KENDRIYA VIDYALAYA SANGATHAN

REGIONAL OFFICE AGRA

STUDENT SUPPORT MATERIAL (2020 - 2021)

ECONOMICS (030)

CLASS XII

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 Message for the Students

Dear Students, It gives me immense pleasure to introduce this “STUDENT

SUPPORT MATERIAL” for the Class 11th Economics, to assure you all that we are

behind you, cheering you on to the finish line. You might be feeling stressed, confused

and so, tired, we understand that – but keep going. Due to fast pacing scenario of

technological advancements and COVID’19 Pandemic Era there is a need for assuring

health and safety of our students hence, this edition of E support material has been

prepared and provided. I am thankful to Shri C S Azad, Deputy Commissioner, KVS RO

Agra for constant encouragement in this endeavour. I am grateful to Smt. Indira Mudgal

and Dr M L Mishra Asstt. Commissioner, KVS RO Agra who has been a source of

inspiration from time to time. I am also so grateful to my team who is readily available for

Content Development.

With Best Wishes

Shri Vijesh Kumar

Principal

Kendriya Vidyalaya Moradabad

&
Subject Coordinator

STUDENT SUPPORT MATERIAL

OUR INSPIRATION
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 Sh. C.S.Azad,
Deputy Commissioner,
KVS Agra Region

Dr. M.L. Mishra,

Assistant Commissioner,
KVS Agra Region

Smt. Indira Mudgal,

Assistant Commissioner,
KVS Agra Region

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 ECONOMICS (Code No. 030)

CLASS - XII (2020-21)

Theory: 80 Marks 3 Hours

Project: 20 Marks
Units Marks Periods
Part A Introductory Macroeconomics
National Income and Related Aggregates 10 23
Money and Banking 6 8
Determination of Income and Employment 12 22
Government Budget and the Economy 6 15
Balance of Payments 6 7
40 75
Part B Indian Economic Development
Development Experience (1947-90) 12 28
and Economic Reforms since 1991
Current Challenges facing Indian Economy 22 35
Development Experience of India – A Comparison with 06 12
Neighbours
Theory Paper (40+40 = 80 Marks) 40 75
Part C Project Work 20 15

Part A: Introductory Macroeconomics

Unit 1: National Income and Related Aggregates 23 Periods
What is Macroeconomics?
Basic concepts in macroeconomics: consumption goods, capital goods, final goods,
intermediate goods; stocks and flows; gross investment and depreciation.
Circular flow of income (two sector model); Methods of calculating National Income -

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 Value Added or Product method, Expenditure method, Income method.
Aggregates related to National Income:
Gross National Product (GNP), Net National Product (NNP), Gross Domestic Product
(GDP) and Net Domestic Product (NDP) - at market price, at factor cost; Real and
Nominal GDP.
GDP and Welfare

Unit 2: Money and Banking 8 Periods

Money - meaning and supply of money - Currency held by the public and net demand
deposits held by commercial banks.
Money creation by the commercial banking system.
Central bank and its functions (example of the Reserve Bank of India): Bank of issue,
Govt. Bank, Banker's Bank, Control of Credit

Unit 3: Determination of Income and Employment 22 Periods

Aggregate demand and its components.
Propensity to consume and propensity to save (average and marginal).
Short-run equilibrium output; investment multiplier and its mechanism.
Meaning of full employment and involuntary unemployment.
Problems of excess demand and deficient demand; measures to correct them - changes in
government spending, taxes and money supply through Bank Rate, CRR, SLR, Repo
Rate and Reverse Repo Rate, Open Market Operations, Margin requirement.

Unit 4: Government Budget and the Economy 15 Periods

Government budget - meaning, objectives and components.
Classification of receipts - revenue receipts and capital receipts; classification of
expenditure – revenue expenditure and capital expenditure.
Measures of government deficit - revenue deficit, fiscal deficit, primary deficit their
meaning.

Unit 5: Balance of Payments 7 Periods

Balance of payments account - meaning and components;
Foreign exchange rate - meaning of fixed and flexible rates and managed floating.

Part B: Indian Economic Development

Unit 6: Development Experience (1947-90) and Economic Reforms since 1991: 28 Periods
A brief introduction of the state of Indian economy on the eve of independence. Indian economic

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 system and common goals of Five Year Plans.
Main features, problems and policies of agriculture (institutional aspects and new agricultural
strategy), industry (IPR 1956; SSI – role & importance) and foreign trade.

Economic Reforms since 1991:

Features and appraisals of liberalisation, globalisation and privatisation (LPG policy);
Concepts of demonetization and GST

Unit 7: Current challenges facing Indian Economy 35 Periods

Poverty- absolute and relative; Main programmes for poverty alleviation: A critical assessment;
Human Capital Formation: How people become resource; Role of human capital in economic
development;
Rural development: Key issues - credit and marketing - role of cooperatives; agricultural
diversification;
Employment: Growth and changes in work force participation rate in formal and informal
sectors; problems and policies
Infrastructure: Meaning and Types: Case Studies: Health: Problems and Policies- A critical
assessment;
Sustainable Economic Development: Meaning, Effects of Economic Development on Resources
and Environment, including global warming

Unit 8: Development Experience of India: 12 Periods

A comparison with neighbours- India and Pakistan, India and China
Issues: economic growth, population, sectoral development and other Human
Development Indicators
Part C: Project in Economics 15 Periods

Prescribed Books:
1. Statistics for Economics, NCERT
2. Indian Economic Development, NCERT
3. Introductory Microeconomics, NCERT
4. Macroeconomics, NCERT
5. Supplementary Reading Material in Economics, CBSE
Note: The above publications are also available in Hindi Medium.

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 Suggested Question Paper Design Economics (Code No. 030)
Class XII (2020-21)
2021 Examination

Marks: 80 Duration: 3 hrs.

SN Typology of Questions Marks Percentage

Remembering and Understanding:

1 Exhibit memory of previously learned material by 44 55%
recalling facts, terms, basic concepts, and answers.
Demonstrate understanding of facts and ideas by
organizing, comparing, translating, interpreting, giving
descriptions, and stating main ideas

2 Applying: Solve problems to new situations by applying 18 22.5%

acquired knowledge, facts, techniques and rules in a
different way.

Analysing, Evaluating and Creating:

Examine and break information into parts by identifying
motives or causes. Make inferences and find evidence to
support generalizations.
3 Present and defend opinions by making judgments about 18 22.5%
information, validity of ideas, or quality of work based on
a set of criteria.
Compile information together in a different way by
combining elements in a new pattern or proposing
alternative solutions.

Total 80 100%

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 CHAPTER PREPARED AS PER RESPECTED TEACHERS

Name of PGT KV Name of chapter/Topics

Sh. Safruddin khan Aligarh National income and related aggregates

Sh Rajkumar KNN Ghaziabad

Smt. Anju Bala AFS No 1 Hindon Money and banking

Smt. Sangeeta Kumari OF Muradnagar

Mrs Mausami Bhattacharzee MRN Mathura Determination of income and employment

Sh. Nand Lal Jangid Mathura cantt

Sh. Amit Kumar Singh Meerut SL Government budget

Mr Purushottam Shukla Jhansi Cantt No 2 Balance of payment

Sh. Prashant Pelwar OEF Hazratpur

Sh. Amit Kumar Singh Meerut SL Development Experience 1947-90 and

Economic Reforms since 1991:
Economic reforms since 1991
Ms Raj Kumari Saraogi Agra No-1 AFS
.

Mrs. Mausami MRN Mathura Current challenges facing Indian economy-

Bhattacharazee Poverty

Sh. Safruddin Khan Aligarh Current challenges facing Indian economy-

Human capital formation

Sh. Anjum Ali Talbehat Current challenges facing Indian economy:

Ruler development and rural credit
Agriculture Marketing System agriculture
diversification

Smt.Najmussahar Khan Sector-24 Noida Current challenges facing Indian economy:

Employment:growth and changes and
workforce participation rate in formal and
informal sectors problems and policies

Smt. Anju Bala AFS No 1 Hindon Current challenges facing Indian economy

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 Infrastructure:
Meaning and types case studies health
problems and policies-A critical assessment

Sh. Rajkumar KNN Ghaziabad Current challenges facing Indian economy:

Sustainable economic development:

Ms. Mousmi Jhansi Cantt No 1 Development experience of India A

comparison with neighbours India and
Pakistan India and China

Shri Ashok Kumar AFS Chandinagar Economic growth population structural

development and other human development
indicators

Compiled by Kendriya Vidyalaya Moradabad

1. Dr. Narendra Kumar, PGT (Economics)

2. Dr. Azhar Shah Khan, (Librarian)
3. Mr. Harsh Vardhan Dixit, TGT (WE)
4. Mr. Navneet Kumar, PRT
5. Ms. Indu Singh, PRT
6. Mr. Naushad Ali, PRT
7. Mr Daljeet Singh, (Computer Instructor)

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 KENDRIYA VIDYALAYA SANGATHAN
AGRA REGION
STUDENT SUPPORT MATERIAL
CLASS –XII (ECONOMICS)

Chapter 1 Introduction

Macro Economics: -Ranger Frisch introduced the term micro and macro in economics.

The term Macro is derived from greek work MAKROS which means large. Thus Macro economics is that
branch of economics in which we study about large economic variables or the economic system as a whole.
For example National income, total output, Aggregate demand, aggregate supply etc. Macroeconomics is
also known as theory of income and employment. Macro economics studies the general equilibrium in the
economy.

J M Keynes is known as father of modern macro economics. He wrote a book “General theory of
employment, interest and money”.

Some Basic concepts of macro economics:-

1 classification of goods produced:-

(i) intermediate goods:- the goods which are used as raw material in the production of other goods are
called intermediate goods. for example wood, rubber, plastic etc. used in production of chair, table etc.
These goods lie inside production boundary and may be purchased for resale for example car purchased by
a whole seller (car agency).
(ii) final goods:- the goods which are used for final satisfaction of wants of the consumer and do not require
any further production process are called final goods for example chair ,car , refrigerator etc purchased by a
house hold.these goods lie outside production boundary and are not meant for resale.
Final goods are classified into two types -
(a) Consumer goods:- these goods are directly used for final satisfaction of human wants like milk,bread
etc.
There are four kinds of consumer goods-
(i) Durable use - like car ,AC refrigerator
(ii) semi- durable:- like clothes, shoes, crockery etc.
(iii) single use consumer goods:- like bread,butter,fruits , vegetable etc.
(iv) Services:- like transport, communication , services of a doctor, teacher etc.
(b) Capital goods :-these are durable goods used in production process.these are fixed assets of the
producer.expediture on such goods is called investment expenditure. For example machinery, equipment,
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etc. These goods do not get transformed into other goods rather they make production of other goods
feasible.

2 Stock and flow variables:- economic quantities are either stock or flow in nature.
STOCK:- it is an economic quantity which is measured at a particular point of time and has no time
dimension for its expression for example population of India on 1 April 2011 was 121.6 crore.capital and
money supply are some other examples of stock.
Flow :- It is an economic quantity which is measured over a period of time and has time dimension for its
expression for example water falling through a tape, population growth rate.etc.
(3) DEPRECIATION:- It refers to the fall in value of capital assets used in production process on account
of normal wear and tear as well as expected capital obsolescence.capital obsolescence may take place dur to
change in technology or may be due change in demand.
(4) INVESTMENT/ CAPITAL FORMATION:- It refers to an addition to the existing stock of capital
goods in an accounting year.it is the part of final output that comprises of capital goods like machines,
equipment, tools,imlementsetc used in production process. It is of two kinds-
(i) Gross investment/ gross capital formation:- Gross investment refers to the total expenditure on buying
capital goods over a specific period of time without considering depreciation.
It has two components-
(a) gross fixed capital formation
(b) Change in stock or inventory investment.
(ii) Net Investment/net capital formation:- it is calculated by subtracting depreciation from gross
investment. Thus
Net Investment = Gross investment –Depreciation

= Net fixed capital formation + change in stock

Aggregates relating to national income

Some basic concepts:-
(1) gross = net + depreciation
Net=. Gross - depreciation
(2) national= domestic + NFIA
Domestic = national- NFIA
(3) At MP = FC - NIT
FC = MP - NIT .
4) At constant price = value at current price / price deflator ( Price Index).
Aggregate of national income:-
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(1) GDP :- Money value of àll final goods and services produced annually in a country is called GDP. It is
of 4 kinds -
( a) GDP mp :- it is the value of GDP Measured in terms of price of goods and services prevailing in the
market.
(b)GDP current price :- it is the value of GDP Measured in terms of price of goods and services prevailing
in the market in the current year
( c ) GDP constant price :- it is the value of GDP Measured in terms of price of goods and services
prevailing in the market in the base year
GDP constant price = GDP at current price x GDP Deflator
(d) GDP factor cost :- it is the value of GDP Measured in terms of cost of production that is cost of factors
involved in its production.
GDP fc = GDP mp - NIT.
(2) GNP (Gross national product):-
GNP = GDP + NFIA
As all other aggregates can be obtained from GDP Thus all other aggregates can be defined on the basis of
Definition of GDP.
GNP mp = GDP mp + NFIA
GNP fc = GDP fc + NFIA
GNP current p = GDP current p + NFIA
GNP constant P = GDP constant p + NFIA
(3) NDP (Net domestic product):-
NDP = GDP - Depreciation.
NDPmp =GDPmp - Depreciation.
NDPfc =GDPfc - Depreciation.
NDPcurrentp =GDP current p -depreciaton
NDPconstant P = GDPconstant P -
depreciaton
(4) NNP ( Net national product)
NNP. = GDP - Depreciation + NFIA
NNP.mp = GDP mp - Depreciation + NFIA
NNP.fc= GDPfc - Depreciation + NFIA
NNP Current p = GDP current p - Depreciation + NFIA
NNP Constant p = GDP constant p- Depreciation + NFIA

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Circular flow of income

Representing the flows of money between the two main groups in society - producers (firms) and
consumers (households). These flows are part of the fundamental process of satisfying human wants.

As we have already seen, a free market economy consists of two components, or sectors that is firms and
households. People in households work for firms (selling their factor services) and receive wages in
exchange. On the scale of the whole economy, this is known as national income - the total amount of
income earned over a given time period. This money is spent on food, clothing, transport, entertainment etc,
and so it returns to the firms. This is the circular flow.

figure - Circular flow of income

We can see this circular flow in Figure 1. Households sell their factor services to firms (in the factor
markets) and in exchange receive wages (the left hand side of the flow). In the meantime, households spend
this income on goods and services (in the goods market) and in exchange receive the goods and services
themselves (the right hand side of the flow). Economists call the wages plus the other forms of income,

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national income and give it the code 'Y'. Domestic consumption is given the code 'C'.Not all income is
spent, however. Some is saved. Savings are coded as 'S'.

Flow of income in three sector economy:- an economy which has three sectors namely house hold, firm and
government is called a three sector economy. The flow of income in three sector economy is shown in
following diagram.

1. Define stock variable.

Ans. A variable whose value is measured at a point of time.
2. Define capital goods.
Ans. Goods used is producing other goods are called capital goods.
3. What is nominal gross domestic product ?
Ans. When GDP of a given year is estimated on the basis of price of the same year, it is called
nominal GDP.
4. Define flow variables.
Ans. Any variable whose magnitude is measured over a period of time is called a glow variable.
5. Define ‘real’ gross domestic product.
Ans. When GDP of a given year is estimated on the basis of base year prices it is called real gross
domestic product.
6. Define capital formation.
Ans. Increase in the stock of capital in the given period is called capital formation
7. When is the national income less than domestic income?
Ans. When NFIA is negative.
8. When is the national income larger than domestic factor income?
Ans. When NFIA is positive.
9. What is the effect of an indirect tax and a subsidy, on the price of the commodity?
Ans. The effect of an indirect tax on a commodity is to increase the price and the effect of subsidy is
to reduce the price in the market.
10. Are the wages and salaries received by Indians working in American Embassy in India a part of
Domestic Product of India?
Ans. No, because American embassy is not a part of domestic territory of India.
11. Why is the study of the problem of unemployment in India considered a macro economic study?
Ans. The problem of unemployment in India is an economic issue at level of economy as a whole,
hence considered as macroeconomic study.
12. When is gross domestic product of an economy equal to gross national product?
Ans. When NFIA is zero.
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 13. Name the book written by J M Keynes ?

Ans “General theory of employment, interest and money”.

14 Give an example of intermediate goods used in Agriculture sector.

Ans Seed and Fertilizer.

15 Milk is a final goods. Is this statement true?

Ans No, this statement is not true . it is because milk purchased by a household is a final goods but milk
purchased by a sweet seller or tea maker is not a final good but an intermediate goods .

16 Car purchased by a traveling agency is an intermediate goods . True or False .

Ans False . Car purchased by a traveling agency is used in production of transport services and it is capital
goods and hence a final goods .
17If net fixed capital is Rs 100 , depreciation is Rs 30 and Change in stock is Rs 60 .Find the value of gross
capital formation .

Ans

Gross capital formation = Net capital formation + Depreciation

= Net Fixed capital formation + Change in stock +Depreciation

= 100 +30 +60

= Rs 190

Short Answer Type Questions (3-4 Marks)

Q1 Distinguish between Stock and flow variables.

Ans

Stock Flow
1-it is an economic quantity which is measured 1 -It is an economic quantity which is
at a particular point of time measured over a period of time
2-It has no time dimension 2-It has time dimension for its expression
3-Example population of India on 1 April 2011 3-for example water falling through a tape,
was 121.6 population growth rate.etc.

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Q2 Distinguish between Intermediate goods and final goods

Ans

Intermediate goods Final goods

Intermediate goods refer to those goods which Final goods refer to those goods which used
are used either for resale or for further either for consumption or for investment.
production in the same year.

They are not ready for use in the sense some They are ready for use in the sense that no
value has to be added to the intermediate value has to be added.
goods.
They are still within the production boundary. They are still within the production boundary.
For example, coal used in factory for further For example, milk purchased by household for
production. consumption.

Q3 Will the following be included in gross domestic product / Domestic Income of India? Give
reasons for each answer.

1. Consultation fee received by a doctor.

2. Purchase of new shares of a domestic firm.
3. Profits earned by a foreign bank from its branches in India.
4. Services charges paid to a dealer (broker) in exchange of second hand goods.

Ans.
1 Yes, It is a factor income. It is his salary.
2 No, It is not included in GDP, because it is a merely financial transaction which does not help
directly in production.
3 Yes, It is a factor income in domestic territory.
4 It is included because it is his factor income (salary).

Q4 State whether the following is a stock or flow:

(a) Wealth, (b) Cement production, (c) Saving of a household, and (d) Income of household.
Ans. Stock – (a) & (b), since these are variables measurable at a point of time.
Flow – (c) & (d), since these are variables measurable over period of time.

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Q5 Is net export a part of NFIA? Explain.
Ans. No, it is not.Net export, the difference between export and import (X- M), is a part of expenditure on
domestic product. While NFIA is the difference between income earned from abroad by the normal
residents of a country and income earned by non-residents in the domestic territory of that country. It is not
included in the domestic product rather it is a component of NI. Therefore both are different concepts.

2. Giving reasons classify the following into intermediate products and final products
1. Furniture purchased by a school.
2. Chalk, duster, etc, purchased by a school.
Ans.
• It is final product because it is purchased for final investment.
• These are intermediate products because these are taken to be used up completely during the
same year.

3. Giving reasons, explain the treatment assigned to the following which estimating national
income.
1. Family members working free on the farm owned by the family.
2. Payment of interest on borrowings by general government.

Ans.

• Imputed salaries of these members will be included in national income.

• It will not be included in national income because it is non-factor payment as general government
borrows only for consumption purpose.

4. Giving reasons, explain the treatment assigned to the following which estimating national
income.
1. Payment of income tax by a firm
2. Festival gifts to employees.
Ans.

• Not included, as it is transfer payment from firm to government.

• Not included, as it is transfer payment.

5. Explain the basis of classifying goods into intermediate and final goods. Give suitable examples.
Ans. Goods which are purchased by a production unit from other production units and meant for
resale or for using up completely during the same year are called intermediate goods for example :
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 raw material. Goods which are purchased for consumption and investment are called final goods for
example : Purchase of machinery for installation in factory.
6. Giving reason classify the following into intermediate and final goods.
1. Machine purchased by a dealer of machine.
2. A car purchased by a house hold.

Ans.

• It is an intermediate good because it is meant for resale in the market.

• It is a final good because it is meant for final consumption.

7. How will you treat the following in estimating rational income of India? Give reasons for your
answer.
1. Value of bonus shares received by shareholders of a company.
2. Interest received on loan given to a foreign company in India.

Ans.

• It is not included in national income because it is the return of financial capital and not of the goods
& services.
• It is included in the national income as interest is a factor income and a part of domestic income.

MEASUREMENT OF NATIONAL INCOME RELATED AGGREGATE

Marks coverage in board Exam: 10

GIST OF LESSON

Part - 1 Value added method

A. Step for calculation of national income by Product method/Output method/Value added

method
Step 1: Estimation of value of output produced by each firm in all the sector of the economy during a
financial year

● value of output = Sales + change instock

Step 2: Calculation of value added/value addition/GDP at MP/ GVA at MP.

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 ● GDPmp/GVAmp = value of output - intermediate consumption
Step 3: Calculation of Net Domestic Product at factor cost (NDP at FC)

● NDP at FC = GDPmp - Depreciation - Net Indirect Taxes

Step 4:Calculation of NNP at FC or National Income

● NNP at FC = NDP at FC + NFIA

B. Top Tip of PRODUCT METHOD (Value added method)

● Value of output = Sales + change in stock
● Change in stock = closing stock – opening stock
● GDP at MP = Value of output - Intermediate consumption
● NNP FC (N.I) = GDPMP (-) consumption of fixed capital (depreciation)
(+) Net factor income from abroad-Net indirect tax

C. Precautions in calculating national income by production method or value-added method:

1. The sale and purchase of second-hand goods should not be included in national income. These
goods should not be treated as fresh production. But Commission or BROKERAGE, if ANY, earned
by the brokers of such services should be included because it facilitates a fresh production activity.
2. The value of production for self-consumption should be included because it contributes to current
output. The value of imputed as it is not sold in the market.
3. Imputed rent of owner-occupied houses should be included.
4. Domestic services are not included in national income.However, production of such services by paid
service will be included.
5. Double counting needs to be avoided.
PART 2 INCOME METHOD

A. Steps for calculating national income by income method

● Step 1: Estimate the factor payments made by each firm in all the sectors of the economy during the
year. Classify the factor payments into three heads:
a) Compensation of employees = Wages and salaries in cash and in kind + Social security
contributions by the employers
b) Operating surplus = Rent + Interest + Royalty + Profit
Note (Profit = Corporation tax + Dividend +Undistributed profit/ retained earnings/savings of private
corporate sector)

c) Mixed income of self employed

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 ● Step 2: Calculation of Net DomesticProduct at factor cost
NDP at FC = COE + OS +MI

● Step 3: Calculation of Net National Product at factor cost or National income

NNP at FC = NDP at FC + NFIA

B. Precautions in making estimates of national income by income method

1. Avoid transfers: - National income includes only factor payments, i.e. payments for the services
rendered to the production units by the owners of factors of production.
Any payment for which no service is rendered is called a transfer like gifts, donations, charity, etc.,
and not a production activity. Hence, transfers payment is not included in national income

2. Avoid capital gain: - Capital gain refers to the income from the sale of second-hand goods and the
financial assets.
These transactions are not production transactions. So, any income arising to the owners of such
things is not a factor income.

3. Imputed rent of self-occupied house: when a house owner lives in that house, he does not pay any
rent. But in fact, pays rent to himself. Since rent is a payment for factor service rendered, even
though rendered to the owner itself, it must be counted as a factor payment.
4. Includes free services provided by the owner of factor unit (Employer)

PART 3 EXPENDITURE METHOD

A. Steps for calculation of national income by expenditure method
● Step 1: Identify all the final expenditure done by different sectors of economy and calculate GDP at
MP
● GDPatMP =Private final consumption expenditure + Government final consumption expenditure +
Gross domestic capital formation + Net Export
● Step 2: Calculation of Net Domestic Product at Factor Cost
● NDP at FC = GDP at MP - Depreciation - NIT
Step 3: Calculation of Net National Product at Factor Cost

● NNP at FC = NDP at FC +NFIA

Note:

● If capital formation is given as Net domestic capital formation, we arrive at NDPmp.

● Gross domestic capital formation =Gross domestic fixed capital formation + Change in Stock

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 ● Capital formation = Investment
B. Precautions in making estimates of national income by expenditure methods: -
1. Intermediate expenditure like expenditure on raw material is not included
2. Do not include expenditure on second-hand goods and financial assets.
3. Avoid transfer expenditures like Charity, donation, gifts, scholarship etc.
4. Include the self-use of own produced final products.

PART 4. NOMINAL AND REAL GDP, GDP AND WALFARE

A. Nominal GNP and Real GNP

Ans. Nominal GDP: Nominal GDP is measured at current prices. Since this aggregate measure the value of
goods and services at current year prices, GDP will change when volume of product changes or price
changes or when both changes.

Real GDP: Real GDP is computed at the constant prices. Under real GDP, value is expressed in terms
of prices prevailing in the base year. This measure takes only quantity changes. Real GDP is the indicator of
real income level in the economy.

B. GDP Deflator
The ratio of nominal GDP to real GDP of current year is well known price index, called GDP deflator. It
gives the change in the price level between the base year and current year.

GDP Deflator / Price Index = NominalGDP/Real GDP *100

C. GDP and Welfare

● Is GDP a perfect index of economic welfare of a country?
Ans. Generally it is considered that an increase in the gross domestic product of any economy ensures
increase in welfare of the people of the country. However, this may not always be correct. Following are
some of the limitations of using GDP as an index of welfare of country:

1. Distribution of GDP
If the GDP of the country is rising, the welfare of people may not increase if there is inequalities in
the distribution of GDP. Increase in inequalities means that rich become richer and poor become
poorer.

Since utility of money is higher among poor and lower among the rich, therefore, if the distribution
of GDP is not uniform, inequalities may not lead to increase in welfare of the entire country people.

2. Non-monetary exchanges
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 Non-monetary exchange are those activities in an economy which cannot be evaluated in terms of
money due to non-availability of data. For example, domestic services of a housewife/family
members, hobbies like painting, gardening, etc. are not paid for. Similarly, barter exchangers take
place without the help of money. These activities to contribute to welfare of the people.

Since, GDP does not account for such activities, it is a majorcause of underestimation of GDP in the
economy. As a result, welfare of the people is also underestimated.

3. Externalities
Externalities refers to the harms or benefits a firm or an individual cause to another for which they
are not penalised or not paid.

A. Negative Externalities may cause harm to the people. Hence, their welfare will fall. However, GDP
does not account for such negative externalities. Thus, GDP overestimates the actual welfare.
B. Positive externalities increase welfare of people or general public. However, GDP does not account
for such positive externalities. Thus, GDP is an index underestimates welfare.
4. Composition of GDP

A. If the production of tobacco products, liquor, etc. increase in the country, GDP will increase since it
is counted in the GDP. However, these harmful goods adversely affected the health of the people.
B. Government imposes a ban on the consumption of tobacco products, it will bring down the
production of tobacco products, liquor, etc. Since it is counted in GDP, GDP will fall. However, the
ban will improve the health in general. It will increase welfare.

Numerical Practice
1. Calculate Value Added at factor cost from the following.
Items (Rs. CRORES)
a. Purchase of raw materials 30

b. Depreciation 12

c. Sales 200

d. Excise tax 20

e. Opening stock 15

f. Intermediate consumption 48

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g. Closing stock 10

Ans: Value of output =Sales + ∆ in stock

=200 + (cl. St – op. st)
=200 + (10 -15)
= 200 -5=195
Value added at MP = Value of output - intermediate consumption
195-48 = 147
Value added at FC = V.A at MP – Net indirect tax
=147 – 20
=127

2. Calculate NNPmp by Production method and Income method.

1. Intermediate consumption
(a) primary sector 500
(b) Secondary sector 400
(c) tertiary sector 300
2. Value of output of
(a) primary sector 1,000
(b) Secondary sector 900
(c) tertiary sector 700
3. Rent 10
4. Emoluments of employers 400
5. Mixed income 650
6. Operating surplus 300
7. Net factor income from abroad -20
8. Interest 05
9. Consumptive of fixed capital 40
10. Net indirect tax 10
Ans: NNP MP by production method
• Value added at MP = (2) Value of output– (1) Intermediate consumption
(2) a + b+ c – (1) a + b + c
(1000 + 900 + 700) – (500 + 400 + 300)
2600– 1200

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 GDPmp = 1400
• NNP MP = GDP MP – (9) + (7)
=1400 – 40 + (-20)
NNP MP = 1340
NNP at MP by Income method:

NDP FC = (4) + (5) + (6)

= 400 + 650 + 300
= 1350
NNP MP = NDP FC +NFIA+NIT
= 1350 + 10 – 20
= 1340

3. Estimate National Income By (a) Expenditure Methods (b) Income Method from the following
information.
DATA Rs. in crores
1. Private final consumption expenditure 210

2. Govt: final consumption expenditure 50

3. Net domestic capital formation 40

4. Net exports (-) 5

5. Wages & Salaries 170

6. Employer’s contribution 10

7. Profit 45

8. Interest 20

9. Indirect taxes 30

10. Subsidies 05

11. Rent 10

12.Factor income from abroad 03

13.Consumption of fixed capital 25
14. Royalty 15

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 Ans: National Income (NNP FC) by Expenditure Method
NDP at MP = (1) + (2) + (3) + (4)
=210 + 50 + 40 + (-5)
= 295
NNP FC = NDP MP + factor Income from abroad – net Indirect tax (Indirect tax – subsidy)
=295 + 3 – (30 -5)
=295 + 3 – 25
=298 – 25
NNP at FC= 273 crores

National Income by income method

NDP at FC=(5) + (6) + (7) + (8) + (11) + (15)

=170 + 10 + 45 + 20 + 10 + 15
= 270 (NDP FC )
NDP FC = NDP FC + FIFA
= 270 + 3
NNP at FC = 273 crores

4. Given the following date, find the values of Operating Surplus’and‘NetExports’ (6marks)(in`crore)
(i) WagesandSalaries 2,400
(ii) NationalIncome 4,200
(iii) NetExports ?
(iv) NetFactorIncomefromAbroad 200
(v) GrossDomesticCapitalFormation 1,100
(vi) MixedIncomeofSelf-Employed 400
(vii) Private Final Consumption Expenditure 2,000
(viii) NetIndirectTaxes 150
(ix) OperatingSurplus ?
(x) GovernmentFinalConsumptionExpenditure 1,000
(xi) Consumption ofFixedCapital 100
(xii) Profits 500
Solution: National income (ii)=(i)+OperatingSurplus+(vi) + (iv)
Operating surplus = (ii) – (iv) – (vi) – (i)
= 4200 – 200 – 400 – 2400 = `1200 crores
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 National Income (ii) = (vii) + (x) + (v) + Net Exports – (xi) – (viii) + (iv)
NetExports=(ii)–(vii)–(x)–(v)+(xi)+(viii)– (iv)
= 4200 – 2000 – 1000 – 1100 + 100 + 150 – 200
= 150 crores
5. Suppose only one Product X is produced in the country. Its output during the year 2017
and 2018 was 100 units and 110 units respectively. The market price of X during the years
2017 and 2018 were Rs 50 and Rs 55 per unit respectively. Calculate the percentage change
in real GDP and nominal GDP in year 2018 using 2017 as the base year.

Solution:

Year Outp Price Real Nominal

ut GDP GDP
2017 100 50 5000 5000
2018 110 55 5500 6050

Percentage change in Real GDP

= D in real GDP/Base year real GDP × 100
= 500/5000 × 100 = 10%
Percentage change in Nominal GDP
= D in nominal GDP/Base year nominal GDP × 100
= 1050/5000 × 100 = 21%

Giving reason state how the following are treated in estimation of national income:

1. Payment of indirect taxes by afirm

Ans. No, it is not included in national income because an indirect tax paid to the government is a
transfer payment as no good or service is provided inreturn.

2. Payment of corporate tax by afirm

Ans. No, it is not included as it is a transfer payment. Corporate tax accrues to the government. It
is not received by the owners of factors of production. Hence, it is not a factor income.

3. Payment of interest on a loan taken by an employee from the employer/Payment of

interest by an individual to a bank on a loan to buy a car/Interest received on loans given
to a friend for purchasing acar.

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Ans. No, it is not included in national income because the individual is a consumer, and the loan
is taken to meet consumption expenditure. There is no contribution to production of goods
and services. Therefore, it is not a factor payment.

4. Payment of interest by banks to its depositors/Payment of interest by a firm to

households.
Ans. Yes, it is included in national income because it is a factor income paid by a production
unit (bank or firm). Banks borrow for carrying out banking services/The firms borrow
money for carrying out production.

5. Payment of interest by a firm (government firm or a private firm) to abank

Ans. Yes, it is included in national income because it is a factor payment by the firm. The firm
borrows money for carrying out production of goods and services.

6. Interest received on loan given to a foreign company in India.

Ans. Yes, it will be included in the national income as it is a part of factor income from abroad.

7. Interest received ondebentures.

Ans. Yes, it will be included in the national income because interest
receivedondebenturesisafactorincomebecausedebentureisa sort of loan taken by a production unit,
which uses the money in producing goods andservices.

8. Money received by a family in India from relativesworking abroad, i.e., remittances from
abroad/Scholarship given toIndianstudentsstudyinginIndiabyaforeigncompany/Free meal to
beggars/Financial help received by flood victims/ Expenditure on old age pensions by
government/Giftreceived from employer, e.g. festival gift, gifts on independence day, etc.
Ans. No, it will not be included in the national income as it is a transfer income or transfer payment,
which is received or paid without any contribution to production of goods and services. It is not a
factorincome.

9. Free medical facilities or free meals or house rent allowance or leave travel allow ance paid by the
employer/Rent-free housegiven to an employee by an employer/Expenditure on medical treatment of
employee’s family/Payment of bonus by a firm to its employees/ Contribution to provident fund by
employer.
Ans.Yes,it will be included in the national income as it is a part of the compensation ofemployees.

10. Contribution to provident fund or insurance premium paid byemployees

27 | P a g e
Ans. No, it is not included in national income because it is paid out of compensation of employees, which
is already included.

11. Compensation given by insurance company to an injured worker.

Ans. No, as compensation is given by insurance company to the employee and not by employer.

12. Prize won in alottery.

Ans. No, because it is a windfall gain, not a factor income.

13. Receipts from sale ofland.

Ans. No, it will not be included as land is a free gift of nature and cannot be produced.

14. Dividend received byshareholders.

Ans.Yes, it will be included in the national income as it is a part of the profits of production units, which
is distributed to the owners. Hence, it is a factorincome.

15. Rent received by Indian residents on their buildings rented out to foreigners inIndia.
Ans. Yes, it will be included in the national income as it is a factor income earned by the residents.

16. Royalty

Ans. Yes, it will be included in the national income as royalty is a productive income.

17. Fees received fromstudents

Ans.Yes, it will be included in the national income as it Is a part of the private final consumption
expenditure.

18. Purchase of goods by foreigntourists

Ans. Yes, it is included in national income as these are exports produced in the domestic territory, an item of
final expenditure.

19. Expenditureonmaintenanceoffactorybuildingbyafirm

Ans. No, it will not be included in the national income as it is an intermediate expenditure of the firm.

QUESTION - ANSWER

Q.1 Fina lgoods are those goods which are consumed only by the households.” Defend or refute the
given statement with a valid argument. (3)
Ans.The given statement is not correct and is thus refuted. Final goods are those goods which are
purchased/consumed either by households or by the producers for investment purpose, i.e., these are
the goods which have crossed the productionboundary.

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State with valid reason, which of the following statement is trueorfalse:
(a) Gross Value Added at market price and Gross DomesticProductatmarketpriceareoneandthe
samething.
(b) Intermediategoodsarealwaysdurableinnature. (4)
Ans. (a) The given statement is false as Gross Domestic Product is the result of sum of Gross Value
Added by all the producing units/firms in an economy, during an accounting year.

(b) Thegivenstatementisfalseasintermediategoodsare generallynon-durable in nature. They arethegoods

used as raw material and they lose their identity in the production process for the creation of a new
commodity, during an accountingyear.

(a) ‘Domestic/household services performed by a woman may not be considered as an economic

activity’. Defend or refute the given statement withvalidreason.
(b) ‘Compensation to the victims of a cyclone isan example of a welfare measure taken by the
government’. State with valid reason, should it be included/not included in the estimation
of national incomeofIndia. (4)

Ans. (a) The given statement is defended; as it is difficult to

measurethemonetaryvalueoftheservicesperformed byawoman(homemaker).Therefore,theseactivities
maynotbeconsideredasaneconomicactivity.
(b) Compensation given to the victims of a cyclone is an example of a social welfare measure
taken by the government. However, it is not included in estimation of national income as it is a
transfer paymentwhichdoesnotleadtocorrespondingflow of goods andservices.

“India’sGDPisexpectedtoexpand7.5%in2019-20: WorldBank”
—TheEconomicTimes.
Does the given statementmean that welfare of people of India increase at
The same rate? Comment with reason. (3)

Ans. Generally it is considered that an increase in the Gross Domestic Product (GDP) of
any economy (Indiain thiscase) ensures increase in welfare of the people of the country.
However, this may not always be correct.GDP is not the best indicator of the economic
welfare of acountry.Someoftheprimereasonsforthesameare:
(a) unequal distribution and composition ofGDP,
(b) non-monetary transactions in the economy which are not accounted for in GDP,and

29 | P a g e
 (c) Occurrence of externalities in the economy (both positive and negative).

‘Real Gross Domestic Product is a better indicatorof economic growth than Nominal Gross
DomesticProduct’. Do you agree with the given statement? Support your answer with a
suitable numerical example. (4)
Ans.The given statement is correct. Real Gross Domestic Product (GDP) is a better indicator of
economic growth than Nominal Gross Domestic Product (GDP)asitisnotaffected
bychangesingeneralpricelevel.
‘Circular flow of income in a two sector economy is based on the axiom that one’s
expenditure is other’s income’. Do you agree with the given statement? Support your
answer with valid reasons. (3)
Ans. Yes, the given statement is correct. In a two sector economy, the firms produce goods and
services and make factors payments to the households. The factor income earned by the
households will be used to buy the goods and services which would be equal to income
offirms. The aggregateconsumptionexpenditurebythehouseholdsin the economy is equal to
the aggregate expenditure on goods and servicesproduced by the firms in the economy
(Income of theproducers).

“Managementofawaterpollutingoilrefinerysaysthat it (oilrefinery) ensures welfare through it s

contribution to Gross Domestic product.” Defend or refute the argument of management
with respect to GDP as awelfaremeasureoftheeconomy. (3)
Ans. No, the given statement is not true. The value added by oil refinery to the Gross Domestic
Product (GDP) may also be polluting the nearby source of water. Such harmful effects
that the refinery is causing to people and marine life is not penalized for the same. Thus,
these negative externalities are not ensuring the welfare of the economy through Gross
Domestic Product (GDP).
'Subsides to the producers, should be treated as transfer\ payments.'Defend or refute the given
statement with valid reason. (3)

Ans. The given statement is defended, as subsidy is a transfer payment.Subsidy is the financial
assistance provided byt he government to producers to fulfill its social welfare objectives.
Governmentdoes not get anything in consideration for the same.It does not contribute to
the current flow of goods and services and hence do not contribute to any value addition
.
Which of the following items will be included/not included while estimating

30 | P a g e
 Gross Domestic Product? Give valid reasons in support of your answer. (6)
(a) Wages received by an Indian working in the British Embassy inIndia.
(b) Financial aids received from abroad after 'Fanicyclone'.
(c) Purchase of second-hand machineryfromabroad.
Ans. (a) Wages received by an Indian workinginBritishembassyinIndiaisnotapartofeconomicterritory of
India, as British Embassy is a part of Economic territory of Britain.

(b) Financialaidisatransferincomeasnofactorservice is provided in return. Hence, it is not included

while estimating the value ofGDP.
(c) Purchaseofsecond-handmachineryfromabroadis not included as the value of imports are deducted
while estimation GDP of acountry.

Calculate Gross National Product at marketprice. (4)

(Rs. in crore)

(i) Compensationofemployees 2500

(ii) Profit 700
(iii) Mixed incomeofself-employed 7500
(iv) Net addition tocapitalstock 400
(v) Rentandroyalty 400
(vi) Interest 350
(vii) Factorincomefromabroad 150
(viii) Indirecttaxes 200
(ix) Grossinvestment 470
(x) Netexports 40
(xi) Factorincomepaidtoabroad 100
(xii) Subsidies 50
Solution:GNPmp=(i)+(ii)+(iii)+(v)+(vi)+(vii)–(xi)
+ Depreciation (ix – iv) + (viii) –(xii)
= 2500 + 700 + 7500 + 400 + 350 + 150 – 100 +
(470 – 400) + 200 – 50 = Rs. 11720 crore

Compute National Income. (Rs. incrore) (4)

(a) Privatefinalconsumptionexpenditure 900
31 | P a g e
 (b) Governmentfinalconsumptionexpenditure 400
(c) Netimports 30
(d) Grossdomesticcapitalformation 250
(e) Changeinstock 50
(f) Netdomesticfixedcapitalformation 180
(g) Netindirecttaxes 100
(h) Netfactorincomefromabroad (–)40
(i) Profits 100

Solution:Nationalincome=(i)+(ii)+(vi)+(v)–(iii)–(vii)+(viii)
=900+400+180+50–30–100+(–40)
= Rs. 1360 crore

MONEY AND BANKING

Gist of the lesson:

PART-1:

A Introduction and evolution of Money – Its definition, meaning & importance: -A thing which is
commonly accepted as a medium of exchange is known as money.

B.-Money supply and its components: - It is defined as the total stock of all the forms of money which are
held by the public at a point of time. The two components of Money supply are (a) Currency with the public
(b) Demands deposits of the Commercial banks.

C.-The measures of Money supply: -The Reserve Bank of India uses four alternatives measures of Money
supply known as M1, M2, M3 and M4. Among these measures M1 is the most commonly used measure of
Money supply. M1 = C+DD+OD

PART-2: Money creation by the Commercial Banking System

A. Meaning and features of Commercial Banks- It is a financial institution which accepts the deposits
from the public and advance or gives loans for the purpose of consumption and investment.

B. Primary Deposits-Primary deposits refer to the amount which people deposit in cash with the
commercial bank.

C. Secondary Deposits-It refers to those demand deposits which comes to the banks through their lending
operations and it is also known a derivative deposit.

32 | P a g e
D. Meaning of Credit creation-The power of commercial banks which enables them to expand their deposits
through loans is called credit creation.

E. Concept of Legal Reserve Ratio -It is the minimum reserve that a commercial bank must maintain in a
liquid form as per the instructions of the Central banks.

F. Components of LRR -There are two components(i) Cash Reserve Ratio (CRR)-It is the fraction of net
total demand and time deposits that commercial banks must keep as cash reserves with Central bank. (ii)
Statutory liquidity ratio (SLR) – it is the fraction of net total demand and time deposits that commercial
banks must keep themselves in the form of specified liquid assets.

G. Assumptions of Credit creation-(i)There is a single banking system in the economy. (ii) All transactions
are outed through the banks

H. Need for Credit Creation-Commercial banks are called the factories of credit. They advance much more
than what they collect from the people in the form of deposits. Through the process of credit creation, the
commercial banks provide finance to all the sectors of economy.

I. Money Multiplier: -Money Multiplier is the ratio of total money supply to the amount of cash reserves. It
is the inverse of legal reserve ratio.

J. Relationship between Money Multiplier and Credit creation- There is a direct relationship between the
money Multiplier and the total credit creation by the commercial banks.

J. Numerical Practice-Calculation of credit multiplier, total money created, primary deposit and legal
reserve ration

PART-3:

Central Bank and its functions (Reserve Bank of India): It is an apex body in the banking and financial
structure of a country.

Bank of issue: The Central bank enjoys the sole monopoly of issuing currency.

Government Bank: Central bank acts as a banker, agent and advisor to the government.

Banker’s Bank: The Central bank has the same relation with the commercial banks as the later has with the
general public.

Controller of Credit through bank rate: The Central bank controls the credit by decreasing or increasing the
bank rate

33 | P a g e
CRR: Cash Reserve Ratio is a powerful instrument to control credit.

SLR: It refers to the minimum percentage of time and demand deposits required to be kept with the
commercial banks themselves.

Repo rate and Reverse Repo rate: The rate of interest at which RBI gives short terms loans to the
commercial banks is Repo rate whereas the rate of interest which is entitled to a commercial bank its
surplus lending money to RBI is known as Reverse Repo rate.

ASSIGNMENT: May include MCQ’S one marker questions etc

PART A: Key Words-Meaning of money and money supply, demand deposit, primary deposit, secondary
deposits, legal reserve ratio, bank money, money creation and Multiplier.MCQ’S, fill ups, True and False
Online quiz can be given for practice.

Multiple choice questions MCQs:

1.Which among the following is the most liquid asset?

A Gold B Money

C Land D Treasury bonds

Ans: B – Money

2. Historically the Indian rupee was a _______________ coin?

A Copper B Gold

C Silver D Bronze

Ans: C – Silver coin

3. Money supply is a ______________ concept

A Stock B Flow

C Both A and B D Neither A nor B

Ans: A – Stock

4. Which of the following systems governs note issuing in India?

34 | P a g e
 a. Proportionate system; b. Minimum reserve
system;
c. Fixed fiduciary issue system
d. Simple deposit system

Ans: B – Minimum Reserve system

5. Which of the following agency is responsible for issuing rupee one currency note:

A Reserve BANK of India B Ministry of Commerce

C Ministry of finance D NITI Aayog

Ans: C – Ministry of finance

6. Demand deposits created bank are called ______________

A Money B High powered money

C Bank money D All of these

Ans: C – Bank money

7. Who regulates money supply?

A Govt. of India B Reserve bank of India

C Commercial Bank D Planning Commission

Ans: B -Reserve Bank of India

8. Supply of Money refers to the quantity of money:

A As on 31st March B During any specified period of time

C At any point of time D During any fiscal year

Ans: C – At any point of time

9. Currency means:

A Currency notes B Currency notes plus coins

C Money D All of these

Ans: D – All of these

10. The components of money supply:

35 | P a g e
A Currency held by the public

B Demand deposits of the public in commercial bank

C Other deposits with RBI

D A and B

Ans: D – A and B

Q There are four options for each question, out of these only one is correct. You have to identify the
correct option.

Read the following statement Assertions (A) and Reasons (R). Choose one of the correct alternatives
given below:

Assertion (A) Currency notes do not carry as much value in it as is denominated, still has general
acceptance.

Reason (R) Currency notes are backed by a legal promise from the Central bank and the Central
government of the country.

Alternatives:

(a) Both Assertion A and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A)

(b) Both Assertion (A) and Reason (R) are true but Reason (R) is not the correct explanation of Assertion
(A)

c) Assertion (A) is true but Reason (R) is false.

d) Assertion (A) is false but Reason (R) is true

Correct Ans: Assertion (A) Currency notes do not carry as much value in it as is denominated, still has
general acceptance

Read the following News Report and answer Q 7-10 on the basis of the same:

The Monetary Policy Committee of the Reserve Bank of India kept interest rates on hold Thursday even as
it vowed to keep the policy sufficiently loose to help revive the corona virus battered economy. Accepting a
key demand of lenders and the corporate sector, the central bank declared a onetime restructuring of loan
accounts to bail out stressed borrowers, including personal, small and medium loans.

The details of loan restructuring scheme expected to kick in after the moratorium on loan repayments ends
on August 31st will be worked out by a committee headed by former ICICI Bank chairman K v Kamath.

36 | P a g e
The RBI also continue to provide support on liquidity front and open a new targeted window for the small
vendors.The central bank kept the repo rate at 4% and reduced the repo rate at 3.35 %.

Q Suppose you a member of monetary policy committee of RBI. You have suggested the ________
restrictions/release of the money supply. Be ensure to help revive the corona virus battered economy,

Ans: Release

Q “The monetary policy committee of the RBI kept interest rate on hold _______” which of the
following is highlighted above by the term interest rates.

a) Bank rate and repo rate

b) Bank rate and lending rate

c) Repo rate and reverse repo rate

d) None of these.

Ans: C – Repo rate and reverse repo rate

Q What does the repo rate mean?

A) Rate at which banks borrow from the RBI for a short time.

B) Rate at which bank borrows from the RBI for a long time

C) Rate at which banks deposits the excess funds with the RBI

D) Rates at which bank lends the funds to the public

Ans: A - Rate at which banks borrow from the RBI for a short time

Q Reduction in the repo rate by RBI is likely to ___________ (increase/decrease) the demand for goods
and services in the economy.
Ans: Increase
3-4 mark Questions

Q.1 Define the term Money Supply & state its constituents.

It refers to the total stock of money in an economy at any point of time, held by the
general public i.e. the private individuals and business firms (money is in disposable
form). In other words, it is the amount of money which is in circulation in an economy at
a given point of time. The two constituents of money supply are currency held by the

37 | P a g e
 general public & demand deposits of general public held by the Commercial Banks. Thus,
M1 = C +DD+O

Q2 Define the term Commercial bank.

A Commercial bank is a financial institution which performs the function of

accepting deposits from the public & advancing loans. This banks act as the
financial intermediary between the idle resources & the productive sources of
resources

Q3 Explain how a Commercial Bank creates credit (money supply).

Credit creation by the banks is determined by (i) the amount of initial deposits and ii) the
legal reserve ratio (LRR). It is assumed that all the money that goes out of banks is
redeposit into the banks, and LRR consists of CRR &SLR.

A Commercial Bank accepts deposits from general public & creates a primary account
deposit. This creates liability for the bank & asset for the depositor. It is also referred to as
active deposit. From the active deposits the banks deduct the legal reserves to be kept in
Central Bank (RBI), & the rest (excess reserves) are used in loans & investment. When a
bank gives loans & advances, it creates another deposit known as derivative deposits or
secondary account deposits on the name of debtor. This leads to creation of new primary
account, & thus the new primary deposits keep on increasing until the credit multiplier
stops working. Greater the LRR, smaller the amount of total final deposits, & vice versa.

An Illustration to explain the process of credit creation:

Let the LRR be 20% and there is a Fresh/Primary/Initial/Deposit Account of Rs 10000.

The banks keep 20% ie Rs 2000 as cash and lend the remaining Rs 8000 to a borrower
by opening a new account, called as Loan/Secondary/Derived Account.

ROUNDS INITIAL DEPOSIT LRR SECONDARY DEPOSIT

1 10000 2000 8000

2 8000 1600 6400

- - - -

38 | P a g e
 - - - -

- - - -

TOTAL 50000 10000 40000

Here we assume that all the banking transactions will be through monetary instruments
viz cheques etc.

