of this statement like
priority for the small-scale sector and measures
for its growth, an expanded role for the public
sector participation of workers in the manage-
ment and ownership of enterprises, and steps
to check the dominance of large business hous-
es were considered as redeeming features of
this policy.
Industrial Policy, 1980
• This policy, framed by the newly elected Con-
gress government, was primarily based on the
1956 Resolution with suitable modifications to
suit the changed circumstances.
• It sought to remove a misconception and an
artificial barrier seen to have been created be-
tween large enterprises and the small-scale sec-
tor by the 1977 Policy.
• It recognized the vital role played by both these
sectors and emphasized the need for integrated
industrial development to achieve the maximum
potential.
• To promote small-scale units, the permissible
maximum limits of investment in these units
were raised.
• It regularized the excess capacity created over
and above what was licensed and also permit-
ted automatic expansion capacity. This was
done with a view to make full use of the existing
and potential capacity and maximize industrial
production.
• In this context, the observations of the Planning
Commission while preparing the strategy for
the Sixth Plan (1980-85) are relevant.
The Commission observed :
• In addition to the conventional strategies of
aiming at optimum utilization of existing ca-
pacities and improvement of productivity, cer-
tain other elements of policy would be neces-
sary in the medium term perspective. These
would encompass the following:-
1) Substantial enhancement of manufacturing
capacities in public/private sector covering a
wide range of industries for providing not only
consumer goods and consumer durables, but
159
also for supporting agricultural and industrial
growth through supply of intermediate and
capital goods. The pace of industrial investment
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will need to be speeded up so that manufactur-
ing capacities are in position well ahead of de-
mand to permit competitive market forces to
operate and to avoid possibilities of shortages
with attendant adverse effects on the economy.
2) The capital goods industry in general, and the
electronics industry in particular, will need
special attentions as these supports the growth
if a wide range of economic activity. The proper
development of these industries in terms if
competitive costs and high quality would be es-
sential to ensure that the projects based on
domestic capital goods do not become very
costly. Similarly, other selected industries would
need to be identified (such as machine tools
and commercial vehicles) for accelerated devel-
opment for supporting not only the domestic
requirements but also for exploiting the export
potential in a larger measure than hitherto.”
(Sixth Plan document).
New Industrial Policy 1991:
• With the introduction of Industrial Policy Reso-
lution 1956, the public sector became domi-
nant sector and driver of economic growth.
• However, in the course of time it was realized
that excessive controls & restrictions have led
to red-tapism, corruption and inefficiency in the
public sector.
• During 1980s the government slowly started
liberalizing the industrial policy along with its
foreign trade policy.
• Liberalization took further steps under the Con-
gress Government headed by Rajiv Gandhi.
• In 1991, when Congress government came to
power the country was in an economic crisis
particularly the balance of payment situation
was precarious.
• In a changing world economic scenario the
Government realized the need for liberaliza-
tion to overcome the damage done by the so
called ―License-Permit Raj system.
• Accordingly, the New Industrial Policy was an-
nounced on July 24, 1991 as a part of the eco-
nomic reform programmes. It was a radical de-
parture from the earlier industrial policies.
• It substantially deregulated the industrial sector.
It aimed at removing the distortions of the past
and increasing the gains already made, improv-
ing productivity and gainful employment and
also increasing the competitiveness of Indian
Industries.
• The policy was announced in two parts. The
first one was concerned with medium and
large industries; the second one was con-
cerned with development of Small Scale In-
dustries (SSI)
• While the earlier industrial policies emphasized
the role of the public sector, the new industrial
policy assigned a priority role to the private sec-
tor.
• It also envisaged the use of market mechanism
to achieve the various objectives.
Objectives of New Industrial Policy, 1991:
1) Full utilization of indigenous capabilities of
entrepreneurs and thereby employment
generation.
2) Improvement in efficiency & productivity.
3) Self-reliance.
4) Greater investment in Re-
search & Development and
bring new technology to at-
tain international standards.
5) Removing existing government regulations
and restrictions on industry.
6) Encouraging competition.
7) Development of backward areas and the
small-scale sector.
8) Improving efficiency of the public sector.
160
9) Open the economy to the global market.
Highlights of New Industrial Policy (NIP) 1991
Abolition of Industrial Licensing:
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• The licensing policy was introduced by the Gov-
ernment through the Industrial (Development
and Regulation) Act 1951, with the objective of
 regulating the industrial sector and bringing
about proper economic development.
• In reality however, it had resulted in delays in
decision-making, corruption, red-tapism, effi-
ciency etc.
• The NIP, 1991 abolished all industrial licens-
ing, irrespective of the level of investment, ex-
cept for 18 industries related to security & stra-
tegic concerns, social reasons, over riding envi-
ronment reasons, hazardous chemical items of
elitist consumption.
• Delicensed industries do not need government
approval anymore, but entrepreneurs are re-
quired to submit an Industrial Entrepreneur
Memorandum (IFM) to the Secretariat of Indus-
trial Approval.
• The 18 industries for which licensing was
kept necessary were as under coal and lignite;
petroleum ( other than rude) and its distillation
products; distillation, and brewing of alcoholic
drinks; sugar; animal fats and oils; cigars and
cigarettes; asbestos and asbestos-based prod-
ucts; plywood & other wood based products;
raw hides, skins and leather; tanned or dressed
fur skins; motor cars; paper & newsprint; elec-
tronic aerospace & defense equipments; indus-
trial explosives; hazardous chemicals; drugs and
pharmaceuticals; entertainment electronics; and
white goods (domestic refrigerators, washing
