KENDRIYA VIDYALAYA SANGATHAN

RANCHI REGION

STUDY MATERIAL
CLASS XII
SUBJECT- ECONOMICS
SESSION 2023-24

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 OUR CHIEF PATRON

SHRI D. P. PATEL
DEPUTY COMMISSIONER
KENDRIYA VIDYALAYA SANGATHAN
RANCHI REGION.

Our patron
Shri Suresh Singh Assitant Commissioner
Smt. Sujata Mishra Kendriya Vidyalaya Sangathan
Shri Balender Kumar Ranchi Region
Subject Convenor
Shri Navendu Parashar Principal K.V. Maithon Dam
Co-Convenor
 Shri Vijay Kumar, Vice-Principal K.V. Maithon
Dam
 Smt. Archana Prasad, PGT-Eco, K.V. Gomoh

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 ACKNOWLEDGEMENT

We are happy to provide the study material in the subject economics keeping in
view the academic development of the student.
Firstly, we would like to thank SHRI DP PATEL honourable deputy
commissioner, KVS RO Ranchi and Assistant Commissioner MRS SUJATA
MISHRA for showing their concern for the students there by conceptualizing
the preparation of the material.
We would also like to thank SHRI NAVENDU PARASHAR, principal KV
MAITHON DAM, who has guided us through out to prepare the material.
This study material is a ready reckoner for the students of Economics it will
help the student in conceptual clarity. The effort has been made to instill
confidence in the student and help the child score good marks.
We, the editorial team feel proud to contribute for the academic development of
the children and enhance the qualitative and quantitative result of KVS RO
Ranchi.

With Best Wishes,

Regards’
Editorial Team.

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 Compiled By:

Sl. No Name of the Teachers Name of the KV

1. MR. Abhay Kumar K.V Bokaro No:1

2. MR. Rahul K.V Patratu
3. MR.Vikash Kumar Gupta K.V Maithon Dam
Prepared BY

Sl. No. Content Name of Teacher

National Income And Related Aggregates MR. RAHUL

1.
MR. V. KUJUR
Money And Banking MR. RAHUL
2.
MRS. SEEMA NAG
Determination Of Income And Employment MR. PRAMOD KR. GAUTAM
3.
MRS. S. BARA
4. Government Budget And Economy DR. ASHISH KUMAR
Balance Of Payments MR. RAHUL
5.
MRS. F. TUDU
Development Experience (1947-90) And Economic Reforms MR. ABHAY KUMAR
6. Since 1991 MR. U. C. SURYAVANSHI
Current Challenges Facing Indian Economy MR. V. K. GUPTA
MR. H.S. RAM
7.
MR. T. N. TIWARI
MRS. ARCHANA PRASAD
Development Experience Of India – A Comparison With MRS. RAKHEE SINGH
8. Neighbours
Sample Paper MR. ABHAY KUMAR
9.
MRS. ARCHANA PRASAD

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 INDEX

Sl. No. Content MARKS Page No.

National Income And Related Aggregates 10 6-13

1.

Money And Banking 6 13-16

2.

Determination Of Income And Employment 12 16-26

3.

Government Budget And Economy 6 26-32

4.

Balance Of Payments 6 32-39

5.
Development Experience (1947-90) And Economic Reforms 12 39-50
6. Since 1991

Current Challenges Facing Indian Economy 20 50-65

7.

Development Experience Of India – A Comparison With 8 56-72

Neighbours
8.

Sample Paper N.A. 72-87

9.

UNIT I: NATIONAL INCOME AND RELATED AGGREGATES

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Macro Economics: - Macroeconomics is the study of aggregate economic variables of an economy.

Consumption goods:- Are those which are bought by consumers as final or ultimate goods to satisfy their
wants.
Example: Durable goods car, television, radio etc.
Non-durable goods and services like fruit, oil, milk, vegetable etc. Semi durable goods
such as crockery etc.

Capital goods– capital goods are those final goods, which are used and help in the process of production of
other goods and services. E.g.: plant, machinery etc.

Final goods: Are those goods, which are used either for final consumption or for investment. It includes final
consumer goods and final production goods. They are not meant for resale. So, no value is added to these
goods. Their value is included in the national income.

Intermediate goods intermediate goods are those goods, which are used either for resale or for further
production. Example for intermediate good is- milk used by a tea shop for selling tea.

Stock: - Quantity of an economic variable which is measured at a particular point oftime. Stock has no
time dimension. Stock is static concept.
Eg: wealth, water in a tank.
Flow: Flow is that quantity of an economic variable, which is measured during the period of time.
Flow has time dimension- like per hr, per day etc. Flow is a
dynamic concept.
Eg: Investment, water in a stream.