As assumed, the amount of Rs 8000 will come back to the banks as fresh deposit from
which once again the bank will keep 20% i.e. Rs.1600 as LRR and rest Rs 6400 will be
lend to some other borrower. The bank now creates another secondary account which
will once again become a primary account. This process continues and the money goes on
multiplying till the sum of LRR and the fresh deposit amount is same, or the new deposit
becomes nil. Finally, when we add the total money creation, we get Rs 50000 as the total
deposit creation.

Total credit creation = Initial deposit x 1/LRR = 10000 x 1/20% = 10000 x 100/20

= Rs 50000

Q4 Define the terms LRR, CRR, SLR, Repo & Reverse Repo rate, Credit
Multiplier. Legal Reserve Ratio:
It refers to the minimum portion of total net demand &time deposits of Commercial
Banks which have to be maintained with Central Bank & themselves as cash liquid
assets. There are two legal reserves viz. CRR &SLR.

Cash Liquidity Ratio: It refers to that minimum portion of total net deposits of
Commercial Banks which have to be maintained with Central Bank. During inflation or
deflation, the CRR is regulated by RBI to control inflation or deflation. During inflation,
CRR is increased to restrict the credit by making it dearer, while it is reduced during
deflation to expand the money supply in the economy by making it cheaper.

Statutory Liquidity Ratio: It refers to that portion of total deposits which have to be
maintained by the Banks themselves in the form of liquid cash assets against the
securities of Govt. & RBI.

39 | P a g e
 Repo rate i.e. Repurchase rate of interest refers to the interest paid by the Commercial
Banks to RBI against the loans & advances taken by them from RBI to meet the short
term needs. By changing Repo rate, RBI can regulate the money supply. It is different to
Bank Rate in a way that Bank rate is charged against the loans taken by commercial
banks for long term needs.

Reverse Repo Rate refers to the interest received by the Commercial Banks from the
Central banks against the parking of funds by the commercial banks. By increasing RRR,
the RBI can encourage the Commercial Banks to park more funds so as to restrict the
money supply in the economy. By reducing RRR, the RBI discourages the parking of
funds which helps to induce more credit in the economy to resolve the issue of deflation.

Credit Multiplier refers to the amount by which the initial deposit multiplies into a
larger amount of final deposits. It is equal to 1/LRR. Thus, credit multiplier is inverse
to LRR.

High Order Thinking Skills (HOTS) QUESTIONS

Q1 How improvement in banking habits of the people pushes up credit availability

from the commercial bank?

Ans. When banking habits of the people improve, they star holding less money as cash-in-
hand. Instead more and more money is deposited with the commercial bank.
Accordingly, cash reserves of the commercial bank start rising. Higher cash reserve of

the bank enables them to deposits more funds with the RBI as CRR – deposits. If CRR
remains constant higher CRR- deposits with the RBI gives the commercial bank the
legal authority to create more credit by way of loans/credit. Accordingly, availability of
credit from the commercial bank is increased.

Q2. How can 'Jan-Dhan Yojana' be used as an instrument to increase supply of

money by the commercial banks?

Ans. A large section of the population in India does not have their bank accounts. 'Jan- Dhan
Yojana' prompts people to open their bank accounts. When more and more accounts are
open then some of the cash balances with the people (or idle cash lying with the people)
are bound to reach the banking system as cash deposits or primary deposits. This
increase enables commercial banks to increase their cash reserves with the central
banks. If /\ CR (additional cash reserves with RBI) = Rs10,000 and if CRR=4% then
the additional demand deposit the bank can create = 1/4% * 10,000 = Rs 2,50,000.
40 | P a g e
 This is how 'Jan-Dhan Yojana' may be used as an instrument to increase the supply of
money by the commercial banks.

Q3 How in your opinion, credit creation by the commercial banks accelerates the
pace of economic growth? Write two observations.

Ans. Following observations may be noted in this regard:

Observation 1: Credit creation accelerates the process of growth by expanding the

availability of credit for purpose of investment.

Observation 2: Credit creation contribute to the process of growth by expanding size

of the market (or aggregate demand), as the availability of credit for the purchase of
consumer durables increase

41 | P a g e
PART B: Remembering and understanding based questions.

1 How can money be defined?

2 What are the main functions of money in an economic system?

3 What is money supply and what are the two components of supply of money?

4 What are the measures of money supply?

5 What is meant by LRR? State its components.

6 State two components of M1, measure of money supply.

7 What is an ideal supply of money?

8 Explain the process of credit creation with the help of a suitable numerical example?

9 What is Money Multiplier and its role in determining the credit creation power of
banks?

10 Define Money Multiplier and what is the relationship between Legal Reserve Ratio
and Money Multiplier?

PART: C – Hots and application-based questions

1What is a Commercial bank? What are the two essential conditions for financial
institutions to become a bank?

2 Is credit card a form of money? Give reasons for your answers.

3 Why do people accept cheques when these are not legal tenders?

4 How has the introduction of money separated the act of sale and purchase?

5 If the total deposit created by the commercial banks is Rs 50,000 crores and CRR is
12% and SLR is 8% then calculate the amount of initial deposit with the bank?

6 Calculate the Legal Reserve Ratio if the initial deposits of 10,000 crores leads to a
creation of total deposit of 1,00,000 crores?

7 Use a numerical example to elaborate the Credit creation process as handled by the
Commercial banks?

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8 Explain the working of Money Multiplier with the help of a numerical example?

9 If the Legal Reserve Ration is 20% and Primary deposits are rupees 100 crores. What is
the value of deposit Multiplier and total lending by the banking system? Given the same
amount of initial deposit if the RBI increased the Reserve Ratio to 25% what would
happen in the economy? Explain.

10 Currency is issued by the Central Bank, yet we say that the Commercial banks create
Credit. Explain how is this money creation by the Commercial banks likely to affect the
national income? Explain.

CENTRAL BANK:- Central bank is the apex institution of a county’s monetary system.
The design and the control of the country’s monetary policy is its main
responsibility.India’s central bank is the ‘Reserve Bank of India’. It came into existence
in 1935.
Functions of central bank

There are four functions of central bank:-

1. Authority of currency issue / bank of issue - the central bank is the sole authority
for the issue of currency in the economy. It has the sole responsibility of printing
and putting in circulation all types of currency notes ( with a few exceptions).
a. It promotes efficiency in the financial system.
b. Firstly - because this leads to uniformity in the issue of currency.
c. Secondly - because it gives central bank direct control over money supply
.
d. This function of the bank also builds faith in the currency system of the
economy.
2. . Banker to the government /Government’s Bank -The central bank acts as a
banker to the government. It means the central bank gives the same banking
facilities to the government which commercial banks give to the general public.

43 | P a g e
 a. As the banker to the government the central bank provides a large number
of routine banking functions to the government like – maintaining the
balances, arranging and managing funds of the government and so on .
b. It gives loan to the government,
c. It accepts receipts and makes payments for the government .
d. It works as an agent of the government in matters of collection of taxes,
manages public debt and buys and sells government securities in the open
market.
e. It also acts as a financial adviser to the government.

3. Bankers’ bank and supervisor/regulator – as the banker to the commercial banks

the central bank performs the following fuctions:

a) Holds surplus cash reserves of commercial banks .

b) It also gives loans to the commercial banks when they are in need of funds
.
c) The central bank also provides a large number of routine banking
functions to the commercial banks like cheque clearing , remittance
facilities , etc.
d) It also acts as a supervisor and a regulator of the banking system . It makes
rules regarding their licensing , branch expansions , liquidity of assets ,
amalgamation (merging of banks ) and liquidation ( the winding up of
banks ) , etc. The control is exercised by periodic inspections of the banks
and the returns filed by them.
RBI is known as ‘ lender of the last resort ‘ –Lender of the last resort ; refers to
the role of the central bank (RBI ) , of being ready to lend to banks , especially
when a bank is faced with unanticipated severe financial crises , and due to this
central bank is said to be the ‘ lender of the last resort ‘. If the central bank refuses
to extend this help, there is no option for the bank but to shut down .
4. Controller of credit - The primary objective of credit control is to remove causes
responsible for instability in price fluctuations which in turn are related to the
supply of money .The tools used by the central bank to control money supply can
be quantitative or qualitative .

44 | P a g e
 Quantitative tools control – the extent of money supply by changing the cash
reserve ratio (CRR)or statutory liquidity ratio (SLR) or bank rate or repo rate or
reserve repo rate , or through Open market operations (OMO)
Qualitative tools includes persuasion by the central bank in order to make
commercial banks discourage or encourage the lending which is done through margin
requirement, moral suasion , etc.

Q1 Define the term Central Bank.

Central Bank is the apex institution of a county’s monetary system. The design and the
control of the country’s monetary policy is its main responsibility.India’s central bank is
the ‘Reserve Bank of India’. It came into existence in 1935.
Q2 Explain Authority of currency issue function of a Central Bank.
Authority of currency issue / bank of issue - the central bank is the sole authority for the
issue of currency in the economy. It has the sole responsibility of printing and putting in
circulation all types of currency notes (with a few exceptions).
a. It promotes efficiency in the financial system.
b. Firstly - because this leads to uniformity in the issue of currency.
c. Secondly - because it gives central bank direct control over money supply
.
d. This function of the bank also builds faith in the currency system of the
economy.

Q3” Central Bank acts as the banker to the government”. Elaborate the given
statement
OR
Explain the function of Central Bank as ‘Banker, Agent and Advisor’ of the
Government.
.Banker to the government /Government’s Bank -The central bank acts as a banker to the
government. It means the central bank gives the same banking facilities to the
government which commercial banks give to the general public.
e. As the banker to the government the central bank provides a large number
of routine banking functions to the government like – maintaining the
balances, arranging and managing funds of the government and so on.

45 | P a g e
 f. It gives loan to the government,
g. It accepts receipts and makes payments for the government.
h. It works as an agent of the government in matters of collection of taxes,
manages public debt and buys and sells government securities in the open
market.
i. It also acts as a financial adviser to the government.
Q4 Explain the function of Central Bank as ‘Bankers’ bank and supervisor.

Bankers’ bank and supervisor/regulator – as the banker to the commercial banks the
central bank performs the following fuctions:

e) Holds surplus cash reserves of commercial banks.

f) It also gives loans to the commercial banks when they are in need of funds
.
g) The central bank also provides a large number of routine banking
functions to the commercial banks like cheque clearing , remittance
facilities , etc.
h) It also acts as a supervisor and a regulator of the banking system . It makes
rules regarding their licensing , branch expansions , liquidity of assets ,
amalgamation (merging of banks ) and liquidation ( the winding up of
banks ) , etc. The control is exercised by periodic inspections of the banks
and the returns filed by them.

Q5 Why is RBI (Central Bank) known as lender of the last resort?

RBI is known as ‘ lender of the last resort ‘ –Lender of the last resort ; refers to
the role of the central bank (RBI ) , of being ready to lend to banks , especially
when a bank is faced with unanticipated severe financial crises , and due to this
central bank is said to be the ‘ lender of the last resort ‘. If the central bank refuses
to extend this help, there is no option for the bank but to shut down .
Q6 Distinguish between ‘ Qualitative and Quantitative tools’ of credit control as
may be used by a Central Bank

OR

46 | P a g e
Explain controller of credit function of a Central Bank.

Controller of credit - The primary objective of credit control is to remove causes

responsible for instability in price fluctuations which in turn are related to the supply of
money .The tools used by the central bank to control money supply can be quantitative or
qualitative .

Quantitative tools control – the extent of money supply by changing the cash
reserve ratio (CRR)or statutory liquidity ratio (SLR) or bank rate or repo rate or
reserve repo rate , or through Open market operations (OMO)
Qualitative tools includes persuasion by the central bank in order to make
commercial banks discourage or encourage the lending which is done through margin
requirement, moral suasion, etc.
Determination of Income and Employment
Key concepts

 Aggregate demand and its components.

 Propensity to consume and propensity to save
 Short run fixed price in product market equilibrium output, investment or output
multiplier and the multiplier mechanism.
 Meaning of full employment and involuntary unemployment.
 Problems of excess demand and deficient demand.
 Measures to correct excess demand and deficient demand.
 Change in government spending.
 Availability of credit.

Key points
 Determination of income, output and employment is the core of the subject matter
of macroeconomics.
 AD and AS together determine the level of income, output and employment.
 Aggregate demand is the total demand of goods and service in the economy.
 The main components of AD are-
1. House hold consumption expenditure.
2. Investment expenditure.

47 | P a g e
 3. Government consumption expenditure
4. Net export.
 Household consumption expenditure is the expenditure incurred by the
household on the purchase of goods and services to satisfy their wants.
 Investment expenditure refers to the expenditure incurred by the private firms
and government on the purchase of capital goods such as plant and equipment.
 Government consumption expenditure refers to the expenditure incurred by the
government on the purchase of goods and services.
 Net export refers to the difference between export and import.
 AD=C+I+G+(x-m).
 In a two sector economy AD =C+I.
 Aggregate supply is the sum total of consumption expenditure and saving.
AS=C+S
PROPENSITY TO CONSUME AND PROPENSITY TO SAVE.
 The relationship between consumption and income is called propensity to
consume or consumption function.
1. C=F(Y).
 Consumption function may be represented by an equation.
C=a+b(Y) (a can be also be written as c)
C=consumption, a =consumption at zero level of income=MPC (slope of the
consumption curve) Y=income.
The consumption equation shows the level of consumption for various level of
income.
 Propensity to consume is of two types
A) Average propensity to consume (APC)
B) Marginal propensity to consume (MPC).

 APC= ratio of total consumption to total income.

APC=C/Y.
 MPC=∆C/∆Y.
 Propensity to save indicates the tendency of the households to save at a given
level of income. It shows the relation between saving and income.
 Propensity to save is also of two types.

48 | P a g e
 A. Average propensity to save (APC)
B. Marginal propensity to save.(MPC)
 Average propensity to save is the ratio of saving to income
APC=S/Y.
 Marginal propensity to save is the ratio of change in saving to change in income
MPS=∆S/∆Y.
 There is relationship between APC and APS.
APC+APS=1
APC=1-APS.
 There is relationship between MPC and MPS.
MPC+MPS=1
1-MPC=MPS.
Meaning of involuntary unemployment and full employment.
 Involuntary unemployment refers to a situation in which people are ready to work
at prevailing wage rate, but do not find work.
 Full employment refers to a situation in which no one is unemployed i.e.…there is
no involuntary unemployment.
 According to Keynes full employment signifies a level of employment where
increase in aggregate demand does not lead to an increase in the level of output
and employment.
Increase in demand beyond full employment causes prices to go up.
DETERMINATION OF INCOME AND EMPLOYMENT.
 The determination of income and employment in the Keynesian theory depends
on the level of AD and AS.
 Equilibrium level of income and output is determined where,
1) AD=AS 2) Planned saving =planned investment.
 In a two sector economy Ad=C+I, AS=Y, Y=C+I.
 Suppose that C=40+0.75Y(CONSUMPTION FUNCTION) and I =Rs.60
(investment function)then the equilibrium level of income is obtained as
Y=C+I
Y=40+0.75Y=60
Y-0.75Y=100
0.25Y=100

49 | P a g e
 Y=10000/25
Y=400CRORES.
 Investment multipliers and its working.
 Investment multiplier explains the relationship between increase in investment
and the resultant increase in income.
 Investment multiplier is the ratio of change in income to change in investment.
Multiplier (k) =∆y/∆I.
 The value of multiplier depends on the value of marginal propensity to consume
(MPC).
 There is direct relationship between K and MPC.
 Multiplier also depends on the marginal propensity to save
 There is inverse relationship between multiplier and MPS.
IMPORTANT FORMULAE.
 AD=C+I (two sector economy).
 APC=C/Y.
 APS=S/Y.
 APC+APS=1
 MPC=∆C/∆Y
 MPS=∆S/∆Y
 MPS+MPC=1 AND 1-MPC=MPS
 K=∆Y/∆C or K=1/MPS or K=I/I-MPC
 C= ~c+b(Y)
 S=-a+(1-b)Y
-a= negative saving
(1-b)=MPS

SHORT RUN FIXED PRICE ANALYSIS

Basic Concept

Autonomous consumption: The consumption which is not depends upon income. (Or)
The amount of consumption Expenditure when income is zero. C > 0. Even if income is
zero consumption cannot be zero. Consumption will take place from past savings for
survival.

50 | P a g e
Autonomous Investments: It is Investment which is made irrespective of level of
income. It is generally run by the government sector. It is income inelastic. The volume
of autonomous investment is same at all level of income.

Assumption

1) Fixed Price :
In the short period price is fixed (constant) and elasticity of supply is infinite i.e., supply
curve is perfectly elastic. It means the suppliers are willing to supply whatever amount of
goods, consumer will demand at that price.

2) Fixed Interest Rate : Interest rate remains constant.

3) Aggregate supply is perfectly elastic at this price.
Under these circumstances equilibrium output will be determined by aggregate demand at
this price in the economy. At a fixed price the value of ex-ante aggregate demand for
final goods is the sum of ex-ante consumption expenditure C and ex-ante investment
expenditure I on final goods.

AD=C+I
Consumption function C =ˉc + b(Y)
C = Autonomous consumption

Shows marginal propensity to consume due to unit increase in income

In the short period price and rate of interest remaining constant i.e., ex-ante Investment
expenditure is uniform / same amount every year.
I = I

Effective demand I = Autonomous Expenditure we also assume that Aggregate Supply at

this cost price is determined by aggregate demand this is known as Effective demand
principle. The level of AD required to achieve full employment equilibrium is called
effective demand. (or) AD at the point of equilibrium is called Effective demand.

AD = C+I (By substituting the value of C+I)

AD = C + I + by
When final good market is in equilibrium quantity demanded = quantity supply

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AD = AS
Y = C + I + by

Y = A + by (A = C + I showing total autonomous expenditure

Y – by = A
Y (l – b) = A
Y=A/ l-b
Y depends upon A (C (or) I) or MPC.

Effects of an autonomous change on equilibrium in the product market.

AS=Y

E2 AD2=A2 + cy
Aggregate Demand

F AD1=A1 + cy

J
A2
E1
G
A1

O Y1

Output

The line AD1 and AD2 correspond to the values of A, via A1 and A2 respectively

AS is the 45° line is equal to one (tan 45° = 01)

• The 45° line represents point at which AD and output are equal.
The AD1 line intersects the 45° line at point E1.
At equilibrium point the equilibrium values of output and aggregate demand are
OY1 and AD1.
When autonomous investment increases the AD1 line shifts upwards and assumes
the position AD2.

52 | P a g e
 The value of aggregate demand at output OY1 is Y1F which is greater than the
value of output OY1 = Y1E1 by an amount E1F
• E1F measures the amount of excess demand that emerges in the economy as a
result of the increase in autonomous expenditure: The new AD2 intersects the 45°
line at point E2 at the new equilibrium output and AD2 have increased by an
amount E2G which is greater than the initial increment in autonomous
expenditure E1F.
1 MARK QUESTIONS
1. What is the relation between APC and APS?
Ans. APC+APS=1

2. What is the relation between MPC and MPS?

Ans. MPS+MPC=1.
3. If APC is 0.7 then how much will be APS?
Ans. 1-0.7=0.3
4. If MPC =0.75, what will be MPS?
Ans. MPC+MPS=1
1-0.75=0.25
5. State the important factor influencing the propensity to consume in an
economy?
Ans. The level of income (Y) Influences the propensity to consume (c) of
an economy.
6. What is meant by investment?
Ans. Investment means addition to the stock of capital good, in the nature
of structures, equipment or inventory.
7. What is the investment demand function?
Ans. The relationship between investment demand and the rate of interest
is called investment demand function.
8. What is equilibrium income?
Ans. The equilibrium income is the level of income where AD=AS
i.e.…AD=AS and planned saving equals planned investment.
9. Give the formula of investment multiplier in terms of MPC.
Ans. K=1/1-MPC

53 | P a g e
10. What can be the minimum value of investment multiplier?
Ans. One.
11. What is the maximum value of investment multiplier?
Ans. Infinity.
12. Give the equation of propensity to consume.
Ans. C=a+by.

13. Write down the equation of saving function?

Ans. S= -a+ (1-b) y.
3 AND 4 MARKS QUESTIONS.

1. Explain the components of equation c= a + by.

Ans. ‘a’ is called intercept and it represents the amount of consumption when
there is a zero level of income i.e. autonomous consumption. The
consumption is positive at zero level of income. The coefficient ‘b’ measures
the slope of consumption. The slope gives the increase in consumption per
unit increase in income. This is called as MPC. Consumption changes by ‘b’
for every one rupee change in income. Consumption changes in the same
direction as income.

2. Derive the saving function from the consumption function c=a+by.

Ans. Saving is equal to income minus consumption (y=c+s).The saving
function relates to the level of savings to the level of income. It is derived
from the consumption which is as follows:
Y=C+S
S=Y-C
SINCE C=a+bY.
THEREFORE,
S=Y-(a+bY)
S= -a+(1-b)Y (SAVING FUNCTION).

3. Explain the components of S= -a+ (1-b) Y.

54 | P a g e
 Ans. The saving function is S= -a+ (1-b) Y.-a represents the intercept term
and it represents the amount of savings done when there is zero level of
income. The saving is negative at zero level of income because at zero level of
income consumption (a) is positive. Negative saving is nothing but dis saving,
this means that at zero level of income there is dissaving of amount –a.
The coefficient (1-b) measures the slope of the saving function. The slope of
the saving function gives the increase in savings per unit increase in the
income. This is known as MPS. Since ‘b’, that is MPC is less than one, it
follows that (1-b) i.e. MPS is positive. Saving is an increasing function of
income.
4. Can the value of APS be negative? If yes then when?
Ans. The value of APS can be negative when the value of consumption
exceeds the value of income. At low level of income saving is negative.
e.g.: if income is Rs 1000 and consumption expenditure is Rs 1200
y=c+s s=y-c
1000-12000=-200
APS=-200/1000=0.2 APS=S/Y.
APS=-0.2.
5. Can the average propensity to consume be greater than one? Give the reason
for your answer.
Ans. APC can be greater than one when the consumption exceeds the income.
At that level APS will be negative .when the APS is negative APC will be
greater than one.
e.g.: if the income is 1000 and the consumption is 1200, APC
=1200/1000=1.20.
6. When can the APC be equal to one? Give reason for your answer.
Ans. APC can be equal to one when APS =0, i.e when consumption = income.
E.g: y=1000, c=1000.
APC=C/Y 1000/1000=1
APC=1
APC+APS=1
1-APC=APS
1-1=0

55 | P a g e
 7. Explain the meaning of investment multiplier? What can be its minimum
value and why?
Ans. Defined as the ratio of change in the income to the change in the
investment.
K=∆Y/∆I.
The value of the multiplier is determined by the MPC. It is directly related to
MPC.
K=1/1-mpc = 1/1-0 =1
K=1
Minimum value of K is when minimum value of MPC=0, the minimum value
of K will be unit one.

8. Explain the working of a multiplier with an example.

Ans. Multiplier tells us what will be the final change in the income, as a result
of change in investment. Change in investment results in the change in
income. Symbolically:
∆I→∆Y→∆C→∆Y
The working of a multiplier can be explained with the help of the following
table which is based on the consumption that is, ∆I=1000 and MPC=4/5.
PROCESS OF INCOME GENERATION.

ROUNDS ∆I ∆Y ∆C
1. 1000 1000 4/5×I000=800
2. - 800 4/5×800=640
3. - 640 4/5×640=512
4. - 512 4/5×512=409.6
↓∞ ↓∞ ↓∞ ↓∞
TOTAL 5000 4000

As per the table the initial increase in the investment of Rs 1000 there is a total increase
in the income by Rs 5000 given MPC=4/5 . Out of this total increase in the income Rs
4000 will be consumed and Rs 5000 be saved.

The sum of total increase in income is also derived as:

56 | P a g e
∆y=1000+800=640+512+…………….infinity.

1000+4/5×1000(4/5)2×1000+(4/5)3×1ooo+………..infinity

=1000[1+4/5+ (4/5)2+(4/5)3+………infinity]

=1000[1/1-4/5] = 1000×5/1=Rs. 5000 cores.

9. Differentiate between ex ante and ex post investment.

Ans. Ex ante is the planned investment which the planner intends to invest at different
level of income and employment in the economy.

Ex post investment may differ from ex ante investment when the actual sales differ from
the planned sales and the firms thus face unplanned addition or reduction of inventories.

6 MARKS QUESTIONS WITH ANSWERS

1.Draw a hypothetical propensity to consume curve from it draw the propensity curve to
save curve
Ans. APC=C/Y APS=S/Y
Propensity to save curve
Is drawn from propensity to consume curve
When y=c APC=1
Till that point APS is negative at point‘s’
When y>c there is a positive saving

Y = c+s
y

Y>C c
C/S

c
S
S=0

0 X
APS=0 Income

57 | P a g e
 2. Explain the determination of income and employment with AD and AS. (Give
schedule)

AD= C+I
AS=C+S AS=Y (refers to countries national income)
The equilibrium level of income is determined at a point when AD=AS.
Equilibrium can be achieved at full employment and even at under employment
situation.
It may not be always at full employment condition in an economy.

y c I AD=C+I AS=Y
0 50 100 150 0
100 100 100 200 100
200 150 100 250 200
300 200 100 300 300 AD=
AS
400 250 100 350 400
500 300 100 400 500
The above schedule shows equilibrium level of income is 300 where AD=AS 300=300.
1. Explain the equilibrium level of income, employment and output with saving and
investment approach. What happens when savings exceeds investment?
Ans. Equilibrium is achieved when planned saving is equal to planned investment that is
S=I.
This can be seen with the help of schedule and a diagram.
INCOME CONSUMPTION SAVING INVESTMENT
Y C (S=Y-C) I
0 50 -50 100
100 100 0 100
200 150 50 100
300 200 100 100 S=I
400 250 150 100

58 | P a g e
 Y
Saving

100 I

S/I
X
300 Income
The equilibrium level of income is s 300 core and at this point S (100) =i (100) the
equilibrium may necessarily not be at the full employment level.
When saving exceeds planned investment means people are consuming less and
spending more as a result AD is less than AS.
This will lead to accumulation of more goods with producer .this will make the
businessmen to reduce production consequently, output, income & employment
will be reduced till the equilibrium level of income.
2. Draw a straight line consumption curve. From it derive a saving curve explaining
the process. Show on the diagram.
a) The level of income at which average propensity to consume equal to
one.
b) A level of income at which average propensity to save is negative.

Consumption

Y
Negative saving C
A
S

o Y B Income/Output

Savings

59 | P a g e
Ac is the consumption curve and OA is the consumption expenditure at zero level of
income. Income minus consumption is saving.
When income is 0, the economy’s consumption level is OA. The corresponding
level of saving is -0A.
So –a is the starting point of saving curve. At OB level of income consumption is
equal to income, so saving are zero. so B is another point on saving curve .

Join A and B and extend this line to S, AS is the saving curve.

a) The level of income at which APC is equal to one is OB.
b) A level of income at which APS is negative OY.
NUMERICALS.
1. If in an economy investment increases by Rs 1000 cores to Rs 1200 cores and as a
result total income increases by 800 cores calculate capital MPS.
Ans.∆ I=1200-1000=200
∆Y=800
∆K=∆Y/∆I=800/200=4
K=1/MPS=4
MPS=1/4=0.25
MPS=0.25

2. IF in an economy the actual level of income is Rs 500crores whereas the full

employment the level of income is RS 800 cores. The MPC=0.75 calculate the
increase in investment required to achieve full employment income.
Actual income=Rs500 cores
Full empl Income = Rs 800 cores
∆ y = 800 -500 = 300 cores
MPC = 0.75 = 75 = 3
100 4
K= 1 1 1 100
-------- ------------ = ---------- = --------- =4
01-MPC 1 - 0.75 0.25 25
We know that ∆ y = K. ∆ I
300 = 4 × 4 I

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 ∆ I = 75 crores
3. Calculation of APC and MPC given the level of Income and Consumption
Income consumption APC = c/y MPC = ∆c/∆y
0 4 - -
10 12 1.20 0.80
20 20 1.00 0.80
30 28 0.93 0.80
40 36 0.90 0.80

4. Calculation of APS and MPS given the level of Income and consumption

Income consumption saving APS MPS

(Rs in crores) (Rs in crores)

0 4 -4 - -

10 12 -2 -0.20 0.20

20 20 0 0.00 0.20

30 28 2 0.07 0.20

40 36 4 0.10 0.20

Clue: APS = s/y MPS = ∆s/∆y S=Y – C

5.Suppose the consumption equals c= 40 + 0.75 y, Investment equals I = Rs 60 and Y= C

+ I. Find i) Equilibrium level of income ii) The level of consumption at equilibrium iii)
level of saving at equilibrium

Ans: i) Y= C + I AS = AD
Substituiting the value of c and I we get
Y = 40 + 0.75y + 60 Y= C+ I I=60
(Y-0.75y)= 100 AS =AD C= 40 + 0.75y).25 Y = 100
Y= 100 = 10000
------- --------- = 400
0.25 25

61 | P a g e
 Y = 400 Equilibrium level of Income
ii) Given c= 40 + 0.757
Y = 400
C= 40 + 0.75(400) = 340
C=340
iii) Y= C + S So S= Y-C
S= 400 -340 = 60
S= 60 crores
6. In a two sector economy, the saving and investment functions are:

S= -10 + 0.2Y I = -3 + 0.1Y

What will be the equilibrium level of income?

Ans: Equilibrium level of income S= I

-10 = 0.2y = -3 + 0.1y

0.2y – 0.1y = -3 = 10

0.1y =7 = y = 70

7. Explain the components of the equation c= 20 + 0.90 y and construct a schedule for
consumption where income is Rs 200 , Rs 300 , Rs 350 and Rs 400.

Components of equation c=20 + 0.90y explained in ¾ mark question number 1

The schedule for consumption is as follows

Y (Income) c=20 + 0.90y

200 200 c= 20 + 0.9 × 200

250 245 =20 + 180 = 200

300 290 c= 20 + 0.9 ×250

350 335 = 20 + 225 = 245

400 380 c= 20 + 0.9 × 300 = 290

C= 20 + 0.9 × 350 + 335

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 C= 20 + 0.9 × 400 = 380

8. The consumption function is C= 20 + 0.9y. The value of Income is given as 100,200,

300, 400 and 500. Find out the consumption schedule and draw the consumption curve.

The consumption schedule

Y (Income) C = 20 + 0.9 Y

0 C=20

100 C=20 + 0.9 (100) = 110

200 C=20 + 0.9 (200) = 200

300 C=20 + 0.9 (300) = 290

400 C=20 + 0.9 (400) = 380

500 C=20 + 0.9 (500) = 470

The consumption curve is shown as

C=f(y)
470

380
300

290
Consumption

200

110
20
20
0 500
100 200 300 400
Income

10. How is equilibrium output of final goods determined under short run fixed price

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 Under short run fixed price, equilibrium output and equilibrium demand at
fixed price and constant rate of interest can be found with the help of
following formulas
__
Y= A
---------
1-b
Y= Value of equilibrium output
__
A = Total Autonomous consumption
B= MPC

Thus, value of equilibrium output (y) depends on values of A (i.e, c + I) and b

i.e AD = AS
__ __
Y= C + I + by
__ __ __ __
Y = A + by (A= C + I showing total autonomous expenditure)
__
Y – by = A
_
Y (1-b) = A __
Y= A
--------
1-b

Application level questions

Multiplier

1. In an economy an increase in investment leads to increase in national income

which is three times more than the increase in investment (calculate marginal
propensity to consume)

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2. In an economy the MPC is 0.95 investment is increased by Rs. 100 crores.
Calculate the total increase in income and consumption expenditure
3. Explain with numerical example how an increase in investment in an economy
affects the level of consumption.

4. An increase in investment leads to total rise in national income by Rs. 500

crores. If MPC is 0.9 what is the increase in investment? Calculate.

5. In an economy the MPC is 0.8 Investment is increased by Rs.500 crores.

Calculate the total increase in income and consumption expenditure.

6. If in an economy MPC is 0.75 and its investment is increased by Rs.500 crores.

Calculate the total increase in income and consumption expenditure

7. Compete the table

Income MPC Saving APS

0 - -90 -
100 0.6 - -
200 0.6 - -
300 0.6 - -

8. In an economy S= -50 +0.5Y is the saving function (where S=saving and

Y=national income) and investment expenditure is 7000. Calculate
(i) Equilibrium level of national income
(ii) Consumption expenditure at Equilibrium level of N.I

9. From the following information about an economy calculate

(i) its Equilibrium level of national income and

(ii) saving at Equilibrium level of N.I

Consumption function = 200 + 0.9Y

Investment expenditure I=3000.

10. Disposable income is Rs.1000 crores and consumption expenditure is Rs.750

crores. Find out average propensity to save and average represent to consume.

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11 In an economy investment expenditure increased by Rs.700 crores. The marginal
propensity to consume is 0.9 calculate total increase income and consumption
expenditure

12. Complete the following table

Level of Consumption Marginal Marginal

income Propensity to
Expenditure Propensity
consume

400 240

600 320

700 465

13. In an economy an increase in investment leads to increase in national income

which is three times more than the increase in investment calculate marginal
propensity to consume.

14. The disposable income is Rs.2500 crores and saving is Rs.500 crores find out
average propensity to consume

15. In an economy MPC is 0.75 if investment expenditure is increased by Rs.500

crores calculate the total increase in income and consumption expenditure

16. Complete the following table

17. As a result of increase investment by 125 crores national income increased by

500 crores calculate multiplies, MPC and MPS

18. Given consumption function C=100+.75 Y (where C=consumption expenditure

and Y=national income) and investment expenditure Rs.2000 .calculate
(i) Equilibrium level of national income
(ii) Consumption expenditure at equilibrium level of income

19. In an economy S= -50+0.5Y is the saving function (where S=saving and

Y=national income) and investment expenditure is 9000 calculate
(i) Equilibrium level of national income
(ii) Consumption of expenditure at equilibrium level of national income

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20. From the following information about an economy calculate (i) Equilibrium level
of N.I (ii) saving at Equilibrium level of income consumption function
C=200+0.9Y (where C=consumption expenditure and Y=N.I. Investment
expenditure I =5000

21. C=100+0.75 is a consumption function (where C= consumption expenditure and

Y= N.I) and investment expenditures =1600 on the basis of this information
calculate
(i) Equilibrium level of national income
(ii) Saving at Equilibrium level of N.I

22. Given below is the consumption function in an economy C=100+0.10Y with the
help of a numerical example show that in this economy as income increase APC
will decrease

23. Given below is the consumption function in an economy C=100 +0.5Y with the
help of a numerical example show that in this economy as income increases APS
will increase.

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 SUPPORT MATERIALDETERMINATION OF INCOME & EMPLOYMENT
Contents

-Aggregate demand and its components.

-Propensity to consume and propensity to save Short run fixed price in product
market equilibrium output, investment or output multiplier and the multiplier
mechanism.

-Meaning of full employment and involuntary unemployment.

-Problems of excess demand and deficient demand.

-Measures to correct excess demand and deficient demand.

-Change in government spending.

-Availability of credit.

Autonomous consumption: The consumption which does not depend upon income.
(Or) The amount of consumption expenditure when income is zero.C > 0. Even if
income is zero consumption cannot be zero. Consumption will take place from past
savings for survival.

Autonomous Investments: It is Investment which is made irrespective of level of

income. It is generally run by the government sector. It is income inelastic. The
volume of autonomous investment is same at all level of income

National Income Determination Under Aggregate Demand And Supply Approach

And Saving, Investment Approach, Effective Demand

1. Determination of equilibrium level of national income

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(a) It refers to that point which has come to be established under the given condition
of aggregate demand and aggregate supply, and has tendency to stick to that level
under this given condition:

Condition to get equilibrium level of NY

• AD = AS

• Investment = Saving

How is Investment = Saving?

Here,

AD = AS

C+I=C+S

I=C+S–C

I=S

(b) If due to some disturbance, we divert from that position, then the economic
forces will work in such a manner so as to drive us back to the original position,

i. e., aggregate demand is equal to aggregate supply.

(c) Any movement from that point would be unstable. In short, it is a position of
rest.

(d) It can be explained with the help of following schedule and diagram:

National Income

(e) Figure B is derived from figure A. In figure A at point P, income is equal to

consumption, which is known as to be break even point. Corresponding to point P,
we derive point P1; in figure B, where saving is equal to zero. In figure A, the
equilibrium level of national income is attained at point E, where aggregate supply =
aggregate demand. Corresponding to point E, we derive the point E1, where saving
= investment.

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2. Determination of equilibrium level of national income through Aggregate
demand-Aggregate Supply Approach

(a) It refers to the point that has come to be established under the given condition of
aggregate demand and aggregate supply, and has tendency to stick to that level
under this given condition where Aggregate Demand = Aggregate Supply.

(b) If due to some disturbance, we divert from that position, the economic forces will
work in such a manner so as to drive us back to the original position, i.e., aggregate
demand is equal to aggregate supply.

(c) In the above mentioned figure, at point P, income = consumption, which is

known as to be a break-even point. The equilibrium level of national income is
attained at point E, where aggregate demand = aggregate supply.

(d) If due to some disturbance we divert from our position, like when AD > AS [at
Y2], then, production will have to be increased to meet the excess demand.
Consequently, national income will increase. As we know positive relationship exists
between national income and consumption, so consumption will increase, which will
thereby increase the aggregate demand till we reach the equilibrium.

(e) As against it, when AD < AS [at Y1], then there would be stockpiling and
producers will produce less. National income will fall and as a result consumption
will start falling, which will thereby fall the aggregate demand till we reach the
equilibrium.

3. (a) Ex-ante saving and ex-ante investment:

(i) In an economy what we plan (or intend or desire) to save during a particular
period is called ex-ante saving.

(ii) Against it, what we plan (or intend or desire) to invest during a particular period
is called ex-ante investment.

(b) Ex-post saving and ex-post investment.

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(i) In an economy what we actually save or what is left after deducting consumption
expenditure from income is called ex-post (or realized) saving.

(ii) As against it what we actually invest or what we actually add to the physical
assets of an economy is called ex-post (or realized) investment.

4. Determination of equilibrium level of national income through Saving-Investment

Approach

(a) It refers to the point that has come to be established under the given condition of
aggregate demand and aggregate supply, and has tendency to stick to that level
under this given condition where Aggregate Demand (AD)= Aggregate Supply (AS).
AD = AS

Consumption (C) + Investment (I) = Consumption (C) + Saving (S)

I=S

(b) If due to some disturbance, we divert from that position, the economic forces will
work in such a manner so as to drive us back to the original position, i.e., Saving is
equal to Investment.

National Income

(c) In the above figure, the equilibrium level of national income is attained at point
E, where saving = investment which is derived from a point where AD = AS.

(d) If due to some disturbance we divert from our position like when investment >
saving [at Y2], then production will have to be increased to meet the excess demand.
Consequently, national income will increase leading to rise in saving until saving
becomes equal to investment. It is here that equilibrium level of income is
established because what the savers intend to save becomes equal to what the
investors intend to invest.

(e) As against it, when saving > investment [at Y1], then there would be stockpiling
and producers will produce less. .National income will fall and as a result saving will
start falling until it becomes equal to investment. It is here the equilibrium level of
income is derived.

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5. Effective Demand:

The level at which the economy is in equilibrium, i.e., where aggregate demand =
aggregate supply, is called effective demand. It can also be explained with the help
of the following table:

Concepts Of Investment Multiplier

1. Investment Multiplier

Meaning: The ratio of change in national income (ΔY) due to a change in investment
(ΔI) is known as multiplier (K).

FULL EMPLOYMENT EQUILIBRIUM

Full employment refers to a situation where all the factors of production are fully
employed in the production process and their is no involuntary unemployment.

Excess Demand And Its Related Concepts

Introduction An illustration of meaning, diagram, reasons, impacts and measures to

control excess demand (inflationary gap) and deficient demand (deflationary gap);

72 | P a g e
basic definitions of full employment, over full employment, involuntary
unemployment, voluntary unemployment is also dealt with in this chapter.

Excess Demand and Its Related Concepts

1. Excess Demand and Inflationary Gap:

(a) When in an economy, aggregate demand exceeds “aggregate supply at full

employment level”, the demand is said to be an excess demand.

(b) Inflationary gap is the gap showing excess of current aggregate demand over
‘aggregate supply at the level of full employment’. It is called inflationary because it
leads to nation (continuous rise in prices).

(c) A simple example will further -clarify it. Let us suppose that an imaginary
economy by employing all its available resources can produce 10,000 quintals of
rice. If aggregate demand of rice is say 12,000 quintals, this demand will be called an
excess demand, because aggregate supply at level of full employment of resources is
only 10,000 quintals and the result of the gap of 2000 quintals will be called as
inflationary gap. In the above diagram gap is AB because at Full employment Y*,
Aggregate demand (BY*) is grInflationaryeater than Aggregate Supply(AY*).

73 | P a g e
2. Reasons or causes for excess demand: The main reasons for excess demand are
apparently the increase in the following components of aggregate demand:

(a) Increase in household consumption demand due to rise in propensity to

consume.

(b) Increase in private investment demand because of rise in credit facilities.

(c) Increase in public (government) expenditure.

(d) Increase in export demand.

(e) Increase in money supply or increase in disposable income.

3. Impacts or effects of excess demand on price, output, employment:

(a) Effect on General Price Level: Excess demand gives a rise to general price level
because it arises when aggregate demand is more than aggregate supply at a full
employment level. There is inflation in economy showing inflationary gap.

(b) Effect on Output: Excess demand has no effect on the level of output. Economy
is at full employment level and there is no idle capacity in the economy. Hence
output can’t increase.

(c) Effect on Employment: There will be no change in the. level of employment also.
The economy is already operating at full employment equilibrium, and hence, there
is no unemployment.

4. Measures to control the excess demand: We can control the excess demand with
the help of the following policy:

(a) Monetary Policy

(b) Fiscal Policy

Let us discuss in detail:-

(a) Monetary Policy:Monetary policy is the policy of the central bank of a country to
control money supply and availability of credit in the economy.The central bank can
take the following steps:

74 | P a g e
(i) Quantitative Instruments or General Tools of Monetary Policy:

These are the instruments of monetary policy that affect overall supply of
money/credit in the economy.These instruments do not direct or restrict the flow of
credit to some specific sectors of the economy.They are as under-

• Bank Rate or Discount Rate (Increase in Bank Rate)

-> Bank rate is the rate of interest at which central bank lends to commercial banks
without any collateral (security for purpose of loan). The thing, which has to be
remembered, is that central bank lends to commercial banks and not to general
public.

->In a situation of excess demand leading to inflation

-> Central bank raises bank rate that discourages commercial banks in borrowing
from central bank as it will increase the cost of borrowing of commercial bank.

❖It forces the commercial banks to increase their lending rates, which discourages
borrowers from taking loans, which discourages investment.

❖ Again high rate of interest induces households to increase their savings by

restricting expenditure on consumption.

❖ Thus, expenditure on investment and consumption is reduced, which will control

the excess demand.

• Repo Rate (Increase in Repo Rate):

-> Repo rate is the rate at which commercial banks borrow money from the central
bank for short period by selling their financial securities to the central bank

-> These securities are pledged as a security for the loans.

-> It is called Repurchase rate as this involves commercial bank selling securities to
RBI to borrow the money with an agreement to repurchase them at a later date and
at a predetermined price.

-> So, keeping securities and borrowing is repo rate.

75 | P a g e
->In a situation of excess demand leading to ination

❖ Central bank raises repo rate that discourages commercial banks in borrowing
from central bank as it will increase the cost of borrowing of commercial bank.

❖It forces the commercial banks to increase their lending rates, which discourages
borrowers from taking loans, which discourages investment.

❖ Again high rate of interest induces households to increase their savings by

restricting expenditure on consumption.

❖ Thus, expenditure on investment and consumption is reduced, which will control

the excess demand.

• Reverse Repo Rate (Increase in Reverse Repo Rate)

-> It is the rate at which the central bank (RBI) borrows money from commercial
bank

-> In a situation of excess demand leading to ination, Reverse repo rate is increased,
it encourages the commercial bank to park their funds with the central bank to earn
higher return on idle cash.It decreases the lending capability of commercial
banks,which controls excess demand

.Open Market Operations (OMO)(Sale of securities):

->It consist of buying and selling of government securities and bonds in the open
market by central bank

->In a situation of excess demand leading to inflation, central bank sells government
securities and bonds to commercial bank. With the sale of these securities, the
power of commercial bank of giving loans decreases, which will control excess
demand.

• Increase in Varying Reserve Requirements or Legal Reserve Ratio:

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-> Banks are obliged to maintain reserves with the central bank, which is known as
legal reserve ratio. It has two components. One is the Cash Reserve Ratio or CRR
and the other is the SLR or Statutory Liquidity Ratio.

-> Cash Reserve Ratio (Increase in CRR):

❖It refers to the minimum percentage of a bank’s total deposits, which it is

required to keep with the central bank. Commercial banks have to keep with the
central bank a certain percentage of their deposits in the form of cash reserves as a
matter of law.

❖ For example, if the minimum reserve ratio is 10% and total deposits of a certain
bank is Rs.100 crore, it will have to keep Rs.10 crore with the central bank.

❖ In a situation of excess demand leading to inflation, cash reserve ratio (CRR) is

raised to 20 per cent, the bank will have to keep Rs.20 crore with the central bank,
which will reduce the cash resources of commercial bank and reducing credit
availability in the economy, which will control excess demand.

-> Statutory Liquidity Ratio (Increase SLR):

❖It refers to minimum percentage of net total demand and time liabilities, which
commercial banks are required to maintain with themselves.

❖In a situation of excess demand leading to inflation, the central bank increases
statutory liquidity ratio (SLR), which will reduce the cash resources of commercial
bank and reducing credit availability in the economy.

(ii) Qualitative Instruments or Selective Tools of Monetary Policy:These

instruments are used to regulate the direction of credit. They are as under:

(i) Imposing margin requirement on secured loans (Increase):

• Business and traders get credit from commercial bank against the security of their
goods. Bank never gives credit equal to the full value of the security. It always pays
less value than the security.

77 | P a g e
• So, the difference between the value of security and value of loan is called
marginal requirement.

• In a situation of excess demand leading to inflation, central bank raises marginal

requirements. This discourages borrowing because it makes people get less credit
against their securities.

(ii) Moral Suasion:

• Moral suasion implies persuasion, request, informal suggestion, advice and appeal
by the central banks to commercial banks to cooperate with general monetary
policy of the central bank.

• In a situation of excess demand leading to inflation, it appeals for credit

contraction

(iii) Selective Credit Control (SCC) [Introduce Credit Rationing]:

. In this method the central bank can give direction to the commercial banks not to
give credit for certain purpose or to give more credit for particular purposes or to
the priority sectors.

. In a situation of excess demand leading to inflation, the central bank introduces

rationing of credit in order to present excessive flow of credit, particularly for
speculative activities.It helps to wipe off the excess demand

(b) Fiscal Policy: The expenditure and revenue policy taken by the general
government to accomplish the desired goals is known as fiscal policy. A general
government can take the following steps:

(a) Revenue Policy (Increase Taxes):

(i) Revenue policy is expressed in terms of taxes.

(ii) During inflation the government impose higher amount of taxes causing the
decrease in purchasing power of the people.

78 | P a g e
(iii) It is so because to control excess demand we have to reduce the amount of
liquidity from the economy.

(b) Expenditure Policy (Reduces Expenditure):

(i) Government has to invest huge amount on public works like roads, buildings,
irrigation works, etc. (ii) During inflation, government should curtail (reduce) its
expenditure on public works like roads, buildings, irrigation works thereby
reducing the money income of the people and their demand for goods and services.

(c) Increase in Public Borrowing/Public Debt:

(i) This measure means that government should raise loans from public and hence
borrowing decreases the purchasing power of people by leaving them with lesser
amount of money.

(ii) So, government should resort to more public borrowing during excessive
demand.

(iii) Government should make long term debts more attractive so that public may
use their excess liquidity amount of money in purchasing these bonds, which will
reduce the liquidity amount of money in the economy and thereby inflation could be
controlled

Deficient Demand and Its Related Concepts

1. Deficient Demand or Deflationary Gap: (a) when in an economy, aggregate

demand falls short of aggregate supply at full employment level, and the demand is
said to be a deficient demand.

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(b) Deflationary gap is the gap showing Demand

Deficient of current aggregate demand over ‘aggregate supply at the level of full
employment’. It is called deflationary because it leads to deflation (continuous fall in
prices).

(c) Let us suppose that an imaginary economy by employing all its available
resources can produce 10,000 quintals of rice. If aggregate demand of rice is, say
8,000 quintals, this demand will be called a deficient demand and the gap of 2000
quintals will be called as deflationary gap. Clearly here equilibrium between AD
and AS is at a point less than level of full employment. Keynes called it an under
employment equilibrium

2.Reasons or causes for deficient demand: The main reason for deficient demand
are apparently the decrease in four components of aggregate demand:

(a) Decrease in household consumption demand due to fall in propensity to

consume.

(b) Decrease in private investment demand because of fall in credit facilities.

(c) Decrease in public (government) expenditure.

(d) Decrease in export demand.

(e) Decrease in money supply or decrease in disposable income.

3. Impacts or effects of deficient demand:

(a) Effect on General Price Level: Deficient demand causes the general price level to
fall because it arises when aggregate demand is less than aggregate supply at full
employment level. There is deflation in an economy showing deflationary gap.

(b) Effect on Employment: Due to deficient demand, investment level is reduced,

which causes involuntary unemployment in the economy due to fall in the planned
output.

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(c) Effect on Output: Low level of investment and employment implies low level of
output.

4. Measures to Control the deficient demand: We can control the deficient demand
with the help of the following policies:

(a) Monetary policy (b) Fiscal policy

Let us discuss it in detail:

(a) Monetary Policy: Monetary policy is the policy of the central bank of a country
of controlling money supply and availability of credit in the economy. The central
bank takes the following steps: (i) Quantitative Instruments or General Tools of
Monetary Policy: These are the instruments of monetary policy that affect overall
supply of money/credit in the economy. These instruments do not direct or restrict
the ow of credit to some specific sectors of the economy. They are as under:

• Bank Rate or Discount Rate (Decrease in Bank Rate):

-> Bank rate is the rate of interest at which central bank lends to commercial banks
without any collateral (security for purpose of loan). The thing, which has to be
remembered, is that central bank lends to commercial bank and not to general
public

->In a situation of deficient demand leading to deflation,

❖ Central bank decreases bank rate that encourages commercial banks in

borrowing from central bank as it will decrease the cost of borrowing of commercial
bank.

❖ Decrease in bank rate makes commercial bank to decrease their lending rates,
which encourages borrowers from taking loans, which encourages investment.

❖Again low rate of interest induces households to decrease their savings by

increasing expenditure on consumption.

81 | P a g e
❖ Thus, expenditure on investment and consumption increase, which will control
the deficient demand.

• Repo Rate (Decrease Repo Rate)

-> Repo rate is the rate at which commercial banks borrow money from the central
bank for short period by selling their financial securities to the central bank.

-> These securities are pledged as a security for the loans.