machines, air conditioners, etc).
• With the passage of time, most of these indus-
tries have also been delicensed. Now, only five
industries require licensing. These are alcohol,
cigarettes, hazardous, chemicals, electronics
aerospace and defense equipment & industrial
explosives.
Public Sector’s Role Diluted: The 1956 Policy
Resolution had reserved 17 industries for the
public sector.
1991 (NEP), reduced this number to 8
1) arms & ammunition
2) atomic energy
3) coal & lignite
4) mineral oils
5) mining of iron ore, manganese are, chrome
are, gypsum, sulphur, gold & diamond
6) mining of copper, lead, zinc, fin, molyb-
denum and wolfram
7) mineral specified in the schedule to the
atomic energy
8) rail transport
• NIP, 1991 also announced a greater degree of
autonomy to PSUs through the system of
Memorandum of Understanding (MOUs).
• The sick public sector units had to be rehabili-
tated and reconstructed after getting the advice
from the Board for Industrial & Financial Re-
construction (BIFR).
• The intention of the government to offer a part
of its equity in PSUs to the public, financial insti-
tutions, and workers etc. also announced in this
policy.
• A beginning in this direction was made in 1991-
92 itself by divesting part of equities of selected
PSUs.
Abolition of MRTP Limit:
• The government enacted the Monopolies and
Restrictive Trade Practices (MRTP) Bill in
1969 w.e.f. from 1970.
• The MRTP firms were originally defined as en-
terprises or interconnected firmsthat had assets
of Rs. 20 crore or more or a dominant market
share (33% or more).
• In 1984, the dominant share was reduced to
161
25% and in 1985, the asset limit was raised to
Rs.100 crores such firms were not allowed to
expand their activities or appoint director with-
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out the Government‘s permission.
• There were several restrictions on mergers and
amalgamation and takeovers in case of such
firms. All this restricted the growth, productive
expansion and efficiency of firms.
• Thus, the NIP, 1991 scrapped the threshold
limit of assets in respect would now be on par
with other firms.
• They would also not require prior approved
from the Government for investments in deli-
censed industries.
• The new Act aims at protecting the welfare of
consumers by preventing and restricting unfair
trade practices.
Significant Role of Foreign Investment and
Technology
• The NIP, 1991, widened the scope of foreign
capital in Indian Industries.
• This was done with the objective of improving
the balance of payments position, making
advanced technology available to domestic in-
dustries, modernizing industries, and improving
their competitiveness.
• The policy specified a list of high technology,
high investment priorities industries wherein
automatic approval was to be given for direct
foreign investment up to 51% of foreign equi-
ty.
• It consisted of industries like capital goods, en-
tertainment electronics, food processing etc.
• The Foreign Investment Promotion Board has
been constituted with the primary objective of
speeding up the approval process for in India.
• Similarly, the use of foreign brand name or
trademark for sale of goods in India permitted.
• Foreign equity upto 100% is particularly en-
couraged in export-oriented units (EOUs), pow-
er sector, electronics & software technology
parks.
• Moreover, foreign equity up to 24 % permitted
in small scale enterprises.
• Foreign capital invested in India is allowed to be
repatriated with capital appreciation after pay-
ment of taxes.
• No permission would be required for hiring for-
eign technicians and foreign testing of indige-
nously developed technologies.
• Remittances for technical services fees, subject
to RBI approval can be made by companies.
11.2 Role of Public Sector:
• The adoption of the socialist pattern of socie-
ty in 1954 as the national objective, as well as
the need for planned and rapid development,
also required that all industries of basic and
strategic importance, or in the nature if public
utility services, should be in the public sector.
• Thus many important industries like Hindustan
Aircraft, Sindri Fertilizers, a unit at Chittaranjan
for manufacture of locomotives, the Integral
Coach factory for manufacture of rail coaches,
Hindustan Machine Tools, Indian Telephone In-
dustries, Hindustan Cables, and a Penicillin
manufacturing unit came to be set up in the
public sector. By the end of the First Plan, firm
foundation had been laid for future industri-
al growth.
• The state was to extend financial aid to pri-
vate sector and for this purpose set up finan-
cial institutions such as the Industrial Finance
162
Corporation (IFC), the National Industrial Devel-
opment Corporation (NIDC), and the Industrial
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Credit and Investment Corporation (ICIC). In-
dustries like textiles, rayon and staple fibre,
chemicals, pharmaceuticals, dyestuffs and plas-
tics, cement, paper and paper board, sugar, jute
 textiles, etc. were those in which private sector
mostly set up units.
• Second Five-Year Plan (1956-61) was drafted
with a view to give major thrust to industrializa-
tion. Three major steel plants were set up dur-
ing this Plan-at Bhilai in Madhya Pradesh (now
in Chhattisgarh) with Russian collaboration, at
Rourkela in Orissa (Odisha) with German co-
operation, and at Durgapur in West Bengal with
the aid from United Kingdom.
• The expansion of the iron and steel industry
received the highest priority as the levels of
production of steel and allied items determine
the tempo of progress of the economy as a
whole, and it would accelerate the development
of many other intermediate and consumer
goods industries.
• As the private sector would be guided largely
by considerations of locational advantages such
as proximity to raw material sources, the public
sector had to play a greater role in ensuring
that development extended to other regions to
basic and heavy industries like steel, heavy en-
gineering and heavy electrical, oil, and power
generation which involve heavy investments
with long gestation periods, and which the pri-
vate sector may not able to undertake.
• These factors explain the dominant role given
to the public sector in the initial years of
planning and the ‘commanding heights’ of the
economy which it came to occupy.
• However, with the passage of time, this policy
was overstretched, and the public sector intrud-
ed into many areas like light goods and con-
sumer goods industries which could have been
left for the private sector.
• This approach has come to be questioned later,
especially because many of the public sector
undertaking (PSUs) did not function optimally