-> It is called Repurchase rate as this involves commercial bank selling securities to
RBI to borrow the money with an agreement to repurchase them at a later date and
at a predetermined price.

-> So, keeping securities and borrowing is repo rate

In a situation of deficient demand leading to deflation,

❖ Central bank decreases Repo rate that encourages commercial banks in

borrowing from central bank as it will decrease the cost of borrowing of commercial
bank.

❖ Decrease in Repo rate makes commercial banks to decrease their lending rates,
which encourages borrowers from taking loans, which encourages investment.

❖Again low rate of interest induces households to decrease their savings by

increasing expenditure on consumption.

❖ Thus, expenditure on investment and consumption increase, which will control

the deficient demand.

• Reverse Repo Rate (Decrease Reverse Repo Rate):

-> It is the rate at which the central bank (RBI) borrows money from commercial
bank.

-> In a situation of deficient demand leading to deflation, Reverse repo rate is

decreased, it discourages the commercial bank to park their funds with the central

82 | P a g e
bank. It increases the lending capability of commercial banks, which controls
deficient demand.

• Open Market Operation (Purchase of Securities):

-> It consists of buying and selling of government securities and bonds in the open
market by central bank.

-> In a situation of deficient demand leading to deflation, central bank purchases

government securities and bonds from commercial bank. With the purchase of these
securities, the power of commercial bank of giving loans increases, which will
control deficient demand

• Decrease in Varying Reserve Requirements:

-> Banks are obliged to maintain reserves with the central bank, which is known as
legal reserve ratio. It has two components. One is the Cash Reserve Ratio or CRR
and the other is the SLR or Statutory Liquidity Ratio.

-> Cash Reserve Ratio (Decrease):

❖It refers to the minimum percentage of a bank’s total deposits, which is required
to keep with the central bank. Commercial banks have to keep with the central
bank a certain percentage of their deposits in the form of cash reserves as a matter
of law.

❖ For example, if the minimum reserve ratio is 10% and total deposits of a certain
bank is Rs. 100 crore, it will have to keep Rs.10 crore with the central bank.

❖ In a situation of deficient demand leading to deflation, cash reserve ratio (CRR)

falls to 5 per cent, the bank will have to keep Rs. 5 crore with the central bank,
which will increase the cash resources of commercial bank and increasing credit
availability in the economy, which will control deficient demand.

-> The Statutory Liquidity Ratio (SLR) (Decrease):

❖It refers to minimum percentage of net total demand and time liabilities, which
commercial banks are required to maintain with themselves.

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❖In a situation of deficient demand leading to deflation, the central bank decreases
statutory liquidity ratio (SLR), which will increase the cash resources of commercial
bank and increases credit availability in the economy.

(ii) Qualitative Instruments or Selective Tools of Monetary Policy: These

instruments are used to regulate the direction of credit. They are as under:

• Imposing margin requirement on secured loans (Decrease):

-> Business and traders get credit from commercial bank against the security of
their goods. Bank never gives credit equal to the full value of the security. It always
pays less value than the security.

-> So, the difference between the value of security and value of loan is called
marginal requirement. -> In a situation of deficient demand leading to deflation,
central bank decreases marginal requirements. This encourages borrowing because
it makes people get more credit against their securities.

• Moral Suasion:

-> Moral suasion implies persuasion, request, informal suggestion, advice and
appeal by the central banks to commercial banks to cooperate with general
monetary policy of the central bank.

> In a situation of deficient demand leading to deflation, it appeals for credit

expansion.

• Selective Credit Controls (SCCs):

-> In this method the central bank can give directions to the commercial banks not
to give credit for certain purposes or to give more credit for particular purposes or
to the priority sectors.

-> In a situation of deficient demand leading to deflation, the central bank

withdraws rationing of credit and make efforts to encourage credit.

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2. Fiscal Policy: The expenditure and revenue policy taken by the general
government to accomplish the desired goals is known as fiscal policy. A general
government has to take the following steps

(a) Revenue Policy (Decrease in Taxes):

(i) Revenue policy is expressed in terms of taxes.

(ii) During deflation the government will impose lower amount of taxes so that
purchasing power of the people be increased.

(iii) It is so because to control deficient demand we have to increase the amount of

liquidity in the economy.

(b) Expenditure Policy (Increase in Expenditure):

(i) Government has to invest huge amount on public works like roads, buildings,
irrigation works, etc. (ii) During deflation government should increase its
expenditure on public works like roads, buildings, irrigation works thereby
increasing the money income of the people and their demand for goods and services

(c) Decrease in Public Borrowing / Public Debt:

(i) At the time of deficient demand public borrowing should be reduced.

(ii) People will have more money and more purchasing power.

(iii) In brief, during period of deficient demand government should adopt the
pricing of decit budget. (iv) Old taken debts from public should be finished and paid
back to increase money in the market.

Full Employment, Voluntary Unemployment And Involuntary Unemployment

1. Full employment:

(i) Full employment equilibrium refers to the situation where aggregate demand is
equal to aggregate supply, and all those who are able to work and willing to work
(at the existing wage rate) are getting work.

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(ii) Full employment doesn’t means that there is no unemployment in an economy.
Unemployment also exists at full employment level because of voluntary
unemployment.

2. Voluntary unemployment:

(i) Voluntary unemployment refers to the situation when a person is unemployed

because he is not willing to work at the existing wage rate, even when work is
available.

(ii) Suppose, if the market wage rate for MBA in the industries is Rs.8,000 a month,
but some of the qualified MBA’s refuse to accept job at Rs.8,000 a month, they will
be considered as voluntarily unemployed.

3. Involuntary unemployment:

(i) Involuntary unemployment refers to a situation in which all able and willing
persons to work at existing wage-rate do not find work.

Words that Matter

1. Excess Demand: When in an economy, aggregate demand exceeds “aggregate

supply at full employment level”, the demand is said to be an excess demand.

2. Inflationary gap: It is the gap showing excess of current aggregate demand over
‘aggregate supply at the level of full employment’. It is called inflationary because it
leads to inflation (continuous rise in prices).

3. Deficient demand: When in an economy, aggregate demand falls short of

aggregate supply at full employment level, the demand is said to be a deficient
demand.

4. Deflationary gap: It is the gap showing deficient of current aggregate demand

over ‘aggregate supply at the level of full employment’. It is called deflationary
because it leads to deflation (continuous fall in prices).

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5. Monetary policy: It is the policy of the central bank of a country to control money
supply and availability of credit in the economy.

6. Quantitative Instruments or General Tools of Monetary Policy: These are the

instruments of monetary policy that affect overall supply of money/credit in the
economy.

7. Qualitative Instruments or Selective Tools of Monetary Policy: These instruments

are used to regulate the direction of credit.

8. Bank rate: It is the rate of interest at which central bank lends to commercial
banks without any collateral (security for purpose of loan).

9. Repo rate: It is the rate at which commercial bank borrow money from the
central bank for short period by selling their financial securities to the central bank.

10. Reverse repo rate: It is the rate at which the central bank (RBI) borrows money
from commercial bank.

11. Open Market Operation: It consists of buying and selling of government

securities and bonds in the open market by central bank.

12. Cash Reserve Ratio: It refers to the minimum percentage of a bank’s total
deposits, which it is required to keep with the central bank.

13. Statutory Liquidity Ratio: It refers to minimum percentage of net total demand
and time liabilities, which commercial banks are required to maintain with
themselves.

14. Marginal requirement: Business and traders get credit from commercial bank
against the security of their goods. Bank never gives credit equal to the full value of
the security. It always pays less value than the security. So, the difference between
the value of security and value of loan is called marginal requirement.

15. Moral suasion: It implies persuasion, request, informal suggestion, advice and
appeal by the central banks to commercial banks to cooperate with general
monetary policy of the central bank

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16. Selective credit control: In this method the central bank can give directions to
the commercial banks not to give credit for certain purposes or to give more credit
for particular purposes or to the priority sectors.

17. Fiscal policy: The expenditure and revenue policy taken by the general
government to accomplish the desired goals is known as fiscal policy.

18. Full employment equilibrium: It refers to the situation where aggregate demand
is equal to aggregate supply, and all those who are able to work and willing to work
(at the existing wage rate) are getting work.

19. Voluntary unemployment: It refers to the situation when a person is

unemployed because he is not willing to work at the existing wage rate, even when
work is available.

20. Involuntary unemployment: It refers to a situation in which all able and willing
persons to work at existing wage-rate do not find work.

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 LESSON NOTES /QUESTIONS/NUMERICALS
GOVERNMENT BUDGET AND THE ECONOMY

Definition:
1. It is an annual statement, showing item wise estimates of receipts and
expenditures during a financial year.
2. As per Article 112 of constitution government is supposed to present Annual
Financial Statement in front of the Parliament.
3. It unveils the fiscal policy of the government.

Objectives of Government Budget:

1. High rate of growth of GDP-Budget is a frame-work of policies meant to
increase the production. Government spends on infrastructure, gives tax rebate
and incentive for productive ventures. Special Economic Zones are set to increase
production.
2. Redistribution of income and wealth (Reducing inequalities in income and
wealth)-Government aims to influence distribution of income by imposing taxes
on the rich and spending more on the welfare of the poor thus raising standard of
living of poor.
3. Re-allocation of resources-Public goods like defence, administrative services,
parks etc. cannot be supplied by private sector because they are not profitable.
Even if they supply the price is very high which is unaffordable by poor.
Government can reallocate resources by giving tax concessions to produce
necessities and impose heavy taxes to discourage harmful goods. Government can
start producing goods and services directly.
4. Balance regional Growth- Through liberal tax laws for the backward region and
investment on infrastructure in such regions government tries to achieve this
objective.
5. Economic Stability-Through taxation and expenditure policy government tries to
correct the situation of inflation and deflation.

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 6. Management of Public Sector Enterprises- Through budget makes provision
for such enterprises.
Components of Budget
Budget can be classified as
1. First way
a. Revenue Budget
i. Revenue Receipt
ii. Revenue Expenditure
b. Capital Budget
i. Capital Receipt
ii. Capital Expenditure
2. Second way
a. Budgetary Receipts
i. Revenue Receipt
ii. Capital Receipt
b. Budgetary Expenditure
i. Revenue Expenditure
ii. Capital Expenditure

Budgetary Receipts
Budgetary receipts refer to the estimated money receipts of the government from all
sources during a given fiscal year.
1. Revenue Receipts-They neither reduce assets nor create liability.
2. Capital Receipts- They either reduce assets or create liability.

RECEIPT ASSET LIABILITY

TYPE REDUCTION CREATION
To learn REVENUE NO NO
CAPITAL YES YES

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 REVENUE RECEIPTS CAPTIAL RECEIPTS

Revenue receipts refer to those receipts Capital receipts refer to those receipts
which neither create any liability nor which either create any liability or
cause any reduction in the assets of the cause a reduction in the assets of the
government. government.

They are regular and recurring in They are irregular and non-recurring.
nature.

Examples- Tax Revenue (like income Examples- Borrowings, Disinvestment,

tax, sales tax, etc) and non-tax revenue Recovery of loan etc.
(such as fee, interest, etc)

Revenue Receipts
They can be classified as-
1. Tax Receipt
2. Non-Tax Receipt
Tax Revenue (Receipts)
It refers to sum total of receipts from taxes and other duties imposed by the government.
Tax is a compulsory payment made by people and companies to the government without
reference to direct benefit in return.

Classification of taxes
1. Direct & Indirect taxes
2. Progressive & Regressive taxes
3. Ad Valorem & Specific taxes

Direct & Indirect Taxes

1. Direct Taxes
Those taxes, burden of which cannot be shifted to others. The person who pays
the tax bears the burden also.
Examples: Income tax, Corporation tax, Interest tax, Wealth tax, Gift tax, Estate
duty

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 2. Indirect Taxes
Those taxes, whose burden can be shifted to another person. The person who pays
the tax doesn’t bear the burden
Examples: GST, Sales Tax, Entertainment Tax, Excise Tax, Custom Duties,
Service Tax

Direct Taxes Indirect taxes

Direct taxes are those taxes which are Indirect taxes are those taxes which are
imposed on income and properties of imposed on goods and services.
individuals and companies.

The burden of a direct tax cannot be The burden of an indirect tax can be
shifted. shifted.

They are generally progressive in They are generally proportional in

nature. nature.

Examples- Income tax, interest tax, Examples-Sales tax, service tax, Excise
capital gains tax etc. duty etc.

Progressive & Regressive Taxes

1. Progressive tax-
a. Rate of tax increases with an increase in income
b. Burden more on rich
2. Regressive tax
a. Rate of tax decreases with increase in income.
b. Burden more on poor

Ad Valorem & Specific Taxes

1. Value Added Tax (VAT)
Imposed on value added by producer
2. Specific Taxes
Levied on the basis of units, size, weight etc.

Non-tax Revenue (Receipts)

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It is the revenue earned by the government other than taxes.
Examples: Interest, Receipts, Profits & Dividends, Fees, License Fee, Fines & Penalties,
Escheats, Gifts & Grants, Forfeitures, Special Assessment Tax

Capital Receipt
They either create liability or reduce an asset.
1. Debt Creating
It creates liability
Example- Borrowings, RBI, OMOs, Foreign governments, International
Institutions.
2. Non-Debt Creating
It reduces assets.
• Recovery of Loans (given to states).
• Other Receipts- Disinvestment.

Budgetary Expenditures
1. Revenue Expenditure
They neither create assets nor reduce liability. They are-
1. Recurring in nature.
2. Incurred on normal functioning of government
Example: Interest payments on loan, Grants to states, Defence services,
Salaries and pensions, Subsidies.
2. Capital Expenditure
They either create assets or reduce liability.
1. Non-recurring in nature.
2. Adds to capital stock and productivity of economy.
Example: Investment in shares, Construction of school buildings, hospitals,
Repayment of loans, Loans given by government to state governments,
Acquisition of land, building, machinery

EXPENDITURE ASSET LIABILITY

TYPE CREATION REDUCTION
To learn
REVENUE NO NO
CAPITAL YES YES 93 | P a g e
 Revenue Expenditure Capital Expenditure

Revenue expenditure refers to the Capital expenditure refers to the

expenditure which neither creates any expenditure which either creates any
asset nor causes reduction in any asset or causes a reduction in any
liability of the government. liability of the government

It is recurring in nature. It is non-recurring in nature.

Examples- Salary, pension, Interest, Examples- Repayment of borrowings;

etc. Construction of Metro, school, hospital
etc.

Types of Budget
1. Balanced Budget
When Total Expenditure of government is equal to Total Receipts of government
2. Surplus Budget
When Total Expenditure of government is less to Total Receipts of government

3. Deficit Budget
When Total Expenditure of government is more to Total Receipts of government
Budgetary Deficits
There are three types of deficits
1. Revenue Deficit
2. Fiscal Deficit
3. Primary Deficit
Revenue Deficit
It is the difference between Revenue Expenditure and Revenue Receipt
RD = RE – RR
Implications of Revenue Deficit
1. It indicates the inability of the government to meet its regular and recurring
expenditure

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 2. It implies that government is dissaving
3. Government makes up this deficit by borrowing which increases future liabilities.
4. Government will have to curtail its expenditure on welfare.
5. Government is compelled to disinvest
Fiscal Deficit
It is the difference between Total Expenditure and Total Receipt (excluding borrowings)
FD = TE – TR (excluding borrowings)
FD = (RE + CE) – (RR + CR excluding borrowings)
FD = RD + CE – CR excluding borrowings
As Fiscal Deficit is financed through borrowings, it can be alternatively found in the
following way:
FD = Total Borrowings
FD = Borrowings from RBI
+ Borrowings from Public
+ External Borrowings
Implications of Fiscal Deficit
1. It leads to debt trap.
2. Government resorts to deficit financing which leads to inflation.
3. It increases foreign dependence.
4. It hampers future growth.
Primary Deficit
It is the difference between Fiscal Deficit and Interest Payments
PD = FD – Interest Payments
Implications of Primary Deficit (same as Fiscal Deficit)
1. It indicates the government borrowing requirements to meet expenses other than
the interest payments.
2. Zero Primary Deficit indicates that government is forced to borrow to repay
interest on past borrowings
KEY CONCEPTS:
 Meaning of the Budget
 Objectives of the Budget
 Components of the Budget
 Budget Receipts

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  Budget Expenditure
 Balanced, Surplus and Deficit Budgets
 Types of Deficits
GOVERNMENT BUDGET – A FLOW CHART

1 MARK QUESTIONS AND ANSWERS

1. Define a Budget.
Ans: It is an annual statement of the estimated Receipts and Expenditures of the
Government over the fiscal year which runs from April –I to March 31.
2. Name the two broad divisions of the Budget.
Ans:i) Revenue Budget
ii) Capital Budget
3. What are the two Budget Receipts?
Ans: i) Revenue Receipts
ii) Capital Receipts
4. Name the two types of Revenue Receipts.
Ans:i) Tax Revenue
ii) Non-tax Revenue
5. What are the two types of taxes?
Ans: a) Direct Taxes: i) Income Tax, ii) Interest Tax, iii) Wealth Tax
b) Indirect Taxes: i) Customs duties, ii) Excise duties, iii) Sales Tax

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6. What are the main items of Capital Receipts?
Ans: a) Market Loans (loans raised by the government from the public)
b)Borrowings by the Government
c)Loans received from foreign governments and International financial Institutions.
7. Give two examples of Developmental Expenditure.
Ans: Plan expenditure of Railways and Posts
8.Give two examples of Non-Developmental expenditures.
Ans: i) Expenditure on defence
ii) Interest payments
9.Define Surplus Budget.
Ans: A Surplus Budget is one where the estimated revenues are greater than the
Estimatedexpences.
10. What are the four different concepts of Budget Deficits?
Ans: a) Budget Deficit
b) Revenue Deficit
c) Primary Deficit and
d) Fiscal Deficit

3 AND 4 MARK QUESTIONS AND ANSWERS

1. Explain the objectives of the Government Budget.

Ans: These below are the main objectives of the Government Budget.
a) Activities to secure reallocation of resources: - The Government has to reallocate
resources with social and economic considerations.
b) Redistributive Activities: - The Government redistributes income and wealth to
reduce inequalities.
c) Stabilizing Activities: - The Government tries to prevent business fluctuations and
maintain economic stability.
d) Management of Public Enterprises: - Government undertakes commercial
activities that are of the nature of natural Monopolies, heavy manufacturing etc.,
through its public enterprises.
2. What are the components of the Budget?
Ans: These below are the main components of the Government Budget. They are---

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 a) Budget Receipts
b) Budget Expenditure
Budget receipts may be classified as:
i) Revenue Receipts and
ii) Capital Receipts
Revenue Receipts may be classified as:
i) Tax Revenue and
ii) Non-tax Revenue
Budget Expenditure may be classified as -------
a) Revenue Expenditure and Capital Expenditure
b) Plan Expenditure and Non-Plan Expenditure
c) Developmental and Non-Developmental Expenditure

3. Define Direct Taxes and Indirect taxes and give two examples each.
i) Direct Tax: - These are those taxes levied immediately on the property and
Income of persons, and those that are paid directly by the consumers to the
state.
Examples: Income Tax, Wealth Tax, Corporation Tax etc.
ii) Indirect Taxes: These are those taxes that affect the income and property of
persons through their consumption expenditure. Indirect taxes are those taxes
levied on one person but paid by another person.
Examples: Customs duties, excise duties, sales tax, service tax etc.
4. What are the Non-Tax Revenue receipts?
Ans: These below are the Non-tax revenue receipts:
a) Commercial Revenue: Examples-Payments for postage, toll, interest on funds
borrowed from government credit corporations, electricity, Railway services.
b) Interest and dividends
c) Administrative revenue: Examples: Fees, fines, penalties etc.,
5. What are the three major ways of Public Expenditure?
Ans: These below are the three ways of Public Expenditure----
a) Revenue Expenditure and Capital Expenditure
b) Plan Expenditure and Non-Plan Expenditure
c) Development and Non-developmental Expenditure.

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6. What do you mean by Revenue Expenditure and Capital Expenditure?
Ans: i) Revenue Expenditure:- It is the expenditure incurred for the normal running
of government departments and provision of various services like interest charges on
debt, subsidies etc.,
ii)Capital Expenditure:- It consists mainly of expenditure on acquisition of assets like
land,building, machinery, equipment etc., and loans and advances granted by the
Central Government to States & Union Territories.
7. Define Balanced, Surplus and Deficit Budgets.
Ans: a) Balanced Budget:- It is one where the estimated revenue EQUALS the
estimated expenditure.
b) Surplus Budget:- It is one where the estimated revenue is GREATER
THAN the estimated expenditures.
c) Deficit Budget:- It is one where the estimated revenue is LESS THAN the
estimated expenditure.

8. Explain the four different concepts of Budget deficit.

Ans: These are the four different concepts of Budget Deficit.
a) Budget Deficit:- It is the difference between the total expenditure, current
revenue andnet internal and external capital receipts of the government.
Formulae: B.D = B.E > B.R (B.D= Budget Deficit, B.E. Budget Expenditure
B.R= Budget Revenue
b) Fiscal Deficit:- It is the difference between the total expenditure of the
government, therevenue receipts PLUS those capital receipts which finally
accrue to the government. Formulae: F.D = B.E - B.R (B.E > B.R. other than
borrowings) F.D=Fiscal Deficit,B.E= Budget Expenditure, B.R. = Budget
Receipts.
c) Revenue Deficit: - It is the excess of governments revenue expenditures over
revenuereceipts.
Formulae: R.D= R.E–R.R., When R.E > R.R., R.D= Revenue Deficit, R.E=
RevenueExpenditure, R.R. = Revenue Receipts.
d) Primary Deficit: - It is the fiscal deficitMINUSInterest payments.
Formulae: P.D= F.D–I.P, P.D= Primary Deficit, F.D= Fiscal Deficit, I.P=
InterestPayment.

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 i) the amount of tax equals the amount of expenditure (T=E)
ii) A balanced budget has an expansionary effect on the economy.
iii) Under balanced budget, the increase in income is equalent to the amount
of government expenditure financed by tax revenue (i.e., ∆ Y =∆G/∆T)
iv) The multiplier effect of a balanced budget is ONE (Unitary)
v) A balanced budget is a good policy to bring the economy, which is under
employment to a full employment equilibrium.

HIGHER ORDER THINKING SKILLS (HOTS)

1. What are the three levels at which the budget impacts the economy?
Ans: These below are the three levels at which the budget impacts the economy.
a) Aggregate fiscal discipline:- This means having control over expenditures, given
thequantum of revenues. This is necessary for proper macro-economic performance.
Allocation of resources: - The allocation of resources based on social priorities.
b) Effective and efficient provision of programmes:-Effectiveness measures the extent to
whichgoods and services the government provides its goals.
NUMERICALS
1. The following figures are based on budget estimates of Government of India for
the year 2001 – 2002. Calculate i) Fiscal Deficit ii) Revenue Deficit and iii)
Primary deficit.
ITEMS RSBILLIONS

A) Revenue receipts 2,31,745

Tax
i) Revenue 1,63,031

Non-tax
ii) Revenue 68,714

B Capital receipts 1,43,478

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 Recoveries of
i) loans 15,164

Other
ii) receipts 12,000

iii) Borrowins and other 1,16,314

liabilities

C) Revenue expenditure 3,10,566

Interest
i) payments 1,12,300

ii) Major subsidies 27,845

Defence
iii Expenditure 1,70,421

Capital
D Expenditure 64,657

E Total Expenditure 3,75,223

Plan
i) expenditure 1,00,100

Non-plan
ii) expenditure 2,75,123

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i) Ans: Fiscal Deficit = Total expenditure – Revenue receipts – Non-debt capital
receipts = 3, 75,223 – 2, 31,745 – 15,164 – 12,000 = Rs. 1, 16,314 billion.
ii) Revenue Deficit = Revenue expenditure – Revenue receipts
= 3, 10,566 – 2, 31,745 = Rs. 78,821 billion.
iii) Primary deficit = Fiscal deficit – Interest payments
= 1, 16,314 – 1, 12,300 = Rs. 4,014 billion.
2. From the following data about a government budgetfind
a) Revenue Deficit b) Fiscal Deficit and c) Primary Deficit.

S.No. Items Rs. (cr.)

01 Tax revenue 47

02 Capital receipts 34

03 Non-tax revenue 10

04 Borrowings 32

05 Revenue expenditure 80

06 Interest payments 20

Ans: a) Revenue Deficit = Revenue expenditure – (Tax revenue + Non-tax revenue) =

80 – (47+10) = 80 – 57 = 23 (cr.)
Fiscal Deficit = Borrowings = 32 (cr.)
Primary Deficit = Borrowings – Interest Payments 32 - 20 = 12 (cr).

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 BALANCE OF PAYMENTS
Topic: Balance of payments account - meaning and components.
This chapter is of great importance in understanding the complex relationship between closed
economy and Open Economy which in fact can be clear by knowing the concepts and
components of Balance of payments.
Keeping in mind the importance of the chapter and for its better understanding, the Topic is
divided into three parts.
The detailed structure of the chapter is as below:
Part I:
An open economy is one which interacts with other countries through various channels. There
are three ways in which these linkages are established-

1. Output Market
2. Financial Market
3. Labour Market

Meaning of Balance of Payments (BOP):

The balance of payments (BOP) record the transactions in goods, services and assets
between residents of a country with the rest of the world for a specified time period
typically a year.
It is the statement of accounts of a country’s inflows and outflows of foreign exchange in
a fiscal year
BOP is prepared on the principles of Double Entry System.(Debit side and credit side)
In BOP any transactions resulting in payments to foreigners is entered as a debit (-).i.e.
All spending and Lendingof foreign exchange (outflow of foreign exchange) are
recorded as debit items
In BOP any transactions resulting in a receipt from foreigners is entered as a Credit
(+).i.e. all earnings and Borrowings of foreign exchange (inflow of foreign exchange)
are recorded as credit items.
BOP is always balance .BOP is a schedule of debit and credit transactions which must
necessarily be equal in accounting sense.
Current Account of BOP

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Current Account is the record of business in commodities, transfer payments and
services.

Balance on Current Account: Two components

I. Balance of Trade (Trade balance)

II. Balance on Invisibles

I. Balance of Trade (BOT): It is the difference between theValue of Exports

of goods and Value of Imports of goods during a year.
BOT is said to be in Balance when Value of Exports of goods are equal to Value of
Imports of goods.
It may also Surplus BOT (Trade surplus) or Deficit BOT (Trade deficit).
Balance on Invisibles: It is the difference between theValue of Exports o and Value of
Imports of invisibles of a country in a given period of time. Invisible includes services,
transfers and flows of income.
Overall Current Account Balance:

• Current account is in balance when receipts on current account are equal to the
payments on the current account.
• Current account surplus (CAS) refers to excess of receipts from value of
exports of visible items, invisible items and unilateral transfers over payments for
value of imports of visible items, invisible items and unilateral transfers.
(CAS signifies that the nation is a lender to the rest of the world)

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 • Current Account Deficit (CAD) arises when the value of exports of visible
items, invisible items and unilateral transfers is less than the value of imports of
visible items, invisible items and unilateral transfers.
(CAD signifies that the nation is a borrower from the rest of the world)
Current Account Surplus Balanced current Account Current account Deficit

Receipts > Payments Receipts = Payments Receipts < Payments

Part II:
Capital Account of BOP
Capital Account records all international transactions of assets. An asset is any one of the
types in which wealth can be held, for example stocks, bonds, Government debt, money,
etc.
Capital Outflows such as repayments of loans, Purchase of assets or shares in foreign
countries etc debit on the capital account. If an Indian purchases a UK Car Company, it
enters capital account undertakings as a debit (as foreign exchange is going out of India).
Capital Inflows such as receipt of loans from abroad, sale of assets like sale of the share
of an Indian company to a Japanese customer is a credit on the capital account.

Balance on Capital Account:

Capital account is in balance when capital inflows (like receipt of loans from abroad, sale
of assets or shares in foreign companies) are equal to capital outflows (like repayment of
loans, purchase of assets or shares in foreign countries).
Surplus in capital account arises when capital inflows are greater than capital outflows.
Deficit in capital account arises when capital inflows are lesser than capital outflows.

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 Errors and Omissions
It is difficult to record all international transactions accurately. Thus,we have a third
element of BoP (apart from the current and capital accounts) called errors and omissions
which reflects this.
Part III:
The concept of BOP, cause of BOP Deficit/Surplus can be understood with the help of
given imaginary schedule:-

Table: The Balance of Payments of a hypothetical Economy,2019-20

S.No Items Credit (+) Debit (-) Remarks

(Capital (Capital outflows) in US$

Inflows) in
US$

1 Trade in Goods Export =300 Import =700

2 Trade Balance (X-M) = (-) 400

3 Trade in Services 300 360

Autonomous
4 Transfer payment 100 100 Transactions

5 Current Account Balance (Net of 1+3+4)= (-) 460 (Above the line
transactions )
6 Foreign Investment 560 400

7 External Borrowings 450 300

8 External assistance 300 250

9 Capital Account Balance

(Net of 6+7+8) = (+) 360

10 Errors and Omissions 20 10

11 Overall Balance of Payments

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 (5+9+Net of 10) = (-) 90

12 Official Reserve (+) 90 Accommodating

Transactions
(Below the line
transactions)
Total 2120 2120 BOP is Always
(1+3+4+6+7+8+10+12) Balance

Hypothetical schedule shows that this economy has Deficit in BOT and Deficit in Current
a/c of BOP, whereas Surplus in Capital Account. But overall BOP is unfavourable which
has been financed by withdrawal from official reserve of equitable amount.
Autonomous and Accommodating Transactions---
Autonomous Transactions- Cause of BOP deficit (or Surplus)(termed Above the line’
items),
International economic transactions are called autonomous when transactions are
made due to some reason other than to bridge the gap in the balance of payments, that is,
when they are independent of the state of BOP. One reason could be to earn profit. These
items are called ‘above the line’ items in the BOP. Autonomous Transactions cause
imbalance in the BOP. A deficit or surplus in BOP equals deficit or surplus in
Autonomous Transactions only.The balance of payments is said to be in surplus (deficit)
if autonomous receipts are greater (less) than autonomous payments.
Accommodating transactions -restore Balance in BOP(termed ‘below the line’ items),

Accommodating transactions on the other hand, are determined by the gap in the balance
of payments, that is, whether there is a deficit or surplus in the balance of payments. In
other words, they are determined by the net consequences of the autonomous
transactions. Since the official reserve transactions are made to bridge the gap in the
BOP, they are seen as the accommodating item in the BOP. In other
words,accommodating transactionsrestore Balance in BOP.

CAUSES OF UNFAVOURABLE BOP:

a) ECONOMIC FACTORS: i) Fast Economic Development ii) Inflation
b) POLITICAL FACTORS: i) Political Instability ii) Political disturbances

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c) SOCIAL FACTORS: i) Changes in taste, preferences, fashion, and style, etc.
ii) Demonstration effect iii) Population explosion
 Words that Matter
Balance of payment: The balance of payments of a country is a systematic record of all
economic transactions between its residents and residents of the foreign countries during
a given period of time.
Current account: It records imports and exports of goods and services and unilateral
transfers.
Capital account: Capital account is that account which records all such transactions
between residents of a country and rest of the world which cause a change in the asset or
liability status of the residents of a country or its government.
Foreign Direct Investment: It refers to purchase of an asset in rest of the world, such
that it gives direct control to the purchaser over the asset.
Portfolio Investment: It refers to the purchase of financial asset by the foreigners that
does not give the purchaser control over the asset.
Balance: It means difference between the sum of credits and sum of debits.
Balance of trade: The term “balance of trade” denotes the difference between the
exports and imports of goods in a country. Balance of trade refers to the visible items
only.
Balance on Current Account: It is the difference between sum of credits and sum of
debits on current account.
Balance on Current Account = Sum of credits on current account – Sum of debits on
current account
Balance on Capital Account: It is the difference between sum of credits and sum of
debits on capital account.
Balance on capital account = Sum of credits on capital account – Sum of debits
on capital account
Autonomous items: It refer to those international economic transactions in the current
account and capital account which take place due to some economic motive such as profit
maximization.
Accommodating items: It refer to the transactions that are undertaken to cover deficit or
surplus in autonomous transactions, i.e., such transactions are determined by net
consequences of autonomous transactions.

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  MCQ (Each Question carry one Marks)

Q1.The Balance of payments records;

a) Export and imports of machinery.

b) Transactions in foreign exchange .

c) Transactions in goods ,services and assets between residents of a country

d) None of these

Correct Answer: c) Transactions in goods ,services and assets between residents of a

country

Q2.In context of BOP of a country which of the following statement is true;

a) Import of machine is recorded in Current account .

b) Export of machine is recorded in capital account.

c) FDI and FII’s are recorded in trade in services .

d) None.

Correct Answer: a) Import of machine is recorded in Current account .

Q3.Which one is the component of Current account of BOP:

a) Invisibles items

b) FDI

c) Loans

d) Banking capital

Correct Answer: a) Invisibles items

Q4.Which of the following is not recorded in the capital account of BoP:

a) Offshore Funds

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b) Gifts, Remittances, and Grants

c) Government Aid

d) Equity capital

Correct Answer: b) Gifts, Remittances, and Grants

Q5.“Domestic demand for goods and demand for domestic goods are one and the same
thing” True/False?

a) True

b) False

Correct Answer: b) False

Q6.If an Indian buys a Japan car company, it enters __________ (Current account/capital
account) of balance of payments as a _________(Debit/Credit) item.

a) Capital Account, Debit item

b) Capital Account, Credit item

c) Current Account, Debit item

d) Current Account, Credit item

Correct Answer: c) Current Account, Debit item

Q7.Disequilibrium in Balance of payments may leads to:

a) Increase in Official reserve with RBI

b) Decrease in Official reserve with RBI

c) Both Increase and Decrease in Official reserve with RBI .

d) None of these

Correct Answer: c) Both Increase and Decrease in Official reserve with RBI .

Q8.Cause of BoP imbalance relates to :

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a) Autonomous items

b) Accommodating items

c) Both Autonomous and Accommodating items

d) None of these

Correct Answer: a) Autonomous items

Q9.Exports =₹1000 lakh, imports=₹1550 lakh, Balance of trade shows :

a) Surplus of ₹550 lakh

b) Deficit of ₹1550 lakh

c) Balance of ₹2550 lakh

d) Deficit of ₹550 lakh

Correct Answer: d) Deficit of ₹550 lakh

Q10.If balance of trade is showing a deficit of ₹200crore and value of imports is ₹1000
crore. Then the value of exports would be:

a) ₹200 crore

b) ₹800 crore

c) ₹1200 crore

d) ₹1000 crore

Correct Answer: b) ₹800 crore

Q11. Finally balance of payments of a country is

a) Always Deficit

b) Always balance

c) Always Surplus

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d) None

Correct Answer: b) Always balance

Q12.Unilateral transfers are :

a) One sided payments

b) Reciprocal payments

c) Receipt > Payments

d) All

Correct Answer: a) One sided payments

Q13.Balance of trade is measured as :

a) Difference between visible items of exports and imports

b) Difference between invisible items of exports and imports

c) Difference between external and internal flow of US Dollar

d) Difference between all receipt of foreign exchange and payments of foreign exchange

Correct Answer: a) Difference between visible items of exports and imports

Q14.Capital Inflows such as receipt of loans from abroad, sale of assets like sale of
the share of an Indian company to a Japanese customer is a debit on the capital
account. True/False?

a) True

b) False

Correct Answer: b) False

Q15.Components of Capital Account are :

a) Direct Investment eg.Foreign Direct Investment (FDIs),Equity Capital,Reinvested

Earnings and other Direct Capital Flows.

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b) Portfolio investment, eg. Foreign Institutional Investment(FIIs),Offshore Funds etc

c) External Borrowings, eg External commercial Borrowings, Short term debt etc.

d) All of the above

Correct Answer: d) All of the above

Q16.Rise in inflation in a country may cause :

a) Surplus in BoP

b) Deficit in BoP

c) No change in BoP

d) Both Surplus and deficit in BOP

Correct Answer: b) Deficit in BoP

Q17.Current account deficit signifies that the nation is a lender to the rest of the
world. True/False?

a) True

b) False

Correct Answer: b) False

Q18.The balance of payments account must always balance because —

a) it is based on the double-entry principle

b) it is a record of flow of foreign exchange between countries

c) it is a cash flow statement

d) it records international transactions

Correct Answer: a) it is based on the double-entry principle

Q19.In BOP any transactions resulting in payments to foreigners is entered as :

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a) a debit(-)

b) a credit(+)

c) Both (a) and (b)

d) None

Correct Answer: a) a debit(-)

Q20.The country which enjoys a capital account surplus today must get ready to:

a) Suffer current account deficit in future.

b) The current account deficit in future will become equal to Capital account Deficit.

c) All above

d) None

Correct Answer: a) Suffer current account deficit in future.

Q21.Which of the following pairs is not correctly matched with regard to balance of
payment accounts?

a) Import of goods and services – Debit in the current account

b) Receipts of transfer payments – Credit in the current account

c) Direct investment receipt – Credit in the capital account

d) Portfolio investment payments – Debit in the current account

Correct Answer: d) Portfolio investment payments – Debit in the current account

Q22.A country that does not trade with other countries is called an economy:

a) Open

b) Closed

c) Independent

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d) None

Correct Answer: b) Closed

Q23.which is systematic record ofall the economic transactions between one country
and rest of the world

a) Balance of trade

b) Balance of transactions

c) Budget

d) Balance of payments

Correct Answer: a) Balance of trade

Q24.current account may be

a) visible items

b) invisible items

c) unilateral transactions

d) all of above

Correct Answer: d) all of above

Q25.If the value of visible exports exceeds the value of invisible imports the balance
relates to

a) Current account of BOP

b) Capital account of BOP

c) Balance of trade

d) none of these

Correct Answer: a) Current account of BOP

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Q26.Which of the following should not be included in the balance of payments
account?

a) imports of automobile parts

b) bonus shares to equity shareholders

c) interest payment on loan to the IMF

d) dividend payment to home-country investors from a foreign subsidiary

Correct Answer: b) bonus shares to equity shareholders

Q27.Aid provided by a country to another country will come in which of the

following accounts of the second country?

a) capital account

b) errors and omissions

c) official reserves account

d) current account

Correct Answer: d) current account

Q28.External commercial borrowing comes under the category of —

a) official reserves account

b)current account

c) exports

d)capital account

Correct Answer: d) capital account

Q29.Capital flows that take place to help bring equilibrium in the balance of
payments are called —

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 a) FDI

b) autonomous flows

c) official reserves

d) accommodating flows

Correct Answer: c) official reserves

Q30.Which of the following is NOT part of the balance of payments?

a)The current account

b)The capital account

c)The treasury account

d) None

Correct Answer: c) The treasury account

 Short and Long Questions with answers

Q. Define the term Balance of Trade.

Ans : It refers to the systematic record of visible items in a financial year. In other words,
it isthe value of imports and exports of commodities i.e. merchandise. If the exports
exceedimports, the BOT is said to be favourable, and unfavourable in case of vice versa.
Thus,Favourable BOT = Exports receipts > Import payments.

Q. Differentiate between BOP & BOT.

Ans: The term 'Balance of Payments' refers to the account of both visible items &
invisibleitems while 'Balance of Trade' refers to the record of visible items only. BOT is
only oneof the components of BOP while the BOP is a wider concept & therefore offers a
morecomprehensive picture of economic transactions of a country with the rest of the
world.Moreover, the BOT may be balanced, deficit or surplus, while BOP as a whole
always

remain balanced. BOT is a simple statements related to the foreign trade of the
countrywhile BOP presents a classified record of all receipts on account of goods

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exported,services rendered and capital received, and payments made on account of goods
imported,services rendered from, and capital transferred to abroad.

Q. State the Items included in BOP account.

Ans : 1. Visible Items include all merchandise imports and exports i.e. the items which
arerecorded at the port & made of some material.

2. Invisible Items include receipts & payments for the services viz. shipping,
banking,insurance, travel etc.; receipts and payments of income on foreign
investments;interest on foreign loans & remittances of NRI's etc; govt's current
expenditure inabroad viz. expenditure on embassies etc.; transfer payments & receipts.

3. Capital transfers include the capital receipts & capital expenditure of a residentcountry.

Q. Explain the Structure of BOP:

Ans: BOP account is categorized into Current Account & Capital Account.

BOP on Current Account refers to transactions related to goods, services, income

oninvestments & unilateral transfers. BOP on current account reveals the net income of
thecountry generated in abroad. Both visible & invisible items include constitute the
currentaccount of BOP. It need not always be in balance. It may show a surplus or deficit.
Itrepresents the difference between payments & receipts of currently produced &
consumedgoods & services. A deficit in current account indicates lowering down the
level ofincome, creating problem of the payments to the foreigners & have adverse
impact oncountry's exchange reserves, & may increase external borrowings.

The components of BOP on current account are:

1) Visible trade includes the export and import of the physical goods

2) Invisible items include cost of non-factor services; investment income, &

unilateraltransfers.

(i) The non-factor services include transportation, finance, tour & travel etc. Theservices
rendered by the resident country to the ROW are recorded on the credit side,while the
services rendered by the foreigners for the resident country are recorded onthe debit

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side.(ii) Income on investment includes interest payments on foreign loans & credits,
transferof profits & miscellaneous for patents, royalties etc. The interest & dividend

payments made by the foreigners are recorded on the credit side, and vice versa.

(iii) Unilateral Payments includes foreign gifts & grants, donations, military aid,technical
assistance etc. These are also referred to as unrequired transfers. These referto those
receipts or payments which take place without getting anything in return.These transfers
are further classified into Official & Private transfer payments.Official unilateral transfers
are the foreign donations & aids, while Private transfersrefer to the gifts & donations
from foreign residents to the domestic residents & viceversa. Payments of these transfers
are recorded as debit & receipts are recorded ascredit.Thus, the balance of visible trade,
invisible trade & unilateral transfers is recorded as BOPon current account.

BOP on Capital Account: It refers to the international transactions in financial assets

viz.bonds, equities, loans, bank account etc.; fixed plants &equipments, and
directinvestments. It is a record of those transactions which leads to change in assets or
liabilityof the resident country. In other words, it is record of capital transactions i.e. the
private &the official capital transfers as well as the banking capital flows. BOP on capital
accountdeals with payments of debts and claims.

The components of BOP on capital account are:

i) Private Capital Transactions which refer to those transactions which affect assets
orliabilities of the resident country

.ii) Official Capital Transactions refer to the transactions which affect assets &liabilities
of the govt. It includes loans, repurchase & resale of securities sold toforeign residents,
debt service, gold & foreign exchange reserves, & miscellaneousreceipts & payments.

iii) Banking Capital Transactions includes movement in the external financial assetsand
liabilities of those banks which are authorized to deal in the foreign exchange.

Q. Differentiate between BOP on current account & capital account.

Ans: The current account deals with the receipts & payments for those goods which
arecurrently produced, while the capital account deals with debts & claims. Secondly,

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theBOP on current account has a direct influence on the level of income of a country,
whilethe capital account influences the volume of assets of the country.

Q. What is meant by Disequilibrium in the BOP?

Ans: It refers to such a situation when the BOP of the country is deficit or surplus. In
otherwords, it is a situation when the net balance of all receipts & payments is not zero. If
thenet balance is in (+), it is surplus; while the negative (-) balance is deficit. In both of
thesituation, the BOP is in disequilibrium.

Q. State the causes for disequilibrium in BOP.

Ans: Disequilibrium in BOP may be due to the following reasons:Economic Factors viz.
Cyclical fluctuations, huge public expenditure on developmentprojects, hike in inflation
which induces large imports of essential goods, development ofimport substitutes, change
in cost structure of the trading partner countries etc;

Demonstration effect which implies the effect of developed countries on the lifestyle
&consumption pattern of the less developed countries which leads to rise in
imports;Political instability which may lead to large scale capital outflow; Social factors
viz.changes in the social structure & norms which may affect the propensity to
consume,comforts & exports; etc.

Q. State the measures to correct adverse BOP:

Ans: Dear money policy, depreciation of the external value of domestic currency,
devaluationof the currency, exchange control restrictions, tariff & import duties, fixing of
importquotas, export promotion measures, import substitution etc.

Q. Briefly explain the other items in the BOP.

Ans: There are certain items which do not form the part of current & capital account.
Theseitems are kept for balancing the BOP. These items are as follows:

I. Errors & Omissions are the balancing items in the BOP accounts which are used
forcorrecting the BOP as it is difficult to keep an accurate record of all the
transactionswhich may be due to sample of transactions, dishonesty of traders, smuggling
etc.

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II. Official Reserve Transactions refer to those transactions which are carried out bythe
govt. and the Central bank on behalf of govt. with regard to certain economicpolicy &
their effect on BOP, & the exchange rates. It includes the Country's OfficialReserve
Assets & Foreign official Assets in the country.The Official Reserves are held in the form
of foreign currency or foreign securities, gold& Special Drawing Rights (SDR) with the
IMF. Reduction in these reserves impliespurchase of foreign exchange which is taken as
credit items in the BOP since it causesinflow of foreign exchange. On the contrary, an
increase in these reserve assets is taken asa debit in the BOP as it causes outflow of
foreign exchange.The Foreign Official assets in the country are in the form of rupee
reserves of foreigncentral banks. Increase in these rupee reserves of foreign banks is
taken as a credit item asit causes inflow of foreign exchange in the resident country
(India), while decrease inthese reserves is taken as debit as it causes outflow of foreign
exchange.

Q. Differentiate between Autonomous &Accommodating Items.

Ans: Items in the BOP account can be also classified into two categories viz.
Autonomous orabove the line items and Accommodating or below the line items.

Autonomous items refer to those items which are taken with the motive of
profitmaximization. These transactions are not related to the country's BOP position. It is,
therefore, these items are called as autonomous items. These items are taken as first
itemsbefore calculating deficit or surplus in BOP account, therefore these items are called
asabove the line items. If the receipts from autonomous items exceed the payments
forautonomous items; the BOP is called to be as surplus, and vice versa. It implies that
theresident country has net claims against the ROW. On the other hand, if the payments
forthese items exceed the receipts from these items, it implies that the ROW has some
netclaims against the resident country.

Accommodating items refer to those items which are undertaken by the govt. to keep
theBOP balanced. These items are transacted when a country faces disequilibrium in
theBOP. Through these transactions, the govt. or monetary authorities settle the deficit
orsurplus in the BOP.

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Q. Estimate the following related to Current Account BOP from the data given
below:

1. Trade Balance;

2. Goods & Services Balance;

3.Balance of Invisibles;

4. CurrentAccount Balance

S.NO. ITEM US million $

1 Export 1,66,974
2 Import 2,40,188
3 Invisibles(net) 55,272
4 (a) Non-factor 36,069
5 (b) Income -13,554
6 (c) Transfers 32,757
Ans.

1. Trade Balance= X – M= 1,66,974 – 2,40,188= (-)73,214 Trade deficit

2. Goods and Service Balance= Trade balance + Balance on account of non- factor
service

= (-)73,214 + 36,069= (-)37,145

3. Invisible balance= Balance of non-factor service + Balance on income +Balance of

transfers

= 36,069 – 13,554 + 32,757 , => 55,272

4. Current Account Balance= Trade balance + Invisible balance

= (-) 73,214 + 55,272= (-) 17,942

Q. Calculate the value of imports when the balance of trade is (-) Rs 800 crore and
thevalue of exports is Rs 500 crore .

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Ans. Balance of trade = Value of exports – Value of import; (-)800crore = 500 crore –
value

of importValue of imports = 500 crore + 800 crore; = Rs 1,300crore

 Case studies

Read the following report and answer Questions 1-3 on the basis of the same:

The Economic Survey 2019-20 expressed satisfaction that India’s external sector has
gained further stability in the first half of 2019-20, with an improvement in Balance of
Payments (BoP) position, anchored by capital flows through FDI, FPI and ECBs; receipt
of robust remittances and contraction of CAD.The Union Minister for Finance and
Corporate Affairs, Smt. Nirmala Sitharaman tabled the Economic Survey 2019-20 in
Parliament today.

The Balance of Payments position improved to USD 433.7 billion by September, 2019
from USD 412.9 billion of forex reserves in March, 2019. This is on the back of Current
Account Deficit (CAD) narrowing further to 1.5 per cent of GDP in the first half of 2019-
20 from 2.1 per cent in 2018-19. Net FDI inflows remained buoyant attracting USD 24.4
billion in the first eight months of 2019-20, much higher than the corresponding period of
2018-19. Net overseas remittances in the first half of 2019-20 were more than 50 per cent
of total receivables in 2018-19, standing at USD 38.4 billion. As per World Bank report
of 2019, India’s 17.5 million diaspora made it the top remittance-recipient country in
2018.

Q1.Which item is an invisible item in balance of payments account?

a) Export of food grains

b) Imports of crude oil

c) receipt of robust remittances

d) Import of steel by steel industry

Correct Answer: c) receipt of robust remittances

Q2.Which one deal with debts and claims of a country?

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a) Balance of capital account

b) Balance of trade account

c) Balance of current account

d) Balance of Services

Correct Answer: a) Balance of capital account

Q3.Capital account may be

a) FDI

b) Banking capital

c) Official Capital

d) All the above

Correct Answer: d) All the above

 HOTS QUESTIONS

Q. How is depreciation of Indian rupee likely to affect Indian export? Explain.

Ans. Depreciation of the domestic currency implies that the domestic currency (rupee)
loses itsvalue in relation to foreign currency (say US Dollar). Now, more rupee are
required tobuy a dollar, or a dollar can now buy more goods in domestic in the domestic
economy.Accordingly, exports are expected to rise.

Q. Will you always appreciate a rise in exchange rate as a means to boost our
exports?

Ans. No. Because a rise in exchange rate may not always lead to a rise in our export
earnings.A rise in exchange rate is beneficial only elasticity of demand for our exports is
greaterthan unity. Because, it is only then that the total expenditure on our exports will
rise inresponse to a fall in prices of domestic goods (in terms of the foreign currency)
yieldsgreater revenue only when the elasticity of demand for our exports is greater than
unity.

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Q. How does decrease in FDI in India act as a supply stock for foreign exchange?

Ans. Decrease in FDI leads to a decrease in a supply of foreign exchange, for reasons
otherthan change in exchange rate. It is a supply shock that cause a backward shift of
supplycurve of foreign exchange for the Indian economy. Consequently, equilibrium
exchangewill rise. More rupee are to be paid for buying a unit of foreign currency.

Q. How do we finance the deficit on current account BOP in case officially reserves
with the RBI are not moved?

Ans. We are left with on two alternatives only:1. We borrow from rest of the world; 2.
We sellour assets (financial assets like stock and bonds, and physical assets (like plant
andmachinery) to rest of the world.

Q. What is its likely impact of depreciation of rupee on Indian imports and how?

Ans. Depreciation of rupee is the fall in the value of Indian currency in relation with
foreigncurrency. More rupees are now required to buy a unit of foreign currency. This
will makeforeign goods expensive to the buyers in India. As a result, import are likely to
fall.

Q.Giving reasons, state whether the following statements are true or false.

(i) Excess of foreign exchange receipts over foreign exchange payments on account of
accommodating transactions equals deficit in the Balance of Payments.

(ii) Export and import of machines are recorded in capital account of Balance of
Payments account.

Ans. (i) False, as accommodating transactions removes both surplus and deficit of
Balance of Payments account.

(ii) False, export and import of machine, it will be recorded in current account as it is a
producer good exported.

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Q. State whether the following statements are true or false. Give reasons for your
answer.
(i) Difference between value of exports and imports of goods and services are called
Balance of Trade.
(ii) External assistance is not recorded in Balance of Payments account.
Ans. (i) False, because Balance of Trade only records the export and import of visible
items, i.e. goods.
(ii) False, because external assistance are included in the current account of Balance of
Payments as unilateral receipts..
Q. State which type of exchange rate has no official intervention in the
foreign exchange market? How it is determined?
Ans. Flexible exchange rate has no official intervention. It is determined by the
interaction of supply and demand in the foreign exchange market.
Q. State which of the following is a visible item and which is an invisible item
in Balance of payments.
(a) Export of jute product (b) Software services exports.
Ans. (a) Export of jute product - Visible Item
(b) Software services exports - Invisible Item
Q. Name the items which are not included in the current account of India’s Balance
of payment,
Ans. The capital transactions in the form of direct and portfolio investment that take
place between the countries are not included in the current account of India’s Balance
of payments.
Q.4 In which account of balance of payment tourism services to tourist are included?
Ans. Tourism services to tourist are included in current account of Balance of payments.
Q Which transactions- autonomous or accommodating bring balance in the balance
of payments.
Ans. Accommodating transactions bring balance in the balance of payment.
Q. What will be the value of imports, if the net imports are Rs 160 crores and the
value of exports are Rs 400 crores.
Ans. Balance of Trade = Exports- Imports
Imports= Exports – Balance of trade= 400-(-160)=560
Or Imports= Exports + net imports

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= 400+160=560 Ans Rs 560 crores
Q . If Balance of payment of a country is Rs (-) 100 crores and total payment are Rs
500 crores. Find out its total receipts.
Ans. Balance of Payment = Total receipts- Total payments
Total receipts= Total Payment +BOP
=500 + (-100)
=500-100=400 Ans Rs 400 crores
Q. Balance of payments always balances. Discuss it.
Ans. Balance of payments is always balanced. A negative balance on the current account
is equated with positive balance in the capital account. The monetary authorities may
finance a deficit by depleting their reserves of foreign currencies or by borrowing from
the IMF etc. Hence BOP is always in balance.

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 FOREIGN EXCHANGE RATE

(i) Foreign Exchange Rate : Foreign exchange rate refers to the rate at which one
unit of currency of a country can be exchanged for the number of units of
currency of another country.
SYSTEM OF EXCHANGE RATE

Fixed exchange rate Managed Flexible exchange rate

floating
exchange
rate

 Types of Foreign Exchange Regimes :

(ii) Fixed Exchange Rate : When the Central Bank of a country fixes (or pegs) the value of
exchange rate, it is called Fixed Exchange Rate system or Pegged Exchange Rate System.
(iii) Flexible Exchange Rate System : The system of exchange rate in which value of a
currency is allowed to adjust freely or to float as determined by the demand for and
supply of foreign exchange is called Flexible Exchange Rate System.
 Managed floating system : It is a system in which the central bank allows the exchange rate
to be determined by market forces but intervenes at times to influence the rate. When central
bank finds the rate is too high, it starts selling foreign exchange from its reserve to bring it
down. When it finds that the rate is too low, it starts buying to raise the rate.
 Determination of Flexible Exchange Rate Demand and Supply theory of exchange rate
determination Equilibrium Rate of Exchange : Exchange rate is determined by the
interaction of demand and supply in foreign exchange market. There is an inverse
relationship between price of foreign exchange (i.e., rate of exchange) and demand for
foreign exchange rate. On the contrary, there is direct relation between foreign exchange
rate and

 Reasons for the Demand of Foreign Exchange : The demand of foreign exchange has
inverse relation with flexible exchange rate. If flexible exchange rates rises, the demand of
foreign exchange falls and vice versa. The demand for Foreign Exchange is created due to
the following purposes:

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 (i) To purchase goods and services from the rest of world.
(ii) To purchase financial assets (i.e., to invest in bonds and equity shares) in a foreign country.
(iii) To invest directly in shops, factories, buildings in foreign countries.
(iv) To send gifts and grants abroad.
(v) To speculate on the value of foreign currency.
(vi) To undertake foreign tours.
 The supply of foreign exchange has positive relation with foreign exchange rate. If foreign
exchange rate rises, the supply of foreign exchange rate also rises and vice versa. Sources of
Supply of Foreign Exchange :
(i) Direct purchase by foreigners in domestic market.
(ii) Direct investment by foreigners in domestic market.
(iii) Remittance by non-residents living abroad.
(iv) Flow of foreign exchange due to speculative purchases by N.R.I.
(v) Export of goods and services.
 Factors Influencing Exchange Rate : (i) Change in trade, (ii) Capital Movement, (iii) Sale
and purchase of securities, (iv) Bank Rate, (v) Speculation, (vi) Political conditions

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 Q. Define the term Foreign Exchange Rate.

Ans : It refers to the rate at which one unit of currency of a country is exchanged for the
currency of other country. In other words, it is the price of one currency in terms of
another currency.

Q. Define the term Foreign Exchange Market.

Ans : It refers to the place where foreign currencies are bought & sold. It acts to transfer the
purchasing power between the countries (transfer function); provides credit for
international trade (credit function); make provision for hedging facilities i.e. protection
against the risk related to variations in forex rate (hedging function).

Q. Explain the determination of foreign Exchange Rate.

Ans : The exchange rate is the price of a currency in terms of another currency. It depends
upon the different foreign exchange regimes which are Fixed Exchange Rate System
& Flexible Exchange Rate System.
Fixed Exchange Rate System refers to the system in which the rate of exchange is
determined by govt. or monetary authorities. It can be classified into Gold Standard
System or Mint Parity of Exchange & Adjustable Peg System.

The fixed exchange rate system had certain merits viz. it ensured stability &
fluctuations had been avoided; encouraged international trade due to low risk & lesser
uncertainty & coordinated the macroeconomic policies across the different countries.
But it had certain shortcomings viz. need of huge international reserves of gold;
restriction in movement of capital due to the need of huge reserves of gold;
discouraged venture capital; & rigid in resource allocation.

Flexible Exchange Rate System refers to such a rate of exchange which is determined
by the demand for & supply of the foreign exchange in the foreign exchange market.
Under this system, the govt. or central bank does not intervene in the determination of
exchange rates. The exchange rate is determined by the free play of two forces viz.
demand & supply of concerned foreign currencies. The rate of exchange is determined
when both demand & supply of foreign exchange are equal to each other.

Q. State the sources of demand for foreign exchange.

Ans : These are import of goods & services; investment in other countries; gifts & grants to

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 abroad; direct purchase made in abroad; other payments involved in international
transactions etc. The demand for foreign exchange is made for the purpose of payments

of foreign loans, import of products, making investments & giving loans to other
countries, tour & travel in abroad etc. The demand for foreign exchange is inversely
related to the exchange rate.

Q. What are the Sources of Supply of foreign exchange?

Ans : These are the export of goods & services; investments by ROW in the resident country;
receiving gifts, donations & grants from the ROW; remittances by the non-residents
from the ROW; direct purchase made by the non-residents in the domestic country;
other receipts involved in international transactions etc. The supply of foreign exchange
is directly related to the exchange rate.

Q. Explain how the Equilibrium rate of exchange is determined?

Ans : It refers to the rate at which demand for & supply of foreign exchange is equal to each
other. It can be explained with the help of following example:

Price of US Demand for Supply for Price DS

$(in Rs.) US $ US $
40 500 100
50 400 200
0 E
60 300 300
70 200 400
80 100 500
D &O 300 S

Here, the equilibrium exchange rate is 1 US dollar = Rupees 60, because at this price the
demand for dollars is equal to its supply.
Q. Explain the role of Central Bank during depreciation.

Ans : Due to depreciation, the price of imports rises due to which the price of essential
products viz crude oil rises which leads to increase in petroleum prices & further which
leads to inflation in the economy. The central Bank can resolve this under the managed
floating system. The Central Bank will release more of dollars in the market & reduce
the supply of INR. Consequently, the supply of dollars rises which leads to reduce its

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 price, & on the other hand, the value of INR rises due to decline in availability. This
process leads the exchange rate back to its original one later. Due to this act, the
managed floating is also known as dirty floating.

Q. Differentiate between Depreciation and Devaluation.

Ans : Depreciation means decline in external value of a domestic currency in relation to a

foreign currency, while the term devaluation also mean the same. But the difference
is that depreciation takes place due to the outcome of changes in the market forces i.e
increase in demand or decrease in supply of foreign exchange, while devaluation means
a deliberate action taken by the Govt. in order to correct its deficit BOP by
discouraging imports & encouraging exports which will increase the inflow & reduce
the outflow of foreign exchange. Thus, depreciation is the part of flexible exchange rate
system while devaluation is the part of fixed exchange rate system.

Q. Differentiate between depreciation of currency & appreciation currency.

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Multiple Choice Questions

Select the correct answer of the following questions:

Here, due to increase in supply the demand curve shifts right, & the supply curve shifts
right & thus the price of dollars falls, & the value of INR increases. This is
Appreciation of INR. In this situation, the exports become dearer & imports cheaper.
Thus, the imports rises & exports fall. As a result, the outflow of foreign exchange falls.

1. The exchange rate at which demand for foreign currency becomes equal to
its supply, is called:
a. Equal rate of exchange; b. Unequal rate of exchange;

c. Equilibrium rate; d. All of these

Ans: (c)

2. What is the relationship between demand for foreign exchange and exchange
rate?

a. Inverse; b. Direct;

c. One to one; d. No relationship

Ans: (a)

3. What is the relationship between supply of foreign exchange and exchange rate?

a. Inverse; b. Direct;

c. One to one; d.No relationship

Ans: (b)

4. If Rs 150 are required to buy $ 2, instead of Rs100 earlier, then:

a. Domestic currency has depreciated; b. Domestic currency has appreciated; c.

Rupee

value of import bill will increase; d. Both (a) and (c)

Ans: (d)

5. In which of the following categories are economic transactions of

balance of trade recorded?
a. Visible items; b. Invisible items;

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 c. Capital items; d. All of the above

Ans: (a)

Q. Estimate the following related to Current Account BoP from the data given
below:

1. Trade Balance; 2. Goods & Services Balance; 3.Balance of Invisibles; 4.

Current Account Balance

Item US million
Export 1,66,974
Import 2,40,188
Invisibles(net) 55,272
(a) Non-factor 36,069
(b) Income -13,554
(c) Transfers 32,757
1. Trade Balance
= X-M
= 1,66,974 – 2,40,188
= (-)73,214 Trade deficit
2. Goods and Service Balance
= Trade balance + Balance on account of non- factor service
= (-)73,214 + 36,069
= (-)37,145
3. Invisible balance

= Balance of non-factor service + Balance on income +Balance of transfers

= 36,069 – 13,554 + 32,757 , => 55,272
4. Current Account Balance
= Trade balance + Invisible balance
= (-) 73,214 + 55,272
= (-) 17,942

Q. Calculate the value of imports when the balance of trade is (-) Rs 800 crore and the
value of exports is Rs 500 crore .

Ans. Balance of trade = Value of exports – Value of import; (-)800crore = 500 crore –
value of import Value of imports = 500 crore + 800 crore;= Rs 1,300crore

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 HOTS QUESTIONS

1. How do we finance the deficit on current account BOP in case officially reserves
with the RBI are not moved?
Ans. We are left with on two alternatives only:1. We borrow from rest of the world; 2. We
sell our assets (financial assets like stock and bonds, and physical assets (like plant
and machinery) to rest of the world.

2. What is depreciation of rupee? What is its likely impact on Indian imports and
how?

Ans. Depreciation of rupee is the fall in the value of Indian currency in relation with foreign
currency. More rupees are now required to buy a unit of foreign currency. This will
make foreign goods expensive to the buyers in India. As a result, import are likely to
fall.

3. How is depreciation of Indian rupee likely to affect Indian export? Explain.

Ans. Depreciation of the domestic currency implies that the domestic currency (rupee) loses
its value in relation to foreign currency (say US Dollar). Now, more rupee are
required to buy a dollar, or a dollar can now buy more goods in domestic in the
domestic economy. Accordingly, exports are expected to rise.

4. Will you always appreciate a rise in exchange rate as a means to boost our
exports?

Ans. No. Because a rise in exchange rate may not always lead to a rise in our export earnings.
A rise in exchange rate is beneficial only elasticity of demand for our exports is
greater than unity. Because, it is only then that the total expenditure on our exports
will rise in response to a fall in prices of domestic goods (in terms of the foreign
currency) yields greater revenue only when the elasticity of demand for our exports is
greater than unity.

5. How does decrease in FDI in India act as a supply stock for foreign exchange?

Ans. Decrease in FDI leads to a decrease in a supply of foreign exchange, for reasons
other than change in exchange rate. It is a supply shock that cause a backward shift of
supply curve of foreign exchange for the Indian economy. Consequently, equilibrium
exchange will rise. More rupee are to be paid for buying a unit of foreign currency.

6. How do the deficit BoP and surplus BoP impact the exchange rate?

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 Ans. (i) Deficit Balance of Payment: If the balance of payment of a country show deficit,
demand for foreign currency will increase. Accordingly, exchange rate is expected to
rise. Domestic currency will depreciate in relation to foreign currency. (ii) Surplus
Balance of Payment: If the balance of payment of a country shows surplus,
availability of foreign currency will increase. Accordingly, exchange rate is expected
to fall. Domestic currency will appreciate in relation to foreign currency.

DEVELOPMENT EXPERIENCE (1947-90) AND ECONOMIC REFORMS SINCE 1991

UNIT 6 (12 MARKS)

Economy of a country includes all production, distribution or economic activities that relates
with people and determines the standard of living. On the eve of independence Indian economy
was in a very bad shape due to the presence of British colonial rule.

The Britishers generally framed policies ‘that favoured England. The only purpose of Britishers
was to unjustly enrich themselves at the cost of India’s economic development. Thus, in 1947,
when British transferred power back to India, we inherited a crippled economy.

♦ India’s National and Per Capital Income under Colonial Rule There were no efforts from the
part of the colonial government to measure the national and per capital income of India. Some
individual attempts were made to measure such incomes but produced conflicting and
inconsistent results. The contribution of VKRV Rao and Dadabhai Naoroji are considered very
significant in this context.

Low Economic Growth under Colonial Rule

India had an independent economy before the arrival of British rule. But the Britishers,
dominated it for over a period of 200 years. Britishers framed policies that protected and
promoted the economic interests of their own country. They transformed India into supplier of
raw materials and consumer of finished goods from the factories of Britain. Such policies
affected Indian economy very adversely.
In this context, we will discuss the conditions of certain sectors that were badly affected by the
presence of colonial rule, i.e. on the eve of independence.
State of Agriculture Sector

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Agriculture was the main source of livelihood for most of the people of India, and about 85% of
the country’s population lived mostly in villages and derived livelihood directly or indirectly
from agriculture.
Inspite of such a large segment of the population being dependent of agriculture, either directly
or indirectly, this sector was facing stagnation and constant deterioration, as is brought forward
through the following points.

1. Low Level of Productivity

Productivity, i.e. output per hectare of land was very low. This led to a low level of output,
inspite of a large area under cultivation.

2. High ‘Degree of Vulnerability

Agriculture was vulnerable to climatic factors and mostly affected by erratic rainfall. Poor
rainfall generally led to a low level of output and also to crop failures. No effort was made by
British Government to provide permanent source of irrigation facilities for the farmers.
The reasons for stagnation of agricultural sector were

(i) Land Revenue System

The Britishers introduced the zamindari system. The zamindars were recognised as permanent
owners of the soil. Zamindars were to pay a fixed sum to the government as land revenue and
they were absolutely free to extract as much from the tillers of the soil as they could.
Their main interest was in rent collection regardless of the economic conditions of cultivators
and this caused misery and social tension among the latter.
Apart from this there are two more systems namely, the Ryotwari and the Mahalwari were
prevalent.

(ii) Lacking of Resources

Because the tillers had to pay huge amount of rent, referred to as ‘Lagaan’, they were not left
with any surplus to be able to provide for resources needed in agriculture in the form of
fertilisers or providing for irrigation facilities. This further lowered the agricultural
productivity.

(iii) Commercialisation of Agriculture

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Commercialisation of agriculture refers to shift from cultivation for self-consumption to
cultivation for sale in the market. It also refers to cultivation of cash-crops like cotton, indigo,
etc.Due to commercialisation of agriculture, there was some evidences of a relatively higher
yield of cash crops in certain areas of the country. But this could not help in improving the
conditions of Indian farmers.
Instead of producing food crops, farmers were producing cash crops, which were ultimately to
be used by British industries.

State of Industrial Sector

In the pre-British period, India was particularly well-known for its handicraft industries, in the
fields of cotton and silk textiles, metal and precious stone works, etc. These products enjoyed a
worldwide market based on the reputation of the fine quality of material used and the high
standards of craftsmanship.
But the Britishers followed a policy of systematic de-industrialisation by creating circumstances
conducive to the decay of handicraft industry and not taking any steps to promote modern
industry and reduced India to a mere exporter of raw material and importer of finished goods.
The following points bring forward the state of the industrial sector at the eve of independence

1. Decay of Handicraft Industry

The traditional handicraft industry in India enjoyed worldwide reputation, but the British
misrule in India led to the decline of Indian handicraft industry. The Britishers adopted the
following policies to systematically destroy the handicraft industry.

(i) Discriminatory Tariff Policy of the State

The Britishers followed a discriminatory tariff policy by allowing tariff free exports of raw
material from India (to provide for the requirements of their industries in Britain) and tariff free
import of British Industrial products (to promote British goods in India), but placed a heavy
duty on the export of handicraft products. So, Indian handicraft products started loosing their
domestic as well as foreign markets.

(ii) Competition from Machine-made Products

Machine-made products from Britain were cheap and better in quality than the handicraft
products. This competition forced many a handicrafts to shut down their business.

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(iii) Introduction of Railways in India
The Britishers introduced Railways in India, to expand the market of its low priced industrial
products. Consequently, the demand of high-priced handicraft products started to fall, thus
leading to the downfall of handicraft industry.

2. Slow Growth of Modem Industry

Under second half of 19th Century, modern industry showed slow growth. This development
was confined to the setting up of cotton and jute textile mills.
Subsequently, the iron and steel industries began coming up in the beginning of the 20th
century.
In this context, the Tata Iron and Steel Company (TISCO) was incorporated in August, 1907 in
India. It established its first plant in Jamshedpur [Bihar, at present Jharkhand].
But, these industries were the result of private endeavour. The state participation in the process
of modem industrialisation was very limited, as is evident from the following points

(i) Limited Growth of Public Sector Enterprises

The public sector enterprises such as railways, power, post and telegraph were confined to areas
which would enlarge the size of market for British products in India.

(ii) Lopsided Industrial Structure

The industrial growth was lopsided, in the sense that consumer goods industry was not
adequately supported by the capital goods industry.

(iii) Lack of Basic and Heavy Industries

No priority was given for the development of basic and heavy industries. Tata Iron and Steel
Mills was the only basic industry in India.

Textile Industry in Bengal

Muslin is a type of cotton textile which had its origin in Bengal,particularly, places in and
around Dhaka (now the capital city of Bangladesh). Daccai Muslin had gained worldwide fame
as an exquisite type of cotton textile.
The finest variety of muslin was called malmal. Foreign travellers also used to refer to it as
malmal shahi or malmal khas meaning that it was worn by or fit for, the royalty.

State of Foreign Trade

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India has been an important trading nation since ancient times.
But when the restrictive policies of commodity production, trade and tariff were imposed by the
colonial government, it adversely affected the structure, composition and volume of India’s
foreign trade.
Following were the reasons behind the poor growth of foreign trade

1. Exporter of Primary Products and Importer of Finished Goods

Under the colonial rule, India became an exporter of primary products such as raw silk, cotton,
wool, sugar, indigo, jute, etc and an importer of finished consumer goods like cotton, silk and
woollen clothes and capital goods like light machinery produced in the factories of Britain.

2. Britain’s Monopoly Control

Britain maintained a monopoly control over India’s exports and imports. Due to this, more than
half of India’s foreign trade was restricted to Britain while the rest was allowed with a few
other countries like; China, Ceylon (Sri Lanka) and Persia (Iran). The opening of Suez Canal in
1869 further intensified British control over India’s foreign trade.

3. Drain of India’s Wealth

An important characteristic of foreign trade throughout the colonial period was the generation
of a large export surplus. But this surplus came at a huge cost to the country’s economy.
Several essential commodities like food grains, kerosene, were scarcely available in the
domestic market.
Also, this surplus was not used in any developmental activity of India. Rather, it was used to
maintain the administrative set-up of the Britishers or bear the expenses of war taught by
Britain. All of this, led to the drain of Indian wealth.

State of Occupational Structure

During the colonial period, the occupational structure of India exhibited its backwardness. The
agricultural sector accounted for the largest share of the work force which remained at a high of
70-75% of the work force and the manufacturing and services sectors accounted for only 10 and
15-20% respectively.

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♦ There existed a growing regional disparity with few states such as Orissa, Rajasthan and
Punjab witnessing an increase in agricultural workforce while the states which were the parts of
Madras presidency. Bombay and Bengal witnessed a decline in the percentage of work force
dependent on agriculture.

State of Infrastructure

Infrastructure comprises of such industries which help in the growth of other industries. Under
the colonial period, basic infrastructure such as railways, port per transport, posts and
telegraphs developed.
However, the real motive behind this development was not to provide basic amenities to the
people but to sub serve various colonial interests.
The state of infrastructure under the colonial rule can be understood with the help of following
points

1. Roads

Roads constructed before independence were not fit for modern transport. It was very difficult
to reach rural areas during rainy season.
The roads were built only to serve the purpose of mobilising the army within India and
transporting raw materials from the countryside to the nearest railway station or the port for
exporting it.

2. Railways

British rulers introduced railways in India in 1850 and it began its operation in 1853. It is
considered as one of the important contribution of Britishers.
The railways affected the structure of the Indian economy in the following two ways

(i) It enabled people to undertake long distance travel and thereby break geographical and
cultural barriers.

(ii) It fostered commercialisation of Indian agriculture which adversely affected the self-
sufficiency of the village economies in India.

So, the social .benefits provided by the Railways was outweighed by the country’s huge
economic loss.

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3. Water and Air Transport

The colonial rulers took measures for the development of water transport. The inland
waterways, at times, also proved uneconomical as in the case of the coast canal on the Orissa
coast. The main purpose behind their development was to serve Britain’s colonial interest.
The colonial government also showed way to the air transport in 1932 by establishing Tata
Airlines. Thus, in this way it inaugurated the aviation sector in India.

4. Communication
Modern postal system started in India in 1837. The first telegraphy line was opened in 1857.
The introduction of the expensive system of electric telegraph in India served the purpose of
maintaining law and order.
Demographic Condition
Various details about the population of British India were first collected through a census in
1881. Before 1921, India was in the first stage of demographic transition. The second stage
began after 1921. However neither the total population of India nor the rate of population
growth at this stage was very high. Though suffering from certain limitations, it revealed the
Unevenness in India’s population growth. The population grew at a rate of 1.2% up to the year
1951.

On the eve of independence the demographic condition was as follows

(i) The overall literacy level was less than 16%.
(ii) The female literacy level was at a negligible low rate of about 7%.
(iii) Public health facilities were either unavailable to large chunks of population or when
available, were highly inadequate. Infant mortality rate was 218 per thousand in contrast to
present infant mortality rate of 63 per thousand.
(iv) Life expectancy was very low 44 years in contrast to the present 66 years.
(v) Both birth rate and death rate were very high at 48 and 40 per thousand of persons
respectively.

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 INDIAN ECONOMY:1950-1990
KEY POINTS:
Economy:

An economy is an organization of economic activities which provide people with the

means to work and earn a living.

• Economy (Types):
i. Capitalist
ii. Socialist
iii. Mixed
• Capitalist Economy: In which major economic decisions (what to produce,
how to produce and for whom to produce) are left to the free play of the market
forces.
• Socialist Economy: In which major economic decisions are taken by the Govt.
keeping in view the collective interest of the society as a whole.
• Mixed Economy: In which major economic decisions are taken by the central
Govt. authority as well as are left to the free play of the market forces.
Economic Planning:

Economic Planning means utilization of country’s resources in different

development activities in accordance with national priorities.

Economic Planning is a system under which a set of targets is defined by the Govt.
and these targets are to be achieved within a specified period of time, taking resources of the
country in consideration.

*Goals of Planning in India:

• Short-term and Long-term Objectives/Goals:

Short- term goals are plan specific and are to be achieved over a period of 5 years.
Long-term objectives are common to all plans and are to be achieved over a period of 20 years.

*Long-term Goals of Planning in India:

• Modernization: Adoption of new technology.

• Self-reliance: Reducing dependence on imports.
• Economic Growth: Increase in the aggregate output of
Goods & services.
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 • Equity: Reduction inequality of income or wealth.
• Full employment: Refers to a situation when all the people in the working age
group are actually engaged in some gainful employment.

*Short-term Goals of Planning in India:

Short term objectives vary from plan to plan depending on current needs of the country.
For example first plan (1951-56) focused on higher agricultural production while in second plan
(1956-61) shifted the focus from agriculture to Industry. In India growth and equity are the
objectives of all the five year plans. The goal of current five year plan (11th, 2007-2012) is
faster, broad-based and inclusive growth.

Conditions of Agriculture (1950-1990):

*Main Features of Indian Agriculture:

1. Low productivity

2. Disguised unemployment.

3. Dependence on rainfall

4. Subsistence farming - objective of farmer is to secure subsistence for his family not
to earn profit.

5. Traditional inputs

6. Small holdings

7. Backward technology.

8. Landlord tenant conflict.

*Problems of Indian Agriculture:

Institutional Problems:

1. Small and scattered holdings.

2. Poor implementation of land reforms.

3. Lack of credit and marketing facilities.

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 Technical Problems:

1. Lack of irrigation facilities.

2. Wrong cropping pattern.

3. Outdated technique of production.

General Problems:

1. Pressure of population on land.

2. Land degradation.

3. Subsistence farming

4. Social environment.

5. Crop losses- by pest, insect, flood, draught etc.

*Reforms in Indian Agriculture:

Institutional Reforms/ Land reforms:

i. Abolition of intermediaries.
ii. Ceiling on land holdings.
iii. Regulation of rent.
iv. Consolidation of holdings.
* General reforms:

i. Expansion of irrigation facilities.

ii. Provision of credit.
iii. Regulated markets and co-operative marketing societies.
iv. Price support policy.
*Technical Reforms/ Green Revolution:

i. Use of HYV seeds.

ii. Use of domical fertilizers.
iii. Use of insecticides and pesticides for crop protection.
iv. Scientific rotation of crops.
v. Modernized means of cultivation.
*Achievements of Green revolution:

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 1. Rise in production and productivity.

2. Increase in income.

3. Rise in commercial farming.

4. Impact on social revolution - use of new technology HYV seeds, fertilizers etc.

5. Increase in employment.

*Failures of green revolution:

1. Restricted to limited crops and areas such as two crops wheat & rice growing states
like Punjab, Haryana, U.P and Andhra Pradesh.

2. Partial removal of poverty.

3. Neglected land reforms.

4. Rise in un- employment.

5. Ecological degradation.

QUESTIONS AND ANSWERS

1. What was the percentage of people living in villages and deriving their livelihood
from agriculture during British period in India?
a) 72 b) 88 c) 79 d) 25

Ans: A

2. What was the life expectancy in India during British Rule?

a) 65 b) 38 c) 45 d) 32

Ans: D

3. When were the Railways introduced in India?

a) 1769 b) 1825 c) 1850 d) 1875

Ans: D

4. ____________is described as “year of great divide.”

a) 1931 b) 1942 c) 1911 d) 1921

Ans: D
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5. ____________refers to an arrangement by which central problems of the economy
solved.
a) Economic system b) Mixed economy c) Modernization d) Socialist economy
Ans: A

6.Name any two taxes which were subsumed in goods and services tax

Ans. VAT, SERVICE TAX

7.WTO established in 1995, as a successor organisation to ……..

Ans.GATT

8. What were the main causes of India’s agricultural stagnation during the colonial
Period?

Ans.This stagnation in the agricultural sector was caused mainly because

• land settlement that were introduced by the colonial government. Particularly, under
the zamindarisystem.The profit accruing out of the agriculture sector went to the
zamindars instead of the cultivators.

• zamindars, and the colonial government, did nothing to improve the condition of
agriculture. The main interest of the zamindars was only to collect rent regardless
of the economic condition of the cultivators.

• revenue settlement was also responsible for the zamindars adopting such an attitude;
dates for depositing specified sums of revenue were

fixed, fai l ing which the zamindars were to lose their rights.

• low levels of technology,

• Lack of irrigation facilities and

• Negligible use of fertilisers,

• Forced commercialisation of agriculture

• Partition of the country

All above factors added up to aggravate the plight of the farmers and contributed to the dismal
level of agricultural productivity.

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9. What was the impact of the decline of the indigenous handicraft industries on Indian
Economy?

Ans.The decline of the indigenous handicraft industries created

• Created massive unemployment in India

• but also created a new demand in the Indian consumer market, which was now deprived
of the supply of locally made goods.

• This demand was profitably met by the increasing imports of cheap manufactured
goods from Britain.

10. Were there any positive contributions made by the British in India? Discuss.

Ans.Positive Contribution of British administration

• Self sufficiency in food grain production

• Better means of Transportation

1- Introduction of Railways

2- Construction of all weather roads

3- Introduction of water transport and air transport

• Better means of Communication Systems

1- Introduction of electrified Telegraphs

2- Introduction of Postal Services

• Check on Famine

• Implementation of Monetary Economy

• Effective administrative setup

11. Give a quantitative appraisal of India’s demographic profile during the colonial
period.

OR

Describe the state of demographic profile of colonial India.

Ans.The Demographic structure of Colonial India is mentioned as Below: -

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 • Before 1921, India was in the first stage of demographic transition. The second stage
of transition began after 1921.

• Low Population growth: Neither the total population of India nor the rate of
population growth at this stage was very high.

• Low Literacy rate: The overall literacy - less than 16%. & female literacy- 7%

• High Birth rate -48 and High death rate-40

• High infant mortality rate: 218/1000 live births (Current-40/1000)

• Low life expectancy: - 44 years (current-68 years)

• Poor health facilities: - Public health facilities were either unavailable to large chunks
of population or, when available, were highly inadequate. Consequently, water and air-
borne diseases were rampant and took a huge toll on life.

• Widespread Poverty: - it is difficult to specify the extent of poverty at that time but
there is no doubt that extensive poverty prevailed in India during the colonial period.

12. Explain the state of Industries in India on the eve of Independence.

Or

Critically appraise some of the shortfalls of the industrial policy pursued by the British
colonial administration.

Ans.The state of Industries on the eve of independence is as follows :-

• India could not develop a sound industrial base under the colonial rule. Even as the
country’s world-famous handicraft industries declined, no corresponding modern
industrial base was allowed to come up to take pride of place so long enjoyed by the
Indian handicraft Industries.

• Adverse Impact of decline of Handicraft Industries: -The decline of the indigenous

handicraft industries created massive unemployment in India.Domestic demand was
profitably met by the increasing imports of cheap manufactured goods from Britain.

• Lack of capital goods industry to help promote further industrialisation in India.

Capital goods industry means industries which can produce machine tools which are,
in turn, used for producing articles for current consumption.
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 The establishment of a few manufacturing units here and there was no substitute to the
near wholesale displacement of the country’s traditional handicraft industries.

• Low GDP: -The growth rate of the new industrial sector and its contribution to the
Gross Domestic Product (GDP) remained very small.

• Limited role of Public Sector: -Another significant drawback of the new industrial
sector was the very limited area of operation of the public sector. This sector remained
confined only to the railways, power generation, communications, ports and some other
departmental undertakings.

• Very Slow progress of Modern Industries:-During the second half of the nineteenth
century, modern industry began to take root in India but its progress remained very
slow. Ini t ial ly, this development was confined to the setting up of cotton and jute
textile mills.

13.why were economic reforms introduced in india in 1991?

Ans.*Declinng foreign exchange reserves

*Economic crises related to external debt

*Growing imports without matching rise in exports.

*High inflation

14.The policy of Liberalisation changed the role of Reserve bank of india from a regulater
to a facilitator in the financial sector.defend or refute the given statement.

Ans. Liberalisation measures introduced in 1991

*Deregulation of Industrial sector

*Financial sector Reforms

*Tax reforms

*Foreign Exchange reforms

*Trade and investment policy reforms.

15. what is GST? State its Aim and Features.

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Ans. The parliament passed a law , GST act 2016, to simplify and introduce a unified Indirect
tax system in india .the law come into effect from 1july 2017.it Aim to generate additional
revenue for the government ;to reduce tax evasion;to create one nation ,one taxand one market.

Features;

*single comprehensive indirect tax on supply of goods and services

*Destination based consumption tax

*having 5 rates (0%,5%,12%,18% and 28%0

ECONOMIC REFORMS IN INDIA

 New Economic Policy (NEP) refers to the efforts made through different policy decisions
and changes that were made to create competitive environment and increase in productivity and
efficiency.

 Need for Economic Reforms—

(A) Problems facing Economy— (i) Unsatisfactory performance of public sector, (ii) High
rate of inflation, (iii) Increasing debt burden, (iv) Problem of balance of payment.

(B) Immediate crisis— (i) Gulf crisis, (ii) Inadequate Foreign Exchange Reserves.

 Main components of New Economic Policy— (i) New Industrial Policy, (ii) New trade
policy, (iii) New fiscal policy, (iv) New monetary policy, (v) New investment policy, (vi)
Globalisation of finance.

 Main Phases of New Economic Policy— (i) Liberalisation, (ii) Privatisation, and (iii)
Globalisation.

 Meaning of Liberalisation— Liberalisation means removing all unnecessary controls and

restrictions like permits, licenses, protectionist duties, etc., imposed by the government.

 Measures adopted for Liberalisation—

(A) Soft Liberalisation policy (1985-1991)— The era of liberalisation started with the period
of Rajiv Gandhi, the then Prime Minister, in 1985. In this period of modernization, a large
number of incentives and exemptions wer granted.

(B) Extensive Liberalisation Policy [After 1991 period]— (i) Liberalised licensing policy,
(ii) Expansion of industries, (iii) Concession from Monopolies, (iv) Extending investment limits
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for small industries, (v) Free import of machinery and Raw materials, (vi) Freedom to import
technology, (vii) Freedom to financial institution, (viii) Reduction in Tax rates.

 Meaning of Privatisation— Transfer of ownership from government to private sector of

organisations which are presently run and controlled by government.

 Measures of Privatisation—

(A) Ownership Measures— (i) Total Denationalisation, (ii) Joint venture.

(B) Organisational Measures— (i) Holding company, (ii) Leasing, (iii) Disinvestment.

 Factors encouraging privatisation in India— (i) New Economic reforms programmes, (ii)
Increasing debt burden on government, (iii) Presence of foreign companies, (iv) To make
Indian companies more competitive, (v) Broad base for increasing production.

 Steps of Indian Economy towards privatisation— (i) Contraction of Public sector, (ii)
Participation of private sector, (iii) Abolition of Industrial licensing, (iv) Improvement by
MOU, (v) Re-organisation of public sector, (vi) Disinvestment of equity of public sector, (vii)
Establishment of National Renewable fund, (viii) Removal of investment control on big
houses, (ix) Policy related to sick units, (x) Sale of shares of public sector undertaking.

 Arguments in favour of Privatisation— Reduction in Budgetary Deficit, (ii) Less political

intervention, (iii) Improvement in economic efficiency and technical efficiency, (iv) Increased
accountability, (v) Globalisation of economy, (vi) Sources of new job, (vii) Increase in
industrial growth, (viii) Increase in foreign investment, (ix) In line with international trade, (x)
Encouragement to new Inventions.

 Arguments Against Privatisation— (i) Concentration of economic power, (ii) Substitution

of monopoly power, (iii) Lop-sided development of industries, (iv) Industrial sickness, (v)
Entry of multinationals, (vi) No safety for the weaker sections, (vii) Social institutions, (viii)
Corruption.

 Globalisation— Globalisation means integrating the economy of the country with the world
economy.

 Factors fostering Globalisation in India— (i) Technical changes, (ii) Competition, (iii)
Liberalisation policies, (iv) Emergence of United states as a super power, (v) Experiences of
Developing countries, (vi) Other factors.

 Effects of Globalisation—
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(A) Favourable Effects— (i) Increasing share of exports in world trade, (ii) Favourable effect
on Export-Import Ratio, (iii) Application of high technology, (iv) Stable and strong exchange
rate.

(B) Adverse Effects— (i) Decrease in Revenue of Indian Industries, (ii) Increasing share in
capital and management by foreign entrepreneurs, (iii) Increasing Regional disparities, (iv)
Export of Profit.

 Suggestions Regarding Globalisation— (i) Improvement in Competitiveness of Indian

producers, (ii) Alliance with MNCs, (iii) Self-sufficiency in Technology, (iv) Facing
International protectionism, and (v) Modernisation of Agriculture and small sector.

 Outsourcing— Outsourcing means obtaining goods and services by contract from an outside
source.

 World Trade Organisation— From January 1, 1995, WTO has been working. It was
replaced the GATT. The objective of WTO was free trade in order to help in the growth and
development of all member countries. The WTO acts as a permanent watch dog of international
trade.

 Achievements of LPG Policies— (i) Rise in GDP growth, (ii) Rise in Foreign exchange
reserves, (iii) Control of inflation, (iv) Rise in flow of foreign capital, (v) Rise in
competitiveness of industrial sector, (vi) Rise in integration with the world economy.

 Demonetisation— It is the process of stripping a currency unit from its status as legal tender
in the country.

 Demonetisation results in change in national currency.

 The present currency in circulation is pulled off and new currency is circulated.

 Types of Demonetisation

(i) Total Demonetisation

(ii) Partial Demonetisation

 Purposes sought by Demonetisation

(i) Stripping corruption

(ii) Combating inflation

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(iii) Curbing counterfeit currency

(iv) Combating tax evasion

(v) Increasing performance of economy

 History of Demonetisation in India.

(i) On 12/01 /1946 - all notes of denominations of "500 and "1000 were demonetised with a
time limit of 10 days to exchange demonetised notes. Its purpose was to catch tax evaders.

(ii) On 16/01/1978 - all notes of denominations of "1000, "5000 and "10000 were demonetised
with a time limit of 3 days to exchange demonetised notes. Its purpose was to catch corrupt
leaders and officials in predecessor governments.

(iii) On 08/11/2016 - all notes of denominations of "500 and "1000 were demonetised with a
time limit of 50 days to exchange demonetised notes from banks and some essential service
stores.

 Demonetisation of 2016

(i) On 8 November 2016, the Government of India announced the demonetisation of all "500
and "1000 banknotes of the Mahatma Gandhi Series.

(ii) "500 (new series) and "2000 notes were introduced.

(iii) 50 days’ time limit given for exchange of demonetised notes.

(iv) Limits were put on exchange per day and withdrawal per day (and week) during this time.

(v) Mixed reaction by public but strongly criticized by Opposition.

 Effects of 2016 Demonetisation

(i) Pushed India towards cashless economy

(ii) Raised tax payments

(iii) Brought an end to black money

(iv) Curbed terrorist funding

(v) Curbed effect on growth and revenues of MSMEs

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 Goods and Service Tax (GST)

 Objectives of GST

(i) To eliminate the cascading impact of taxes on production and distribution cost of goods and
services,

(ii) Streamlining indirect tax regime

(iii) Growth of Revenue in States and Union Territories

(iv) Reduction in transaction costs and unnecessary wastages

(v) Elimination of the multiplicity of taxation

(vi) One Point Single Tax

(vii) Reduction in average tax burdens

(viii) Reduction in the corruption

 Types of GST laws

(i) At a centre level called ‘Central GST (CGST)’

(ii) At the state level - ‘State GST (SGST)’.

 Benefits of GST

(i) GST provides comprehensive and wider coverage of input credit setoff, you can use service
tax credit for the payment of tax on sale of goods etc.

(ii) Many indirect taxes in state and central level have been included by GST. You need to pay
a single GST instead of all.

(iii) Uniformity of tax rates across the states.

(iv) Ensure better compliance due to aggregate tax rate reduction.

(v) By reducing the tax burden, the competitiveness of Indian products in international market
has increased and there by development of the nation.

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(vi) Prices of goods are expected to reduce in the long run as the benefits of less tax burden
would be passed on to the consumer.

Know the Terms

 Balance of payment crisis :If imports persistently exceed exports and if holders of the
currency begin to lose confidence in the capacity of the economy to pay for their imports, it is
said to be the balance of payment crisis.

 Bank note :A not issued by a bank which makes a promise to pay on demand the bearer...

 Competitiveness :The degree to which a firm succeeds in selling its product when there is
competition in the market place.

 Contracting out :Means buying in inputs from an independent supplier rather than sourcing
all inputs from inside the organisation.

 Economic integration :Refers to the increasing interdependence of modern economies.

Integration grows through increased international trade and increases further within economic
unions such as EU.

 Economic Union :It involves the creation of an area composed of several different
economies which all agree to use the same economic policies and regulations.

COMMON GOALS OF FIVE YEAR PLANS

Meaning of Planning— Planning is a technique and a means to attain goals. These

predetermined goals are specially formulated by the central planning authority. Characteristics
of Economic Planning— 1. Organisation system, 2. Maximum utilisation of Resources, 3.
Applicable on the whole economy, 4. Central planning Authority, 5. Interference by the state, 6.
Changes in the economy, 7. Long term process, 8. Pre-determined objectives, 9. Existence of
valuation mechanism, 10. Achievement of objectives. Plan period in India— India has
completed 12 Five Year Plans. Time Period of 12th Plan was 2012-2017.

Indian Planning Commission— The Planning Commission of India was established on 15th
March 1950, to evaluate the physical, capital and human resources and on this basis
programmes for the Plan Development and its evaluation. The Planning Commission of India
has now been dissolved in 2015 and replaced with National Institution for Transforming India
(NITI) Aayog.
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National Development Council (NDC)— As an apex body to planning, it was constituted on
6th August 1952. No plan was implemented without its approval.

Objectives of Planning in India— (i) Economic growth, (ii) Modernisation, (iii) Selfreliance,
and (iv) Economic equity. Achievements of Indian Plans— 1. Growth-Oriented Development
Strategy (1951-65)— In first plan, actual growth rate was higher than targeted. But in second
and third plans, it was less than targeted. 2. Equity Oriented Development Strategy (1966-90)—
There are two big achievements in the field of selfreliance. (i) India attained almost self-
sufficiency in the field of food grains, and (ii) due to development of heavy engineering,
machinery equipment, iron and steel and other capital goods industries, India become self-
sufficient in machinery equipment and other capital goods.

Failures of Economic Planning— 1. Slow progress in per capita and national income, 2.
Unemployment, 3. Increase in economic disparity, 4. Economic instability, 5. Failure in
agriculture sector, 6. Failure in industrial sector, 7. Failure in resource mobilisation, 8.
Dependence on foreign aid, 9. Defective regulatory policy.

Suggestions for the Success of Plans— 1. Widespread mass participation, 2. Control on

prices, 3. Co-ordination between public and private sector, 4. Integration between long term and
short term programmes, 5. Physical achievements should be basis of success, 6. Encouragement
of saving and investment, 7. Control on population growth, 8. Job oriented economic planning,
9. Coordination between capital intensive and consumption oriented industries, 10. Utilisation
of human power, 11. Clean administration

LAND REFORM :

At the time of independence, the land tenure system was characterised by

intermediaries(zamindar, jagirdar, etc) who merely collected rent from the actual tillers of the
soil without contributing towards any development towards the farms. The low productivity of
the agricultural sector forced India to import foods from Britain. Equity in the agricultural
sector called for land reform which refer to the change in ownership of landholdings.

Steps were taken to abolish intermediaries and to make the tillers the owners of land.

The idea behind this move was that ownership of land would give incentives to the tillers to
invest in making improvements provided sufficient capital was made available to them.

Land ceiling was another policy to promote equity in the agricultural sector. This means fixing
the maximum size of land which could be owned by an individual.

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The purpose of land ceiling was to reduce the concentration of land ownership in a few hand

The Green Revolution in India refers to a period when Indian agriculture was converted into
an industrial system due to the adoption of modern methods and technology such as the use of
high yielding variety seeds, tractors, irrigation facilities, pesticides, and fertilizers. It was
mainly found by M.S. Swami Nathan. The Green Revolution: this refers to the large
increase in production of food grains resulting from the use of high yielding variety
(HYV) seeds especially for wheat and rice. The use of these seeds required the use of fertiliser
and pesticide in the correct quantities as well as regular supply of water; the need for these
inputs in correct proportions is vital. the use of HYV seeds was restricted to the more affluent
states such as Punjab, Andhra Pradesh and Tamil Nadu.

Impact of Green Revolution

High - Yielding Varieties Programme was constrained to only 5 crops namely;• Rice, Wheat,
Jowar, Maize, Bajra Consequently, non- food grains were expelled from the domain of the new
strategy. That wheat has stayed the bastion of Green Revolution over the years.

Main reasons for deceleration in the growth of agriculture in post - reform period:

Momentous deceleration in public and general investment in agriculture

Dwindling farm size

Failure to develop new technologies

Scarce irrigation cover

Insufficient use of technology

Unhinged use of inputs

Turning down in plan outlay

Flaws in credit delivery system.

Marketed surplus.A substantial amount of agricultural produce is sold in the market by the
farmers, the higher output can make a difference to the economy. The portion of agricultural
produce which is sold in the market by the farmers is called marketed surplus.

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‘miracle seeds’ : The policy makersof independent India had to address Agricultural issues
which they did through land reforms and promoting the use of ‘miracle seeds’ which ushered in
a revolution in Indian agriculture.

INDUSTRY AND TRADE

1) Public enterprises were played a central role in the process of Industrialization

2) Private enterprises were to play only a secondary role in the process of industrialization. It
means private sector were to obtain a license for their industrial establishments and to produce
goods within the prescribed limits of production capacity.

3) Major thrust was given to import substitution. It means production of such goods were to be
accorded high priority which were imported from abroad. It was necessary to achieve the
objective of growth with self reliance.

4) Domestic industries were given protection from foreign competition and it was done through
(i) Heavy duty in imports (ii) Large – scale industry was to be developed with a view to build
an infrastructural base in country.

Inward looking trade strategy was adopted as foreign trade policy . This strategy is called
import substitution. It aims at replacing or substituting imports with domestic production.
Domestic industry is offered protection from foreign competition through import duties.

Its main objective was to save foreign exchange by encouraging domestic production of such
goods which could be imported from rest of the world. The Government protected the domestic
industries from competition through tariffs and quotas. Through imposition of tariffs and
quotas, the government restricted the imports of goods and thereby protecting the domestic
firms from foreign competition.

DEVELOPMENT POLICIES AND EXPERIENCE (1950-1990)

1. What is Economic Planning?

Ans :- It means utilization of country’s resources into different development. Activities in
accordance with the national priorities.

2. When was planning commission set up ?

3. Ans :- It was set up in 1950.
4. When was National development council set up?
Ans:- It was set up in 1952

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5. Mention the objectives or goals of planning in India. Briefly explain it.
Ans :- The goals or objectives of planning in India are as follows:

i) Growth: -
It refers to increase in the country’s capacity to produce the output of goods and services within
the country. It implies either a large stock of productive capital or an increase in the efficiency
of productive capital and services like transport, banking & communication etc. In other
words, it means steady increase in the gross domestic product (GDP). It is necessary to produce
more goods and services if the country need to achieve higher growth level.
(ii) Modernization:-

It is necessary to adopt new technology in order to increase production of goods & services.
Adoption of new technology is called modernization.

However, modernization does not refer only to the use of new technology but also to change in
social outlook such as women empowerment . A modern society makes use of the talents of
women in the work place so that the society will be more civilized and prosperous

(iii) Self reliance:-

It refers to utilization of country’s resources in order to promote economic growth and

modernization without using the resources imported from other countries. It means avoiding
imports of those goods which could be produced in India itself.

It is necessary in order to reduce our dependence on foreign countries in order to

safeguard the sovereignty of our country and unnecessary foreign interference in our polices.

(iv) Equity:-

It means equal distribution of income and wealth among the societies. It is important to ensure
that the benefits of economic development should reach the poor sections of the society as well
instead of being enjoyed by the rich. It is necessary that every people of a country should be
able to meet their basic needs such as food, education, health facilities in order to reduce the
inequality

6. Mention the development of Agriculture sector between 1950-1990

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Ans : (i) Land reforms :Land reforms were initiated in order to bring equity in ownership of
landholdings. It was decided to establish intermediaries and to make the tillers of the owners of
land. It gives the tillers the incentives to invest in making improvements in land provided
sufficient capital was made available to them.

(ii) Land Ceiling :-

If refers to fixing the maximum size of land which could be owned by an individual.
The purpose of land ceiling was to reduce the concentration of land ownership in a few hands
and to promote equality in the agricultural sector.

(iii) Green Revolution:-

It refers to large increase in reduction of food grains resulting form the use of High
yielding variety (HYV) seeds. The use of fertilizers, pesticides, irrigation facilities is important
along with HYV seeds in order to increase agricultural productivity & production. The farmers
should be provided adequate financial resources in order to purchase agricultural inputs.

Q6 Mention the development of Industrial sector between 1950-1990

Ans : 1) Public enterprises were played a central role in the process of Industrialization

2) Private enterprises were to play only a secondary role in the process of industrialization. It
means private sector were to obtain a license for their industrial establishments and to produce
goods within the prescribed limits of production capacity.

3) Major thrust was given to import substitution. It means production of such goods were to be
accorded high priority which were imported from abroad. It was necessary to achieve the
objective of growth with self reliance.

4) Domestic industries were given protection from foreign competition and it was done through
(i) Heavy duty in imports (ii) Large – scale industry was to be developed with a view to build
an infrastructural base in country.

Q7. Mention the development of foreign trade between 1950-1990

Ans :- Inward looking trade strategy was adopted as foreign trade policy . This strategy is
called import substitution. It aims at replacing or substituting imports with domestic production.
Domestic industry is offered protection from foreign competition through import duties.

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Its main objective was to save foreign exchange by encouraging domestic production of such
goods which could be imported from rest of the world. The Government protected the domestic
industries from competition through tariffs and quotas. Through imposition of tariffs and
quotas, the government restricted the imports of goods and thereby protecting the domestic
firms from foreign competition.

Q.8 what is marketed Surplus?

The excess portion of agriculture produce which is sold into the market by the farmers is
called marketed surplus.

ECONOMIC REFORMS SINCE 1991

Q1.What is economic reforms?