and efficiently, went into losses, and have
turned sick.
• This has led to a rethink of the policy and
forced the government to go in for disinvest-
ment of such loss-making and unproductive
units.
• Due to the thrust given to the industrial sector
from the Second Plan onwards, there was per-
ceptible progress in the field of industry and
manufacturing.
• Production in mining, metallurgy, and other in-
dustrial products witnessed considerable in-
crease.
• Also, the share of industry in GDP increased
substantially between 1950-51 and 1990-91.
• The public sector was, however, beset with sev-
eral constraints.
• As observed by the Planning Commission, “the
internal resource generated by the public sec-
tors undertaking for financing the Plan have
comparatively meagre.
• The major factors responsible for these are :
1) Low return on investment on account of
price constraints imposed on some public
sector undertakings;
2) Considerable number of private sector sick
units (particularly in the textile and engi-
neering industries) which a Central Gov-
ernment had to take over in the interest of
maintaining employment and production;
and
3) The technological complexity of the indus-
tries which had to be promoted in the pub-
lic sector where a longer gestation period
and slower learning curve are inevitable.”
(Sixth Plan document).
163
11.3 Industrial Licensing, Control Regime,
and its Consequences
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• India adopted a system of industrial licensing
from the beginning. The primary and ostensible
purpose of control and licensing was to ensure
proper allocation and utilization of scarce re-
sources.
• The Industries (development and Regulation)
Act, 1951 stipulated licensing of industries and
setting up of Development Councils for individ-
ual industries to ensure industrial development
in conformity with the objectives set out in the
Plans.
• The Act was amended in 1953 with a view to
bringing additional industries within the sched-
ule.
• The Licensing Committee set up in accordance
with the provisions of the Act functioned as an
advisory body to the Ministry of Commerce and
Industry for the scrutiny of applications for new
units and expansions of capacity in the sched-
uled industries.
• Under this system, an entrepreneur required
approval from the Industry Ministry at every
stage.
• A part from licence to start an industry, approv-
als were required for import of any capital
goods, components, or raw materials required
for the unit or for any foreign collaboration or
foreign technology.
• If funds had to be raised from the capital mar-
ket, it required separate sanction from the Fi-
nance Ministry.
• Many sectors were reserved exclusively for
the public sector and a large number of items
were reserved for the small-scale industries to
promote that sector.
• All these inhibited the growth of private enter-
prise that the system of licensing and controls
acted as an inhibiting force in industrial growth
became evident even during the 1960s and the
‘70s, it did not result in proper regional dis-
persal of industries or wider distribution of
entrepreneurship for preventing the concen-
tration of economic power.
• That the system of licensing and controls act-
ed as an inhibiting force in industrial growth
became evident even during the 1960s and the
‘70s, it did not result in proper regional disper-
sal of industries or wider distribution of entre-
preneurship for preventing the concentration of
economic power.
• There were periods of stagnation and slow-
down in industrial activity caused by low
productivity, rising costs, and lack of technology
upgradation.
• Vested political interests, rigid bureaucratic con-
trol, and the influence of multinationals that
supplies technology and capital all added to the
impediments.
• This phase of Indian economy is referred to as
the ‘License Permit Raj’ which acted as a major
stumbling block in industrial growth.
• Various Committees like the Swaminathan
Committee (1964), the Hazari Committee
(1967), and the Dutt Committee (1964), were
appointed to study these problems.
• The reports of all these Committees pointed to
the deficiencies of the ‘licence and control’
regime which were hampering industrial
growth and recommended the need to bring
about radical changes.
• Despite all these, the government took no
worthwhile steps to change the course, and it
took nearly a decade more to do some serious
thinking on the issue.
• Stagnation in industry persisted from the mid-
1960s and through 1970s.
• It was realized that Indian industry was handi-
capped by technological, qualitative, and cost
disadvantages compared to foreign competi-
tions.
• Against this background, the government set
up, during the eighties, more experts commit-
164
ties to examine the problems plaguing the in-
dustrial sector.
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• These were the Arjun Sengupta Committee on
Public Enterprises (1984), the Abid Hussain
Committee on Trade policy (1984), the Abid
Hussain Committee on Trade policy (1984), and
 the Narasimhan Committee on the shift from
physical to fiscal control measures (1985).
• These committees recommended liberalizing
the regime in their respective area of study, i.e.,
trade policy, substitution of physical and quan-
titative controls by fiscal and other means of
macro-economic management, and providing
greater autonomy to the public sector in taking
managerial and business decisions, and to en-
hance their productive efficiency and moderni-
zation process.
• As a result of these measures, there was some
progress in the process of deregulation during
the 1980s. thirty-two groups of industries
were delicensed without any investment limit.
And in 1988, all industries were exempted from
licensing except for a specified negative list of
twenty-six industries. But this exemption was
subject to investment and location conditions
and thus again became rather restrictive.
• In regard to trade policy, a major change was
that exporters were given greater access to in-
puts at international prices.
• But traffic protection to industries increased
substantially in 1980’s as compared to previous
decade. Thus the policy needed further reform
measures which came to be taken from 1991.
11.4 Location and Dispersal of Industries
and Regional Balance
• Location of industries tends to be near areas
where raw materials are available. This is done
to minimize the need for their transportation
over long distance and thus kept down produc-
tion costs.
• Availability of good infrastructure such as
roads, railheads, proximity to ports, water, and
power are other critical factors which industries