Ans. The new economic policy started by the government since 1991 in order solve the
Economic crisis and to accelerate the rate of economic growth is called Economic Reforms. It is
also known as new economic policy which consists of Liberalization, Privatization and
Globalization (LPG).

Q2.Why there was need for economic reforms?

Ans. 1.Mounting fiscal deficit : Fiscal deficit of the government had been mounting year after
year on continuous increase in non-development expenditure. Due to persistent rise in fiscal
deficit there was corresponding rise in public debt and interest payment liability there was
possibility that the economy might lead to debt-trap situation. Thus it becomes essential for the
government to reduce its non-development expenditure and restore fiscal discipline in the
economy.

2. Adverse balance of payment :When receipts of foreign exchange fall short of their
payments, the problem of adverse balance of payment arises. Despite the restrictive policy
adopted by the government till 1990 import substitution and export promotion the desired result
could not be meet. Our export could not compete in terms of price and quality in the
international market. As a result there was slow growth of export and rapid increase in imports.
Accordingly the burden of foreign debt services increased tremendously and leading to
depletion of foreign exchange reserves.
3.GulfCrises: On account of Iraq war in 1990-91 prices of petrol shot-up . Besides india used
to receive huge amount of remittances from gulf countries in terms of foreign exchange.

4. Poor performances of PSU’s:

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Due to poor performances of public sector undertakings degenerated in to a liability. Most of
public sector undertakings were incurring loss and their performance was quiet satisfactory. On
account of these factors, itbecomes imperative for the government to adopt new economic
policy or to initiate economic reforms.

5 .Rise in price:Due to rise in prices of food grains there was pressure of inflation Prior to
1991. Which deepen the economic crisis from bad to worse.

6 .Fall in foreign exchange reserves: In 1990-91 India’s foreign exchange reserves fall to such
a low level that there was not enough to pay for an import bill of even10 days. In such situation
the government had to helplessly resort to policy of liberalization as suggested by the World
Bank.

Q3 what is New Economic Policy? Briefly explain it.

Ans. New Economic Policy refers to adoption of Liberalisation,Privatisation and

Globalization(LPG) which aims at the rendering the economy more efficient, competitive and
developed.

ELEMENTS OF NEW ECONOMIC POLICY

1. Liberalization: It means to free the economy from the direct and physical control imposed
by the government.
Measures adopted for Liberalization:

(i) Abolition of industrial licensing.

(ii) DE reservation of production areas
(iii) Expansion of production capacity
(iv) Freedom to import capital goods

2. Privation: It refers to general process of involving the private sector in the ownership or
management of state-owned enterprises. Itimply partial or full ownership and management
of public sector enterprises by the private sector.
Measures adopted for Privatization:

(i) Contraction of public sector

(ii) Disinvestment of public sector undertaking
(iii) Selling of shares of public enterprises

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3. Globalization: It men’s integrating the economy of a country with the economies of other
countries under condition of free flow trade and capital and movement of persons across
borders.
Measures adopted for Globalization:

(i) Increase in equity limit of foreign investment

(ii) Partial convertibility of Indian rupees
(iii) Long –term trade policy
(iv) Reduction in tariffs.
(v)
Q4. Mention the positive impact of LPG polices

1. a vibrant Economy
2. Stimulant to Industrial production
3. Check on fiscal deficit
4. Check on inflation
5. Improvement in consumers sovereignty
6. A substantial increase in foreign exchange reserves.
7. Flow of private foreign investment.
8. India as an emerging economic power
9. Shift from monopoly market to competitive market
10.
Q5. . Mention the negative impact of LPG polices.

1. Neglect of agriculture
2. Urban concentration of growth process
3. Economic colonialism
4. Spread of consumerism
5. Lopsided growth process
6. Cultural erosion

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 CHAPTER:II

INDIAN ECONOMY (1950-1990)

1. A Plan sells out how the resources of a nation should be put to use.
2. Purchasing power refers to the value of money.
3. Market economy: In a market economy, also known as “Capitalism”,
only those goods will be produced that can be sold profitably either is
the domestic or in the foreign market.
4. Tariff: A tax on imports, which can be imposed wither on physical units,
e.g., pertone or on value.

5. Land reforms primarily refer to change in the ownership

of landholdings, so as to bring about equity in agriculture.
6. Marketed surplus: The portion of the agricultural produce which is sold
in the market by the farmers.
7. Equity refers to every Indian be able to meet his or her basic
needs and the inequality in the distribution of wealth should be
reduced.
8. Structural composition refers to the contribution made by each of the
sector, i.e the agricultural sector, the industrial sector and the service
sector of the economy.

9. World Trade Organization(WTO) was founded in 1995 to establish a

rule
based trade regime, to ensure optimum utilization of world resources.

10. Quotas specify the quantity of goods which can be imported.

11. Land ceiling refers to sixing the maximum size of land which could
be owned by an individual.
12. Policy of protection: is the policy based on the nation that industries
of developing countries are not in a position to compete against the good
produced by more developed countries. So, it is assumed that if the
domestic industries are protected they will learn to compete in the course
of time.

13. Green Revolution: A Rapid and sudden increase in agriculture

output in a short period of time with the use of new technology.
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 Subsidy: A grant or benefit given by the government to a producer as an

encouragement to produce more. Subsidy is given to consumers as well, for

eg.,Subsidy on LPG. In New Delhi subsidy was provided to domestic
consumers with monthly consumption upto 200 units.

ONE MARK QUESTIONS AND ANSWERS:

1. Self –reliance means avoiding:

(a) Exports (b) imports (c) Both (a) and (b) (d)None of the above.
ANSWER( B)
2. A good indicator of growth is steady increase in the :
(a) Gross Domestic Product (b) Net Domestic Product
(c) Population (d) National income.
ANSWER:(A)

3. Which factor led to the breaking up of the stagnation of agriculture?

(a) Land reforms (b) Green Revolution
(c) Buffer stocks (d) Land ceiling.

ANSWER( B)
4. The planning commission was set up in
(a) 1948 (b) 1950 (c) 1951 (d) 1956
Answer (b)
5. Who is known as the architect of “Indian Planning”?
(a)Jawaharlal Nehru (b) Dr. BR Ambedkar

(c) PC Mahalanobis (d) Sardar Vallabhbhai

Patel

Answer: (c)

6. When was first five-year plan introduced?

(a) 1st April ,1950 (b) 1st April, 1951

(c) 1st April,1952 (d) 31st March,1950

Answer (b)

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 7. The common goals of the five year plans are :
(a) Modernisation (b) Growth (C) Self –reliance (d) All of the above.
Answer: (d)

8. Long- term objectives to be achieved over a long period of time

formulated with reference to common goals of plans are called
(a) Objectives of plans (b) Objectives of planning
(b) Perspective plans (d) Both (a) and (c)
Answer (d)

9. Under which system the goods are distributed among people

not on the basis of what people need but on the basis of what people
need but on the basis of purchasing power?
(a) Capitalistic system (b) Socialistic system

(c ) Mixed system (d) Dual system

Answer : (a)

10. Green Revolution introduced during the planning

process was restricted mainly to :
Wheat and rice (b) Cereals and pulses

(c) Cotton and jute (d) Jowar and bajra.

Answer: (a)

11. What is a planned democracy?

Ans. A Planned democracy is the one in which people elect their representatives
who take decisions tas to how to use the nation’s resources with the help of
planning.

12. Why should plans have goals?

Ans. While a plan specifies the ways and means to allocate scarce resources to
achieve proposed targets, goals are the ultimate targets, the achievement of
which ensures the success of plans.

13. In which year NitiAayog initiated ?

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 II SHORT QUESTIONS AND ANSWERS (3 marks and 4 marks )

1. Explain “growth with equity” as planning objective.

Ans. Growth refers to the increase in GDP over a long period of time Equity
refers to an equitable distribution of GDP so that the benefits due to higher
economic growth are shared by all sections of population. Growth in itself does
not guarantee the welfare of people. Hence, growth with equity is a rational and
desirable objective of planning. This is not only leads to reduction of inequality
of income but also enables everyone to be self-reliant.

2. Are self –Reliance and self-sufficiency the same? Explain.

Ans. No. Self-reliance is the ability to meet one’s own –development needs. An
economy must have enough resources or foreign exchange to purchase all inputs
required for production. If they are not available within the country.

This is so because n economy can be self-sufficient, i.e. produce everything

within the country, as costs may be high. It may be cheaper and better to
purchase certain inputs from others countries, For this , an economy needs to
have enough foreign exchange. This is self-Reliance. So, while it is good to be
self- sufficient, it is not the best way to develop. It is more desirable to be
self- reliant.

3. What has been the impact of Self-reliance on Indian economy?

Ans. Impact of self-reliance on the Indian economy:

Self –sufficiency in food grains.

Decline in foreign aid and reduced dependence on imports owing to

growth in domestic production .

Progress in exports.

Rise in contribution of industries to GDP.

3. Explain the policy of “land to the tiller” and its benefits

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Ans. The ownership of land provides incentives to the tiller of the land t invest in
making improvements, provided sufficient capital is made available to them.

They take more interest since they make profit from the increased output
which is not shared by anyone.

The importance of ownership in providing incentives to farmers is illustrated by

the carelessness with which farmers in the former Soviet Union used to pack
fruits for sale. Rotten fruits were packed along with fresh fruits in the same box
since it did not affect them if the goods were not sold

4. Why was thee a need for reform of economic policy in 1990? Explain.
ANS. The need for reform of economic policy in 1990 was widely and strongly
felt in the context of the changing global economic scenario. The new economic
policy was initiated in 1991, in order to enhance the efficiency of the country’s
economy.

5.“Subsidies provide an incentive for wasteful use of resources”. Do you

accept/reject? Justify your answer.

Ans. Yes, Subsidies provide an incentive for wasteful use of resources, if they
are provided free or at a subsidized rate, then they will be used wastefully i.e.
without any concern for the scarcity of say water/ Electricity. Fertiliser and
pesticide subsidies lead to overuse of resources like land. This inturn can be
harmful to the environment. So in this way provision of subsidies may cause
more than benefit, if not properly used.

6. Why are HYV seeds called ”miracle seeds”?

Ans. High Yielding Variety of seeds were developed by the Nobel Laureate Dr.
Narman Barlauf in Mexico. These seeds are more productive and need regular
and adequate irrigation facilities along with greater use of fertilizers and
pesticides. HYV seeds grow faster than the normal seeds and crops can be
harvested in a much shorter time-period.

7. What is import substitution policy? Why it was introduced in India?

Ans. Import substitution policy aimed at replacing or substituting imports

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with domestic production. For example, instead if importing vehicles from
abroad, the industries were encouraged to produce them in India itself.
It was introduced in India because the government wanted to protect the domestic
industries from foreign competition. It was assumed that if domestic industries are
protected, they will learn to compete in the course of time.

8. Explain how tariffs and quotas protect the domestic industry? Ans.
Tariffs are tax imposed on imported good. They make imported goods more
expensive, thus, discouraging their use. Quotas specify the quantity of goods
which can be imported, thus restricting the import of foreign goods.

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 III LONGQUESTIONSANDANSWERS (6 MARKS)

1. Mention the period covered under different plants.

Ans
First Plan 1951-1956

Second plan 1956-1961

Third plan 1961-1966

Annual plans 1966-1969

Fourth plan 1969-1974

Fifth plan 1974-1978

Annual plans 1978-1980

Sixth plan 1980-1985

Seventh plan 1985-1990

Annual plans 1990-1992

Eighth plan 1992-1997

Ninth plan 1997-2002

Tenth plan 2002-2007

Eleventh plan 2007-2012

Twelfth 2012-2017
Nityi Plan 2017 onwards

2. What is achievements of plans and failures of Economic planning?

Ans.(I) Increase in national income (ii) increase in per capita income, (iii) increase
in the rate of capital formation (iv)institutional and technological reforms in
agriculture (v) Growth and diversification of industry (vi) Economic infrastructure ,
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(vii) Social infrastructure.

(II) Failures of Economic Planning: (i) Abject Poverty (ii) Mounting inflation, (iii)
Unemployment crises, (iv) Deficient infrastructure , (v) Skewed distribution.

3. What is Economic planning ?

Ans. Economic planning is the determination of a suitable way to utilize the

resources of the country to achieve the goals or objectives. It is the assessment,
allocation, mobilisation and utilization of available resources to benefit the people.

4.State the common goals of Five –Year plans.

Ans. 1. High rate of growth 2.Socialjustice

3. Self –reliance
4. Modernisation
(Explanation required).

4. Explain the various land reforms introduced post-independence in India

in the agricultural sector.
Ans.(1) Abolishing the intermediaries

(2) Consolidation of Holdings

(3) Redistribution of land

(4) Co-operative farming

(5) Tenancy reforms

(6) Ceiling on land holdings

(Explanationrequired).

5. Why was the Green Revolution implemented?

ANS-1. Low irrigation facility
2.Lack of Finance
3.Conventional and Traditional approach
4.Lack of Self-sufficiency

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 5.Marketing agriculture produce
6.Frequent occurrence of famines
6. (Explanation required)
7. While subsidies encourage farmers to use new technology, they are a huge
burden on government finances. Discuss the usefulness of subsidies in the light
of this fact.
Ans. The following arguments are given in favour of subsidy:

a. Subsidy is generally provided to the poor farmers with the motive of reducing
inequality of income between rich and poor farmers.
b. Subsidy was basically an incentive for the farmers to adopt modern techniques
and vital inputs like fertilizers, HYV seeds etc. The subsidy was provided so
that the farmers might not hesitate to use modern techniques.
c. Subsidy is very important for marginal land holders and poor farmers who
cannot avail the essential farm inputs at the ongoing market rate.
The following arguments are given against subsidy:

a. Subsidies are also given to the farmers who do not need them. This often
leads to the misallocation of the scarce resources.
b. It is generally argued that subsidy favours and benefits fertilizer industries
more than the farmers.
c. Subsidies may lead to the wastage of precious resources.

Hence, we can conclude that although subsidies are useful and necessary for poor
farmers they put an excessive burden on the scarce finances of the government.
Allocation of subsidies to the farmers who need it most is required.

8. How were the industries classified according to the industrial policy

Resolution,1956?
Ans. (1) Category A

(2)Category B

(3)Category C

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 CHAPTER:III

ECONOMIC REFORMS SINCE 1991

KEY CONCEPTS

1. Economic crisis: A situation wherein the expenditures are much more

than the revenues and there is no source (such as world Bank) to lend
(as the borrower already has a large outstanding loan to repay with
interest)
2. Public sector undertakings (PSU’s): Government-owned enterprises
that produce and sell various goods in the market, to earn profit.

3. Remittances: These are foreign currencies transferred by those working

outside the country to their families and friends in their own countries.
4. Delicensing: Removal of controls, especially on industries.
5. Dereservation: Taking off certain industries from the sole domain of
public sector by allowing
Private capital investment, such as in coal, medicine etc.

6. Devaluation: It is the fall in the value of domestic currency with respect

to foreign currency under the fixed exchange system (Presently, the
synonymous term is depreciation-under flexible exchange system).
7. Outsourcing: Contracting another agency to conduct a process during
production of services Foreg. Contract for maintaining software,
customer services etc.
8. Quantitative restrictions: Restrictions in the form of total quantities or
quotas imposed on
imports to reduce Balance of Payments (BoP)deficit and protect domestic
industry.

9. Import Licensing: Permission required from the government to import

goods into a country.
10. Foreign Direct investment(FDI) : refers to the investment of foreign
assets into domestic
structures, equipment and organizations. It does not include investment
into the stock markets.
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 ONE MARK QUESTION AND ANSWER

1.International Bank for Reconstruction and Development(IBRD) is

popularly known as :
(a) World Bank (b) Bank of Tokyo(c) American Express (d ) HSBC Bank
Answer(A)
2. IMF stands for :
(a) International Monetary Foundation (b) Internal Monetary Fund

(c ) International Monetary Fund (d) International money foundation

Answer (c)
3. What was the one major proposal of new industrial
policy(1991)?
(a) NRI’s will not be allowed for capital investment in India.
(b) Facility of FDI upto 51 percent in high priority industries
(c) Import restrictions on technical know how for one year

(d) Abolition of industrial licencing except for six industries.

Answer (d)
4. Objectives of privatization policy are :
(a)To improve the government’s financial position
(b) To improve the performance of an enterprise
(c) To reduce the burden on public administration.
(d) All the above.
Answer(a)
5. Rate of which tax was reduced as per the tax
reforms:
(a) Income tax (b) corporation tax (c) value –added tax (d) property tax
Answer(b)
6. Which is the latest tax introduced by the government of
India?
(a) Goods and services tax (b) Value –added tax

(c) service tax (d) corporation tax

Answer(a) :

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 7. Privatization of the public sector undertakings by selling off part of the
equity of PSU’s to the private sector is known as
answer:(disinvestment)

8. SGST stands for answer ( State Goods and Services Tax)

9. What is privatization?
Ans. It implies shedding of the ownership or management of a
government – owned enterprise.

10. Define disinvestment.

Ans. Disinvestment refers to a deliberate sale of a part of the capital stock
of a company to raise resources and change the equity and /or
management structure of a company.

11. What is meant by globalization?

Ans. Globalization is an outcome of the set of various policies aiming at
transforming the world towards greater interdependence and integration.

12. What is meant by demonetization?

Ans. De monetization is the economic policy wherein the legal status
of a currency unit is cancelled and new one comes into circulation.

13. When was de monetization implemented in India?

Ans. On November 8,2016 , demonetization was implemented in India
with its announcement by the Prime Minster Narendra Modi’s address to
the nation at 20:15 IST.

II SHORT QUESTIONS AND ANSWERS(3 OR 4 MARKS)

1. State the features of new economy policy.

Ans. 1. Liberalization

2. Privatization
3. Globalization
(Brief Explanation required)

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 2. What are Fiscal policy reforms? Explain.
Ans. Fiscal policy reforms were undertaken to improve the expenditure
and revenue policies of the government. The following steps were
undertaken: (a)Tax Reforms: Tax rates were reduced, tax evasion was
plugged and procedures were simplified.

(b) Government expenditure was curtailed by cutting down on

unnecessary expenses. Borrowings were reduced and all loss-making
PSU’s were shut down.
(c) Disinvestment in PSU’s was undertaken to plug the budgetary
deficit.
3. Explore the industrial policy Reforms under NEP 1991.
Ans. Industrial Policy Reforms were aimed at reducing government control
and opening up the industrial sector to private participation. The reforms
were:

(i) Delicensing of industries

(ii) Deregulation of industries
(iii) Dereservation of industries by withdrawal of reservation in
public sector.
(iv) Foreign capital was also encouraged by increasing the share of foreign
investment.

4. Write a short note on Niti Aayog.

Ans. Its constitution comprises the following:

1. Chair person (The Prime Minister)

2. Vice-Chairperson
3. Full Time members(four)
4. Chief Executive officer(one)

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 Formed via a resolution of the union Cabinet on January 1,2015. NITI Aayog is the
premier policy “Think-Tank” of the government of India (GOI), providing both
directional and policy inputs. While designing strategic and long-term policies and
programmes for the GOI, it also provides relevant technical advice to the centre and
states.

5. Give any three aims of demonetization.

Ans. The three aims of demonetization are:

(a) To Curb corruption

(b) To curb counterfeiting
(c) To curb the use of high denomination notes for terrorist activities.

5. What do you understand by GST? How good is a system of GST as

compared to the old tax system? State its categories.

Ans. GST is the “single comprehensive indirect tax” on supply of goods And services
right from manufacturer or service provider to the consumer.

The system of GST as compared to the old tax system.

1. Has simplified the multiplicity of taxes on goods and services.

2. The laws, procedures and rates of taxes across the country are also now
standardized.
3. It has also facilitated the freedom of movement of goods and

services.

4. It has created a common market in the country. The two

categories of GST and CGST and SGST.
7. Give the list of navaratna companies
Ans. (a) Bharat Electronics Ltd.
(b) Bharat petroleum Corporation Ltd.
(c) Hindustan Aeronautics Ltd.
(d) Hindustan Petroleum Corporation Ltd.
(e) Mahanagar Telephone Nigam Ltd.

(f) National Alluminium Company Ltd.

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 (g) National mineral Development Corporation Ltd.

(h) Neyvelil Lignite Corporation Ltd.

(i) Oil India Ltd.

(j) Power Finance Corporation Ltd.

(k) Power Grid Corporation of India Ltd.

(l) Rashtriya Ispat Nigam Ltd.

(m) Rural Electrification Corporation Ltd.

(n) Shipping Corporation of India Ltd.

8. What are the objectives of WTO?

Ans. Objectives of World Trade Organization(WTO) are: (a)Reduction of

trade barriers to liberalize world trade.

(b) Serves as a platform for countries to raise their concerns regarding the trade
policies of their
trading partners.

(c) To enlarge production and trade of services.

(d) To ensure optimum utilization of world resources.
(e) To protect the environment.

(f) To provide greater market access to all member countries.

LONG QUESTIONS AND ANSWERS: (6 MARKS)

1. Explain the reasons for introduction of New Economic policy.

Ans. (1) Poor performance by the public sector undertakings

(2) Inflationary pressures

(3) Increasing debt burden

(4) Fragile balance of payments position.

(Briefly explanation required)

2. Explain financial sectors reforms under Liberalisation.

Ans. 1. Freedom to determine own interest 2.Private banks

granted permission 3.Permission for foreign investment

3. Do you think outsourcing is good for India. Why are developed countries
opposing it ?
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Ans.(1) Employment

(2) Higher standard of living

(3) Contributes to human capital formation

(4) Encourages other sectors

(5) Greater infrastructural investment

(6) International worthiness

(7) Foreign Exchange

(Briefly explanation is required)

4. What are the major factors responsible for the high growth of the service
sector?
Ans. (1) Cheaplabour and reasonable degree of skill in India.

(2) Advanced technology and growth of IT

(3) Structural transformation

(4) High demand for services as final product (Briefly

explanation is required)

5. Explain the main objectives of Globalization.

Ans. Following are the main objectives of globalization are as follows:

1. Reduction of trade barriers to liberalize world trade.

2. Serves as a platform for countries to raise their concern regarding the trade
policies of their trading partners.
3. To enlarge production and trade of services.
4. To protect the environment
5. To provide greater market access to all member countries.

6. To ensure optimum utilization of world resources

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Support Material Poverty

It is inability to fulfill the minimum requirements of life.

Relative Poverty It refers to poverty in relation to different classes, regions or countries.

Absolute Poverty In India, concept of poverty line is used as a measure of absolute poverty.

Poverty Line

It is that line which expresses per capita average monthly expenditure by which people can satisfy their
minimum needs.

Relative poverty and absolute poverty are the two variants of poverty.

Poverty line is fixed in India

in the estimation of consumption cut off.

in private consumption expenditure.

frequencies are recorded against each class-interval. Each frequency counts the number of heads belonging
to a particular consumption class.

Categorising Poverty

Category 1 Chronic poorThose who are always poor and those who are usually poor e.g., Landless
workers.

Category 2 Transient Poor Those who are moving in and out of poverty and occasionally poor.

Category 3 Never Poor These are categorised as non-poor people.

Rural Poor

These include landless agricultural work marginal holders and tenants-at-will.

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Urban Poor

These include migrants from the rural areas in search of employment, casual factory workers and self
employed serving largely as street vendors.

Urban poor are largely the spillover of the rural poor who are forded to migrate in search of jobs.

Causes of Poverty

-Low level of national product

-Low rate of growth

-Heavy pressure of population

-Inflationary pressures

-Chronic unemployment and under employment

-Capital deficiency

-Outdated social institutions

-Lack of infrastructure

-Measures to Remove Poverty

Combating poverty by accelerating the pace of economic growth.

Combating inequality of income through fiscal and legislative measures.

Combating poverty through population control.

Other measures enhancing quality of life of the poor.

Poverty Alleviation Programmes

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Some of the principle measures adopted by the government to remove poverty are given below

=Samaranjayanti Gram SwarozgarYojana (SGSY)

=SampoornaGraminRozgarYojana (SGRY)

=PradanmantriGramodayYojana (PGY)

=Jai PrakashRozgar Guarantee Yojana (JPRGY)

=The SwaranJayantiShahriRozgarYojana (SJSRY)

=Prime Minister’s RozgarYojana

=Development of Small and Cottage Industries

Minimum Needs Programme

=Twenty Point Programme

=Mahatma Gandhi National Rural Employment Guarantee

Question 1.

Why calorie-based norm is not adequate to identify the poor?

Answer:

The government uses Monthly Per Capita Expenditure (MPCE) as proxy for income of households to
identify the poor. Poverty line is estimated by the monetary value (per capita expenditure) of the minimum
calorie intake that was estimated at 2400 calories for a rural person and 2100 for a person in the urban area.
But this calorie-based norm is not adequate to identify the poor due to following reasons

This mechanism groups all the poor together and does not differentiate between the very poor and the other
poor which makes it difficult to identify who amongst them needs help the most.

Economists question, the basis of taking expenditure on food and a few select items as proxy for income.

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This norm does not take into account the other factors associated with poverty such as accessibility to basic
education, health care, drinking water and sanitation.

This norm does not take social factors such as illiteracy, lack of access to resources, discrimination or lack
of civil and political freedoms into consideration.

Question 2.

What is meant by ‘Food for Work’ Programme?

Answer:

The National Food for Work Programme was launched in November 2004 in 150 most backward districts
of the country, identified by the Planning Commission in consultation with the Ministry of Rural
Development and the State Governments. The objective of the programme was to provide additional
resources apart from the resources available under the SampoornaGrameenRozgarYojana to 150 most
backward districts of the country so that generation of supplementary wage employment and providing of
food security through creation of need based economic, social and community assets in these districts are
further intensified.

The scheme was 100 per cent centrally sponsored and was open to all rural poor who were in need of wage
employment and wanted to do manual and unskilled work.

The focus of the programme was on work relating to water conservation, drought proofing and land
development. Flood control protection, rural connectivity in terms of all-weather roads and any other
similar activity for economic sustainability could be included.

Foodgrains were given as part of wages under the NFFWP to the rural poor at the rate of 5 kg per man day
and the remaining portian may be given in cash. More than 5 kg foodgrains can be given to the labourers
under this programme in exceptional cases subject to a minimum of 25% of wages to be paid in cash. The

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programme has now been subsumed in Nationai Rural Employment Guarantee Act, which has come in
force in 200 identified districts of the country including 150 NFFWP districts.

Questions 3.

Why are employment generation programmes important in poverty alleviation in India?

Answer:

In India, twin problems exist i.e., poverty and unemployment. Poverty alleviation has been one of the
guiding principles of the planning process in India. Poverty can effectively be eradicated only when the
poor start contributing to growth by their active involvement in the growth process. This can only be
achieved by launching various employment schemes.

Following points discussed the importance of Employment Generation Programmes to eradicate poverty.

Nexus between Unemployment and Poverty There exists a deep nexus between unemployment and poverty.
If employment opportunities are generated, then more people will be employed leading to rise in their
income which in turn will reduce poverty.

Availability of Basic Facilities With the rise in employment opportunities, income increases and poor
people are able to get access to education, health facilities, proper sanitation etc.

Creation of Assets The Employment Generation Programmes aim at creation of assets like water
harvesting, irrigation facilities, construction of roads, construction of dams etc. All these assets help in the
social and economic development of the rural areas and hence eradication of poverty.

Creation of Skills An essential element of employment generation programmes is the formation of human
capital by imparting skills to the unskilled labourers through training. This skill formation enhances income
earning capability of poor people.

Thus, such poverty alleviation programmes like Prime Minister’s RozgarYojana,

SwarnaJayantiShahariRogzarYojana, National Food for Work Programme, Annapurna are came into an
existence.

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Question 4.

How can creation of income earning assets address the problem of poverty?

Answer:

The problem of poverty cannot be solved by giving foodgrains to the poor or distributing clothes to them as
no government can keep doing these activities for long due to lack of resources. Poverty can effectively be
eradicated only when the poor start rning for themselves and in turn contribute to growth by their active
involvement in the growth process. This is possible by providing income generating assets to the poor in the
form of land for agriculture, tools and instruments to set up self employment units and giving them proper
training which will enhance their income earning capacity.

This can help pbor people to participate in economic activities and make them empowered. This will also
help create employment opportunities which may lead to increase in levels of income, skill development,
health and literacy and thus poor can be assured of income per month which will help him to come above
the poverty line.

Question 5.

The three dimensional attack on poverty adopted by the government has not succeeded in poverty
alleviation in India. Comment.

Answer:

Poverty alleviation has always been accepted as one of the major objectives of planned development
process in India but even after vast spending on poverty alleviation programmes, the government has not
succeeded in poverty alleviation in India.

Despite various strategies to alleviate poverty, problems like hunger, malnourishment, illiteracy and lack of
basic amenities are prevalent in India. None of the poverty alleviation strategies resulted in any radical
change in the ownership of assets, process of production and improvement of basic amenities to the needy.

Due to unequal distribution of assets, the benefits from poverty alleviation programmes have not actually
reached the poor. The amount of resources allocated for the poverty alleviation programmes is not sufficient
when we take the magnitude of poverty into consideration.
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The implementation of the poverty alleviation programmes is the responsibility of government and bank
officials who are ill motivated, inadequately trained, corruption prone and vulnerable to pressure from local
elites. The resources are thus used inefficiently.

Government policies have also failed to address the various issues related to poverty due to non-
participation of local level institutions in programme implementation. It is evident that high growth alone is
not sufficient to reduce poverty without the active participation of the people.

Further, it is necessary to identify poverty stricken areas and provide infrastructure such as schools, roads,
power, telecom, IT services, training institutions etc. Institutional weaknesses abound and implementation
failure are the biggest reasons that these programmes not succeeded.

Question 6.

What programmes has the government adopted to help the elderly people and poor and destitute women?

Answer:

In accordance with the Directive Principles of State Policy, the Government of India introduced National
Social Assistance Programme (NSAP) in 1995 to help the elderly people and poor and destitute women.

The NSAP aims at ensuring minimum national standard for social assistance in addition to the benefits that
states are currently providing or would provide in future. At present, NSAP comprises of the following five
schemes for BPL persons

Indira,Gandhi National Old Age Pension Scheme (IGNOAPS)

Indira Gandhi National Widow Pension Scheme (IGNWPS)

Indira Gandhi National Disability Pension Scheme (IGNDPS)

National Family Benefit Scheme (NFBS)

Annapurna

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Under Indira Gandhi National Old Age Pension Scheme (IGNOAPS), f 200 per month provided to the
beneficiary of age 65 or more and belonging to a BPL family according to criteria prescribed by
Government of India.

Widow pension is provided under IGNWPS to the BPL widows of age group of 40-64 years. Disability
pension is provided to the multiple or severely disabled persons of age group of 18-64 years under
IGNDPS. Central assistance of ₹ 200 per month per beneficiary is provided under Indira Gandhi National
Disability Pension Scheme (IGNDPS) and Indira Gandhi , National Widow Pension Scheme (IGNWPS).

The states are urged to contribute another ₹ 200 from their own resources so that a pensioner could get at
least ₹ 400 per month in the above programmes.

Question 7.

Is there any relationship between unemployment and poverty? Explain.

Answer:

There exists a deep nexus between unemployment and poverty. Unemployment or under employment and
the casual and intermittent nature of work in both rural and urban areas drives unemployed people who do
not have resources to make their ends meet into indebtedness and poverty.

If employment opportunities are generated, then more people will be employed leading to rise in their
income which in turn will reduce poverty.

Due to unemployment, income of the people is reduced to a large extent and they are unable to get access to
education, health facilities, proper sanitation, etc. This causes poor quality of living and hence poor human
capital and skills which in turn lead to poverty making a vicious circle of poverty.

Question 8.

Suppose you are from a poor family and you wish to get help from the government to set up a petty shop.
Under which scheme will you apply for assistance and why?

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Answer:

We can apply for assistance to set up a petty shop under Prime Minister RozgarYojana (PMRY) because
the educated unemployed from low income families in rural and urban areas can get financial help to set up
any kind of enterprise that generates employment under PMRY.

Question 9.

Illustrate the difference between rural and urban poverty. Is it correct to say that poverty has shifted from
rural to urban areas? Use the trends in poverty ratio to support your answer.

Answer:

The difference between rural and urban poverty is mainly of the nature of poverty.’ The poor are identified
on the basis of their occupation and ownership of assets. The rural poor work mainly as landless agricultural
labourers, cultivators with very small landholdings, landless labourers who are engaged in a variety of non-
agricultural jobs and tenant cultivators with small landholdings.

On the other hand, the urban poor are largely the overflow of the rural poor who had migrated to urban
areas in search of alternative employment and livelihood, labourers who do a variety of casual jobs and the
self-employed who sell a variety of things on roadsides and are engaged in various activities.

It can be seen from the following table showing the trends in poverty ratio that poverty has shifted from
rural to urban areas.

Poverty Class 11 Notes Chapter 4 Indian Economic Development 1

It is evident from the above table that rural poverty has declined significantly from 56.4% in 1973-74 to
28.3% in 2004-05 whereas decline in urban poverty (from 49% to 25.7%) is not that significant. Moreover,
the gap between the rural and urban poverty ratios which was around 7% in 1973-74 fell to just around 2%
in 2004-05 again signifying the shift in poverty from rural to urban areas.

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Question 10.

Suppose you are a resident of a village, suggest a few measures to tackle the problem of poverty.

Answer:

As a resident of a village, a few measures which I would suggest to alleviate poverty from rural areas are as
follows

Identified the poorest who is in the most urgent need of assistance.

Allocation of funds for poverty alleviation programmes must be increased.

Implementation of poverty alleviation programmes should be done by involving the village panchayat and
local people.

Focus of schemes should be more on providing income generating asset? which can provide sustainable
income for the poor.

Vocational training should be provided to the youth to enable them to

earn their livelihood.

Improved delivery mechanism should be put in place in schools so that the level of education is brought up
to the required standards.

Credit facilities through banks and micro finance institutions should be provided to the people to save them
from indebtedness to the exploitative moneylenders.

Farmers should be provided land for cultivation and irrigation, warehousing and marketing facilities should
be provided to small farmers.

Targeted Public Distribution System (PDS) should be adopted to provide food security to BPL families.

Committed government officials should be given the responsibility of rural development programmes.

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 CHAPTER 5 HUMAN CAPITAL FORMATION

Notes Human Capital Formation: How people become resource;

Haman capital refers to skills, knowledge, efficiency , experience etc which improves productive efficiency
and earning capacity of a person.
Features of human capital:-
1 it is intengible and endogenously build in a person.
2 it can not be separated from its owner(worker).
3 it can be improved through training.
Human capital formation:- it is the process of acquiring and increasing no of persons with skills ,
knowledge, Calibre, experience which improves productive efficiency and earning capacity of a person.
Sources of human capital formation:-
1- investment in education:- it stimulates innovation and facilitates adoption of new technology.
2 investment in health:- good health means more working hours and working more efficiently.
3 On the job training:- it enhances labour productivity which is more than cost of providing training.
4 migration :- rural - urban migration and migration from one country to another avails better job
opportunities and better chances of earning .
5 expenditure on acquiring information:- information about labour market and other markets enables a
person to make better job choices which offers him / her better remuneration.
Difference between physical capital and human capital:-
1 physical capital is tangible where as human capital is intangible
2 physical capital includs machines, equipment, instruments, etc.used in production process.whereas human
capital includs skills, abilities, knowledge etc which enhance productive capacity of a person.t
3 working efficiency of physical capital can not be improved by training etcwhere as working efficiency of
human capital can be improved by training.
Human development and human capital:-
Human development :-It refers to the process of enlarging people's choices which allow him to lead a long
and healthy life,to enjoy a decent standard of living.
Human development is based on the idea that health and education are integral to the human well being
because an educated and healthy person can lead a good life and it leads to widening people's choices.it
regards human wellbeing as an end . investment in health and education is regarded as desirable it it
improves human wellbeing even if it doesn't increase labour productivity.

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 Human capital refers to the abilities,skills, knowledge, experience etc which improves capacity to
produce more goods. The human capital regards human beings as a means to achieve the end goal of more
labourproductivity.any investment in health and education is desirable only if it leads to increase in output
of goods and services.

Notes of Human Capital and development

Role of human capital in economic growth:-
Economic growth means sustained rise in real per capita income over a long period of time.it requires rise
in production of goods and services in the economy.
Following points high lights the importance of human capital in economic growth:-
1 Increase in labour productivity
2 It facilitates innovation and invention of new technology for production process
3 It facilitates adoption of new technology
4 It ensures better utilisation of physical capital.
5 It leads to desirable social changes in the attitude of the people.
Though the relationship between human capital and qrowth is nebulous in nature .moreover there is dual
relationship between human capital and economic growth.that is economic growth is directly related with
human capital as clear from following schedule .
It
It is clear from the schedule that when human capital increases in the form of increase in literacy rate,
increase in Life expectancy etc ,the real per capita income also increases.

Problems facing human capital formation

(i) Rising population
(ii) High regional and gender inequality.
(iii) Brain drain
(iv) Insufficient man power planning.
(v) Insufficient on the job training in agriculture
(vi) High poverty levels
(vii) Low academic standards.

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Education :- in India the expenditure on education has increased from 7.9percent to 15.7 percentage of total
govt.ecpenditure from the year 1952 to 2014. In terms of percentage of GDP it has increased from 0.64
percent to 4.23 percent of GDP In the same period.
The govt expenditure on education is inadequate because the education commission recommended that
atleast 6 percent of GDP should be allocated for education sector.
Tapas Majumdar Committee in 1999 recommend Rs 1.37 lakh Crore for 10 yearsto cover the entire
population of children between the 6 to 14 years of age.

Q1 What is meant by human capital formation?

Ans. Human capital formation refers to the process of adding to the stock of human capital overtime.

2. Define human capital.

Ans. Human capital is the stock of ‘skill and expertise’ of a nation at a point of time.

3. What is investment in education?

Ans. Expenditure on education by the government is known as investment in education.

4. Which five year plan recognized the importance of human capital?

Ans. The seventh five year plan puts in print the importance of human capital in economic growth.

5. Why do we need to invest in human capital?

Ans. It is necessary to invest in human capital and to make use of the physical capital in an efficient manner
and to develop man’s ability to increase productive capacity of a country.

6. What is on the job training?

Ans. On the job training refers to the training provided to the workers by the firm to home their specialized
skills. It makes them more efficient and productive.

7. What is the difference between literacy and education?

Ans.Education is a much wider concept than literacy. Literacy refers to the ability to read and write.
Education includes three parameters primary, secondary and tertiary education. All educated people are
literate but all literate people are not necessary educated.

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8. What do you mean by the term sources of human capital formation?
Ans. Source of human capital formation are the ways of adding to the existing stock of human capital.

9. How does human capital formation improve quality of life?

Ans. Literate, healthy, skilled and trained people are an asset for an economy therefore it is the quality of
population which means more economic growth.

10. Name the movement started by national literacy mission.

Ans. The movement started by national literacy mission is ‘Education for all’.

11. What is meant by training?

Ans. The movement started by national literacy mission is ‘Education for all’.

12. What is the literacy rate of India?

Ans. 70.04% (2011)
Short answer type

Q1 Distinguish between human capital and physical capital

Ans

BASIS FOR
PHYSICAL CAPITAL HUMAN CAPITAL
COMPARISON
Physical capital implies the non-human
Human capital refers to stock
assets of the company, such as plant
of knowledge, talent, skills
Meaning and machinery, tools and equipment,
and abilities brought in by the
office supplies etc. that help in the
employee, to the organization.
process of production.
Nature Tangible Intangible
Social process and conscious
Formation Economic and technical process.
decision of the possessor.
Only the services of human
Formation It can be traded in the market.
capital can be sold.
Separability It is separable from its owner. It is not separable from its

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 owner.
Not shown in financial
Financial Statement Shown in financial statement.
statement.
Occurs out of nationality and
Restriction on mobility Occurs due to trade barriers.
culture.
Ageing leads to depreciation,
Nature of depreciation Constant use, results in depreciation.
but it can be minimized.
Q2 Explain import sources of human capital formation.

AnsSources of human capital formation:-

1- investment in education:- it stimulates innovation and facilitates adoption of new technology.
2 investment in health:- good health means more working hours and working more efficiently.
3 On the job training:- it enhances labour productivity which is more than cost of providing training.
4 migration :- rural - urban migration and migration from one country to another avails better job
opportunities and better chances of earning .
5 expenditure on acquiring information:- information about labour market and other markets enables a
person to make better job choices which offers him / her better remuneration.

Q3 What is importance of Human capital in economic development of a country?

AnsFollowing points high lights the importance of human capital in economic growth:-
1 Increase in labour productivity
2 It facilitates innovation and invention of new technology for production process
3 It facilitates adoption of new technology
4 It ensures better utilisation of physical capital.
5 It leads to desirable social changes in the attitude of the people.
Question 4.Bring out the differences between human capital and human development.
Answer.Difference between Human Capital and Human Development

Human Capital
1. Human capital considers education and health as a means to increase labour productivity.
2. Human capital is a narrow concept which treats human beings as a means to achieve an end which is
higher productivity, failing which the investment is not considered to be productive.

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How does investment in human capital contribute to growth?

Answer:

Investment in human capital is believed to be positively related to economic growth. The

contribution of human capital formation to economic growth can be explained as follows (i)
Increase in Labour Productivity Investment in human capital through expenditure on education,
health, etc enhances the productivity of labour as they become physically fit and skilled in their
jobs. It leads to efficient utilisation of the material inputs and capital. With increase in productivity,
output increases at an increasing rate and hence economic growth accelerates. (ii) Innovations
Research and development is necessary for innovations in an economy, which lead to advancement
in technology and creation of new products. Human capital formation helps in preparing learned
scientists and researchers in various subjects who bring out innovative products, technologies and
processes and thus add to the economic growth. (iii) Absorptive Capacity Advanced technology can
be adopted only if the skills and knowledge required for using that technology is present in the
country. Investment In education and on the job training helps to create these skills and knowledge
base and thus helps in absorption of new technologies which lead to higher production and thus
economic growth. Thus, it is evident that human capital contributes to economic growth in various
ways.

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 Chapter - Rural Development

Introduction
India is a country of villages, about 50% of the villages have very poor socio-economic conditions. More
than two-third of India's population depends on agriculture. One third of rural India still lives in abject
poverty. If our country has to realise real progress, we have to develop rural India. This chapter focuses on
various aspect of rural India rural development.In particular, we will discuss in detail the issues of
Agriculture Marketing and Rural Credit, Issues of Diversification of Indian Farming and Organic Farming.

Meaning of Rural Development

❏ Rural Development is a strategy designed to improve the economic and social life of rural poor.
❏ It is a process which aims at improving the well being and self realization of people living outside
the urbanised area through collective process.
❏ According to the United Nations, “Rural development is a process of change by which the efforts of
the people themselves are United, those of government authorities to improve their economic, social
and cultural condition of communities into the life of the nation and enable them to contribute to
national programme”.
❏ Some of the areas which are challenging and need fresh initiatives for development in Rural India
includes:
❖ Development of human resources including
➢ Literacy, particularly female literacy, education and skill development.
➢ Health, in terms of sanitation and General Public Health.
❖ Land Reforms.
❖ Development of the productive resources of each locality.
❖ Infrastructure development like electricity, irrigation, credit, marketing, transport facilities
including construction of village roads and feeder roads to nearby Highways, facilities for
Agricultural Research and Extension, and information dissemination among common
people.
❖ Special measures for alleviation of poverty and bringing about significant improvement in
the living conditions of the weaker section of the population emphasising access to
productive employment opportunities through specific development programmes.

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Process of rural development
Rural development is a comprehensive term. It essentially focuses on action for the development of areas
that are lagging behind in the overall development of the village economy. Some of the areas which are
challenging and need fresh initiatives for development in rural India includes:
1. Land reforms
Land reforms were introduced to change the defective agrarian system to protect the interest
of the tenants and cultivators and to provide equal opportunities to all the sections of society.
Various institutional changes in the agrarian system must be undertaken in the country for
increasing agriculture production and providing incentives to the cultivators. The main institutional
changes (land reforms) include :
❖ Abolition of intermediaries
❖ Reforms for fixation of tenure
❖ Consolidation of land holdings
❖ Imposition of ceiling on land holding
2. Infrastructure development
For the overall development of the village economy infrastructure development includes :
❖ Electricity
❖ Irrigation
❖ Credit
❖ Marketing
❖ Transport facilities
❖ Construction of village roads to nearby highways
❖ Facilities for agriculture research and extension
❖ Information dissemination
NABARD has been set up to regulate rural credit. Moreover, regulated markets have been set-up to enhance
the system of agricultural marketing.
3. Development of human resource
Development of human resources includes
❖ Literacy, more specifically, female literacy, education and skill development.
❖ Health, addressing both sanitation and public health
❖ Job training and opportunities for skill development
4. Elevation of poverty

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 ❖ As around 30% of total population is still below the poverty line, special measures for alleviation of
poverty and bringing about significant improvement in the living condition of the weaker sections of
the population emphasising access to productive employment opportunities.
5. Development of productive resources
❖ People engaged in farm and non-farm activities in rural areas have to be provided with various
means that help them to increase the productivity.
❖ Opportunities to diversify into various non-farm productive activities such as food processing, must
be given.

Rural credit (Agricultural credit)

● Credit is an essential requirement for every protective activity. Growth of rural economy depends
primarily on infusion of capital, from time to time, to realise higher productivity in agriculture and
non-agricultural sectors
● Farmers in India are, by and large, poor and their savings are very low and inadequate. Therefore, it
is essential that there should be appropriate and efficient agencies to meet the financial requirements
of the agriculture sector.
Rural Credit is a small amount of money given to the poor people including farmers and unemployed
persons as loan to start their own work
● In India farmers borrow from various sources to meet their initial investment on seeds, fertilisers
implements and other family expenses of marriage, death, religious ceremonies etc.
Types of rural credit
Agriculturists require finance to meet their diverse requirements. It can be classified into different
categories.
(A) According to purpose
On the basis of the purpose or use of credit, Rural credit takes the form of productive and unproductive
credit.
1. Productive credit -
● Finance needed by the farmers to carry on the productive activities is known as productive
credit.
● It includes finances taken to purchase seeds, fertilizers, equipments, pesticides etc.
● It also includes loans taken to finance expenditure on making permanent improvement on
land like digging of Wells, fencing the land etc.
● Credit taken for these objectives can be repaid from increased income and hence are
economically justified.
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 2. Unproductive credit -
● Credit required by the farmers to finance expenditures other than production activities is
known as unproductive credit.
● It includes finance taken to meet various types of consumption expenditures for social and
religious purposes like marriages, funerals, festive occasions etc.
● Credit taken for unproductive purposes do not contribute to production and cannot be easily
paid back and hence these cannot be economically justified.
(B) According to time
According to time credit required by the Indian farmers can be classified into three types :
1. Short term credit:
● It is required for the period up to 15 months.
● It is related to current activities of the production and can be repaid out of the current income
of the farmers.
● Farmers need funds for short periods to carry about normal agricultural operations that is to
meet outlay on inputs like seeds, fertilizers and to pay wages, rent etc.
2. Medium term credit
● It is needed to acquire fix farm assets that is to introduce various type of improvements on
land
● It covers a period extending from 15 months to 5 years.
● Such credit is needed for the purpose of animals, making improvements on land, repair of
Wells and implements, etc.
3. Long term credit
● It is needed for a period of more than 5 years and may extended to a period of 20 years.
● Expenditure on purchase of land, reclamation of land, purchase of expensive machines and
construction of new wells and tube wells are financed from long-term finances.

Sources of rural credit

❖ Credit requirements of farmers can be classified into two broad categories :
(A) Non institutional sources
● These are the traditional sources of rural credit in India
● These mainly consist of money lenders, traders, commission agents, landlords and relatives.
1. Moneylenders
● These are the most important non-institutional sources of rural credit.

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 ● Moneylenders were the major source of rural finance in the past, accounting for
nearly 70% of rural credit in 1950 51. In 2000-2001 they accounted only for 7% of
rural credit.
● Moneylenders charge exorbitant interest-ranging from 24 to to 50% on the money
borrowed by the farmers.
● They take advantage of the illiteracy of the farmers and manipulate the accounts
without the knowledge of the borrowers.
2. Landlords
● landlords are also prepared to advance loans for any and every purpose productive
and non productive purpose.
● Landlords charge high rates of interest.
3. Traders and commission agents
● Traders and commission agents force the farmers to sell their produce at low rates as
a condition for granting loans.
4. Relatives
● Farmers generally borrow from their own relatives for a short period to tide over their
temporary difficulties

(B) Institutional sources

● Institutional credit refers to the funds available to the farmers by various institutions,
cooperative societies, commercial banks, regional rural banks, state governments, land
development banks, the National bank for agriculture and rural development (NABARD)
etc.
● The basic motive of institutional credit is to help the farmers to raise their productivity so as
to maximize their income.
1. Cooperative credit societies
● Cooperative societies deal directly with the rural borrowers, give them loans and
collect repayment of loans.
● Loans are given largely for short periods (normally for one year) for carrying out
agricultural operations.

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 ● Cooperative credit societies made a remarkable progress. particularly during the last
two decades. As on March 2011, there were 93,400 primary agricultural credit-
societies covering 65% of the rural population and 94% of the villages.
2. Land development banks
● Land development banks (LDBs) are the specialised institutions that provide long-
term credit to the agriculturists.
● The main function of the land development banks is to provide long-term credit for a
variety of purposes such as redemption of old debts, improvement of land, purchase
of costly agricultural equipments like tractors, construction of wells etc.
3. NABARD
● The National Bank of Agriculture and Rural Development (NABARD) was set up in
July 12, 1982 as an Apex body to coordinate the activities of all institutions involved
in the rural financing system.
● It provides refinance assistance to cooperative societies and the regional rural banks.
● NABARD was established with the multiple objective for providing credit for
agriculture promotion, small scale industries, cottage and village industries,
handicrafts and other aligned activities in rural areas.
● NABARD is the apex institution at the national level for agricultural credit.
NABARD provides refinance facilities to various rural based financial
institutions for farmers and workers engaged in related on the farm activities.
● NABARD obtains funds from Government of India, World Bank and mobilises
finance by issuing bonds and debentures guaranteed by government of India.
● NABARD Regional Office (RO) as a Chief General Manager (CGMs) as its head
and the head office has several top Executives with the Executive Directors (ED)
Managing Directors (MD) and the chairperson. It has 336 District Offices (DO)
across the country, one special cell at Srinagar. It also has six training establishments.
Role Of NABARD
1. 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.
2. NABARD also reaches out to allied economics and supports and promotes integrated
development.
3. NABARD discharge its duty by undertaking the following roles :
● Serves as an Apex financing agency for the institutions providing investment and
production credit for promoting the various development activities in the rural areas.
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 ● Takes measures towards institution building for improving absorptive capacity of the
credit delivery system, including monitoring formulation of rehabilitation schemes,
restructuring of credit institutions, training of personnel, etc.
● Coordinates the rural financing activities of all institutions engaged in development
work at the field level and maintains liaison with Government of India, state
governments, Reserve Bank of India (RBI), and other national level institutions
concerned with policy formulation.
● Undertakes monitoring and evaluation of projects refinanced by it.
● NABARD refinances the financial institutions which finances the rural sector.
● NABARD partex in development of institutions which help the rural economy.
● NABARD also keeps a check on its client institutions.
● It regulates the institutions which provide financial help to the rural economy.
● It provides training facilities to the institutions working in the field of rural
upliftment.
● It regulates the cooperative banks and the RRBs and manages talent acquisition
through IBPS CWE.
● NABARD’s references is available to State Co-operative Agriculture and Rural
Development Banks(SCARDBs), State Co-operative Banks (SCBs), Regional Rural
Banks (RRBs), Commercial Banks (CBs) and other financial institutions approved by
RBI. While the ultimate beneficiaries of investment credit can be individuals,
partnership concerns, companies, state-owned corporations or cooperative societies,
production credit is generally given to individuals, NABARD has its head office at
Mumbai, India.
● NABARD is also known for its ‘SHG Bank Linkage Programme’ which encourages
India's banks to lead to self help groups (SHGs). Largely because SGH are composed
mainly of poor women, this has evolved into an important Indian tool for
microfinance. By March 2006, 22 lakh SHGs representing 3.3 core members had to
be linked to credit through this programme.
● NABARD also has a portfolio of Natural Resource Management Programme
involving diverse feels like Watershed Development, Tribal Development and Farm
Innovation through dedicated funds set up for the purpose.
4. Commercial banks
● After the nationalization in 1969, Commercial Banks have entered in the field of rural credit.