consider while deciding on their location.
• Besides, availability of skilled manpower needed
for a particular type of industry could also influ-
ence location of industries.
• Keeping the above aspects in view, the 1956
Industrial Resolution recognized the need to
ensure the balanced growth of all regional to
avert disparities between various regions.
• A fair and even spread of industries was essen-
tial to provide employment in a satisfactory
manner and bring about al-round improvement
in the standards of living in all regions.
• As stated earlier, since the private sector would
be largely guided by considerations of location-
al advantages in setting up industries, the pub-
lic sector had to step in to ensure balanced de-
velopment of all regions.
• Also, one of the objectives of national planning
was to ensure that the various infrastructural fa-
cilities were steadily made available in areas
which were lagging behind industrially.
• During the formulation of the Fourth Plan
(1969-74), the Planning Commission observed
thus: “Measures are proposed to be taken for
the development of industries in the backward
areas.
• The normal economic forces governing the lo-
cation of industries are at present so over-
whelmingly in favour of the developed areas
that the problem of dispersal of industries to
backward levels.
• The problem is so widespread that during the
4th Plan it would be possible to make only a be-
ginning.
• It is through a continuing programme of eco-
nomic development supported by measures to
attract industries to backward region that the
present imbalance can be rectifies over a period
of time.”
165
• In pursuance of such a policy, the government
set up more steel plants at locations away from
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the sources of main raw materials.
• Three more steel plants were set up in south
India.
• These were the Salem Steel Plant in Tamil Na-
du, the Vizag Steel Plant at Visakhapatnam (An-
 dhra Pradesh), and the Vijayanagar Steel Plant
at Hospet (Karanataka).
• Apart from these major plants, there are many
smaller units located in different parts of the
12. Inflation
 Inflation is defined as a situation where there is
sustained, unchecked increase in the general
price level and a fall in the purchasing power
of money. Thus, inflation is a condition of price
rise.
 The reason for price rise can be classified un-
der two main heads : Increase in demand and
Reduced supply
12.1 Major Problems:
 It hurts the poor more as a greater proportion
of their incomes are needed to pay for their
consumption.
 Increasing uncertainty may discourage invest-
ment and saving. The saving pattern is affected
country. The Central Government also extended
subsidy for the establishment of industrial units
in backward areas.
thus: With the declining value of money, people
would be more inclined to spend than save an-
ticipating that their money can buy even less in
the future.
 Dampens investment
 People on a fixed income (e.g. pensioners, stu-
dents) will be worse off in real terms due to
higher prices and equal income as before; this
(will lead to a reduction in the purchasing pow-
er of then income)
 Inflation discourages exports as domestic sales
are attractive and BPO problems can be caused.
Inflation may erode the external competitive-
ness of domestic products if it leads to higher
production costs such as wages increase, higher
interest rate and currency deprecation
 Leads to depreciation of currency thus making
imports costlier
 Inflation tax happens. When a government bor-
rows and spends, the cash held by people
erodes in value due to inflation.
 It will redistribution income from those on fixed
income; such as pensioners, and shifts it to
those who draw an inflation-linked income and
business.
 Strikes can take place for higher wages which
can cause a wage spiral. Also if strikes occur in
an important industry which has a comparative
166
advantage the nation may see a decrease in
productivity, exports and growth.
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12.2 Low inflation has many benefits
• When inflation is low, consumers and busi-
nesses are better able to make long-range
plans because they know that the purchasing
 power of their money will hold and will not be ➢ It measures changes over time in the level of
steadily eroded year after year. retail prices of selected goods and services
• Low inflation also means lower nominal and on which consumers of a defined group spend
real (inflation-adjusted) interest rates. Lower their incomes.
real interest rates reduce the cost of borrowing. ➢ Base Year for CPI ➔ 2012
• This encourages households to buy durable
goods, such as houses and autos. It also en-
courages businesses to invest in order to im-
prove productivity so that they can stay com-
Of these, the first three are compiled by the La-
petitive and prosper without steadily having to
bour Bureau in the Ministry of Labour and Em-
raise prices.
ployment. Fourth is compiled by the Central Sta-
• Sustained low inflation is self-reinforcing. If
tistical Organization (CSO) in the Ministry of
businesses and individuals are confident that in-
Statistics and Programme Implementation.
flation is under long-term control, they do not
Difference between CPI and WPI
react as quickly to short-term price pressures by
➢ WPI, tracks inflation at the producer level and
seeking to raise prices and wages. This helps to
CPI captures changes in prices levels at the
keep inflation low.
consumer level.
➢ Both baskets measure inflationary trends (the
12.3 Methods to measure Inflation:
movement of price signals) within the broader
economy, the two indices differ in which weight-
Wholesale Price Index (WPI)
ages are assigned to food, fuel and manufac-
➢ Price of a representative basket of wholesale
tured items.
goods
➢ WPI does not capture changes in the prices
➢ Focuses on the price of goods traded be-
of services, which CPI does.
tween corporations, rather than the goods
➢ In April 2014, the RBI had adopted the CPI as
bought by consumers, which is measured by
its key measure of inflation.
the Consumer Price Index
➢ Purpose of the WPI ➔ To monitor price CPI Rural, CPI Urban and CPI (Combined):
movements that reflect supply and demand in
• For computing Dearness Allowance (DA), CPI is
industry, manufacturing and construction
used
➢ Helps in analyzing both macroeconomic and
• For inflation targeting, RBI and government. of
microeconomic conditions
India uses CPI (Combined) for policy making
➢ Published by Office of Economic Adviser,
• Headline Inflation is based on CPI (Combined)
Ministry of Commerce and Industry
➢ Base year of All-India WPI ➔ revised from GDP Deflator:
167