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 ● Commercial Banks have made deep inroads in the rural areas by opening branches in rural
areas. At present these banks become an important source of agricultural credit.
● Commercial banks cater credit facilities to protective sectors of the economy which are
significantly contributing to GDP.
● Commercial banks also provide loans for activities related to agriculture, e.g. dairy and
poultry farming, bee-keeping, fisheries, etc.
5. Regional rural (RRBs)
● Regional rural banks (RRBs) were established on October 2, 1975 by the government of
India to provide more credit to the rural sector.
● The RRBs are under the control and regulation of NABARD.
● RRBs grant direct loans to the weaker sections of the rural areas for productive purposes as
concessional lending rates.
● Moreover, these banks mobilised rural savings and channelise for supporting the productive
activities specially in rural areas.
● These are regarded as ‘Small Man's Banks’.
6. Self help groups app
● Recently ‘Self Help Groups’ (SHGs) have emerged to fill the gap in the formal credit system
because the formal credit delivery mechanism has not proven inadequate but has also not
been fully integrated into the overall rural social and community development.
● The (SHGs) promote thrift in small proportions by a minimum contribution from each
member. From the pooled money, credit is given to the needy members to be repayable in
small installments at reasonable interest rates. Such credit provisions are generally referred
to as microcredit programmes.
● SHGs have helped in the empowerment of women.
Rural banking a critical appraisal
● Rapid expansion of the banking system has a positive effect on rural farm and non-farm
output, income and employment.
● It helped farmers to avail services and credit facilities and a variety of loans for meeting their
production needs.
● The period of 5 years plans is characterised by continuous institutionalization of rural credit
in India. As a result, about 87% of the short-term, medium term and long term productive
credit is provided by institutional agencies.

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 ● Despite various significant development in the field of agriculture credit, it has not been
possible to provide adequate credit to the bottom 50% of the rural population. Agriculture
loan default rats have been chronically hagh. Farmers Failed to pay back loans.
● To improve the situation it is suggested that banks need to change their approaches from just
being leaders to building up relationship banking with the borrowers.

Agricultural marketing system

● Agricultural marketing is a process that involves the assembling, storage, processing, transportation,
packaging, grading and distribution of different agricultural commodities across the countries.
● This world motivate the farmers to increase agriculture produce by adopting improved farm
practices.
● A good marketing system is also initial to mobilise agricultural surplus in the form of foodgrains
and raw materials to feed urban population and industries.
Defects or problems of agricultural marketing in India.
Agricultural marketing in India suffers from various shortcomings some of the defects are :
❖ Distress sales sell at very low price
❖ Lack of storage facilities
❖ Inadequate transport facilities
❖ Lack of grading and standardization
❖ Multiplicity of middleman
❖ Malpractices of middlemen
❖ Multiplicity of marketing charges from the farmers by the marketing agencies
❖ Lack of market information
❖ Low bargaining power of the farmers

Measures taken by the government to improve Agricultural Marketing System

Government has taken a number of measures to improve the agricultural marketing in India. Some of the
important measures are discussed below:
1. Regulation of markets :
● Organised marketing of agricultural commodities is being promoted in India through a
network of regulated markets.

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 ● The purpose of the regulated markets is to eliminate unfair and unhealthy market practices,
to reduce market charges, the enforce the use of standardised weights and ensure fair price
for the farmers.
● These markets have helped farmers in securing fair price for their product and helped in
using standard measures and weights throughout the country.
2. Infrastructure facilities :
● The government has made elaborate arrangements to develop physical infrastructure
facilities like roads, railways, warehouse, godowns, cold storage and processing units.
● The government has started a scheme of construction of rural godowns.
3. Uniform standard weights :
● In order to regulate the system of weights, the Government of India passed the Standard
Weight and Measures Act in 1958, making the use of government approved weights
compulsory.
● The metric system of weights was introduced in 1963.
● These steps have helped in reducing the exploitation of farmers by agents and traders.
4. Cooperative marketing :
● Cooperative marketing in realising fair prices for farmer’s products is the important aspect of
government initiative.
● The success of milk cooperatives in transforming the social and economic landscape of
Gujarat and some other parts of the country is testimony to the role of cooperatives.
5. Grading and standardization :
● Grading of agricultural products is done under the provisions of the Agricultural Produce
(Grading and Marketing) Act. These graded goods are stamped with the seal AGMARK,
which is the hallmark of quality.
● Rice, wheat, pulses, coffee, tambaku, oilseeds, cotton, leather, etc. commodities are graded
and standardized.
6. Policy instruments :
Some instruments are aimed at protecting the income of the farmers and providing food grains at a
subsidized rate to the poor.
(a) Assurance of ‘Minimum Support Price’ (MSP) for agriculture products.
(b) Maintenance of buffer stocks of wheat and rice by FCI (Food Corporation of India)
(c) Distribution of food grains and sugar through PDS
7. Marketing information :

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 ● The government collects weekly data on regular market arrivals, sales, prices on a regular
basis. It provides this information to the farmers through public media like radio, television,
newspaper, etc.
● It can help farmers in planning their production and sales and also to ensure that they get fair
prices for their products.

Emerging Alternative Marketing Channels

It has been realised that if farmers directly sell their produce to consumers, it increases their
incomes. Some example of these channel are :

1. Direct sale to consumers

In order to increase their share in the price paid by consumers, the farmers can directly sell
their produce to the consumers. This will eliminate the share of middlemen in the price
Examples:
❏ Apni Mandi : Punjab Haryana Rajasthan
❏ Rythu bazar : Vegetable and fruit market markets in Andhra
Pradesh
❏ Hadapsar Mandi : Pune
❏ Uzhavar sandies : Farmers market in Tami Nadu
2. Sales contract by National and multinational companies
● Several National and multinational fast food chains are increasingly entering into
contracts alliances with farmers to encourage them to cultivate farm products
(Vegetables, fruits etc.) of the desired quality by providing them not only seeds and
other inputs but also assured procurement of the produce at pre-decided prices.

Agricultural Diversification or Diversification into Productive Activities

● Agricultural Diversification refers to reallocation of productive resource such as land, labour,
capital, farm equipments etc. in the agriculture sector into new activities.
● In other words, Diversification means a major proportion of the increasing labour force in the
agricultural sector needs to find alternative employment opportunities in other non farm sectors.
● Agricultural Diversification is an important instrument of agricultural development in India. It is
regarded as an important means to increase output, to generate more employment and to ensure
sustainability of natural resources.
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Terms of Diversification
Diversification includes two aspects:
Diversification
Change in the cropping pattern. Diversification of productive activities.

Diversification of crop production Shift of Workforce from Agriculture to other

Allied Activities and Non-agricultural Sector

A. Diversification of Cropping Pattern or Diversification of Crops

Agricultural diversification in India in recent years is characterised by diversification within the crop sector.
● It implies substitution of one crop from another or one product for another. It gives a wider choice in
the production of variety of crops.
● It implies switch over forms from the production of food crops like wheat and rice to the production
of commercial crops like cotton, oil seeds, sugarcane etc. (shift from subsistence farming to
commercial farming).
● It implies shift from less remunerative crops to more remunerative crops.
● Diversification is also reflected in the rising export of high-valued agricultural products.

B. Diversification of employment for productive activity

● It implies shift of workforce from agriculture to other allied activities such as livestock, poultry,
fisheries etc.
● There is a greater risk of depending exclusively on farming for livelihood, Diversification towards
new areas is necessary not only to reduce the risk from agriculture sector but also to provide
productive sustainable livelihood options to rural people.
● As agriculture is already overcrowded, a major proportion of the increasing labour force need to find
alternative employment opportunities in other non-farming sectors.
● Non-farm economy has several segment in it:
1. Dynamic sub-sectors
The dynamic sub-sectors include agro-processing industries; food processing industries,
leather industry, tourism etc.These sectors process dynamic linkages that permit healthy growth.
2. Traditional household industries
Sectors which have the potential but lack infrastructure and other support include pottery, crafts,
handlooms, etc.
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 ● Majority of rural women find employment in agriculture while mean generally look for non-
farm employment.Important non-farm areas of employment are as under:
(1) Animal husbandry
● Animal Husbandry plays an important role in National Economy and in Socio- Economic
development of the Country. Animal Husbandry is output contributes about 30% of the
country's agricultural output.
● In India diversifications has occurred also in terms of moving away from crop production to
other agricultural activities, mainly livestock farming.
● Livestock farming has become a secondary source of income for millions of rural families.
In India, the farming community uses the mixed crop-livestock farming system cattle, goats,
fowl are the widely held species.
● A scheme for livestock insurance is being executed in the states with the dual objective of
providing protection mechanism to farmers and cattle rearers against loss of three animals
due to debt.
● Milk production in India has recorded a significant increase overtime, from 17 millions
tonnes in 1950-51 to 166 million metric tonnes in 2011-12. India has emerged as the world's
largest producer of milk.
● Meat, eggs, wool and other by products are also emerging as important protective sectors for
diversification.
(2) Fisheries
● The fishing community regards the water body as ‘mother’ or ‘provider’. The water bodies
consisting of sea, oceans, rivers, lakes, natural aquatic ponds, streams, etc. are an integral
and life giving source for the fishing community.
● Fisheries sector is an important source of livelihood for people in the country, particularly
for the people belonging to states of Kerala, Maharashtra, Gujarat and Tamil Nadu.
● Fisheries and allied activities provided livelihood to our 14.4 millions people in 2013-
14.Ffisheries sectors contributed 5.4 % of GDP from agriculture and allied activities.
● Fisheries sector faces the problems of low productivity, low income, underemployment and
slow upgradation of technology.
(3) Horticulture
● It is an important area of diversification of production activity in rural areas.
● It includes a wide range of crops, e.g. fruit crops, vegetable crops, flowers, spices, medicinal
and aromatic plants and plantation crops.

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 ● The period between1991-2003 is also called an effort to heralding a ‘Golden Revolution’
because during this period, the planned investment in horticulture became highly productive
and the sector emerged as a sustainable livelihood option.
● India is the second largest horticulture producer in the world just after China.
● India has emerged as a world leader in producing a variety of fruits like mangoes, bananas,
coconuts, cashew nuts and number of spices and is the second largest producer of fruits and
vegetables.
● Over the years, horticulture has emerged as one of the potential agriculture enterprises in
accelerating the growth of the economy. Economic condition of many farmers engaged in
horticulture has improved and it has become a means of improving livelihood for many
unprivileged classes.
● However, horticulture sector in India faces various problems. Low crop productivity of the
small farms, huge post-harvest losses and damages during transportation of horticulture
products, inadequate transport and storage facilities and low export competitiveness of the
Indian producers are some of the difficulties faced by the fruit and vegetables growers.
3. Other alternative livelihood options
● The information technology (IT) has revolutionized many sectors in the Indian economy.
There is broad consensus that IT can play a critical role in achieving sustainable
development and food security in the 21st century.
● It helps in making the farmers aware of the latest equipment, technologies, weather and soil
conditions for growing different crops etc.
● It can act as a tool for releasing the creative potential and knowledge embedded in the
society. It also has potential of employment generation in rural areas.
Multiple-choice questions

1. Which of the following is not an indicator of human resources development in rural India
(a) Electricity (b) Literacy (c) Skill development (d) Education
Ans. (a) Electricity
2. In which year, India adopted social banking and multiagency approach to adequately meet the needs
of rural credit:
(a) 1951 (b) 1965 (c) 1969 (d) 1982
Ans. (c) 1969
3. NABARD was set up in :
(a) 1972 (b) 1972 (c) 1981 (d) 1982

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 Ans. (d) 1982
4. SHG stands for:
(a) Small-Help Groups (b) Self-Help Groups
(c) Small Human Groups (d) Self-Helping Gatherings
Ans. (b) Self-Help Groups
5. Which of the following is the major source of livelihood in the rural sector of India
(a) Manufacturing (b) Agriculture (c) Services (d) Secondary
Ans. (b) Agriculture
6. Institutional sources of rural credit include:
(a) Cooperative Societies (b) Regional Rural Banks
(c) Commercial Banks (d) All of the above
Ans. (d) All of the above
7. Which of the following have emerged to fill the gap in the formal credit system of rural India?
(a) Regional Rural Banks (b) Self-Help Groups
(c) Land Development Banks (d) Cooperatives
Ans. (b) Self-Help Groups
8. Growth of rural economy depends primarily on infusion of
(a) Capital (b) Income (c) Expenditure (d) Wealth
Ans. (a) Capital
9. The apex body to coordinate the activities of all the institutions of rural financing is :
(a) R.R.B (b) R.B.I. (c) NABARD (d) S.B.I
Ans. (c) NABARD
10. Which of the following is not a source of non-institutional credit in India?
(a) Village traders (b) Landlords (c) Money Lenders (d) None of the above
Ans. (d) None of the above
11. Which of the following is not a part of agricultural marketing process?
(a) Assembling (b) Storage (c) Processing (d) None of the above Ans. (d)
None of the above
12. In India more than seven lakh SHGs had reportedly been credit linked. Such credit provisions are
generally referred to as:
(a) Macro-credit programmes (b) Micro-credit programmes
(c) Static-credit programmes (d) Dynamic-credit programmes
Ans.(b) Micro-credit programmes

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13. Which of the following has promoted thrift in small proportions by a minimum contribution from
each member?
(a) Regional Rural Banks (b) Self-Help Groups
(c) Land Development Banks (d) Commercial Banks
Ans.(b) Self-Help Groups
14. With the possible exception which institution, other formal institution have failed to develop a
culture of deposit mobilization?
(a) Regional Rural Banks (b) Commercial Banks
(c) Land Development Banks (d) None of the above
Ans.(b) Commercial Banks
15. The buffer stocks of wheat and rice in India are maintained by:
(a) Food corporation of India (b) Food Security of India
(c) Public Distribution system (d) Food chain of India
Ans. (a) Food corporation of India
16. Which of the following is a policy instrument to improve the agricultural marketing in the country?
(a) Assurance of minimum support prices (b) Maintenance of buffer stocks
(c) Distribution of food grain through PDS (d) All of the above
Ans. (d) All of the above
17. Diversification is related to:
(a) Change in cropping pattern
(b) Shift of workforce from agriculture to other allied activities
(c) Shift of workforce from agriculture to non- agriculture sector (d) All of the aboves
Ans. (d) All of the above
18. Distress sale by the farmers to:
(a) the sale of cotton crop
(b) the sale of crop through the commission agents
(c) the sale of crop at the minimum support price fixed by the government
(d) the sale of crop immediately after harvest owing to urgent cash needs of the farmers.
Ans. (d) the sale of crop immediately after harvest owing to urgent cash needs of the farmers.
19. Which is the significance of ‘Alternate Marketing Channels’?
(a) Farmers can directly sell their produce to consumers (b) Maintenance of buffer stocks
(c) Increasing Government intervention in agricultural marketing (d) All of the above
Ans. (a) Farmers can directly sell their produce to consumers
20. Much of the agricultural employment activities in India are concentrated in the:
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 (a) Kharif season (b) Rabi season (c) Rainy season (d) Summer season
Ans. (a) Kharif season
21. Which of the following is a dynamic sub-sector of non-farm economy?
(a) Agro- processing industries (b) Food processing industries
(c) Tourism (d) All of the above
Ans. (d) All of the above
22. In India, the farming community uses which type of the farming system?
(a) Shifting farming (b) Mixed crop-livestock
(c) Crop rotation (d) Plantation farming
Ans. (b) Mixed crop-livestock
23. Livestock production provides:
(a) Increased stability in income (b) Food security
(c) Transport (d) All of the above
Ans. (d) All of the above
24. ‘Operation Flood’ is related to:
(a) Rice (b) Milk (c) Water (d) Wheat
Ans. (b) Milk
25. From the following which is include in process of rural development:
(A) Land reforms (B) Infrastructure development
(C) Development of human resource (D) All of above
Ans. (D) All of above
26. From the following which is not a point according to time of rural credit:

(A) Short term credit (B) Medium term credit

(C) Long term credit (D) Productive credit
Ans. (D) Productive credit
27. Short term credit is needed for:
(A) Period of 15 months (B) Period of 5 years
(C) Period of 15 years (D) Period of 20 years
Ans. (A) Period of 15 months
28. Father of ‘Green Revolution’ in India:
(A) M. S. Swaminathan (B) Norman Borlog
(C) Chidambaram Subramaniam (D) None of the above
Ans. (A) M. S. Swaminathan

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29. Which is related to microfinance:
(A) Self Help Group (B) NABARD
(C) Both a and b (D) None of the above
Ans. (C) Both a and b

30. Short term period credit is needed for:

(A) Maintenance of existing land (B) Purchase of new land
(C) Purchase of seeds and manure (D) Purchase of machinery
Ans. (C) Purchase of seeds and manure
31. Which of the following is an emerging challenge related to rural development in India:
(A) Provision of credit (B) Agricultural marketing
(C) Organic farming (D) Irrigation
Ans. (C) Organic farming
32. Which of the following is expected to improve the marketing system:
(A) Regulated market (B) Improvement in transportation
(C) Minimum Support Price (D) All of these
Ans. (D) All of these
33. The principal lingering challenge in rural areas is:
(A) Challenge of rural marketing (B) Challenge of rural credit
(C) Both a and b (D) None of these
Ans. (C) Both a and b
34. Long term credit is required for:
(A) Purchase of additional land (B) Purchase of machinery
(C) For carrying out permanent improvements of existing land (D) Both a and c
Ans. (D) Both a and c
35. Which of the following is correct statement with respect to National Bank for Agriculture and Rural
Development (NABARD):
(A) It serves as an Apex funding agency for the institutions providing credit in rural areas
(B) It relates it takes appropriate measures to improve the credit delivery system
(C) Both a and b (D) None of these
Ans. (C) Both a and b
36. Which of the following statements highlight the glaring deficiencies of rural banking system:
(A) Institutional credit has invariably been tied to collateral

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 (B) Laxity in recovery of loans, owing to political reasons
(C) Both a and b (D) None of these
Ans. (C) Both a and b
37. Cooperative Credit Societies are to ensure
(A) Timely and rapid flow of credit to the farmers
(B) Elimination of money lenders as credit agencies
(C) Spread of credit facilities across all regions of the country
(D) All of these
Ans. (D) All of these

38. Conventional agriculture relies heavily on:

(A) Chemical (B) Toxic pesticide
(C) HYV seeds (D) All of the above
Ans. (D) All of the above
39. Which state launch program of apni Mandi:
(A) Punjab (B) Haryana
(C) Rajasthan (D) All of the above
Ans. (D) All of the above
40. Farmers Market in Tamilnadu called:
(A) Apni Mandi (B) Rythu Bazar
(C) Hardaspur Mandi (D) Uzhavar sandis
Ans. (D) Uzhavar sandis

Short-type questions

Q.NO. 1 What do you mean by rural development?

Answer. Rural development is a comprehensive term which essentially focuses on action for the
development of areas that are lagging behind in the overall development of the village economy.

Q.NO. 2. Discuss the importance of credit in rural development.

Answer. Farmers need money to buy additional land, implements and tools, fertilizers and seeds, paying off
old debt, personal expenses like marriage, death, religious ceremonies, etc. Since the gestation period

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between crop sowing and realisation of income after sale of agricultural produce is very long, farmers need
to take credit.

Q.NO. 3. Explain the role of micro-credit in meeting credit requirements of the poor.

Answer. SHGs (Self-Help Groups) and micro credit programmes promote thrift in small proportions by a
minimum contribution from each member. From the pooled money, credit needs are fulfilled. The member
have to repay the credit in small instalments at low rate of interest. The borrowings are mainly for
consumption purposes.

Q.NO. 4 Why is agricultural diversification essential for sustain-able livelihoods?

Answer. Diversification into non-farm activities is important because it will:
1. reduce the risk from agriculture sector.
2. provide sustainable livelihood options to people living in villages.
3. provide ecological balance.

Q.NO.5 What do you mean by agricultural marketing?

Answer. Agricultural Marketing is defined as a process of marketing farm produce through wholesalers and
stockists to ultimate consumers.

Q.NO. 6 Mention some obstacles that hinder the mechanism of agricultural marketing.
Answer. Defects of Agricultural Marketing are :
1. Inadequate Warehouses
2. Multiplicity of Middlemen
3. Malpractices in Unregulated Markets
4. Improper Measuring for Weighing, Grading and Standardisation
5. Lack of Adequate Finance
6. Inadequate means of Transport and Communication
7. Inadequate Market Information.

Q.NO. 7 What are the alternative channels available for agricultural marketing? Give some
examples.
Answer. In India, alternative marketing channels are emerging. Through these channels farmers directly
sell their produce to the consumers. This system increases farmers’, share in the price paid by the
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consumers. Important examples of such channels are: (a) Apani Mandi (Punjab, Haryana and Rajasthan),
(b) Hadaspar Mandi (Pune); Rythu Bazars (Vegetable and fruit market in Andhra Pradesh) and (c) Uzhavar
Sandies (Tamil Nadu), (d) Several national and international fast food chains and hotels are also entering
into contracts with the farmers to supply them fresh vegetables and fruits.

Q.NO. 8 Explain the term ‘Golden Revolution’.

Answer. The period between 1991-2003 is called ‘Golden Revolution’ because during this period, the
planned investment in horticulture became highly productive and the sector emerged as a sustainable
livelihood option. India has emerged as a world leader in producing a variety of fruits like mangoes,
bananas, coconuts, cashew nuts and a number of spices and is the second largest producer of fruits and
vegetables.

Q.NO. 9 Explain the role of non-farm employment in promoting rural diversification.

Answer. The non-farm sectors include agro-processing industries, food processing industries, leather
industry, tourism, etc. Some other sectors which have the potential but lack infrastructure are traditional
household-based industries like pottery, crafts, handlooms, etc.

Q.NO. 10 ‘Information technology plays a very significant role in achieving sustainable development
and food security’—comment.
Answer. Information technology plays a very significant role in achieving sustainable development and
food security in the following ways:
1. It can act as a tool for releasing the creative potential and knowledge embedded in our poeple.
2. Issues like weather forecast, crop treatment, fertilizers, pesticides, storage conditions, etc. can be
well administered if expert opinion is made available to the farmers.
3. The quality and quantity of crops can be increased manifold if the farmers are made aware of the
latest equipments, technologies and resources.
4. IT has ushered in a knowledge economy.
5. It has potential of employment generation in rural areas.

Long-type questions

Q.NO. 1 Bring out the key issues in rural development.

Answer. Some of the areas which are in need of fresh initiatives for rural development are:
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 1. Development of human resources like literacy, more specifically, female literacy, education and skill
development.
2. Development of human resources like health, addressing both sanitation and public health.
3. Honest implementation of land reforms.
4. Development of the productive resources in each locality.
5. Infrastructure development like electricity, irrigation, credit, markseting, transport facilities including
construction of village roads and feeder roads to nearby highways, facilities for agriculture research-
and extension, and information dissemination.
6. Special measures for alleviation of poverty and bringing about significant improvement in the living
conditions of the weaker sections of the population.
Q.NO. 2 Explain the steps taken by the government in developing rural markets.
Answer. The government has taken various steps for improving agricultural marketing system. These are:
1. Establishment of Regulated Markets. Government has formed regulated markets to remove most of
the evils of an unorganised market system.
Functions of regulated markets are:
(i) Enforcement of standard weights.
(ii) Fixation of charges, fees, etc.
(iii) Settling of disputes among the operating parties in the market.
(iv) Prevention of unlawful deductions and control of wrong practices of middlemen.
(v) Providing reliable market information.
2. Provision of Infrastructural Facilities. The government has taken measures to develop; infrastructural
facilities like roads, railways, warehouses, godowns, cold storages and processing units.
3. Co-operative Market. Co-operative marketing is a measure to ensure a fair price to fanners. Member
farmers sell their surplus to the co-operative society which substitutes collective bargaining in place
of individual bargaining. It links rural credit farming marketing processes to the best advantage of the
farmers.
4. Important Instruments to Safeguard the Interests of Farmers. The Government has also developed
some instruments to safeguard the interests of farmers. These instruments are:
5. Fixation of Minimum Support Price (MSP) (ii) Buffer
Stock
(iii) Public Distribution System (PDS).

Q.NO. 3 Critically evaluate the role of the rural banking system in the process of rural development
in India.
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Answer. Since 1969, when the nationalisation of commercial banks took place, rural banking has expanded
a great deal. Significant expansion of rural banking system played a positive role in:

1. Raising farm and non-farm output by providing services and credit facilities to farmers.
2. Providing long term loans with better repayment options. It, thus helped in eliminating moneylenders
from the scene.
3. Generating credit for self-employment schemes in rural areas.
4. Achieving food security which is clear from the abundant buffer stocks of grains.

Limitations of rural banking are:

1. The sources of institutional finance are inadequate to meet the requirements of agricultural credit.
Farmers still depend on money-lenders for their credit needs.
2. There exist regional inequalities in the distribution of institutional credit.
3. Rural banking is suffering from the problems of large amount of overdues and default rate.
4. Small and marginal farmers receive only a very small portion of the institutional credit. A large
portion of institutional credit is taken away by the rich farmers.

Q.NO. 4 Explain four measures taken by the government to improve agricultural marketing.

Answer. The government has taken various steps for improving agricultural marketing system. These are:

1. Establishment of Regulated Markets. Government has formed regulated markets to remove most of
the evils of an unorganised market system. Functions of regulated markets are:
(i) Enforcement of standard weights.
(ii) Fixation of charges, fees, etc.
(iii) Settling of disputes among the operating parties in the market.
(iv) Prevention of uMawful deductions and control of wrong practices of middlemen.
(v) Providing reliable market information.
2. Provision of Infrastructural Facilities. The government has taken measures to develop infrastructural
facilities like roads, railways, warehouses, godowns, cold storages and processing units.
3. Co-operative Market. Co-operative marketing is a measure to ensure a fair price to farmers. Member
farmers sell their surplus to the co-operative society which substitutes collective bargaining in place
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 of individual bargaining. It links rural credit farming marketing processes to the best advantage of the
farmers.
4. Important Instruments to Safeguard the Interests of Farmers. The Government has also developed
some instruments to safeguard the interests of farmers. These instruments are:
(i) Fixation of Minimum Support Price (MSP)
(ii) Buffer Stock
(iii) Public Distribution System (PDS).

Q.NO. 5 Bring out the importance of animal husbandry, fisheries and horticulture as a source of
diversification.
Answer.

1. Animal Husbandry
(a) In India, the farming community uses the mixed crop-livestock farming system-cattle, goats, fowl
are the widely held species.
(b) This system provides increased stability in income, food security, transport, fuel and nutrition for
the family without disrupting other food-producing activities.
(c) Today, livestock sector alone provides alternate livelihood options to over 70 million small and
marginal farmers including landless labourers.
(d) Poultry accounts for the largest share. It is 42 per cent of total livestock in India.
(e) Milk production in the country has increased by more than four times between 1960-2002.
(f) Meat, eggs, wool and other by-products are also emerging as important productive sectors for
diversification.
2. Fisheries
(a) The fishing community regards the water body as ‘mother’ or ‘provider’. The water bodies consist
of sea, oceans, rivers, lakes, natural aquatic ponds, streams, etc.
(b) Presently, fish production from inland sources contributes about 49 per cent to the total fish
production and the balance 51 per cent comes from the marine sector (sea and oceans). Today total
fish production accounts for 1.4 per cent of the total GDP.
(c) Among states, Kerala, Gujarat, Maharashtra and Tamil Nadu are the major producers of marine
products.
3. Horticulture
(a) Due to varying climate and soil conditions, India has adopted growing of diverse horticultural
crops such as fruits, vegetables, tuber crops, flowers, medicinal and aromatic plants, spices and
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plantation crpps..
(b) These crops play an important role in providing food, nutrition and employment.
(c) India has emerged as a world leader in producing a variety of fruits like mangoes, bananas,
coconuts, cashew, nuts and a number of spices and is the second largest producer of fruits and
vegetables.
(d) Flower harvesting, nursery maintenance, hybrid seed production and tissue culture, propagation of
fruits and flowers and food processing are highly profitable employment opportunities for rural
women. It has been estimated that this sector provides employment to around 19 per cent of the total
labour force.

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 CHAPTER – 7 (INDIAN ECONOMY)

EMPLOYMENT - GROWTH, INFORMALISATION AND OTHER ISSUES

Basic Concepts:

A worker is an individual who involves in some productive activity to earn a living.

An economic activity refers to the activity performed by people to earn the living.

Labour force: All persons who are working and those are not working but able to work and willing to work
at the existing wage rate constitutes labour force.

Labour force is persons working plus persons seeking for the job.

Workforce: The number of persons who are actually employed at a particular time are known as
workforce. It includes all those persons who are actually engaged in productive activities. This includes
person between age group of 15 to 16 years.

Labour supply: it refers to various amount of labours that are willing to work at particular wage rate.

Work-force participation rate

It is measured as the ratio between work-force and total population of a country.

Work Force Participation Rate = Total work force/Total population ×100

Analysis of Employment situation in India-

Region wise, gender wise and category wise

• As compared to Urban women more rural women are found working in India.
• Regular salaried employees are more in urban areas than in rural areas.
• Less women are found in regular salaried employment.

There are three categories of workers:

1. Regular Salaried Workers 2. Casual Workers 3. Self-employed.

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 Growth and changing structure of employment in India (1950-2015)

Sectoral Distribution of Workforce (2015-16)

Primary sector-47% of work force

Secondary sector- 22% of workforce

Tertiary sector- 31% of workforce

Jobless growth

In decades of 90’s, there was higher growth in GDP and a declining trend in the rate of growth of
employment.In other words, GDP increases and we produced goods and services without generating
employment opportunity.This situation is referred as jobless growth by the Scholars.

Casualisation of Workforce

The process of moving from self- employed and regular salaried employment to casual wage jobs is termed
as casualisation of workforce.

It happened because public sector particularly government sector failed to provide employment
opportunities to people.

Informalisation of Workforce

The process of moving of workforce from formal sector to informal sector is called Informalisation of
workforce.

Due to less opportunities informal sectors, people are forced to find work in informal sector.

The government and private sectors which employ 10 hired workers or more are called formal sector

Whereas farmers, labourers, self-employed persons are treated as informal sector workers. They constitute
92% of the workforce.

Unemployment

Unemployment is a situation in which people (between the age group 15 - 60 years) who are willing and
able to work, but fail to get jobs at the prevailing wage rate.

From social point of view unemployment means wastage of the precious labour resources of the country.

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Types of unemployment.

Disguised unemployment:

It is found in the agricultural sector of our economy. Disguised unemployment refers to a situation where
more people are engaged in any economic activity than required. It is the case of surplus labour.

Seasonal unemployment:

It is found in agricultural sector in rural area.

Agriculture is a seasonal occupation. Most of the part of year Indian farmers are out of work. They
remain idle. It is called seasonal unemployment.
Causes of unemployment in India

1. Rapid rise in population

2. Low level of capital formation
3. Predominance of agriculture
4. Social factors: Illiteracy, caste system, gender inequality are responsible for unemployment in
India.

Measures to reduce unemployment in India

1.The National Rural Employment Guarantee Act 2005 (MNREGA-2005):It promises 100 days of
guaranteed employment to all adult members ofrural household who are willing to do unskilled manual
work.

2.Poverty alleviation programmes: They are also known as Employment generation programme.

3.Educational reforms: Indian education system should be made employment oriented and focus on skill
development.

4.Increase in rate of capital formation: It provides employment to the fast-growing population.

Question/AnswerFor Practice

Very short answer type questions carrying 01 Mark

Q-1 Who is a worker?

ANS: A worker is an individual who involves in some productive activity to earn a living.

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Q-2 Differentiate between labour force and work force.

ANS: All persons who are working and those are not working but able and willing to work at the existing
wage rate constitutes labour force. The number of persons who are actually employed at a particular time
are known as workforce.

Q-3. Classify the following into self-employed, casual labour and regular salaried employees.
Bankers, restaurant owner, labour at construction site, engineers, doctor running his own nursing home,
doctor working in a hospital, pottery maker, vegetable vendor, home tutor, taxi owner, guard at your society
gate, presswala, shopkeeper, gardener, drivers, cobbler, home delivery boy, maids, IT professionals,
electricians, owner of tailoring shop
ANS: Self-employed: restaurant owner, doctor running his own nursing home, pottery maker, vegetable
vendor, home tutor, taxi owner, presswala, shopkeeper, cobbler, electricians, owner of tailoring shop.
Casual labour: labour at construction site,guard at your society gate, gardener, home delivery boy, maids
Regular salaried employees: Engineers, doctor working in a hospital,

Short answer type question carrying 03/04 Marks

Q-4. Compared to urban woman more rural women are found working why?

ANS: In rural area men are not able to earn more. Due to poverty women in rural areas are compelled to
work in agricultural fields and other low income works. But in urban area men are earning sufficiently, so
the women in their family need not to do odd jobs.

Q-5. Why are regular salaried employees more in urban areas than in rural areas?

ANS: People are more skilled and educated in urban areas. Regular salaried jobs required skill, high level
of literacy. Regular salaried job opportunities are available in urban areas only. Rural people are deprived of
all these due to lack of education and skill. There is lack of employment opportunities in rural areas.
Therefore, rural people can’t get employment in regular salaried sector.

Q-6. Why are less women found in regular salaried employment?

ANS: Regular salary employment requires high level of education and skills. Due to lack of education and
skill development in women, less women are found in regular salary sector.

Q-7. What is MNREGA-2005? Explain in brief.

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ANS: The National Rural Employment Guarantee Act 2005 (MNREGA-2005): It is an act passed by
parliament. It promises 100 days of guaranteed employment to all adult members of rural household who
are willing to do unskilled manual work.

Q-8. Is it necessary to generate employment in the formal sector rather than in theinformal sector?
Why?

ANS: It is necessary to generate employment in the formal sector rather than in the informal sectors
because workers and enterprises in the informal sector do not get regular income. They also do not have any
protection or regulations of labour laws. Due to less employment opportunities in formal sectors, people are
forced to find work in informal/unorganised sector. It increases job insecurity, exploitation and reduces
welfare of the labours. Government should create more employment in public sector but it is not practically
possible. Therefore Indian government has initiated the modernisation of informal sector enterprises and
provision of social security measures to informal sector workers.

Long answer type questions carrying 06 Marks

Q-9. Analyse the growth and changing structure of employment in India during the period 1950-
2015.

ANS: Sectoral distribution of workforce in 2015-16 Primary sector-47% of work force Secondary sector-
22% of workforce Tertiary sector-31% of workforce India is an agricultural economy. Most of the
population depend on agriculture due to lack of alternative employment opportunities. There is substantial
shift from farm to non-farm work. About 74% of workforce which was engaged in primary sector in 1972-
75 declined to 47% during 2014-15. The share of secondary and service sector increased from 11% to 22%
and from 15% to 31% respectively during 2014-15.The service sector shows a promising future for the
Indian workforce. Expanding share of tertiary sector is an important indicator of economic development of
a country.

Q-10. Unemployment and Poverty are cause and effect of each other. Explain briefly.

ANS: Relationship between unemployment and poverty Unemployment and poverty are interrelated to
each other. Due to poverty people are not able to get education and acquire skills. Little access to health and
other amenities reduces their productivity and efficiency to work. As a result, they do not get work and earn
income. They remain unemployed. On the other hand, unemployment reduces the income. As a result, they
are not able to fulfil their basic needs. They are compelled to remain below the poverty line. They suffer
from hunger, malnourishment, illiteracy etc.

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Q-11. Unemployment is the wastage of precious human capital of a country- explain.

ANS: Today unemployment is considered one of the most threatening problem before the country.
Unemployment problem signifies the wastage of human resources.

It effects the efficiency of workers as they remain idle and contributing nothing in production of goods and
services.

It reduces the production of goods and services and therefore GDP of the country.

Those persons who should have been assets for the economy have turned into liability for family and
country.

It create tension, frustration, depression among people and anti-social activities.

Q-12. What is meant by unemployment? Describe different types of unemployment in India.

ANS: Unemployment is a situation in which people (between the age group 15 - 60 years) who are willing
and able to work, but fail to get jobs at the prevailing wage rate.
From social point of view unemployment means wastage of the precious labour resources of the country.
Types of unemployment
1. Open unemployment: When the country’s labour force who is able and willing to work does not get
opportunities for gainful employment, it is termed as open unemployment. This type of unemployment is
found in the industrial sector of our economy.

2. Disguised unemployment: It is found in the agricultural sector of our economy. Disguised

unemployment refers to a situation where more people are engaged in any economic activity than are
actually required.This type of unemployment emerges due to population pressure on land and lack of other
employment opportunity in rural area.

3. Seasonal unemployment: It is found in agricultural sector in rural area.Agriculture is a seasonal

occupation. Most of the part of the year Indian farmers are out of work. They remain idle. It is called
seasonal unemployment. To solve the problem, it is essential to develop other employment opportunities in
rural area like, cottage industries and other non-farm activities.

4. Structural unemployment: This type of unemployment is due to the gap between capital stock and
rising population. Capital stock is too small to provide employment opportunities to rapid increasing
population.

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Q-13. What is workforce participation ratio? What are it’s importance in analysing the situation of
employment in a country?
ANS:
Work-force participation rate
It is measured as the ratio between work-force and total population of a country.
work force participation rate = Total work force/Total population ×100
worker population ratio indicates the employment situation of the country.
From this we can know the proportion of population that is contributing to the production of goods and
services in the country.
It’s importance: If worker population ratio is high, it means more people are engaged in economic
activities and if it is low, it suggests that less number of people are engaged in economic activities.
An increase in population worker population ratio suggests that now more people are contributing to GDP.
It helps in comparing the employment situation of one country with another country.
The worker population ratio in India in 2015-16 was 47.8%.
The worker population ratio in the rural sector was 50.4 percent where as it was 41.4 percent in urban area.

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 INFRASTRUCTURE

Gist of the lesson

PART-1:

A Infrastructure meaning and relevance – Its definition, and meaning & relevance and importance: -

Definition: Infrastructure refers to the supporting services in the main areas of industrial and agricultural
production, domestic and foreign trade and commerce.

Meaning & Relevance: Boosts production, helps in the development of industrial economy, basis of modern
agriculture, contribute to the modern development, helps in accessing the health services.

Types of Infrastructure:

Economic infrastructure: It is related with the energy, transportation and communication.

Social infrastructure: It is related to education, health and housing.

Relationship/Difference between Social and economic infrastructure:

Both are interdependent on each other. The main difference between the two is that the Social infrastructure
influences the production and distribution system from the outside whereas economic infrastructure
influences the same from within. However, they are complementary to each other.

Health – A key component of social infrastructure means a sound physical and mental state of an
individual.

Development of health services after independence:

A. Decline in death rate.

B. Reduction in infant mortality rate.

C. Rise in expectancy of life.

D. Control over deadly diseases

E. Decline in child mortality rate.

Health care system in India

India has three a tier health care system.

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a) Tier 1 includes Primary health care system (PHC), Community health centres (CHC) and Sub
Centres.

b) Tier 2 includes Secondary Healthcare institutions-located in big towns and district HQs

c) Tier 3 includes Tertiary Healthcare centres- fully equipped offering specialised medical services like
AIIMS Delhi, GI Chandigarh etc.

Private sector health infrastructure:

1. 80% of the total health care spending in India is occupied by the private sector health infrastructure.

2. Private sector has emerged as the dominant source of health care services in India.

Health as an emerging challenge:

1. Unequal Distribution of Healthcare Services

2. Communicable Diseases

3. Poor Management

4. Privatisation

5. Poor Upkeep and Maintenance

6. Poor Sanitation Level.

Indian System of Medicine: It includes six systems-Aurvedya, Yoga, Unani, Siddha, Naturopathy and
Homeopathy (AYUSH)

Urban-Rural, Poor-Rich Divide:

Health infrastructure is highly biased in favour of the rich and in the urban areas. Rich spends only 2%
of their income on their health care whereas the poor are to spends 12% of their income on their health
care like Bihar, M.P, Rajasthan and Uttar Pradesh are relatively lagging in health care facilities.

Women Health: Women in India suffer neglect not only in the area of education but also in the of
health care as well. Child sex ratio in our country is not favourable and it is 914 females to 1000 males.

Suggestions to improve the effectiveness of the health care programmes:

1. Decentralisation of the public health services

2. Primary health care

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 3. Sound health infrastructure

4. Reducing the gap between the urban and rural health care

5. Accessibility and affordability of basic health care to all.

Medical tourism: When the people travel outside from their local areas for medical services then it is
known as Medical tourism. Medical tourism is a growing sector in India, and it is expected to
experience an annual growth rate of 30%.

Assignment:

It may include MCQ- 1-mark question etc.

PART A: - Key words, meaning of infrastructure, Socail infrastructure, economic infrastructure, , primary

health care centre etc.

Multiple choice questions MCQs

Q1 Which of the following is considered as social infrastructure?

A Road B Education

C Electricity D Transport

Ans: B - Education

Q2 Which of the following is not a component of economic infrastructure?

A Health B Power

C Communication D Transport

Ans: A – Health

Q3 Which of the following is a component of social infrastructure?

A Health B Sanitation

C Both A and B D None of these

Ans: Both A and B

Q4 Which of the following is an essential indicator of good health?

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A Low death rate B High expectancy of life

C Low infant mortality rate D All of these.

Ans: D – All of these.

Q5 Infrastructure facilitates:

A Outsourcing B Industrial linkages

C Investment D All of these

Ans: D -All of these

Q6 Global burden of disease (GBD) as an indicator is used to assess

A The quantity of life lived by the people

B The quality of life lived by the people

C Both the quantity and quality of life lived by the people.

D None of these

Ans: C – Both the quantity and quality lived by the people.

Q7 Read the following statements: Assertions(A) and Reason (R). Choose one of the alternatives
given below:

Assertion(A) Infrastructure is the basic fundamental structure of the economic development of a country.

Reason (A) Economic compact has a direct bearing with the productive activity of an economy.

Alternatives:

A Both Assertion(A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A)

B Both Assertion (A) and Reason (R) are true but Reason (R) is not the correct explanation of Assertion (A)

C Assertion (A) is true but Reason (R) is false.

D Assertion (A) is false but Reason (R) is true.

Ans: B - Both Assertion (A) and Reason (R) are true but Reason (R) is not the correct explanation of
Assertion (A)

Q8 statements-Assertion (A)and Reason (R). Choose one of the correct alternatives given below:

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Assertion (A): Infrastructure contributes to economic development of a country both by increasing the
productivity of the factors of production and improving the quality of life of its people.
Reason (R): Infrastructure can have multiple adverse effects on health.

Alternatives:
Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion(A).

Both Assertion (A) and Reason (R) are true but Reason (R) is not the correct explanation of Assertion (A).

Assertion (A) is true but Reason (R) is false.

Assertion (A) is false but Reason (R) is true.

Answer: c Assertion (A) is true but Reason (R) isfalse.

Q9 Case Study

Read the following carefully and answer the questions on the basis of the same:

India aims to raise health spending to 2.5% of GDP, says health minister Harshvardhan.

Union health minister Harshvardhan reiterated the Narinder Modi’s government commitment to increase
the expenditure on public health to 2.5% of India’s gross domestic product by 2025.

In this initiative the number of government hospitals and dispensaries were increased from 9300 to 53000
approximately and the numbers of beds from 1.2 lakhs to 7.13 lakhs which was huge success.

“The Union government is committed to increase the public health care spending as a %age of GDP from
the existing 1.5% to 2.5% by 2025”. He said in the third episode of Sunday’s Samvaad, a weekly interaction
has been holding with his social media followers ever Sunday for the last three weeks. Harshvardhan noted
the committed leap in the share means of an actual rise of 345% from the current expenditure.

Further it is noted that global burden of disease is an indicator to gauge the number of people dying
prematurely due to particular disease as well as the number of years spent by them in a state of disability
owing to disease

Q1 India aims to raise public health care standing by ___________ % by 2025.

A 1.15 B 2.5

C 345 D None of these

Ans: C – 345
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Q2 The union government decision was to increase the public health care spending from _________ to
__________________ by the year 2025

Ans: 1.5% to 2.5%Q3 During 1951 to 2018 the number of government hospitals and dispensaries increased
from 9300 to _________ and hospital beds from 1.2 lakhs to ________________

Q4 _____________________ is an indicator to gauge the number of people dying prematurely due to

particular disease as well as the number of years spent by them in a state of disability owing to disease.

Ans: Global burden of disease

Short answer questions- 3 / 4 marks

Q1 What is economicinfrastructure?

Ans. It refers to all such elements of economic change like- power, transport,
communication etc. which serve as a support system to the process of economic growth.

It fosters economic growth which results in increase in the standards of living of the people.

Q2. What is social infrastructure?

Ans. It refers to core elements of social change like- schools, colleges, hospitals, banking
etc. which serve as a support system to the process of social development of a country.
social infrastructure focuses on human resource development, implying the development of
skilled personal as well as healthy & efficient human beings. It accelerates the process of
human development.

Q3. What is health? Mention the development of health services in India after independence?

Ans. It is a state of complete physical, mental & social well-being. A person’s ability to
work depends largely on his good health. It enhances the quality oflife.

Development of Health services in India after Independence: -

1. Decline in death rate from 27.4 per thousand in 1951to 7.4 per thousand in 2006-07.
2. Reduction in Infant mortality rate from 146 per thousand in1951 to 55 per thousand in
2007.
3. Rise in expectancy of life from 50 years in 1951 to 63.5 years in 2007.
4. Deadly diseases likemalaria, TB,cholera&smallpoxhavebeenbrought under control.
5. Reduction in child mortality rate from 57 per thousand in 1951 to 17 per thousand in2006.

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 Q4. Mention the emerging challenges of health services in India.

Ans.

Unequal distribution of health services.

Controlofcommunicablediseases.
Poor management of healthcare.
Privatization of health care services.
Poorupkeep&maintenance.
Poor sanitation level.

Q5 What role does infrastructure play in the economic development of anation?

Role of infrastructure in economic development of a nation are:

(a) Infrastructure Increases Productivity: Infrastructure, whether it is social or economic facilitates

production. The availability of good quality infrastructure promises to increase in production

and productivity.
(b) Infrastructure Encourages Investment:Infrastructure provides an encouraging environment to

investment.
(c) Infrastructure Generates Linkages in Production: Infrastructure promotes economic development

through forward and backward linkages in the productionprocess.

Q6 What is Global Burden of Disease?Explain

Ans: i) Global Burden of Disease (GBD) is an indicator used by the experts to measure the number
of people dying prematurely due to a communicable decease.

ii This also includes the number of years spent by them in a state of disability due to
various deceases. India bears a frightening 20% of the GBD

i)More than half of the GBD accounted by communicable deceases such as

diarrhoea, malaria and Tuberculosis.

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 LONG ANSWER QUESTIONS OF 6 MARKS

1..Explain the three-tier system of health infrastructure in India.

A PRIMARY HEALTHCARE:

a) Primary health care includes education concerning prevailing health problems and
methodsof
Identifying, preventing and controlling them.

Promotion of food supply and proper nutrition and adequate supply of water and
sanitation.
b. SECONDARY HEALTH CARE: includes hospitals which have better health
care facilities suchas surgeryanddiagnostics .
c. Tertiary healthcare: Includes medical centres and hospitals which give
advancedmedical Care and solve critical medical problems.

Q2 Is infrastructure a supporting structure? How does it contribute to Economic

development? (HOTS)

i) It ensures easy movement of goods and raw materials and leads efficient use
ofresources.
ii) It makes Agriculture and industry complimentary for eachother.
iii) It provides an environment conducive toinvestment.
iv) It widens size ofthemarket (With briefexplanation)

Q3 Explain the six systems of Indian medicine?

Answer: System medicine looks after the system of the human body as a part of incorporation biochemical,
environment interaction, and physiology. The Ministry of Ayurveda, Yoga, Naturopathy, Unani, Siddha,
and

Homeopathy (AYUSH) under Government of India looks after the developing, education, and research in
Ayurveda, Yoga, Naturopathy, Unani, Siddha, and Homoeopathy, Sowa Rogpa (Traditional Tibetan
Medicine) and other medical systems.

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The six systems of Indian medicine AYUSH are explained below.

1) Ayurveda- The Ayurveda goal is to keep the body functional and structural in a functional state of
equilibrium, which marks good health.
2) Siddha- This system is not only focused on medicine and it‘s treatment but also takes into account
the patient‘s environment, age, physical condition, habit, etc. Siddha treatment is a popular
treatment in Tamil speaking areas of India.
3) Unani- The system of medicine is based on practice and knowledge focused on positive health
and prevention of diseases.
4) Homeopathy-This medicine system is a special course of treatment for curing diseases by
administration of potency drug.
5) Yoga- It is a way of dealing life that has a potential for development of personal behavior, social,
improvement of physical health by stimulating better circulation of oxygenated blood in the body,
restraining sense organ, and serenity of mind.
6) Naturopathy-It is a drugless treatment. It is based on the ancient treatment of diseases like
following simple laws of nature.

Q4 What are the main characteristics of health of the people of our country?
Answer. The main characteristics of health of people of our country:

1. Decline in death rate to 8 per thousand in 2001.

2. Reduction in infant mortality rate to 7 per thousand in 2001.

3. Rise in life expectancy to 64 years in 2001.

4. Control over deadly diseases like cholera, smallpox, malaria, polio and leprosy.

5. Fall in child mortality rate to 23 per thousand in 2001.

Q5 How can we increase the effectiveness of health care programmes?