2004-05 to 2011-12 in 2017

➢ It is the Ratio between GDP at current prices
Consumer Price Index CPI
and GDP at constant prices
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➢ Measures changes in the price level of a

➢ It is a better measure of price behaviour as it
weighted average market basket of consum-
covers all goods and services produced in the
er goods and services purchased by house-
country
holds.
➢ If GDP deflator is 1, it implies no change in gen-
eral price levels
➢ If GDP deflator is >1, it implies increase in gen-
eral price levels
➢ It is broader than the CPI and the WPI
➢ Calculated using variety of primary price indi-
ces
➢ It is used to deflate individual components of
the GDP valued at current prices (either from
the production or the demand side estimates)
to obtain volume estimates
12.4 Types of Inflation (Based on Causes):
Cost push inflation
➢ Caused by an increase in prices of inputs like
labour, raw material, etc.
➢ Increased price of the factors of production
leads to a decreased supply of these goods.
➢ While the demand remains constant, the pric-
es of commodities increase causing a rise in
the overall price level. This is in essence cost
push inflation.
Demand Pull Inflation
➢ Due to increase in Aggregate demand
➢ Increase in Aggregate demand mainly comes
from either increase in Government Expenditure
(Expansionary Fiscal Policy) or by an increase in
expenditure from Households and Firms.
➢ Root cause of demand pull inflation: Aggre-
gate demand > Aggregate Supply. This simp-
ly means that the firms in the economy are not
capable of producing the goods and services
demanded by the households in the present
time period.
➢ The shortages of goods and services due to in-
crease in demand fuels inflation.
Structural Inflation
➢ Inflation persists for a longer period due to de-
ficiencies existing in the economy like poor
productivity in agricultural sector, inefficient
distribution and storage facilities.
➢ These deficiencies lead to food shortages, which
in turn causes inflation.
➢ It is also called as bottleneck inflation.
12.5 Key Terms related to Inflation
Creeping inflation
➢ Inflation of a nation increases gradually, but
continually, over time.
➢ The relatively small effect of creeping inflation,
when viewed long-term, actually adds up to a
pretty significant increase in the cost of living.
Galloping inflation
➢ ‘Very high inflation’ running in the range of
double digit or triple digit (i.e., 20 per cent, 100
per cent or 200 per cent in a year)
Hyperinflation
➢ This form of inflation is ‘large and accelerat-
ing’ which might have the annual rates in mil-
lion or even trillion.
➢ In such inflation not only the range of increase
is very large, but the increase takes place in a
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very short span of time, prices shoot up over-
night.
Headline inflation
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➢ A measure of the total inflation within an
economy, including commodities such as
food and energy prices (e.g., oil and gas),
 which tend to be much more volatile and prone 2) Supply Side factors: Due to erratic agricultural
to inflationary spikes. production, Hoarding of essential commodities
➢ RAW Inflation figure by big farmers, Higher MSPs announced by
government. year after year
Stagflation
➢ Situation in which the inflation rate is high,
the economic growth rate slows, and unem-
ployment remains steadily high.
➢ It presents a dilemma for economic policy, since
actions intended to lower inflation may exacer-
bate unemployment.

Walking Inflation
➢ Also called as trolling inflation.
➢ When the rate of rising prices is more than
creeping inflation like 3% to 10%, it is called as
walking inflation.

12.6 Core Inflation

➢ Inflation measure which excludes transitory or

temporary price volatility as in the case of
some commodities such as food items, energy
products etc.
➢ Reflects the inflation trend in an economy.
➢ Change in the costs of goods and services but
does not include those from the food and
energy sectors.
➢ Excludes these items because their prices are
much more volatile.
➢ Most often calculated using the consumer
price index (CPI), which is a measure of prices
for goods and services.

12.7 Factors of Inflation: Positive Impact of Inflation:

169

It is divided into 2 categories – Demand Side and ✓ Benefits borrower (debtors)

Supply Side ✓ Big farmers and big businesses usually gain as
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they get better profits

1) Demand Side factors: Due to rise in non-
✓ Benefits exporters as exchange rate may depre-
developmental government. expenditure and
ciate
due to increase in deficit financing
✓ Employment may increase in short term
Negative Impact of Inflation:

✓ Bond holder tends to lose due to rise in infla-

tion
✓ Purchasing power falls drastically
✓ Marginal Propensity to Save (MPS) decreases
✓ Changes the saving pattern in favour of unpro-
ductive assets like gold
✓ Rise in Inequality
✓ Rise in Fiscal Deficit 12.9 Key Concepts related to Inflation:

12.8 How to reduce Inflation? Deflation:

➢ It is a decrease in general price levels of goods
➢ Reduce Private Spending and services throughout an economy.
➢ Decrease Non-developmental government. Ex- ➢ If there is a higher supply of goods and services
penditure but not enough money supply to combat the
➢ Avoid Deficit Financing situation deflation can occur.
➢ Prevention of black marketing
➢ Prevention of hoarding
➢ Banning export of constrained materials
➢ Suspending future trading
➢ Facilitating supply of goods and services in case
of demand pull inflation

Measures taken by RBI to control inflation:

➔ Selling government. securities through Open
Market Operations (OMO)
➔ Increasing Cash Reserve Ratio (CRR)
Disinflation:
➔ Increasing Statutory Liquidity Ratio (SLR)
➔ Increasing Bank Rate ➢ It shows the rate of change of inflation over
➔ Increasing Repo Rate time.
➔ Increasing Reverse Repo Rate ➢ Here inflation rate declines over time, but it re-
mains positive.