Answer. Health is a vital public good and a basic human right. All citizens can get better health facilities if
public health services are decentralised. Some measures that should be taken are:

1. Success in the long-term battle against diseases depends on education and efficient health
infra-structure. It is, therefore, critical to create awareness on health and hygiene systems.
237 | P a g e
 2. The role of telecom and IT sectors cannot be neglected in this process.

3. The effectiveness of health care programs also rests on primary centres. Efforts should be
made to make PHCs more efficient.

Encouragement should be given to private-public partnership. They can effectively ensure

reliability, quality and affordability of both drugs and medical care.

Q6 “Infrastructure contributes to the economic development of the country” Do you agree with the
given statement? Give reasons how far India has been able to develop its infrastructure?

Ans: The given statement is correct. Infrastructure is the foundation of economic development of a country
as it helps in increasing the productivity of the factors of production.

The reasons are follows:

1. Modern agriculture depends on the adequate expansion and development of irrigation

facility. It also depends on infra structure for speedy transport of seeds, pesticides, fertilisers
etc. In recent times agriculture also depends on insurance and banking facilities because of
its need to operate on a very large scale.

2. Industrial progress depends on the development of power and electricity generation,

transport and communication.

1. Infrastructure also contributes to the economic development of a country by improving the quality
of life through proper water supply and sanitation and reducing the morbidity from the water borne
diseases.

Is infrastructure a supporting structure ? How does it contribute to Economic

development ?(HOTS)

i) It ensures easy movement of goods and raw materials and leads efficient use
ofresources.
ii) It makes Agriculture and industry complimentary for eachother.
iii) It provides an environment conducive toinvestment.
iv) It widens size ofthemarket (With briefexplanation)

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13. Explain the six systems of Indian medicine?

Answer: System medicine looks after the system of the human body as a part of incorporation biochemical,
environment interaction, and physiology. The Ministry of Ayurveda, Yoga, Naturopathy, Unani, Siddha,
and

Homeopathy (AYUSH) under Government of India looks after the developing, education, and research in
Ayurveda, Yoga, Naturopathy, Unani, Siddha, and Homoeopathy, Sowa Rogpa (Traditional Tibetian
Medicine) and other medical systems.

The six systems of Indian medicine AYUSH are explained below.

7) Ayurveda- The Ayurveda goal is to keep the body functional and structural in a functional state of
equilibrium, which marks good health.
8) Siddha- This system is not only focused on medicine and it‘s treatment but also takes into account
the patient‘s environment, age, physical condition, habit, etc. Siddha treatment is a popular
treatment in Tamil speaking areas of India.
9) Unani- The system of medicine is based on practice and knowledge focused on positive health
and prevention of diseases.
10) Homeopathy-This medicine system is a special course of treatment for curing diseases by
administration of potency drug.
11) Yoga- It is a way of dealing life that has a potential for development of personal behavior, social,
improvement of physical health by stimulating better circulation of oxygenated blood in the body,
restraining sense organ, and serenity of mind.
12) Naturopathy-It is a drugless treatment. It is based on the ancient treatment of diseases like
following simple laws of nature.

14. What are the main characteristics of health of the people of our country?
Answer. The main characteristics of health of people of our country:

1- Decline in death rate to 8 per thousand in 2001.

2-Reduction in infant mortality rate to 7 per thousand in 2001.

3- Rise in life expectancy to 64 years in 2001.

4-Control over deadly diseases like cholera, smallpox, malaria, polio and leprosy.

5-Fall in child mortality rate to 23 per thousand in 2001.

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15. How can we increase the effectiveness of health care programmes?
Answer. Health is a vital public good and a basic human right. All citizens can get better health facilities if
public health services are decentralised. Some measures that should be taken are:

1- Success in the long-term battle against diseases depends on education and efficient health
infra-structure. It is, therefore, critical to create awareness on health and hygiene systems.

2-The role of telecom and IT sectors cannot be neglected in this process.

3-The effectiveness of health care programs also rests on primary centers. Efforts should be
made to make PHCs more efficient.

Encouragement should be given to private-public partnership. They can effectively ensure

reliability, quality and affordability of both drugs and medical care

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 ENVIRONMENT AND SUSTAINABLE DEVELOPMENT

LESSON GIST

PART 1 FUNCTIONS AND ROLE OF ENVIRONMENT

A. Environment is defined as the total planetary inheritance and the totality of the resources. It
includes all the biotic and abiotic factors that influence each other.
B. Functions of the environment
1. It supplies resources. Resources here include both renewable and non-renewable resources.
2. It assimilates waste.
3. It sustains life by providing genetic and biodiversity.
4. It also provides aesthetics services like scenery etc.

When environmental crises occur

● The environment is able to perform these functions without any interruption as long as the demand
of these functions is within the carrying capacity. This implies that the resources extraction is not
above the rate of regeneration of the resource and the waste generated within the assimilating
capacity of the environment.
● If the rate of resources extraction exceeds that of their regeneration, the environment fails to
perform its third and the vital function of life sustenance and this results in an environmental
crisis.
● If the rate of resources extraction exceeds that of their regeneration, the environment fails to
perform its third and the vital function of life sustenance and this results in an environmental
crisis.
Renewable Resources and Non-Renewable Resources

1. RENEWABLE RESOURCES: It refers to those resources which can be used without the
possibility of the resources becoming depleted or exhausted. That is, a continuous supply
of the resources remains available. Examples of the renewable resources are the trees in the
forest and the fishes in the oceans.

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 2. NON-RENEWABLE RESOURCES It refers to those resources, which get exhausted
with extraction and use. For example, fossil Fuel
D. Current Environmental crisis

1. Many resources have become extinct and the wastes generated are beyond the absorptive capacity
of the environment. Absorptive capacity means the ability of the environment to observe
degradation.
2. The industrial development has polluted and dried-up rivers and the other aquifers making water
an economical goods.
3. The intensive and extensive extraction of both renewable and non-renewable resources has
exhausted some of these vital resources and we are compelled to spend huge amounts on
technology and Research to explore new resources.
4. Added to these are the health cost of degraded environment qualities - - decline in air and water
qualities have resulted in increased incidence of respiratory and water-borne disease. Hence the
expenditure on health is also Rising.
5. Global environmental issues such as global warming and ozone depletion also contribute to
increased financial commitments for the government.
Thus, it is clear that the opportunity cost of negative environmental impacts is high.

Supply-Demand reversal of environmental resources

In the early days when civilisation just began, demand for environmental resources and services was
much lesser than their supply.

With the population explosion and with the advent of industrial revolution to meet the growing needs of
the expanding population, things changed. The result was that the demand for resources for both
production and consumption went beyond the rate of regeneration of resources. The pressure on the
observative capacity of the environment increased. This has resulted in the reversal of supply-demand
relationship of environmental resources.

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Part B State of India's environment

Developmental activities in India have resulted in pressure on its natural resources, besides creating
impact on human health and well-being.

1. Land degradation:- land in India suffers from unsable use and inappropriate management
practices. Some of the factors responsible for land degradation are:
● Loss of vegetation occurring due to deforestation
● Unsustainable fuel, wood and fodder extraction
● Shifting cultivation
● Encroachment into forest lands
● Forest fires and overgrazing
● Indiscriminate use of agrochemicals such as fertilizers and pesticides
● Extraction of groundwater in excess of the recharge capacity
2. Biodiversity loss
● India supports approximately 17% of the world's humans and 20% of the livestock population on a
mere 2.5 % of the world's geographical area.
● The high density of population and livestock and the computing use of land for Forestry,
agriculture, human settlements and industries exert an enormous pressure on the countries finite
land resources.
● The per capita forest land in the country is only 0.08 hectare against the requirement of 0.47
hectare to meet basic requirements.
3. Soil erosion
According to the government of India, the quantity of nutrients lost due to erosion each year from
5.8 to 8.4 million tonnes.

4. Air pollution
● In India, air pollution is widespread in urban areas where vehicles are the major contributors and,
in a view, other areas which have a high concentration of industries and thermal power plants.
● The number of motor vehicles has increased from about 3 lakhs in 1951 to 67 crores in 2003. In
2003, personal transport vehicles constituted about 80% of the total number of registered vehicles
thus contributing significantly to total air pollution load.

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PART C STEP TO ATTAINS SUSTAINABLE DEVELOPMENT

● MEANING OF SUSTAINABLE DEVELOPMENT

According to United Nations Conference on Environment and Development

"Sustainable development is the development that meets the needs of the present generation without
compromising the ability of the future generation to meet their own needs.

According to the report of our common future

"Meeting the basic needs of all and extending to all the opportunities to satisfy their aspirations for a
better life".

According to Edward Barbier

"Sustainable development is the development that meets the basic needs of all, particularly the poor
majority, for employment, food, energy, water, housing and ensure growth of agriculture, manufacturing,
power and service to meet the needs".

● STEPS TO ATTAIN SUSTAINABLE DEVELOPMENT

The Brundtland commission emphasises on protecting the future generation.This is in line with the
argument of the environmentalists who emphasise that we have a moral obligation to hand over the planet
earth in good order to the future generation'. that is, the present generation should bequeath a better
environment to the future generation. At least we should leave to the next generation stock of 'quality of
life' assets no less than what we have inherited.

● Conservation and promotion of natural resources.

● Preservation of the regenerative capacity of the world's natural ecological system.
● Avoiding the imposition of added cost or risk on future generations.
● Limiting the human population to a level within the carrying capacity of the environment. The
carrying capacity of the environment is like a plimsoll line of the ship which is its load limit mark.
● Technological progress should be input efficient and not input consuming.
● Renewable resources should be expected on our sustainable basis, that is, rate of extraction should
not exceed the rate of regeneration.
● For non-renewable resources, the rate of depletion should not exceed the rate of creation of
renewable substitutes.

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● Inefficiencies arising from pollution should be corrected.
STRATEGIES FOR SUSTAINABLE DEVELOPMENT

1. Use of Non-conventional Sources of energy: -In place of thermal and hydro power plants, we
should use Wind and Solar Energy.
2. LPG, Gobar gas in Rural Areas
Households in rural areas generally used wood, drunk cake or other biomass as fuel. This practice
has several adverse implications like: deforestation, reduction in green cover and air pollution.

To rectify the situation, Subsidies LPG is being provided. It is a clean fuel.

In addition, Gobar gas plants are being provided through easy loans and subsidies. It is a clean fuel
as well as it provides very good organic fertilizers.

3. CNG in Urban Areas

In Delhi, use of CNG as fuel in the public transport system has significantly lowered air pollution
and the air has become cleaner in the last few years.

4. Wind mills
In areas where the speed of wind is usually high. Wind mills can provide electricity without any
adverse impact on the environment. Wind turbines move with the wind and electricity is
generated.

5. Solar power through photovoltaic cells

India is naturally endowed with a large quantity of solar energy in the form of sunlight. We should
promote the use of solar energy because:

● This technology is extremely useful for remote areas and for places where supply of power
through grid or power lines is either not possible or proves very costly.
● This technique is also totally free from pollution.
6. Mini-hydel plants
In mountainous regions, streams can be found almost everywhere. A large percentage of such
streams are perennial. Mini-hydel plants use the energy of such streams to move small turbines.

● Such power plants are more or less environment friendly as they do not change the land use
pattern in areas where they are located.

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● They generated enough power to meet local demands.
● They can also do away with the need for large scale transmission towers and cables and avoid
transmission loss.
7. Traditional knowledge and practices
If we look back at our agriculture system, healthcare system, housing, transport etc.we find that all
practices have been environment friendly. Only recently have we drifted away from the traditional
systems and caused large scale damage to the environment and also for our ruler heritage. Now, it
is time to go back.

● These products are environment friendly.

● They are relatively free from side effects.
● They do not involve large scale industrial and chemical processing.
8. Biocomposting
Now-a-days, we almost totally neglected the use of compost and completely switched over to
chemical fertilizers. The result is that large track of productive land have been adversely affected,
water bodies including groundwater systems have suffered due to chemical contamination and
demand for irrigation has been going up year after year.

Farmers, in large numbers all over the country, have again started using compost made from
organic wastes of different types. In certain parts of the country, cattles are maintained only
because they produce dung which is an important Fertilizer and soil conditioner.

9 Biopest control

With the advent of green revolution, the entire country entered into a frenzy to use more and more
chemical pesticides for higher yield. Soon, adverse impacts begin to show, food products work
contaminated soil, water bodies and even groundwater work polluted with pesticides.

To meet this challenge, efforts are on to bring its better method of pest control. For example,
Neem trees are proving to be quite useful. Several types of pest controlling Chemicals have been
isolated from Neem and these are being used. Mixed cropping and growing different crops in
consecutive years on the same land have also helped the farmers.

In addition, awareness is spreading about various animals and birds which help in controlling
pests.

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 ● OBJECTIVE TYPE QUESTION
1. _________________is defined as the total planetary inheritance and the totality of the resources. It
includes all the biotic and abiotic factors that influence each other.
Ans. Environment

2. Which of the following is not a function of the environment?

A. It supplies resources
B. It assimilates waste
C. It sustains life
D. Promotes economic growth
Ans. D promotes economic growth

3. _______________ means the ability of the environment to absorb degradation.

Ans. Assimilation capacity.

4. Global warming is caused by:

A. Greenhouse gases
B. Hot climate
C. Oxygen
D. None of the above
Ans. Greenhouse gases

5. CPCB is the full form of _____________

Ans. Central pollution control board

6. ______________is an indicator which measures the number of people dying prematurely due to a
particular disease.
Ans. GBD

7. With the help of______________ solar energy can be converted into electricity.
Ans. Photovoltaic cell.

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Short and long Question-Answer

Q1.“Recently Indians have drifted away from the traditional knowledge and practices and caused
large scale damage to environment.”

Explain how, adopting the traditional practices can be helpful in achieving the objective of
sustainable development. (4)

Answer: - The given statement is quite appropriate.

• India is very much privileged to have about 15,000species of plants which have medicinal
properties. The traditional health care systems such as Ayurveda, Unani, Tibetan etc. are very
useful for treating chronic health problems.
• Traditional cosmetic products are herbal incomposition. These products are not onlyenvironment-
friendly but also are free-from side effects. They do not involve large-scaleindustrial and chemical
processing.Environment-friendly but also are free-from side-effects. They do not involve large-
scale industrial and chemical processing.
• Economic development, which aimed at increasing the production of goods and services to meet
the needs of a rising population, puts greater pressure on the resources and the environment.
Discuss the given statement.

Q2. Economic development, which aimed at increasing the production of goods and services to meet
the needs of a rising population, put greater on the resources and the environment. Discuss the
given statement. (6)

Answer. (i) Effects on Resources – Reversal of supply-demand relationship for environmental resources:
In the initial stages of development (before countries took to industrialisation), the demand for
environmental resources was much less than their supply. This meant that pollution was within the
absorptive capacity of the environment and the rate of resource extraction was less than the rate of
regeneration of these resources.

Hence, environment problems did not arise. But with population explosion and with the advent of
industrial revolution to meet the growing needs of the expanding population, we are now faced with
increased demand for environmental resources but their supply is limited due to overuse and misuse.

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(ii) Effects on environment: Since many resources have become extinct and the wastes generated are
beyond the absorptive capacity of the environment, we are today at the threshold of environmental crisis.

• The economic development has polluted and dried-up rivers and other aquifers making water an
economic good.

• Decline in air and water quality have resulted in increased incidence of respiratory and water-borne
diseases.

• Global environmental issues such as global warming and ozone depletion. Global warming is a gradual
increase in the average temperature of the earth’s lower atmosphereas a result of the increase in
greenhouse house gases since the industrial revolution. Ozone depletion means reductions in the amount
of ozone in the stratosphere, caused mainly due to chlorofluorocarbons (CFC), used as cooling substances
in air-conditioners and refrigerators.

3. “The opportunity costs of negative environmental impacts are high”.

Do you agree with the given statement? Give valued reasons in support of your answer.

(3 marks)

Answer. The given statement is quite appropriate.

(1) Due to intensive and extensive extraction of both renewable and non-renewable resources, many vital
resources have become extinct. As a result, we are compelled to spend hugeamounts on technology and
research to explore new resources.

(2) Health costs of degraded environmental quality – decline in air and water quality have resulted in
increased incidence of respiratory and water-borne diseases. Hence, theexpenditure on health is also
rising.

(3) Global environmental issues, such as global warming and ozone depletion also contribute to increased
financial commitments for the government.

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Q.4“The threat to India’s environment poses a dichotomy – threat of poverty-induced
environmental degradation and at the same time, threat of pollution from affluence and a rapidly
growing industrial sector.” Defend or refute the given statement.(6 marks)

Answer.The given statement is correct. Air pollution, water contamination, soil erosion, deforestation and
wildlife extinction are some of the most pressing environmental concerns of India. The priority issues
identified are:

(a) Land degradation: Land in India suffers from varying degrees and types of degradation mainly due to
unstable use land and inappropriate managementpractices. Some of the factors responsible for land
degradation are

(i) Loss of vegetation occurring due to deforestation

(ii) Unsustainable fuel wood and fodder extraction

(iii) Encroachment into forest lands

(iv) Forest fires and overgrazing

(v) Indiscriminate use of agro-chemicals such as fertilisers and pesticides

(vi) Extraction of ground water in excess of the recharge capacity.

(b) Biodiversity loss: India supports approximately 17% of the world’s human and 20% of livestock
population on a mere 2.5% of the world’s geographical area. Due to high density of population and
livestock, the quantity of nutrients lost due to erosion each year ranges from 5.8 to 8.4 million tonnes.

(c) Air pollution: In India, air pollution is widespread in urban areas where vehicles are the major
contributors and in a few other areas which have a high concentration of industries and thermal power
plants. Vehicular pollution has the maximum impact on the general population. The number of motor
vehicles on Delhi roads was over 1 crore on March 31 2018, with more than 70 lakh two-wheelers, thus
contributing significantly to total air pollution load.

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(d) Management of fresh-water: 70% of water in India is, polluted resulting in increased incidence of
water-borne diseases.

(e) Solid waste management: Environmental issue of waste generation has become critical today. The
wastes generated are beyond the absorptive capacity of the environment. The above points highlight the
challenges to India’s environment. India is one of the ten most industrialised nations of the world. But this
status has brought with it unwanted and unanticipated consequences such as unplanned urbanisation,
pollution and the risk of accidents. The CPCB

(Central Pollution Control Board) has identified 17 categories of industries (large and medium scale) as
significantly polluting.

Question 5

Define ‘Sustainable Economic Development’ what are the strategies for sustainable development?
Explain briefly any five strategies. (6 marks)

Answer.The United Nations Conference on Environment and Development (UNCED) emphasised on the
concept of sustainable economic development and defined it as: ‘Development that meets the need of the
present generation without compromising the ability of the future generation to meet their own needs.’
Strategies for sustainable development:

(i) Use of Non-Conventional Sources of Energy – India is hugely dependent on thermal and hydro power
plants to meet its power needs. Thermal power plants emit large quantities of carbon dioxide which is a
greenhouse gas. Hydroelectric projects inundate forests and interfere with the natural flow of water. Wind
power and solar rays are good examples of non-conventional but cleaner, greener sources of energy.

(ii) LPG, Gobar Gas in Rural Areas – Use of LPG as a cooking fuel reduces household pollution. Also,
energy wastage is minimised. Similarly, gobar gas plants are being provided through easy loans and
subsidy. For the gobar gas plant to function, cattle dung is fed to the plant and gas is produced which is
used as fuel, while the slurry which is left over is a very goodorganic fertiliser and soil conditioner.

(iii) CNG in Urban Areas – In Delhi, the use of CNG as fuel in public transport system has significantly
lowered air pollution and the air has become cleaner in the last few years.

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(iv) Solar Power through Photovoltaic Cells – Photovoltaic cells use special kind of materials to capture
solar energy and then convert the energy into electricity. This technology isextremely useful for remote
areas and for places where supply of power through grid or power lines is either not possible or proves
verycostly. This technique is totally free from pollution.

(v) Mini-hydel plants – In mountainous regions, Mini-hydel plants use the energy of streams to move
small turbines; which generate electricity. Such power plants are eco-friendly as they do not change the
land use pattern in areas where they are located. They generate enough power to meet local demands.
There is no need for large scale transmission towers and cables and avoid transmission loss.

6. Explain how ‘Bio-composting’ and ‘Bio-pest control’ can be helpful in achieving the objective of
sustainable development. (4 Marks)

Ans. Bio-composting: To increase agricultural production, we totally neglected the use of bio-compost
and completely switched over to chemical fertilisers. As a result, land degraded, water bodies suffered due
to chemical contamination, and demand for irrigation increased.

Composts made from organic wastes of different types can be used as important fertiliser and soil
conditioner.

Bio-pest Control: Due to use of more and more chemical pesticides, food products were contaminated;
soil, water bodies and even ground-water were polluted with pesticides.

• Use of pesticides based on plant products, e.g., Neem, trees are very useful. Several types of pest
controlling chemicals are isolated from neem and these are used.

• Animals and birds also help in controlling pests. For example, snakes prey upon rats, mice and various
other pests. Similarly, owls and peacocks prey upon pests.

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7.Define ‘Sustainable Economic Development’ what are the strategies for sustainable development?
Explain briefly any five strategies. (6 Marks)

Sustainable development aims at promoting the kind of development that minimises environmental
problems and meets the needs of the present generation without compromising the ability of the future
generation to meet their own needs. According to Herman Daly, to achieve sustainable development the
following needs to be done:

(i) Limiting the human population to a level within the carrying capacity of the environment,

which is like a ‘plimsoll line’ of the ship which is its load limit mark. In the absence of the plimsoll line
for the economy, human scale grows beyond the carrying capacity of the earth and deviates from
sustainable development.

(ii) Technological progress should be input efficient and not input consuming. Renewable resources
should be extracted on a sustainable basis, that is, rate of extraction should not exceed the rate of
regeneration.

(iv) For non-renewable resources, rate of depletion should not exceed the rate of creation of renewable
substitutes.

(v) Inefficiencies arising from pollution should be corrected.

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 TOPIC: COMPARATIVE DEVELOPMENT EXPERIENCES OF INDIA AND ITS
NEIGHBOURS

SHORT TYPE QUESTIONS

Q1. Write a note on importance of liberty indicators.

Ans. The quality of life of people is measured by human development indicators but along with
this we also need liberty indicators which measure the extent of democratic participation in social
and political decision making. Some of the liberty indicators are as follows:

a) Constitutionally protected rights of citizens.

b) Constitutionally protected independence of the judiciary.
c) Rule of law
The liberty indicators have not been given adequate importance so far. Without liberty
indicators, the Human Development Index may have limited usefulness and may be considered
incomplete.
Q2. Give an account of common failures of India and Pakistan.

Ans. Common failures faced by India and Pakistan are as below:

a) Relatively slow pace of GDP growth, compared with China.

b) Poor performances in HDI ranking.
c) There are a lot of problems faced by private sector like bribes, loan from public financial
institutions, tax evasion etc.
d) High fiscal deficit averaging 78% of GDP continued for a fairly long period of time resulting huge
borrowings by the government.

Q3. Compare and contrast the development of India, China and Pakistan with respect to some salient
human development indicators.

Ans. The development of India, China and Pakistan with respect to some salient human development
indicators can be assessed and compared with the help of the following points:

a) Pakistan’s performance in education, sanitation and access to water is better than India.
b) China is ahead of India and Pakistan in Human Development indicators. China has better ranking
in terms of income indicators such as GDP per capita or proportion of population below poverty

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 line or health indicators such as mortality rate, access to sanitation, literacy, life expectancy or
malnourishment.
c) Maternal mortality is very high in India and Pakistan as compared to China.
d) All the three countries provide improved water soiurces for most of their population.

Q4. Write a brief note on:

a) ASEAN
b) SAARC

Ans. a) ASEAN: The ASEAN- Association of South East Asian Nations- was formed in 1967 by
Indonesia, Malaysia, the Philippines, Singapore and Thailand to promote political and economic
cooperation and regional stability, Brunei and Vietnam joined ASEAN in 1984 and 1995 respectively.
Its headquarter is at Jakarta.

b) SAARC: South Asian Association for Regional Cooperation was established on 8th December
1985 to encourage cooperation among its member countries in the fields of agriculture, health ,
population control, anti-terrorism measures, rural development, science and technology and
narcotics control. Afghanistan, Bangladesh, India, Pakistan, Bhutan, Maldives, Nepal and Srilanka
are its members. Its headquarter is in Kathmandu.
HOTS
Q1. “India, China and Pakistan have many similarities in their developmental strategies”.
Elaborate.
Ans. India, China and Pakistan have many similarities in developmental strategies which are as
follows:
a) All the three countries had started planning their developmental strategies in similar ways.
India announced its five year plans in 1951-56, while Pakistan announced its five year plan in
1956 which is called medium term plan. China announced its five year plan in 1953.
b) India and Pakistan adopted similar strategies such as creating a large Public sector and raising
Public expenditure on social development.
c) Till the 1980s, all the three countries had similar growth rates and per capita income.
d) Economic reforms took place in all the three countries. Reforms started in India in1991, in
China in 1978 and in Pakistan in1988.

Q2. Enumerate the reasons of success of structural reforms in China.

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 Ans. The reasons of success of structural reforms in China are enumerated bellows:

a) There was existence of infrastructure in the areas of education, health and land reforms.
b) There was decentralised planning and existence of small enterprises.
c) Through the commune system, there was more equitable distribution of food grains.
d) There was extension of basic health services in rural areas.
LONG TYPE QUESTIONS
Q1. Bring out the comparision between the economic growth of India, China and Pakistan.

Ans. The comparision between the economic growth of India, China and Pakistan is discussed below:

a) National Income: In terms of national income, China’s position is much better than India and
Pakistan. In this context, we can say that India’s position in comparision with Pakistan is much
better.
b) Per capita income: Although India and Pakistan are at par in terms of per capita income, China is
far ahead of both of these countries.
c) GDP growth rate: Prior to economic reforms, GDP growth rate was very low in all the three
countries. After reforms, there was a breakthrough. But China surpassed both India and Pakistan in
achieving GDP growth rate of nearly 10% per annum and that too almost consistently. In case of
India and Pakistan, GDP growth rate has yet to touch the double digit.
d) Demographic indicators: Growth rate of population has been cut to half in China, following strict
enforcement of its policy of ‘One Child Norm’. India and Pakistan are still struggling with the
problem of high growth rate of population, which is about 1.76% in India and 1.8% in Pakistan.
e) Sex ratio: Sex ratio is found to be low in all the three countries pointing to social backwardness
where people hold high preference for a son in the family.

Q2. Explain briefly the various development strategies of China.

Ans. Certain development strategies of China are discussed below:

a) Great Leap Forward Campaign: The campaign, initiated in1958, aimed at industrialising the
country on a massive scale. People were encouraged to set up industries in their backyards. In
rural areas, communes were started. Under the commune system people collectively cultivated
land.

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b) Great Proletarian Cultural Revolution: In 1965 Mao Tse Tung started a cultural revolution on a
large scale. In this revolution, students and professionals were sent to work and learn from the
countryside.
c) One Child Norm: The Chinese government introduced one child norm to check its growing
population. Couples were allowed to have only one child. In case they gave birth to second child,
social assistance was stopped.
d) 1978 reforms: Since 1978, China began to introduce many reforms in phases. The reforms were
initiated in agriculture, foreign trade and investment sector. In agriculture lands were divided into
small plots which were allocated to individual households. There were allowed to keep all income
from the land after paying taxes. In later phase, reforms were initiated in industrial sector. All
enterprises which were owned and operated by local collectives in particular, were allowed to
produce goods.

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 Development Experience of India
(Issues - economic growth, population, sectoral development)
10.1 Developmental Path—A Snapshot View

1. With the unfolding of the globalisation process, developing countries are keen to
Understand the development processes pursued by their neighbours. Why?
Ans : This is essential for developing countries as they face competition from developed nations as also
amongst themselves. Besides, an understanding of the other economies in our neighbourhood is also
required as all major common economic activities in the region impinge on overall human development in
a shared environment.

2. India, Pakistan and China have similar physical endowments but totality different political systems.
Explain how.

Ans: India has the largest democracy of the world which is wedded to a secular and deeply liberal
Constitution. Pakistan has militarist political power structure and China has the command economy.
Recently, Pakistan started moving towards a democratic system and China towards more liberal economic
restructuring.

3. There is also an increasing eagerness on the parts of various nations to by and understand the
development processes pursued by their neighbouring nations. Why?
Ans: Because it allows them to better comprehend their own strengths and weaknesses vis-à-vis their
neighbours.

4. Distinguish between renewable resources and non- renewable resources.

Ans: Regional and economic groupings are formed to strengthen their own domestic economies.

5. What are regional and economic groupings formed?

Ans :To strengthen their own domestic economies, nations are forming regional and global economic
groupings such as the SAARC, European Union, ASEAN, G-8, G-20, BRICSetc.

6. What similar development strategies have India and Pakistan followed for their respective development
paths?

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 Ans :India and Pakistan adopted similar developmental strategies, such as creating a large public sector
and raising public expenditure on social development.

7. Fill in the blanks :

a. First Five Year Plan of_ commenced in the year 1956.(Pakistan/China)
b. Reforms in (China/Pakistan) were introduced in 1978
.

Ans :Pakistan (b)China

8. What is Commune system?

Ans :In China, under the Commune system peoplecollectively cultivated lands. In 1958, there were 26,000
communes covering almost all the farm population.`

9. Give the meaning of ‘township and villageenterprises’.

Ans :In China, township and village enterprises are those enterprises which were owned and operated by
local collectives.
10. Give the meaning of State Owned Enterprises.
Ans :In China, enterprises owned by government areknown as State Owned Enterprises (SOEs),which
we,in India, call public sector enterprises.
11. What is dual pricing?

Ans:In China, the reform process involved dual pricing, which means fixing the prices in two ways—
farmers and industrial units were required to buy and sell fixed quantities of inputs and outputs on the basis
of prices fixed by the government and the rest were purchased and sold at marketprices.

10.2 Economic Development Indicators of India, China and Pakistan

1. What is the important implication of the ‘one childnorm’ in China? (NCERT)

Ans: One child norm has the important implication that it leads to arrest in the
growth of population.

2. The population of Pakistan is very small and accounts for roughly about _____of China or India.

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Ans: one-tenth

3. The population growth in China is low as compared to India and Pakistan.Why?

Ans: Scholars point out the ‘one child norm’ introduced in China in the late 1970s as the major reason for
low population growth.

4. The sex ratio is low and biased against females in all three countries.Why?

Ans :‘Preference for son’ prevailing in all these countries is the reason for low sex ratio.

5. In China, only about 10 per cent of its total land area is suitable for the cultivation. Why?

Ans :In China, due to topographic and climatic conditions, the area suitable for cultivation is relatively
small.

6. Until the 1980s, more than 80 per cent of the peoplein China were dependent on farming as their sole
source of livelihood. Since then, the government encouraged people to leave their fields and pursue
other activities suchas _.

Ans: handicrafts, commerce andtransport

7. Fill in the blanks:

a) Maternal mortality rate ishighin__________. (China/Pakistan)

b) Proportion of people below poverty line ismore in .(India/Pakistan)

Ans :(a) Pakistan, (b)India

10.3 Development Strategies — An Appraisal

1. Why it is necessary to understand the roots of successes and failures of economic reforms policies
of neighbouring countries?

Ans: In order to learn from economic performance of our neighbouring countries, it is necessary to

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have an understanding of the roots of their successes and failures. It is also necessary to distinguish
between, and contrast, the different phases of theirstrategies.

2. What are the reasons for the slow down of the Pakistan economy?

Ans: Scholars are of the opinion that political instability, over- dependence on remittances and foreign aid
along with volatile performance of agriculture sector are the reasons for the slowdown of the
Pakistaneconomy.

3. What factors helped China positively improving the social and income indicators in the post
reform period?

Ans: Establishment of infrastructure in the areas of education and health, land reforms, long
existence of decentralised planning and existence of small enterprises.

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1. Nations are forming regional and global economic groupings to strengthen their own domestic
economies. Name any two such groupings formed by different nations

SAARC, Europeon Union, ASEAN, G–8 , G–20, BRICS

(any two).

2. Match the following:

A. The largest democracy of the world, Secularism, Liberal (i) India

constitutionsystem

B. The militarist political powerstructure (ii) China

C. The command economy, whichreceltlystarted moving (iii) Pakistan

towards a democratic system and more liberal economic
restructing.

Ans :A – (i) ,B – (iii) C – (ii)

3. While India and Pakistan became independent nations in 1947, People’s Republic of China was
establishedin:(Choose the correct alternative)

(a)1949 (b)1953

(c)1958 (d)1965

Ans :(a) 1949

4. Match the following:

(a) Birds, animals and plants (i) Biotic elements of environment

forests, fisheries, etc.

(b) Air, water, landetc. (ii) Abiotic elements of environment

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Ans :(a)– (i), (b) –(ii)

5. India and Pakistan adopted similar development strategies such as __.

(Fill up the blank with the correct answer)

Ans :Creating a large public sector and raising public expenditure on socialdevelopment.

6. Match the following:

Column-1 Column-2
(a)Regional and global economic grouping’s (i) Students and professionals were sent to
such as the SAARC,G– 8,G–20,ASEANetc. work and learn fromthe countryside.
(b)The Great Leap Forward(GLF) campaign (ii) Means to strength thentheir own
initiated by China in 1958. domesticseconomies.
(c)The Commune system inChina. (iii) People collectivelycultivated lands.
(d)The Great Proletarian Cultural Revolution (iv) Industrialising the country on a
introduced by Maoin 1965. massivescale.

Ans :(ii), (iv) ,(iii), (i)

7. Campaignwas initiated in China in 1958, aimed at industrialisingthe country on a massive scale.

People were encouraged to set up industries in their backyards. (Fill up the blank with the
correctanswer)

Ans :The Great Leap Forward (GLF)

8. Identify the correct sequence of alternatives given in Column II by matching them with respective events of
China in Column I:

9.

Column I Column II

(a) Introduction of economic reforms in China. (i) 1949

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 (b) Establishment of People’s Republic of China. (ii) 1953

(c) China announced its first five year plan. (iii) 1958

(d) The Great Leap Forward campaign initiated in China. (iv) 1978

Ans :A – (iv) ,B – (i) ,C – (ii) ,D – (iii).

10. The population of Pakistan is very small and accounts for roughly about 1/8th of
ChinaorIndia.

Ans :True

11. Among the three nations India, Pakistan and China ,the population growth is the highestinChina.
(True/False)

Ans :False: The population growth is the highest inPakistan (2.1% p.a. in 2015), followed by
India (1.2% p.a. in2015) and China (0.5% p.a.).

12. _______________ is the major reason for low population growth and a decline in the sex ratio in
China. (Fill up the blank with the correct answer)

Ans : ‘One child norm’ introduced in China

13. The fertility rate in low in China and very high in Pakistan. (True/False)

Ans : True

14. In 2015-17 there has been a decline in Pakistan’s growth rate. Give reasons.

(i) Reform processes introduced in Pakistan.

(ii) Political instability over a large period.

15. China’s growth is mainly contributed by the manufacturing and service sectors and India’s growth by
the service sector. (True/False)

Ans : True

16. Match the following:

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(a)High degree ofurbanisation (i) India
(b) Very high fertility rate (ii) China
(c) Lowest density ofpopulation (iii) Pakistan
(d) Growth due to service sector
Ans :A – (ii) , B – (iii) ,C – (ii) , D – (i)

17. Measures of ‘the extent of constitutional protection given to rights of citizens’ or ‘the extent of
constitutional protection of the Independence day of the Judiciary and the Rule of Law’ are called
_. (Humandevelopment indicators /Liberty indicators)

(Fill up the blank with the correct option)

Ans : Liberty indicators

18. GDP per capital , or proportion of population below poverty line is . (Income indicator of human
development / Health indicator of human development)

(Fill up the blank with the correct option)

Ans :Income indicator of human development

19. During the last few years, Pakistan has recovered in economic growth and has been sustaining.
(True/False)

Ans :True: In 2015-16, the GDP registered a growth of 4.7 percent, highest when compared to the
previous eight years.

20. First five year plan of _ commenced in the year 1956. (Pakistan / China)

(Fill up the blank with the correct option)

Ans :Pakistan

21. Reforms in …………………………… were introduced in 1978. (Pakistan / China)

(Fill up the blank with the correct option)

Ans :China

22. Maternal mortality rate is high in . (China / Pakistan)

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 (Fill up the blank with the correct option)
Ans :The United Nations Conference on Environment and Development (UNCED)

23. Proportion of people living below poverty line is more in ………….. (India / Pakistan)
(Fill up the blank with the correct option)
Ans :India
24. Infant mortality rate is high in ………………………….. . (India / Pakistan)
(Fill up the blank with the correct option)

Ans :Pakistan

25. Percentage of undernourished children is more in …………... (India / Pakistan)

(Fill up the blank with the correct option)

Ans :Pakistan

26. Percentage of population using improved sanitation is highestin ……………

(India / China / Pakistan)
(Fill up the blank with the correct option)
Ans :China

27. Which of the following countries has the lowest density of population? (Choose the correct alternative)
(a) India
(b) China
(c) Pakistan
(d) None of the above
Ans :(b) China

28. Growth rate of population is highest in which of the following country?(Choose the correct
alternative)
(a) India
(b) China

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 (c) Pakistan
(d) None of the above

Ans :(c) Pakistan

29. The Great Leap Forward (GLF) campaign was launched in China in the year:
(Choose the correct alternative)
(a) 1978
(b) 1988
(c) 1958
(d) 1949

Ans :(c) 1958

30. Fertility rate is very high in which of the following country?

(Choose the correct alternative)
(a) India
(b) China
(c) Pakistan
(d) None of the above

Ans :(c) Pakistan

31. Special Economic Zones were set up by China to:

(Choose the correct alternative)
(a) Attract foreign investors.
(b) To develop the backward regions.
(c) To maintain economic equality.
(d) To promote private sector.

Ans :(a) Attract foreign investors.

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32. China discontinued the one child policy because:

(Choose the correct alternative)

(a) There will be more elderly people in proportion to young people.

(b) It increased the number of dependent population.

(c) People became dissatisfied with the policy.

(d) Population of the country decreased.

Ans :(a) There will be more elderly people in proportion to young people.

33. China succeeded in achieving higher growth rate than India because: (Choose the correct alternative)

(a) Followed communist pattern of economy.

(b) Started reforms early

(c) Given much importance to manufacturing sector.

(d) All of the above

Ans :(c) Service sector

34. Which of the following features relates to the Chinese economy:(Choose the correct alternative)

(a) Very high fertility rate

(b) Growth due to service sector

(c) Growth due to manufacturing and service sectors

(d) High density of population

Ans :(c) Growth due to manufacturing and service sectors

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1. “The present day fast industrial growth in China can be traced back to the reforms introduced in
1978.” Defend or refute the above statement. (4 marks)

Answer 1

The given statement is correct.

(i)In the initial phase,reforms were initiated in agriculture, foreign trade and investment sectors.
Forinstance, in agriculture commune lands were divided into small plots which were allocated (for

use not ownership) to individual households. They were allowed to keep all income from the land after
paying taxes.

(ii) In the later phase, reforms were initiated in the industrial sector.

Private sector firms and township & village enterprises were allowed to produce goods. At this stage,
State Owned Enterprises (SOEs) were made to face competition.

(iv) In order to attract foreign investors, special economic zones were set up.

2. China did not have any compulsion to introduce reforms as dictated by the World Bank and
International Monetary Fund to India and Pakistan. Why did China introduce structural reforms in
1978? Also, evaluate the various factors that led to the rapid growth in economic development in
China in the post reform period. (6 marks)

Answer 2 China introduced economic reforms in 1978 because of the following reasons:

(i) The new leadership at that time in China was not happy with the slow pace of growth and lack of
modernisation in the Chinese economy under the Maoist rule. They felt that Maoist vision of economic
development based on decentralisation, self-sufficiency and shunning of foreign technology, goods and
capital had failed.

(ii) Despite extensive land reforms, the Great Leap Forward (GLF) and other initiatives, per capita
grain output in 1978 was the same as it was in the mid-1950s. During

1980-90, when many developed countries were finding it difficult to maintain a growth rate of even 5 per
cent, China was able to maintain double-digit growth rate of 10.3% p.a.

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The various factors that led to the rapid growth in economic development in China in the post-reform
period were as follows:

The experimentation under decentralised government enabled to assess the economic, social and political
costs of success or failure. For instance, when reforms were made in agriculture (by handing over plots of
land to individuals for cultivation), it brought prosperity to a vast number of poor people. It created
conditions for the subsequent growth in rural industries and built up a strong support-base for more
reforms.

3. “In China, the lack of political freedom and its implications for human rights are major concerns; yet,
in the last three decades, it has succeeded in raising the level of growth along with alleviation of
poverty. China is moving ahead of India and Pakistan in terms of many human development
indicators.” Defend or refute the above statement. (4 marks)

Answer 3 The given statement is correct.

China used the ‘market system without losing political commitment’ and succeeded in raising the level of
growth along with alleviation of poverty. Unlike India and Pakistan, which are attempting to privatise
their PSEs China has used the market mechanism to create additional social and economic opportunities.

By retaining collective ownership of land and allowing individuals to cultivate lands, China has ensured
social security in rural areas. Public investment in infrastructure in the areas of education and health
brought about positive results in human development indicators in China.

China is moving ahead of India and Pakistan in terms of Human Development indicators as shown below:

HD Indicators India China Pakistan

Life expectancy 68.8 years 76.4 years 66.6 year

People below poverty line 60.4% 23.5% 46.4%

Infant Mortality Rate (per 1,000 live births) 34.6 8.5 64.2

Maternal Mortality Rate (per 1 Lakh births) 174 27 178

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4. “In Pakistan the reform process led to worsening of all the economic indicators. However, during the
last few years, Pakistan has recovered its economic growth and has been sustaining.” Defend or refute
the above statement. (6 marks)

Answer :The given statement is correct.

(i) Declining growth rate – The reform process introduced in Pakistan led to declining growth rate in
Pakistan. The annual growth of GDP was 6.3 per cent during 1980-90, which decreased to 5.3 per cent
during 2015-2017.

(ii) Re-emergence of poverty – The proportion of poor in 1980s was 25 per cent, which started rising
again during 1990s.

The reasons for the slow-down of growth and re- emergence of poverty in Pakistan’s economy are as
follows:

(i) Volatile performance of agriculture sector – Agricultural growth and food supply situation were
based not on an institutionalised process of technical change but on good harvest.When there was a good
harvest, the economy was in good condition, when it was not, the economic indicators showed stagnation
or negative trends.

(ii) Over-dependence on remittances and foreign aid – In Pakistan most foreign exchange earnings
came from remittances from Pakistani workers in the middle-east and the exports of highly volatile
agricultural products. There was also growing dependence on foreign loans, and increasing difficulty in
paying back the loans.

(iii) Political instability over a long period of time. However, during the last few years, Pakistan has
recovered its economic growth. In 2015-16, the GDP registered a growth of 4.7 per cent, highest when
compared to the previous eight years.

While agricultural sector recorded growth rate far from satisfactory level, industrial and service sectors
grew at6.8 and 5.7 per cent respectively.

5. “Till the late 1970s, India, China and Pakistan – all the three countries were maintaining the same
level of low development. The last three decades have taken these countries to different levels.”

Do you agree with the given statement? Give valid reasons in support of your answer. (6 marks)

271 | P a g e
Answer 5 The given statement is correct. INDIA

The annual growth of GDP increased moderatelyfrom 5.7% during1980-90 to 7.3% during 2015-2017.
The share of service sector in GDP is the largest (53%).

• A majority of its people still depend on agriculture. In 2015-2017 about 43% of India workforce
was engaged in agriculture.

• Infrastructure is lacking in many parts of the country.

• It is yet to raise the level of living of more than one- fourth of its population that lives below the
povertyline.

PAKISTAN

• The annual growth rate of GDP has fallen from 6.3% during 1980-90 to 5.3%
during 2015-2017.

• The official data of Pakistan indicate rising poverty there. The proportion of poor which was 25
per cent in 1980s started rising again in 1990s. Political instability over a long period of time, over
dependence on remittances and foreign aid and volatile performance of agricultural sector
are the

reasons for the slowdown of the Pakistan economy. However, during the last three years, Pakistan has
recovered its economic growth.

In 2015-16, GDP growth rate was 4.7%, highest in last 8 years. Many macroeconomic indicators also
began to show stable and positive results.

CHINA

In China, the lack of political freedom and its implication for human rights are major concerns; yet, in the
last three decades, it used the ‘market system without losing political commitment’ and succeeded in
raising the level of growth along with alleviation of poverty.

• China has used the market mechanism to create additional social and economic opportunities.

• By retaining collective ownership of land and allowing individuals to cultivate lands, China has
ensured social security in rural areas.

272 | P a g e
• Public investment in social infrastructure brought about positive results in human development
indicators in China.

6. Mention the salient demographic indicators of China, Pakistan and Inwdia. (6 marks)

Answer 6

Demographic indicators of India, China and Pakistan:

(i) Population: The population of China is the highest followed by India. Out of every six persons
living in this world, one is an Indian and another a Chinese. The population of Pakistan is very
small.

Country Estimated population (in million) (2015)

India 1311

China 1371

Pakistan 188

(ii) Density: Though China is the largest nation and geographically occupies the largest area among
the three nations, its density is the lowest.

Country Density (per sq. km)

India 441

China 146

Pakistan 245
(iii) Annual growth of population: The population growth is the highest in Pakistan, whereas it is the
lowest in China. ‘One Child norm’ introduced in China in the late 1970s is the major reason for low
population growth in China.

Country Annual Growth of population (2015)

India 1.2

China 0.5

Pakistan 2.1

273 | P a g e
The annual population growth rate of India is in the danger zone of more than 1% p.a. India will be
overtaking China as the most populous country in the world in near future.

(iv) Child sex ratio: The child sex ratio is low and biased against females in all three countries.
‘Preference for son’ may be the major reason for this.

Amongst the three countries, India has most skewed data sex ratio (929 females per 1,000 males). This is
one of the major concerns for the demographers in India.

Country Child sex ratio (2015)

India 929

China 941

Pakistan 947
(v) Fertility rate: The fertilityrate is low in China and very high in
Pakistan.

Country Fertility rate (2015)

India 2.3

China 1.6

Pakistan 3.7

(vi) Urbanisation: Urbanisation is high in China with India having only 33% of its people living in
urban areas.

Country Urbanisation (2015)

India 33%

China 56%

Pakistan 39%

1. Identify the correct sequence of alternatives given in Column II by matching them with respective
events in Column I: (1 mark)

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 Column I Column II

A. India announced its first five year plan (i) 1951

B. Pakistan announced its first five year plan, now called the Medium (ii) 1953
Term Development Plan.

C. China announced its first five year plan. (iii) 1956

Ans :A. – (i), B. – (iii), C. – (ii)

2. Which of the following countries has the lowest density of population?

(Choose the correct alternative) (1 mark)

(a) India

(b) China

(c) Pakistan

(d) None of the above

Ans :(b) China

3. China discontinued the one child policy because:

(Choose the correct alternative) (1 mark)

(a) There will be more elderly people in proportion to young people.

(b) It increased the number of dependent population.

(c) People became dissatisfied with the policy.

(d) Population of the country decreased.

Ans :(a) There will be more elderly people in proportion to young people.

4. Name the revolution introduced in China in 1965 under which students and professionals were sent to
work and learn from the country side. (1 mark)

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Ans : The Great Proletarian Cultural Revolution (1966-76)

5. Identify the correct sequence of alternatives given in Column II by matching them with respective
events of China in Column I: (1 mark)

Column I Column II

(a) Introduction of economic reforms in China (i) 1949

(b) Establishment of People’s Republic of China (ii) 1953

(c) China announced its firstfive year (iii) 1958

(d) Great Leap Forward campaign initiated in China (iv) 1978

Ans : A – (iv) , B – (i) , C – (ii) , D – (iii).

6. Explain the Great Leap Forward campaign of China as initiated in 1958. Also, state the problems
which GLF campaign met with. (4 marks)

The Great Leap Forward (GLF) campaign was initiated in China in 1958, which aimed at industrialising
the country on a massive scale.

• People were encouraged to set up industries in their backyards.

• In rural areas, communes were started. Under the Commune system, people collectively cultivated
lands. In 1958, there were 26,000 communes covering almost all the farm population.

However, GLF campaign met with many problems:

(i) A severe drought caused havoc in China killing about 30 million people.

(ii) When Russia had conflicts with China, it withdrew its professionals who had earlier been sent to
China to help in the industrialization process.

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 SAMPLE PAPER WITH MARKING SCHEME

SAMPLE QUESTION PAPER 2020-21

Class -XII (ECONOMICS)
TIME – 03 HRS. MM- 80
सामान्य �नद� श:

i. दोन� खण्ड� के सभी प्रश्न अ�नवायर् है |

ii. प्रत्येक प्रश्न के �नधार्�रत अंक उसके सामने �दये गए ह� |

iii. प्रश्न संख्या 1-10 तथा 18-27 अ�त लघुत्तरात्मक अथवा बहु�वकल्प प्रश्न है, िजनम� प्रत्येक का 1 अंक ह�

इन प्रत्येक का उत्तर एक वाक्य अथवा एक शब्द म� ह� अपे��त ह� |

iv. प्रश्न संख्या 11-12 तथा 28-29 लघत्ु तरात्मक प्रश्न है, िजनम� प्रत्येक के 3 अंक ह� | इन प्रत्येक का उत्तर

सामान्यतः 60-70 शब्द� से अ�धक नह�ं होना चा�हए |

v. प्रश्न संख्या 13-15 तथा 30-32 भी लघत्ु तरात्मक प्रश्न है, िजनम� प्रत्येक के 4 अंक ह� | इन प्रत्येक का उत्तर

सामान्यतः 80-100 शब्द� से अ�धक नह�ं होना चा�हए |

vi. प्रश्न संख्या 16-17 तथा 33-34 द�घार्त्त्मक प्रश्न है, िजनम� प्रत्येक के 6अंक ह� | इन प्रत्येक का उत्तर

सामान्यतः 120-150 शब्द� से अ�धक नह�ं होना चा�हए |

vii. उत्तर सं��प्त तथा तथ्यात्मक होने चा�हए तथा यथासंभव ऊपर द� गई शब्द सीमा के अंतगर्त ह� �दए जाने

चा�हए General Instructions:

i. All questions in both the sections are compulsory.

ii. Marks for questions are indicated against each question.
iii. Question Nos. 1-10 and 18-27 are very short-answer and MCQ type carrying 1 mark each. They
are required to be answered in one sentence or one word each.
iv. Question Nos. 11-12 and 28-29 are short-answer questions carrying 3 marks each. Answer to
them should normally not exceed 60-70 words each.
v. Question Nos. 13-15 and 30-32 are also short-answer questions carrying 4 marks each. Answer to
them should normally not exceed 80-100 words each.

277 | P a g e
 vi. Question Nos. 16-17 and 33-34 are long-answer questions carrying 6 marks each. Answer to them
should normally not exceed 120-150 words each.
vii. Answer should be brief and to the point and the above word limits should be adhered to as far as
possible.