170
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Stagflation:
➢ Stagflation emerges when both stagnation (zero
economic growth) and inflation occurs simulta-
neously
➢ Slow economy with high inflation and high un-
employment
➢ High unemployment + stagnant demand
➢ Stagnation occurs when the production
goods and services in an economy slows down
or even starts to decline
Reflation:
➢ It is a phenomenon when inflation returns after
a spell of deflation
➢ It is a clear indication that economic growth is
back in the economy
Skewflation:
➢ It occurs when there is inflation in some com-
modities and deflation in others
➢ Example : Rise in cost of living (inflation) cou-
pled with falling asset prices, such as housing
(deflation)
CPI Inflation
13. Capital Market
➔ Capital market is a market where buyers and
sellers engage in trade of financial securities
like bonds, stocks, etc. The buying/selling is
undertaken by participants such as individuals
and institutions.
➔ Capital market consists of primary markets
and secondary markets.
o Comprehensive measure used for estimation
of price changes in a basket of goods and
services representative of consumption ex-
penditure in an economy is called consumer
price index.
o Inflation is measured using CPI.
o The percentage change in this index over a pe-
riod of time gives the amount of inflation over
of
that specific period, i.e. the increase in prices of
a representative basket of goods consumed.
Food Inflation
o Food inflation refers to the condition whereby
there exist increase in wholesale price index
of essential food items (defined as food bas-
ket) relative to the general inflation or the
consumer price index
WPI Inflation
o WPI index reflects average price changes of
goods that are bought and sold in the
wholesale market.
o Some countries (like the Philippines) use WPI
changes as a central measure of inflation.
CPI Food Index:
• Released by CSO
• It is computed on point to point monthly basis
with same base year as used in case of CPI.
• ‘Cereals and Products’ carry the highest weight
in the computation of CPI Food Index.
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➔ Primary markets deal with trade of new issues
of stocks and other securities, whereas second-
ary market deals with the exchange of existing
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or previously-issued securities.
➔ Another important division in the capital market
is made on the basis of the nature of security
traded, i.e. stock market and bond market.
13.1 Capital Market Instruments:
Pure Instruments:
• Pure instruments are those instruments which
are issued with their basic features.
• It is unadulterated and is devoid of any feature
of other classes of financial instruments.
• Example: Equity Shares, Preference Shares, de-
bentures and bonds.
Hybrid Instruments:
• There are instruments which combine features
of both debt and equity obligations.
• Example: Convertible Preference Shares. Cumu-
lative convertible preference share, Partly Con-
vertible debentures, Optionally Convertible De-
bentures, etc.
Derivatives:
• Derivative instruments are financial assets
whose value is derived from an underlying asset
such as equity, stock market index, interest rate,
fixed-income security, etc. Hence it is called de-
rivatives.
13.2 Major Financial Instruments in Capital
Market:
Shares:
 The capital of a company is divided into shares.
 “Share” refers to a part of capital of a company
which is divided among a number of people.
 People who purchase the shares of a company
are known as the shareholders and are also
considered as the owners of a company.
 The shareholders receive dividends as return
from the company. On the other side, share-
holders may enjoy or suffer capital gain/loss at
the time of sale of shares.
Debentures:
 A company raises its capital by means of issue
of shares. But the funds raised by the issue of
shares are seldom adequate to meet their long
term financial needs of a company.
 Hence, most companies turn to raising long-
term funds also through debentures which are
issued either through the route of private
placement or by offering the same to the pub-
lic.
 The finances raised through debentures are also
known as long-term debt.
 So debentures are debt instruments with a fixed
rate of interest issued by a company and gener-
ally unsecured.
 Many investors prefer debentures because it
offers higher rate of interest than fixed deposits.
Bonds:
 Bond is also an instrument of acknowledgement
of debt.
 Traditionally, the Government issued bonds, but
these days, bonds are also being issued by
semi-government and non-governmental or-
ganisations.
Mutual Funds:
 These are funds operated by an investment
company which raises money from the public
and invests in a group of assets (shares, deben-
tures etc.), in accordance with a stated set of
objectives.
 It is a substitute for those who are unable to
invest directly in equities or debt because of re-
source, time or knowledge constraints.
172
 Benefits include professional money manage-
ment, buying in small amounts and diversifica-
tion.
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 Mutual fund units are issued and redeemed by
the Fund Management Company based on the
fund’s net asset value (NAV), which is deter-
mined at the end of each trading session.
 NAV is calculated as the value of all the shares
held by the fund, minus expenses, divided by
the number of units issued.
 Mutual Funds are usually long term investment
vehicle though there some categories of mutual
funds, such as money market mutual funds
which are short term instruments.
The structure and components of the market
can be understood in the following way:
Financial Institutions:
• This segment of the capital market was devel-
oped by the Government of India to fulfil the
capital requirements of the upcoming industries
in the country better known as the business of
project financing.
• In the due process of time we see emergence of
four categories of Financial Institutions (FIs) in
India:
1) All India Financial Institutions (AIFIs) such as
the IFCI, ICICI, IDBI, SIDBI and IIBI, etc
2) Specialised Financial Institutions (SFIs) such
as the RCTC and TFCI
3) Investment Institutions (IIs) such as the LIC,
GIC and the UTI
4) State Level Financial Institutions (SLFIs) with
its two variants, the SFCs and the SIDCs
Banking Industry:
• With the passage of time, there developed a
number of government and privately owned
banks in the country and became the mainstay
of the capital market by the 1980s.
Security Market:
• After the government’s attempts to formally
organise the security and stock market of India,
the segment has seen accelerated expansion.
• Today, it is counted among the most vibrant
share markets of the world and has challenged
the monopoly of the banks in the capital market