Q.N. SECTION A MARKS

1. जब सीमांत उपभोग प्रविृ त्त 0.4 है और आय म� प�रवतर्न रु.1000 है, बचत म� 1

�नम्न म� से क्या प�रवतर्न होगा?

(अ) रु.400 (ब) रु.500 (स) रु.600 (द) रु.250

अथवा सीमांत उपभोग प्रविृ त्त को

प�रभा�षत क�िजए |

If MPC = 0.4 and ΔY = 1000, what will be ΔS?

(a)Rs 400 (b)Rs. 500 (c)Rs.600 (d)Rs.250
OR
Define Marginal propensity to consume (MPC).
2. अ�त�रक्त माँग को दरू करने के �लए मौ�द्रक नी�त के �नम्न म� से �कस घटक� 1

को अपनाया जाएगा?

(अ) रे पो रे ट म� कमी (ब) नकद आर�ण अनप

ु ात म� व�ृ द्ध

(स) वैधा�नक तरलता अनुपात म� कमी (द) इनम� से सभी

Which of the following components of monetary policy can be adopted to

correct excess demand?
(a) decrease in repo rate (b) increase in CRR
(c) decrease in SLR (d) all of these
3 एक बंद अथर्व्यवस्था म�----------- सिम्म�लत नह�ं �कया जाताहै| 1

(अ) प�रवार (ब) फमर्

278 | P a g e
 (स) सरकार (द) �वदे शी �ेत्र

In a closed economy________ is not included.

(a) Households (b) Firms
(c) Government (d) Foreign sector
4 य�द साधन लागत, बाजार क�मत से अ�धक है तो इसका अथर् है ; 1

(अ) अप्रत्य� कर >अनुदान (ब) अप्रत्य� कर = अनुदान

(स) अप्रत्य� कर< अनुदान (द) इनम� से कोई नह�ं

If a Factor Cost is greater than market price, then it means that:

(a) Indirect Taxes > Subsides (b) Indirect = Subsidies
(c) Indirect Taxes < Subsides (d) None of these

5. �नम्न�ल�खत सूचना से GNPmp �ात क�िजये; GDPfc = 3000, �वदे श� को 1

शद्ध
ु साधन आय = 200, अप्रत्य� कर= 420, अनुदान = 240.

(अ) 3,380 (ब) 2,980

(स) 3,020 (द) 2620

From the following information, compute GNPmp , Given GDP fc = 3000

; net factor income to abroad = rupees 200. Indirect Taxes = rupees 420
,subsidies = rupees 240.
(a) 3,380 (b) 2,980
(c) 3,020 (d) 2,620

6 भारत म� िस्थत जापानी दत

ू ावास ........घरे लू सीमा का भाग होगा| 1

(अ) भारत (ब) जापान

(स) दोन� अ एवं स (द) अन्तरराष्ट्र�य �ेत्र

Japanese Embassy in India is a part of domestic territory of :

(a) India (b) Japan
(c) Both (a) and (b) (d) International Area

279 | P a g e
7 �वदे शी मुद्रा क� माँग तथा �वदे शी �व�नमय दर के बीच क्या संबंध होता है? 1

(अ) �वप�रत (ब) प्रत्य�

(स) समान अनुपात म� (द) कोई संबंध नह�ं

What is the relationship between demand for foreign exchange and

exchange rate?
(a) Inverse (b) Direct
(c) Equal ratio (d) No relation
8 य�द बजट घाटा रु1000 करोड़ है एवं उधार रु 800 करोड़ है तब राजको�षय घाटा 1

बराबर होगा :

(अ) 1000 crores (ब) 800 crores

(स) 2000 crores (द) उपरोक्त म� कोई नह�ं

If budget deficit is Rs.1000 crores and borrowings are equal to 800 crores
then fiscal deficit is equal to :-
(a)1000 crores (b)800 crores
(c)2000 crores (d)none of these

9 अत्या�धक मांग क� दशा म� सरकार क� बजट नी�त होगी : 1

अ) घाटे का बजट ब) अ�तरे क का बजट

स) संतु�लत बजट द) इनमे से कोई नह�ं

In case of excess demand the government should follow a budgetary

policy of:-
(a)Deficit budget (b)Surplus budget (c) Balanced
budget (d)none of the above
10 ‘व्यापार शेष’ का आकलन कैसे �कया जाता है? 1

How is ‘balance of trade’ estimated?

280 | P a g e
11 क�द्र�य ब�क के ‘ब�क� का ब�क’ कायर् को स्पष्ट क�िजए | 3

अथवा

क�द्र�य ब�क के ‘सरकार का ब�क’ कायर् को स्पष्ट क�िजए |

Explain ‘Banker’s Bank’ function of the central bank.

OR
Explain ‘Banker to the government’ function of central bank.
12 वा�णिज्यक ब�क द्वारा साख (मुद्रा) सज
ृ न कैसे �कया जाता है? उदाहरण द्वारा 3

समझाइये |

How does commercial bank create money? Explain with an example.

13 भुगतान शेष खाते म� दृश्य तथा अदृश्य मद� से क्या तात्पयर् है? अदृश्य मद� के 4

कोई दो उदाहरण द�िजए |

What is meant by visible and invisible items in the balance of payment

account? Give two examples of invisible items.
14. सरकार� बजट क� व्याख्या क�िजए |सरकार� बजट के उद्देश� क� चचार् क�िजए | 4

अथवा

कारण दे कर �नम्न को आगम व्यय तथा पँज

ू ी व्यय म� वग�कृत क�िजए|

(अ) सिब्सडी

(ब) राज्य सरकार� को �दया जाने वाला अनुदान

(स) ऋण� का पुनभग

ुर् तान

(द) �वद्यालय भवन� का �नमार्ण

Define government budget. Discuss the objectives of government budget.

OR
Giving reasons categories the following in to revenue expenditure and
capital expenditure.
(i) Subsidies

281 | P a g e
 (ii) Grants given to state government
(iii) Repayment of loans
(IV) Construction of school buildings

15. उपभोग फलन C= 50 + 0.5Y है, अथर्व्यवस्था म� जहाँ C उपभोग व्यय,Y 4

राष्ट्र�य आय है और �नवेश व्यय रु. 2000 करोड़ है |�नम्न का आकलन क�िजए:

(अ) संतुलन स्तर पर राष्ट्र�य आय

(ब) आय के संतल
ु न स्तर पर उपभोग व्यय

C= 50 + 0.5Y is the consumption function, where C is consumption

expenditure and Y is national income and Investment expenditure is Rs.
2000 crores in an economy. Calculate :
(i) Equilibrium level of national income.
(ii) Consumption expenditure at equilibrium level of income.

16 �चत्र क� सहायता से अ�त�रक्त माँग क� समस्या को स्पष्ट क�िजए| उसे दरू 6

करने म� सरकार� कर एवं सावर्जा�नक व्यय क� भ�ू मका को स्पष्ट क�िजए|

Explain the problem of excess demand with the help of a diagram.

Explain the role of government taxes and public expenditure in correcting
it.
17. क्या �नम्न�ल�खत साधन आय भारत क� घरे लू साधन आय का �हस्सा ह�गी? 6

कारण बताइएँ |

(अ) �वदे शी ब�क� द्वारा भारत म� उनक� शाखाओं से अिजर्त �कया हुआ लाभ |

(ब) भारत म� अमे�रक� दत

ू ावास म� कायर्रत भारतीय रहवासी द्वारा प्राप्त वेतन |

(स) भारतीय कंपनी द्वारा �संगापरू म� अपनी शाखा से अिजर्त लाभ |

(द) चीन म� भारतीय दत

ू ावास म� कायर्रत चीनी रहवासी को �दया गया कमर्चा�रय�

का पा�रश्र�मक |

282 | P a g e
अथवा

�नम्न द� गई जानकार� के आधार पर अ) घरे लू आय, तथा (ब) राष्ट्र�य आय का

आकलन क�िजए

मद� रु करोड़ म�

मजदरू � 10000

�कराया 5000

ब्याज 400

लाभांश 3000

�म�श्रत आय 400

अ�वत�रत लाभ 200

मा�लको द्वारा सामािजक सुर�ा म� योगदान 400

कंपनी कर 400

�वदे श� से शद्ध
ु साधन आय 1000

Will the following factor incomes be a part of domestic factor income of

India? Give reasons.
(i) Profit earned by foreign bank from their branches in India.
(ii) Salary received by Indian residents, working in American embassy in
India.
(iii) Profit earned by Indian company from its branch in Singapore.
(iv) Compensation of employees given to residents of China working in
Indian embassy in China.
OR
Based on the following information, Calculate (a) domestic income, and
(b) national income
ITEMS RS. IN CRORES
Wages 10000

283 | P a g e
 Rent 5000
Interest 400
Dividend 3000
Mixed Income 400
Undistributed Profits 200
Contribution to Social security scheme by 400
employer’s
Company taxes 400
Net factor income from abroad 1000
SECTION B
18. नाबाडर् क� संस्थापना...................वषर् म� हुई | 1

(a)1982 (b)1882 (c)1966 (4)1995

NABARD was set up in :

(a)1982 (b)1882 (c)1966 (d)1995.
19. वैिश्वक रोग भार का क्या अथर् है ? 1

अथवा

मानव पूंजी �नमार्ण से आप क्या समझते है ?

What is meant by Global Burden of Diseases?

OR
What do you understand by Human Capital Formation?

20 ओजोन अप�य क्या है ? 1

What is ozone depletion?

21 स्वतंत्रता के समय भारत म� सा�रता दर एवं म�हला सा�रता दर थी ; 1

(अ) 16% , 7% (ब) 12% , 7%

(स) 32% , 16% (द) 16% , 12%

The literacy rate and the female literacy rate to India at the time of

284 | P a g e
 Independence were:
(a) 16% , 7% (b)12 %, 7%
(c)32 %, 16% (d) 16 %, 12 %

22 वषर् 1950 म� लघु उद्योग इकाई म� �नवेश क� अ�धकतम सीमा क्या थी? 1

(अ) 5 लाख (ब) 10 लाख

(स) 1 करोड़ (द) 10 करोड़

What was the maximum limit for investment in a small –scale industrial
unit in the year 1950?
(a) 5 lakh (b) 10 lakh
(c) 1 crore (d) 10 crores
23 वषर् 2012-2017 म� कौनसी पंच वष�य योजना लागु क� गयी थी ? 1

(अ) अठारहवी (ब) नौवीं

(स) ग्यारहवी (द) बारहवीं

Which five year plan was implemented during the year 2012-17
(a)Eighteenth (b)Ninth
(c)Eleventh (d)Twelfth

24 राष्ट्र�य ग्रामीण रोजगार गारं ट� अ�ध�नयम, 2005 ग्रामीण �ेत्र� म� एक वषर् म� 1

रोजगार के �दन -------- सु�निश्चत करता है|

(अ) 365 �दन (ब) 200 �दन

(स) 100 �दन (द) 150 �दन

National Rural employment guarantee Act, 2005 ensures for --------days

of employment in a year in Rural areas.
(a) 365 days (b) at least 200 days
(c) 100 days (d) 150 days

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25 भारत म� बड़े शहर� म� वायु प्रदष
ु ण का मख्
ु य कारक है- 1

a) मोटर वाहन b) उद्योग

c) वन� क� कटाई d) शहर�करण

In India, air pollution in metro cities is largely caused by

a) Motor vehicles b) Industries
c) Deforestation d) Urbanization
26 एक बच्चा नी�त �कस दे श ने अपनाई थी ? 1

Which country adopted one child policy?

27 पा�कस्तान म� प्रथम पंचवष�य योजना .............. म� शरू
ु हुई | 1

(अ) 1956 (ब) 1954 (स) 1958 (द) 1951

First five year plan was commenced in Pakistan in…………..

(a) 1956 (b) 1954 (c) 1958 (d)1951
28 प्रधानमंत्री द्वारा शरू
ु �कए गये ‘स्वच्छ भारत अ�भयान’ का भारत के 3

जनजीवन के स्वास्थ्य पर क्या प्रभाव पड़ेगा ?

What will be the impact of “Swatch Bharat Abhiyan” launched by the

Prime Minister on the health of the people?

29 पंचवष�य योजनाओं के द�घर्काल�न उद्देश्य� क� व्याख्या क�िजए | 3

अथवा

सामािजक न्याय और जनकल्याण के प�रप्रे�य म� आ�थर्क सुधारो क� चचार्

क�िजए|

Explain long term goals of five year plan in India.

OR
Discuss Economic Reforms in the light of social justice and public
welfare.
30 Explain the Great Leap Forward campaign of china as initiated in 1958. 4

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 चीन के ग्रेट ल�प फॉरवडर् अ�भयान 1958 का वणर्न क�िजए |

31 सरकार के द्वारा ग्रामीण बाजार के �वकास हे तु उठाये गए कदम� को समझाइये| 4

Explain the steps taken by the government in developing rural markets.

32 �नधर्न वगर् के �लए आवश्यक छोटे ऋण म� माइक्रो क्रे�डट (SHGs) क� भ�ू मका 4

स्पष्ट क�िजये |

अथवा

‘ बेरोजगार� और गर�बी साथ साथ चलती है | व्याख्या क�िजए |

Explain the role of micro credit (SHGs) in meeting credit requirement of

the poor.
OR
“Unemployment and Poverty go hand in hand”. Discuss.
33 सन 1991 म� लागु क� गई LPG नी�त क� मुख्य उपलिब्धयां एवम क�मय� को 3+3

समझाइये |

Mention major achievements & weaknesses of the LPG polices perused

since 1991.
34 भारत म� गर�बी को हटाने के �लए सरकार द्वारा अपनाये गये कोई चार उपाय� 6

को बताईये | अथवा

�नम्न�ल�खत के उत्तर द�िजए;

(i) औपचा�रक श्र�मक एवम अनौपचा�रक श्र�मक म� अंतर स्पष्ट क�िजये ?

(ii) भारत म� �वकास के कारण पयार्वरण पर पड़ने वाले कोई दो �वपर�त प�रणामो
3+3
पर रौशनी डा�लए | Discuss the any

four measures adopted by the Government for the alleviation of poverty in

India.
OR
Answer the following;

287 | P a g e
 (i) Differentiate between formal workers & informal workers.
(ii) Highlight any two serious adverse environmental consequences of
development in India.

SAMPLE QUESTION 2020-21

MARKING SCHIME ECONOMICS XII

Ques Value Points M.M 80

. No.
1 (c)Rs.600 Or 1
Ratio b/w change of consumption and change in income
2 (b) increase in CRR 1
3 (d) Foreign sector 1
4 c) Indirect Taxes < Subsides 1
5 (b) 2,980 1
6 (b) Japan 1
7 (a) Inverse 1
8 (b)800 crores 1
9 b) Surplus budget 1
10 Balance of Trade = Exports of Goods – Imports of Goods 1
11 As a banker’s bank, central bank has almost the same relation with other banks 3
in the country as a commercial bank has with its customers. It accepts deposits
from the commercial banks and offers them loans. The rate at which the
central bank offers loans to the commercial banks is called repo rate. The rate
at which commercial banks are allowed to park their surplus funds with the
RBI is called reverse repo rate.
OR
Central bank is a banker, agent and financial advisor to the government. As a
banker to the government, it manages accounts of the government. As an agent
to the government, it buys and sells securities on behalf of the government. As

288 | P a g e
 an advisor to the government, it frames policies to regulate the money market.
12 The deposits held by banks are used for giving loans. However banks cannot 3
use the whole of deposits for lending.
It is legally compulsory for the banks to keep a certain minimum fraction of
their deposits as resources. The friction is called legal reserve ratio (LRR) is
fixed by the central bank.
Example: suppose initial deposits in the bank are ₹ 1000 and LRR is 20%
It means, banks are required to keeps only ₹ 200 as cash reserves and free to
lend ₹ 800.
This 800 will again come in the bank as deposit.
With new deposit of ₹ 800, banks keep 20% as reserves and lend the balance
₹ 640 to other person, and so on…….…….
Total Deposit = 1 / LRR X Initial Deposit = 1/0.2 X 1000=5000

13 Exports and imports of goods are considered as visible items of balance of 4

payment.
Exports and imports of services are considered as invisible items of balance of
payment.
Any two examples of invisible items: factor services, non-factor services,
current transfers etc.

14 Government budget is a statement of the government receipts and government 1

expenditure during the period of the financial year.
Objectives:
(i) Allocation of resources
(ii) Redistribution of income and wealth 3
(iii)Economic stability
(iv) Employment opportunities
(v) Balanced regional growth
and other relevant point. (1-mark each point with)
OR OR

289 | P a g e
 Explanation
1.Subsidies: Revenue expenditure, because it neither reduces liability nor
creates assets of the government.
(i) Grants given to state govt: Revenue expenditure, because it neither reduces 1+1+1+
liability nor creates assets of the government. 1
(ii) Repayment of loans: Capital expenditure, because it reduces liability of the
government.
Construction of school building: Capital expenditure, because it adds to the
assets of the government.
15 Given, C = 50 + 0.5Y; I = 2,000 2+2
At equilibrium, Y = C + I
Y = 50 + 0.5Y + 2000; Y + 2050 + 0.5 Y; Y – 0.5Y = 2050; 0.5Y =
2050;
Y = 4100.
C = 50 + 0.5Y; = 50 + 0.5(4100); = 50 + 2050;
C = 2100.
16 Excess demand refers to the situation when aggregate demand is in excess of 2+4
aggregate supply corresponding to full employment in the economy. Correct
diagram:
Measures-1 Increase in taxes 2. Decrease in public expenditure
With explanation
17 (i) Domestic Income (NDPfc): 3+3
= (wages + social security contribution) + (Rent + Interest + Dividend +
Corporation tax + undistributed profit) + Mixed Income
= (10000 + 400) + (5000 + 400 + 3000 + 400 + 200) + 400
= Rs.19,800 crore.
(ii) National Income (NNPfc):
= Domestic income + Net factor income from Abroad
= 19800 + 1000
= Rs. 20,800 crore.

18 (a)1982 1

290 | P a g e
19 Correct defination 1
20 It refers to the phenomenon of reduction in the amount of ozone in the 1
stratosphere.
21 (a) 16% , 7% 1
22 (a) 5 lakhs 1
23 (d) Twelfth 1
24 c) 100 days 1
25 a) Motor vehicles 1
26 China 1
27 (a) 1956 1
28 Positive impact on health status of the people which will increase production 3 marks
potential and stimulate the increase in national income.
if the child is able to correlate it properly value and answered in positive.

29 Modernization ,self reliance, equity and economic growth 1+1+1

Explanation required
OR or
Economic reforms have led to in equality of income and wealth
It has edversly effected Govt. employees 3
Threat to domestic indestries of developing nations
Economics reforms has benifited the service sector but has not reached to the
root areas like agriculture and industry.
(Marks to be ascertained on the basis on explanation)
30 Government statps 1+1+1+
1. Regulated agricultural market 1
2. Provides infrastructural facilities
3. Encouragement to Co-Operative marketing
4. Policy of minimum Support Prices.
(any of the relevant point- each point 1 mark

31 4

291 | P a g e
 1. The Great Leap forward campaign was introduced by Mao Zedong in
China in 1958. It was aimed at rapid nationalization of China on a
massive scale. People were encouraged to start industrial units in their
backyards. In rural areas commune system was started. Collectivization
of agriculture took place during this period.

32 Micro credit is a scheme under which credit is extended to the poor through 4
self help groups. It has emerged a viable alternative to banking with the rural
poor.
Under it some people of a village organized themselves into a group or
organization. All the members of the group contribute a minimum
contribution. And out this collected money, Loans are given to the needy
members. Credit is given without any collateral and at a moderate rate of
interest.

OR
Yes the root cause of poverty unemployement , employement generate income
which can be used to fullfill basci necessories in life so unemployement and
poverty go hand in hand.

33 Achievements of LPG 3+3

1. Higher Growth rate
2. Increase in FBI
3. Reduction in Fiscal Deficit
Weaknesses of LPG
1. Neglected of agriculture
2. Jobless growth
3. Increase in unemployment (any of the relevant point- each point 1
34 i)Swaranjayanti Gram Sarojnagar Yojna – April-1-1999 1.5*4
(ii) Sampoorna Gramin Rozgar yojna- sep-25-2001
(iii) Pradhanmantri Gramodaya yojna- 2000-2001
(iv) National rural employment guarantees scheme- august-2005

292 | P a g e
( any other program required brief explanation)
Or Or
(i)
Formal workers Informal workers 1+1+1

1. They work in organized sector They work unorganized sector

2. They are protected by various They are not protected various

labour lows. labour laws.

3. They are entitled to social They are not entitled to social security
security benefits. benefits.

(ii) Adverse environmental Consequences in India

a) Rapid increase in motor vehicles and the process of industrialization in
India have caused air pollution. 1.5+1.5
b) Due to fast industrial growth, demand for environmental resources has
exceeded their supply.

293 | P a g e
 KENDRIYA VIDYALAYA SANGTHAN
AGRA REGION
SAMPLE PAPER- ECONOMICS
Class: - XII
�नधार्�रतसमय: 03 घंटे अ�धकतमअंक :80

Time allowed: 03 Hours Maximum Marks: 80

सामान्य�नद� श:

(i) दोन�खंड�केसभीप्रश्नअ�नवायर्ह� |

(ii) प्रत्येकप्रश्नके�नधार्�रतअंकउसकेसामने�दएगएह� |

(iii) प्रश्नसंख्या 1-10 तथा18-27अ�तलघ-ु उत्तर�यप्रश्नह�,िजनम� प्रत्येकका1अंकह� |

इनकाप्रत्येककाउत्तरएकशब्दयाएकवाक्यम� ह�अपे��तह�|

(iv) प्रश्नसंख्या 7-10 तथा24-27 केसआधा�रतप्रश्नहै |

(v)प्रश्नसंख्या11-12तथा28-29लघ-ु उत्तर�यप्रश्नह�, िजनम� प्रत्येकके3 अंकह� | प्रत्येककाउत्तर

सामान्यत: 60-80शब्द�म� ह�अपे��तह�|

(vi) प्रश्नसंख्या13-15तथा30-32 भीलघ-ु उत्तर�यप्रश्नह�, िजनम� प्रत्येकके4 अंकह� | प्रत्येककाउत्तर

सामान्यत:80-100शब्द�म� ह�अपे��तह�|

(vii)प्रश्नसंख्या16-17तथा33-34व्याख्यात्मकउत्तरवालेप्रश्नह�, िजनम� प्रत्येकके6 अंकह� | प्रत्येक

काउत्तरसामान्यत: 100-150शब्द�म� ह�अपे��तह�|

(viii)उत्तरसं��प्ततथातत्थात्मकहोनेचा�हएतथाऊपरद�गईसीमाकेअंतगर्तह��दएजानेचा�हए |

General Instructions :
(i) All questions in both the sections are compulsory.
(ii) Marks for questions are indicated against each.
(iii) Questions No. 1–10 and 18–27 are very short-answer questions carrying 1 mark each. They are
required to be answered in one word or one sentence each.
(iv) Case Based Questions (CBQ’s) are Question No. 7-10 and Question No. 24-27.

294 | P a g e
 (v) Questions No. 11–12 and 28–29 are short-answer questions carrying 3 marks each. They are to be
answered in 60 - 80 words each.
(vi) Questions No. 13–15 and 30-32 are also short-answer questions carrying 4 marks each. They are to be
answered in 80 - 100 words each.
(vii) Questions No. 16–17 and 33–34 are long-answer questions carrying 6 marks each. They are to be
answered in 100-150 words each.
(viii) Answers should be brief and to the point and the above word limits should be adhered to as far as
possible.

खण्डक (समिष्टअथर्शास्त्र)

SECTION A (Macro Economics)

1 �नम्न�ल�खतका�मलानक�िजए: 1

A स्टॉक i मूल्यह्यास

B िस्थरपूंजीकेमूल्यम��गरावट ii वास्त�वकGDP

C प्रवाह ii संप�त
i
D आधारवषर्क�क�मत�परGDP i �नवेश
v
a) ii, iv, i, iii
b) iii, ii, i, iv
c) iii, i, iv, ii
d) i, iii, ii, iv
Match the following:
A Stock i Depreciation
B Decrease in value of fixed i Real GDP
assets. i
C Flow i Wealth
i
i
D GDP at base year prices i Investment

295 | P a g e
 v
a) ii, iv, i, iii
b) iii, ii, i, iv
c) iii, i, iv, ii
d) i, iii, ii, iv
2 मुद्राकेM 1 मापकेदोघटक�केनाम�ल�खये | 1

अथवा

मुद्राकोप�रभा�षत�किजए |

Write the name of two components of M 1 measure of money supply.

OR
Define Money.
3 मांगजमाओंम�शा�मलहै: 1

a) बचतखाताजमाएँऔरसाव�धजमाएँ

b) बचतखाताजमाएँऔरचालूखाताजमाएँ

c) चालूखाताजमाएँऔरसाव�धजमाएँ

d) सभीतरह�कजमाएँ

Demand deposits include

a) Saving account deposits and fixed deposits
b) Saving account deposits and current account deposits
c) Current account deposits and fixed deposits
d) All types of deposits
4 प्रबं�धततरणशीलताप्रणाल�म� �वशेषताएंह� - 1

a) िस्थर�व�नमयदरप्रणाल�क�

b) नम्य�व�नमयदरप्रणाल�क�

c) दोन�aऔरb

d) उपरोक्तम� सेकोईनह�ं

296 | P a g e
 Managed floating system of foreign exchange has the characteristic of:
a) Fixed exchange rate system
b) Flexible exchange rate system
c) Both a and b
d) None of the above
5 कौनसीमद�काप्रयोगभग
ु तानशेषम� संतल
ु नस्था�पतकरनेम��कयाजाताहै 1

a) समायोजकमदे

b) स्वायत्तमदे

c) दोन�aऔरb

d) उपरोक्तम� सेकोईनह�ं

Which items are used to establish equilibrium in Balance of Payment:

a) Accommodating items
b) Autonomous items
c) Both a and b
d) None of the above
6 बताइएक��नम्न�ल�खतकथनसत्यह�याअसत्य: 1

िस्थर�व�नमयदरका�नधार्रण�वदे शी�व�नमयक�मांगऔरपू�तर्क�शिक्तय�द्वाराहोताहै |

State whether the following statement is true or false:

Fixed exchange rate is determined by the forces of demand and supply of foreign exchange.

नीचेद�गई�वषयसामग्रीकोप�ढ़एऔरउसकेआधारपरप्रश्नसंख्या7 से10 केउत्तरद�िजए |

उपभोगमांगकासबसेमहत्वपण
ू �र् नधार्रकघरे लआ
ू यह� |

एकउपभोगफलनआयतथाउपभोगम� सब
ं ंधक�व्याख्याकरताहै

|सरलतमउपभोगफलनम� यहमानाजाताहै,क�आयम� प�रवतर्नहोनेकेसाथ-

साथउपभोगम� िस्थरदरसेप�रवतर्नहोताहै |�न:

संदेह,य�दआयशन्
ू यभीहो,तोभीकुछउपभोगतोहोगाह�,क्य��कउपभोगक�यहमात्राआयसेस्वतंत्रहै,इसेस्वतंत्रउपभो

297 | P a g e
 गकहाजाताहै | हमइसफलनक�व्याख्याइसप्रकारकरसकतेह� –

C= + cY

यहांC,घरे ल�
ू ेत्रद्वारा�कयागयाउपभोगव्ययहै | यहदोअवयव�से�मलकरबनाहैस्वतंत्रउपभोग

तथाप्रे�रतउपभोग (cY) | स्वतंत्रउपभोग

केद्वाराअं�कत�कयाजाताहैतथायहउसउपभोगकोदशार्ताहैजोआयसेस्वतंत्रहै,

य�दआयकेशन्
ू यहोनेपरभीउपभोगहोरहाहै, तोयहस्वतंत्रउपभोगकेकारणहै | उपभोगकाप्रे�रतअवयव

(cY),उपभोगक�आयपर�नभर्रताकोदशार्ताहै, य�दआयम� रुपये 1 क�व�ृ द्धहो,

तोप्रे�रतउपभोगम� सीमांतउपभोगप्रविृ त्त (MPC) अथार्तc क�व�ृ द्धहोगी |

Read the following content and answer Questions 7-10 on the basis of the same:
The most important determinant of consumption demand is householdincome. A consumption
function describes the relation betweenconsumption and income. The simplest consumption function
assumes that consumption changes at a constant rate as income changes. Ofcourse, even if income is
zero, some consumption still takes place. Sincethis level of consumption is independent of income, it
is calledautonomous consumption. We can describe this function as:

C= + cY (4.1)
The above equation is called the consumption function. Here C isthe consumption expenditure by
households. This consists of twocomponents autonomous consumption and induced consumption
(cY).

Autonomous consumption is denoted by and shows the consumptionwhich is independent of

income. If consumption takes place even whenincome is zero, it is because of autonomous
consumption. The induced component of consumption, cY shows the dependence of consumptionon
income. When income rises by Rs. 1. induced consumption rises byMPC i.e. c or the marginal
propensity to consume.
Source: NCERT Book.
7 उपभोगफलनउपभोगतथा _____ (आय / बचत ) म�सब
ं ंधहोताहै | 1

Consumption Function is the relationship between consumption and ______________

(Income/Saving).

298 | P a g e
8 आयकेशन्
ू यस्तरपरउपभोगको ________________________ (स्वतंत्रउपभोग / प्रे�रतउपभोग) कहतेह� | 1

Consumption at Zero level of income is called as ___________________ (autonomous consumption/

induced consumption).
9 _________ (स्वतंत्र / प्रे�रत) उपभोगआयपर�नभर्रहोताहै | 1

Which consumption is dependent on income __________________ (autonomous consumption/

induced consumption)?
10 य�दMPC =0.8 होऔरआयम� 100 रुपये�कव�ृ द्धहोतोउपभोगम� व�ृ द्धहोगी: 1

a) रुपये 8

b) रुपये 80

c) रुपये 800

d) रुपये 100

If MPC =0.8 and income rises by Rs. 100 then induced consumption rises by:
a) Rs. 8
b) Rs. 80
c) Rs. 800
d) Rs. 100
11 मध्यवत�औरअं�तमवस्तओ
ु म
ं � अंतरक�िजए| प्रत्येककाउदाहरणद�िजए | 3

Distinguish between intermediate goods and final goods. Give an example of each.
12 भुगतानशेषकेपूंजीखातेकेघटक�क�व्याख्याक�िजए| 3

अथवा

भग
ु तानशेषकेचालख
ू ातेकेघटक�क�व्याख्याक�िजए|

Explain the components of capital account of balance of payments.

OR
Explain the components of current account of balance of payments.
13 वा�णज्यकब�क�द्वारासाखकासज
ृ नकैसेहोताहै,संख्यात्मकउदाहरणकेसाथव्याख्याक�िजए| 4

अथवा

299 | P a g e
 क�द्र�यब�कके “ब�क�काब�क”कायर्क�व्याख्याक�िजए |

Explains the process of credit creation by commercial banks with numerical example?
OR
Explain the “Banker’s Bank” function of central bank.
14 समग्रमांगऔरसमग्रपू�तर्अवधारणासेआयकेसंतुलनस्तरक�व्याख्याक�िजए|य�दसमग्रमांग,समग्रपू�तर्सेज्यादा 4

हो,तोक्याहोगा|

Explain the equilibrium level of income with AD and AS approach.What happens when AD is greater
than AS.
15 एकअथर्व्यवस्थाम� अभावीमांगकोठ�ककरनेम��नम्नक�भू�मकाबताइए: 4

I. सावर्ज�नकव्यय

II. मद्र
ु ाक�प�ू तर्

Explain the role of the following in correcting deficient demand in the economy:
I. Government/Public Expenditure
II. Money Supply
16 सरकार�बजटके (क) आयऔरसम्प�तकापुनः�वतरण (ख) आ�थर्किस्थरताउद्देश्यसमझाइए | 6

Explain (a) redistribution of income and wealth and (b) economic stability as objectives of
government budget.
17 क्या�नम्नदे शक�राष्ट्र�यआयकेआकलनम� शा�मलहोग� ? कारणद�िजये। 6

क (अमे�रकाम� भारतीयदत
ू ावासम� कामकरनेवालेअमे�रक�कावेतनभुगतान।

ख (भारतकेएक�नवासीद्वाराउसक��संगापुरम�िस्थतकंपनीसेअिजर्तलाभ।

ग (एक�नयोक्तासेउत्सवउपहार।

अथवा

आय�व�धद्वाराराष्ट्र�यआय�ातकरतेसमयरखेजानेवालेसावधा�नयाँ�ल�खए।

Are the following included in the estimation of National Income a country? Give Reasons.
a) Salaries paid to American working in Indian embassy in America.

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 b) Profits earned by a resident of India from his company in Singapore.
c) Festival gift from an employer.
OR
Write down the precautions to find out National Income by Income Method.

खण्डख(भारतीयअथर्व्यवस्थाका�वकास)

SECTION B (Indian Economic Development)

18 स्वेजनहर ___ म� शरु
ु हुई: 1

a) 1907
b) 1901
c) 1921
d) 1869
Swez Canal was opened in ___:
a) 1907
b) 1901
c) 1921
d) 1869
19 नी�तआयोगम� “NITI” कापरू ानामक्याहै ? 1

What is the full form of “NITI” in NITI Aayog

20 �नम्न�ल�खतका�मलानक�िजए: 1

A प्रधानमंत्री i आयातक�जासकनेवाल�मात्रा

B प�रमाणात्मकप्र�तबंध ii योजनाआयोगकेअध्य�

C भू�मसुधार ii अ�धकअनुपातम� उत्पादनदे नेवा

i
लेबीज

D HYVबीज i कृ�ष�ेत्रक�उत्पादकताम� व�ृ द्धके

v
�लए�कएगएसुधार

a) ii, i, iv, iii

b) ii, iii, i, iv

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 c) iii, i, iv, ii
d) i, iii, ii, iv

Match the following:

A Prime Minister i Quantity of goods that can
be imported Product.
B Quota ii Chairperson of the planning
commission.
C Land Reforms ii Seeds that give large
i proportion of output.
D HYVSeeds i Improvements in the field of
v agriculture to increase its
productivity.

a) ii, i, iv, iii

b) ii, iii, i, iv
c) iii, i, iv, ii
d) i, iii, ii, iv
21 बाह्यप्रापणसेक्याअ�भप्रायहै 1

Give the meaning of outsourcing.

22 “एकसंताननी�त”�कसदे शम� लागूक�गई: 1

a) भारत

b) पा�कस्तान

c) चीन

d) उपरोक्तम� सेकोईनह�ं

“One child policy” was introduced in country:

a) India
b) Pakistan
c) China

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 d) None of the above.
23 बताइएक��नम्न�ल�खतकथनसत्यह�याअसत्य: 1

चीनम� आ�थर्कसध
ु ार1988 म� आरं भहुए |

अथवा

�रक्तस्थानभर� :

______________ (पा�कस्तान/ चीन)म�1956म� पंचवष�ययोजनाएँआरं भक�गई |

State whether the following statement is true or false:

Economic Reforms in China were introduced in 1988.
OR
Fill in the blank:
First Five-Year Plan of _________(Pakistan/China)commenced in the year 1956.

नीचेद�गई�वषयसामग्रीकोप�ढ़एऔरउसकेआधारपरप्रश्नसंख्या24से27केउत्तरद�िजए |

मानवपूंजीऔरआ�थर्कसम�ृ द्ध :राष्ट्र�यआयम� �कसकायोगदानअ�धकहोताहै

?�कसीकारखानेकेकमर्चार�काया‘सॉफ्टवेयर�वशेष�का’ ?हमजानतेह�ह��कएक�श��तव्यिक्तकाश्रम-

कौशलअ�श��तक�अपे�ाअ�धकहोताहै | इसीकारणवहअपे�ाकृतअ�धकआयअिजर्तकरपाताहै |

आ�थर्कसम�ृ द्धकाअथर्देशक�वास्त�वकराष्ट्र�यआयम� व�ृ द्धसेहोताहैतो�फरस्वाभा�वकह�है�क�कसी�श��तव्यिक्त

कायोगदानअ�श��तक�तल
ु नाम� कह�ंअ�धकहोगा |

एकस्वस्थव्यिक्तअ�धकसमयतकव्यवधानर�हतश्रमक�पू�तर्करसकताहै |

इसी�लएस्वास्थ्यभीआ�थर्कसम�ृ द्धकाएकमहत्वपूणक
र् ारकबनजाताहै

Read the following content and answer Questions 24-27 on the basis of the same:

Human Capital and Economic Growth: Who contributes more to national income — a worker in a
factoryor a software professional? We know that the labour skill of an educated person is more than
that of anuneducated person and that the former generates more income than the latter. Economic
growth means the increase in real national income of a country; naturally, the contribution of the

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 educated person to economic growth is more than that of an illiterate person. If a healthy person could
provide uninterrupted labour supply for a longer period of time, then health is also an important factor
for economic growth.
Source: NCERT Book.
24 एक ______________ ( कारखानेकेकमर्चार� / ‘सॉफ्टवेयर�वशेष�’) काराष्ट्र�यआयम� योगदानअ�धकहोताहै 1

A _______________ (worker in a factory/ software professional) contributes more to national

income.
25 आ�थर्कसम�ृ द्धकाअथर् __________(राष्ट्र�यआय / जनसंख्या) म� व�ृ द्धसेहोताहै | 1

Economic growth means increase in _____________ (national income / population).

26 एक _______ (स्वस्थ/ अस्वस्थ) व्यिक्तअ�धकसमयतकव्यवधानर�हतश्रमक�पू�तर्करसकताहै | 1

A _________ (healthy / unhealthy) person could provide uninterrupted labour supplyfor a longer
period of time.
27 मानवपूंजी�नमार्णकेघटककाचयनक�िजए: 1

a) स्वास्थ्य

b) �श�ा

c) दोन�aऔरb

d) उपरोक्तम� सेकोईनह�ं

Identify the factor of human capital formation:

a) Health
b) Education
c) Both a and b
d) None of the above
28 �नम्नसारणीम�1972 -1973 3

म� भारतकेश्रमबलका�वतरण�दखायागयाहैइसेध्यानसेपढ़करश्रमबलके�वतरणकेस्वरूपकेकारणबताइए |

�नवासस्थान श्रमबल(करोड़�म� )

पुरुष म�हलाएं कुलयोग

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 ग्रामीण 12.5 6.9 19.5

शहर� 3.2 0.7 3.9

The following table shows distribution of workforce in India for the year 1972-73. Analyse it and
give reasons for the nature of workforce distribution.

Place of Workforce(in crores)

residence Male Female Total
Rural 12.5 6.9 19.5
Urban 3.2 0.7 3.9
29 भारतम� �नधर्नतासेमिु क्तपानेके�लएरोजगारसज
ृ नकरनेवालेकायर्क्रमक्य�महत्वपूणह
र् ै? 3

अथवा

आधा�रकसंरचनाउत्पादनकासंवधर्नकैसेकरतीहै ?

Why are employment generation programmes important in poverty alleviation in India?

OR
How do infrastructure facilities boost production?
30 अंग्रेजीशासनकेदौरानभारतकेपरं परागतहस्तकलाउद्योग�का�वनाशहुआ | क्याआपइस�वचारसेसहमतह� ? 4

अपनेउत्तरकेप�म� कारणबताइए |

The traditional handicrafts industries were ruined under the British rule. Do you agree with this view?
Give reasons in support of your answer.
31 योजनाअव�धकेदौरानऔधो�गक�वकासम� सावर्ज�नक�ेत्रकोह�अग्रणीभू�मकाक्य�स�पीगईथी? 4

Why was public sector given a leading role in industrial development during the planning period?
32 वेसमान�वकासात्मकनी�तयाँकौनसीह�िजनकाभारतऔरपा�कस्ताननेअपने- 4

अपने�वकासात्मकपथके�लएपालन�कयाहै ?

अथवा

चीनक�तीव्रऔधो�गकसंव�ृ द्ध 1978 केसध

ु ार�केआधारपरहुईथी | क्याआपइसकथनसेसहमतह�? स्पष्ट�किजए |

305 | P a g e
 What similar developmental strategies have India and Pakistan followed for their respective
developmental paths?
OR
China’s rapid industrial growth can be traced back to its reforms in 1978. Do you agree? Elucidate.
33 धारणीय�वकासक्याहोताहै ? अपनेआसपासके�ेत्रकोध्यानम� रखकरधारणीय�वकासके�लएकोईचारउपायबताइये 6

|
What is sustainable development?Keeping in view your locality, describe any four strategies of
sustainable development.
34 आजी�वकाकोधारणीयबनानेके�लएकृ�षका�व�वधीकरणक्य�आवश्यकहै ? 6

अथवा

ग्रामीण�वकासकाक्याअथर्है? ग्रामीण�वकाससेजुड़ेमुख्यमुद्द�कोस्पष्टकर� |

Why is agricultural diversification essential for sustainable livelihoods?

OR
What do you mean by rural development? Bring out the key issues in rural development.

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EconomicsClass: - XII
Marking Scheme

SECTION A (Macro Economics)

1 c) iii, i, iv, ii 1
2 Currency held with the public and demand deposits. 1
OR
Medium of exchange authorised by the govt. of the country.
3 b) Saving account deposits and current account deposits 1
4 c) Both a and b 1
5 a) Accommodating items 1
6 False 1
7 Income 1
8 autonomous consumption 1
9 induced consumption 1
10 b) Rs. 80 1
11 Difference between Final goods and intermediate goods: (any three)Final 3
Goods
These goods are not used as raw material to produce other goods.
2. These have completed the production process.
3. These are ready for sale in the market.
Intermediate goods
1. These goods are used as raw material to produce other goods.
2. These have not completed the production process.
3. These goods are not ready for sale in the market.
12 Components of Capital Account: 3
1. Borrowing/Lending

i) External borrowing: Borrowing at market rate of interest from ROW.

307 | P a g e
 ii) External assistance: Borrowing at concessional rate of interest (less
than market rate of interest) from ROW.
2. Investment
I. Foreign Direct investment: Investment with full control. Example:
Purchasing of company/industry in ROW.
II. Portfolio investment: Investment without full control. Example:
Purchasing of shares of a company in ROW.
OR
Components of Current Account:
1. Visible items: Imports and Exports of Goods; these are called visible
because they can be seen while crossing the Borders. Example:
Imports and Exports of cloth, shoes, machine etc.
2. Invisible items: Imports and Exports of Services; these are called
invisible because they can not be seen while crossing the Borders.
Example: Insurance, banking, Customer care etc.
3. Unilateral Transfers: One sided transfers from one country to other.
Example: Gifts, grant, donations etc.
13 Credit creation by commercial banks 4
Banks by their experience knows that all the depositors would not withdraw
their money at the same time Therefore after keeping some legal reserve
banks give loans from rest of the deposits.
Additional Additional
Bank Legal Reserve Ratio (10 %)
deposit loans
A 1000 900 100
B 900 810 90
C 810 729 81
- - - -
- - - -
- - - -
Total 10,000 9000 1000
Credit Multiplier = 1 / LRR LRR: Legal Reserve Ratio
OR

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 Banker’s Bank:
Central Bank do the same functions for the commercial banks as commercial
banks do for their customers. Central bank acts as a banker, agent, advisor
and supervisor to the commercial banks.
• As a banker central bank accept deposits and give loans to the
commercial banks.
• As an agent central bank settles the inter-banking claims of
commercial banks.
• As an advisor central bank advises the commercial banks in the case
of inflation and deflation.
• As a supervisor central bank supervises the activities of commercial
banks.
14 Equilibrium condition: 4
AD = AS
What the buyers plan to buy = What the sellers Plan to sell
when AD > AS
→ More demand
→ More expenditure
→ More sale
→ Stock sold out
→ More Production
→ More output
→ More Income
→ More AS
This process will continue till AD = AS at eq. level
15 Public Expenditure:Government will increase the expenditure on subsidies, 4
infrastructure, employment programmes, investment etc. that results in
increase in employment, income of the people and AD. Thus increase in
public expenditure helps in correcting the deficient demand.
Money Supply- RBI will make the efforts to increase money supply by
decreasing its rates like repo rate, reverse repo rate, CRR, SLR etc. which will

309 | P a g e
 increase the loan advancing capacity of commercial banks. This increase in
money supply increase the AD in the economy and helps in correcting the
deficient demand.
16 (a) Redistribution of income and wealth: Government can reduce inequalities 6
in an economy by redistribution of income and wealth with the help tax and
subsidies in the following ways:
• Taxes on income and goods purchased by rich people.
• Taxes on wine and cigarettes
• Subsidies to poor people on food grains, cloth, kerosene and LPG
• Grants and donations to weaker states and sections.
• Expenditure on the poor in the form of free education, free medical
facilities, cheaper housing etc. in order to raise their income.
(b) Economic stability: Economic stability means stability of prices or
limiting the fluctuations in general price level in the economy.
To fight inflationary situations government can impose heavy taxes to
discourage demand as well as reduce its own expenditure and unnecessary
subsidies.
To fight deflationary situations government can reduce taxes to encourage
demand as well as increase its own expenditure and necessary subsidies.
17 a) Not included in National Income because not generated by normal resident 6
of India.
b) Included in National Income because generated by normal resident of
India. Therefore, part of Net factor income from abroad.
c) Not included because it is transfer payment.
OR
Any four
1. Income from illegal services (gambling, smuggling) is not included in
estimation of national income.
2. Transfer income (gift, scholarship, widow pension, unemployment
allowance, old age pension, charity, grant etc) not included.
3. Income from sale of second-hand goods is not included in estimation of
national income

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 4. Income from sale of shares, bonds etc. are not included in estimation of
national income.
5. Income from windfall gains (lottery) is not included in estimation of
national income.
6. Imputed rent of self-occupied is included in estimation of national income.
SECTION B (Indian Economic Development)
18 d) 1869 1
19 National Institution for Transforming India. 1
20 a) ii, i, iv, iii 1
21 Outsourcing means hiring of regular services such as legal advice, computer 1
service, advertisement, security etc. from external sources, mostly from other
countries.
22 c) China 1
23 false 1
OR
Pakistan
24 software professional 1
25 national income 1
26 healthy 1
27 c) Both a and b 1
28 (i) More workforce resides in rural area as farming is main activity and urban 3
areas did not have sufficient job opportunities to absorb more workforce.
(ii) More women are found working in rural are as compared to urban area as
in rural areas most of the activities are labour intensive and low income
generating while in urban areas where male members are able to earn higher
income, they discourage their female counterpart for taking up jobs.
29 Employment generation programmes like (MNREGA) and Swarna Jayanti 3
ShahariSwarozgar Yojana (SJSRY) are helpful in poverty alleviation in the
following ways:
1. Makes the man capable to earn income and fulfill his basic needs
2. Reduction in rural to urban migration by creating employment
opportunities in rural areas.

311 | P a g e
 3. Reduction in inequality of income and wealth.
4. Formation of human capital formation with the help of education, health
and training
5. Increase in national income.
6. Develop growth-oriented attitude
7. Spread awareness and reduction in social evils like theft, beggary, child
labour etc.
OR
Infrastructure facilities boost production in the following ways:
1. Development of agriculture & industrial sector depends on infrastructural
facilities such irrigation, transportation, banking etc.
2. Provide employment.
3. Induce foreign direct investment.
4. Facilitates outsourcing.
5. Raises productivity and efficiency.
6. Develop growth-oriented attitude and environment.
30 Yes, we agree that the traditional handicrafts industries were ruined under the 4
British rule. The following reasons were responsible for it:
1. Disappearance of Nawabs, Princes etc. that causes decrease in demand for
hand made goods because they were appreciated and supported their work.
2. Use of tariff and non tariff barriers for protecting their woolen and silk
manufacturers.
3. Free imports of machine made goods in India which were cheaper than
domestic goods.
4. Increase in demand of European goods as a result of foreign influence in
India.
5. Exploitation of Indian handicrafts.
6. Shortage of raw material as it was to be sent to the Britain for their
industries.
7. Development of railways increased competition among Indian hand made
goods and British machine made goods.
31 Public sector was given a leading role in industrial development during the 4

312 | P a g e
 planning period due to following reasons:
1) Shortage of capital with private sector.
2) Private sector initially could not take the risk of opening new industries.
3) Large scale industries could not be handled by private sector.
4) To prevent concentration of economic power in few hands.
5) Development of infrastructure.
6) Balance development of country.
7) To provide basic facilities and necessary goods to all sections of society.
32 India and Pakistan both have followed following similar developmental 4
strategies:
1. Five-year plans (India in 1951 & Pakistan in 1956).
2. Both of them have followed the path of mixed economy.
3. Major role assigned to public sector for growth and development.
4. Import substitution.
5. Green revolution.
6. Shift from primary to service sector.
7. Both of them introduced economic reforms to strengthen their
economies.India in 1991 & Pakistan in 1988.
OR
Yes, China’s rapid industrial growth is due to the following economic reforms
that were introduced since 1978.
1. In agriculture sectors Commune System was abolished and land was
divided into small plots & allocated to the individual households.
2. Restrictions were removed from foreign trade and investment.
3. In the industrial sector private firms were allowed to produce goods
and services.
4. Dual pricing: The dual pricing means the farmers and the industrial
units were required to buy and sell a fixed quantity of inputs and
output at the price fixed by the government and the remaining
quantities were traded at the market price.
5. One child policy.
6. Setting up of Special Economic Zones to attract foreign investors.

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33 Sustainable development is the development that last for a long time by using 6
environment and natural resources wisely and carefully so that we present
generation as well as the future generations can also enjoy their benefits.
The strategies involved in attaining sustainable development in India are as
follows:
1 Careful and wise utilisation of the natural resources.
2 Controls over Population.
3 Use of Environment friendly fuel like CNG and LPG.
4 Use of renewable sources of energy like Solar and Wind Energy.
5 Use of energy efficient electrical appliances like LED & star rating
electrical appliances.
6 Pollution Tax and Fines.
7 Use of the Input Efficient Technology.
8. Ban on Plastic Bags.
34 The agricultural diversification implies change in crop pattern and shifting of 6
agricultural workforce to other allied such as dairy , poultry, fisheries, etc.
and non-agriculture sector. The importance of agricultural diversification is as
follows:
1. Help to raise income.
2. Farming is uncertain and risky activity. Therefore, diversification is
required to enable the farmers to earn from non-farm occupations.
3. This lessens excess burden on agriculture.
4. Cash crops along with food crops may bring more income and prosperity
for the farmers.
5. To maintain the fertility of land.
OR
Rural development refers to the steps taken for the social and economic
upliftment of the rural or backward areas. The key issues in rural
development are as follows:
1. Human Capital Formation - Investment in education, training, health care,
information etc.
2. Development of income earning assets - Helps in generating employment

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opportunities and reduces excess burden on agriculture.
3. Development of Rural Infrastructure - It includes development of bank,
electricity, transport, irrigation, markets etc.
4. Land reforms - Land reforms enable the use of modern techniques and
methods, thereby increasing the productivity and production.
5. Lessening Poverty - Poverty alleviation and employment generation
programmes for rural areas.

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