of the country
13.3 Primary Market
➢ It issues security for the first time. Example- Ini-
tial public offer and follow on public offer
➢ Here new stock or bonds are sold to the inves-
tors
➢ Firms issue shares to public
➢ Price is fixed by the firms
➢ Firms raise money for long-term investment
➢ There is no specific geographical location.
➢ SEBI is the regulator for this market
13.4 Secondary Market
➢ Existing securities are bought and sold
➢ One investor sells it to another investor
➢ Price is fixed on the basis of demand and supply
➢ Companies benefit from the secondary markets
➢ There is no specific geographical location
➢ SEBI is the regulator for this market as well
13.5 Gilt-Edged Market
➢ Gilt-edged market refers to the market for gov-
ernment and semi government securities,
backed by the RBI.
➢ The term gilt-edged means 'of the best quality'
➢ It is known so because the government securi-
ties do not suffer from the risk of default and
are highly liquid.
➢ RBI is the sole supplier of such securities.
➢ These are demanded by commercial banks, in-
surance companies, provident funds and mutual
funds.
➢ The gilt-edged market may be divided into two
173
parts- the Treasury bill market and the govern-
ment bond market.
➢ Treasury bills are issued to meet short-term
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needs for funds of the government, while gov-
ernment bonds are issued to finance long-term
developmental expenditure.
13.6 Stock Exchange:
➢ It is an organisation which facilitates buying and
selling of shares of listed companies.
➢ Listed companies are those companies which
are registered with stock exchange.
➢ Only old shares are bought and sold because it
is a secondary market.
➢ Price is based on demand and supply.
➢ Shares are auctioned.
➢ Demand and supply of shares are constructed
on the bidding of people.
➢ Demands are created by buyers.
Bombay Stock Exchange:
➔ Located at Dalal Street, Mumbai
➔ Established in 1875
➔ Asia's oldest stock exchange
➔ On August 31, 1957, the BSE became the first
stock exchange to be recognized by the Indi-
an Government under the Securities Contracts
Regulation Act
➔ BSE established India INX on 30 December 2016
➔ India INX is the first international exchange
of India
National Stock Exchange:
➢ Established in 1992
➢ India’s first fully automated electronic ex-
change witch a nationwide presence
14. Money Market
➔ The money market is a market for short term
funds which deals in monetary assets whose
period of maturity is upto one year. These as-
sets are close substitutes for money.
➔ It is a market where low risk, unsecured and
short term debt instruments that are highly
liquid are issued and actively traded everyday.
➔ It has no physical location, but is an activity
conducted over the telephone and through the
internet.
➔ It enables the raising of short-term funds for
meeting the temporary shortages of cash and
➢ India’s first dematerialised stock exchange
➢ Largest exchange in the country in terms of
trading volumes
➢ HQ: Mumbai
13.7 Securities and Exchange Board of In-
dia (SEBI):
➔ It is the regulator of the securities and com-
modity market in India owned by the Govern-
ment of India.
➔ It was established on April 12, 1988 and given
Statutory Powers on 30 January 1992
through the SEBI Act, 1992
➔ It became an autonomous body on 12 April
1992
➔ Headquarters: Mumbai
➔ Northern Regional Office – New Delhi
➔ Eastern Regional Office – Kolkata
➔ Southern Regional Office - Chennai
➔ Western Regional Office - Ahmedabad
➔ SEBI has to be responsive to the needs of three
groups, which constitute the market:
issuers of securities
investors
market intermediaries
obligations and the temporary deployment of
excess funds for earning returns.
➔ The major participants in the market are the
Reserve Bank of India (RBI), Commercial Banks,
174
Non Banking Finance Companies, State Gov-
ernments, Large Corporate Houses and Mutual
Funds.
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14.1 Money Market Instruments:
Treasury Bills:
➢ They are promissory notes issued by the RBI
on behalf of the government as a short term li-
ability and sold to banks and to the public.
➢ The maturity period ranges from 14 to 364
days.
➢ They are the negotiable instruments, i.e. they
are freely transferable.
➢ No interest is paid on such bills but they are
issued at a discount on their face value.
Commercial Bills:
➢ They are also called Trade Bills or Bills of Ex-
change.
➢ Commercial bills are drawn by one business
firm to another in lieu of credit transaction.
➢ It is a written acknowledgement of debt by the
maker directing to pay a specified sum of mon-
ey to a particular person.
➢ They are short-term instruments generally
issued for a period of 90 days.
➢ These are freely marketable.
➢ Banks provide working capital finance to firms
by purchasing the commercial bills at a dis-
count; this is called 'discounting of bills'.
Commercial Paper (CP):
➢ CP was introduced in 1990 on the recommen-
dation of the Vaghul Committee.
➢ A commercial paper is an unsecured promisso-
ry note issued by corporate with net worth of
atleast Rs 5 crore to the banks for short term
loans.
➢ These are issued at discount on face value for a
period of 14 days to 12 months.
➢ These are issued in multiples of Rs 1 lakh sub-
ject to a minimum of Rs 25 lakh.
Certificate of Deposit (CD):
➢ CD was introduced in 1989 on the recommen-
dation of the Vaghul Committee.
➢ These are issued by banks against deposits
kept by individuals and institutions for a pe-
riod of 15 days to 3 years.
➢ These are similar to Fixed Deposits but are ne-
gotiable and tradable.
➢ These are issued in multiples of Rs. 1 lakh sub-
ject to a minimum of Rs 25 lakh.
Call Money Market (CMM):
➢ This is basically an inter-bank money market
where funds are borrowed and lent for one
day.
➢ Also known as over-night borrowing (called as
money at call) and for a period upto 14 days
(called short notice).
➢ No collateral is required to borrow from this
market.
➢ Funds are usually raised from this market upto
three days—the higher the interest, the longer
the period for which the funds have been bor-
rowed.
Cash Management Bill (CMB):
➢ The Government of India, in consultation with
the Reserve Bank of India, decided to issue a
new short-term instrument, known as Cash
Management Bills, since August 2009 to meet
the temporary cash flow mismatches of the
Government.
➢ The Cash Management Bills are non-standard
and discounted instruments issued for maturi-
ties less than 91 days.
➢ The Cash Management Bills have the generic
character of Treasury Bills (issued at discount to
the face value); are tradable and qualify for
175
ready forward facility; investment in it is consid-
ered as an eligible investment in Government
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Securities by banks for SLR.