Investment: Investment is the net addition made to the existing stock of capital.
Net Investment= Gross investment – depreciation.

Depreciation: - depreciation refers to fall in the value of fixed assets due to normal wear and tear, passage of
time and expected obsolescence.
Circular flow in a two sector economy.

Producers (firms) and households are the constituents in a two sectors economy.
Households give factors of production to firm and firms in turn supply goods and services to households. This
is called Real flow. Firms give factor payments to the households and households pay for the goods and
services. This is called Money flow.

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Related aggregates
1. Gross Domestic product at market price: It is the market value of final goods and services produced
within the domestic territory of a country during the period of an accounting year, inclusive of
depreciation.
2. Net Domestic product at market price: It is the market value of final goods and services produced
within the domestic territory of a country during the period of an accounting year, exclusive of
depreciation.
GDPmp = NDPmp + Depreciation
And , NDPmp = GDPmp - Depreciation
3. Gross National product at market price: It is the sum total of gross Domestic product at market price
and net factor income from abroad.
GNPmp = GDPmp + net factor income from abroad
4. Net National product at market price: It is the sum total of net Domestic product at market price and
net factor income from abroad.
NNPmp = NDPmp + net factor income from abroad
5. Gross Domestic product at factor cost: It is the sum total of factor cost insured on the production of
final goods and services within the domestic territory of a country, inclusive of depreciation.
6. Net Domestic product at factor cost: It is the sum total of factor income insured on the production of
final goods and services within the domestic territory of a country, during an accounting year.
7. Gross National product at factor cost: It is the sum total of gross Domestic product at factor cost and
net factor income from abroad.
GNPfc = GDPfc + net factor income from abroad
8. Net National product at factor cost: It is the some total of net Domestic product at vector cost and net
factor income from abroad.
NNPfc = NDPfc + net factor income from abroad

Net factor income from abroad:

Difference between the factor incomes earned by our residents from abroad and factor income earned
by non-residents with in our country.

Components of Net factor income from abroad

 Net compensation of employees

 Net income from property and entrepreneurship (other than retained earnings of resident companies of
abroad)
 Net retained earnings of resident companies abroad

Conversion rules:

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 Concept of domestic (economic) territory

Domestic territory is a geographical territory administered by a government within which persons, goods and
capital circulate freely.
Scope identified as
*Political frontiers including territorial waters and air space.
*Embassies, consulates, military bases etc. located abroad but including those locates within the political
frontiers.
*Ships, aircrafts etc., operated by the residents between two or more countries.
*Fishing vessels, oil and natural gas rigs etc. operated by the residents in the international waters or other areas
over which the country enjoys the exclusive rights or jurisdiction.
Resident (normal resident):-
Normal resident is a person or an institution who ordinarily resides in that country and whose center of
economic interest lies in that country.
The Centre of economic interest implies:-
1. the resident lives or is located within the economic territory.
2. The resident carries out the basic economic activities of earnings, spending and accumulation from that
location 3. His center of interest lies in that country.

Methods of calculation of national income

I - PRODUCT METHOD (Value added method):

 Sales + change in stock = value ofoutput

 Change in stock = closing stock – openingstock
 Value of output - Intermediate consumption = Gross value added(GDP Mp)
 NNP Fc (N.I) = GDP Mp (-) consumption of fixed capital (depreciation) (+) Net factor
income from abroad(-) Net indirect tax.

I. INCOME METHOD:
1. Compensation of employees.
2. Operating surplus: Rent + Interest + Profit + Royalty
If profit is not given then use (Dividend+ Corporate Tax + Undistributed Profit)
3. Mixed income of self - employed.
 NDP fc = (1) + (2) + (3)
 NNP fc = NDP fc (+) Net factor income from abroad
 GNP mp = NDP fc + consumption of fixed capital + Net indirect tax

III. EXPENDITURE METHOD:

1. Government final consumption expenditure.
2. Private final consumption expenditure.
3. Net Export.
4. Gross domestic capital formation.

GDPmp = (1) + (2) + (3) + (4)

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 NNP fc = GDPmp - consumption of fixed capital + NFIA - Net indirect taxes

GDP and welfare:

Real GDP is considered as an index of the welfare of the people. Welfare of the people is measured in terms of
the ability of goods and services per person. Increase in real GDP means increase in the level of output in the
economy. Other things remain constant this means greater availability of goods and services per person implying
higher level of welfare.

Limitations:
There are certain limitations related to the positive relation between GDP and welfare full stop these are under:
1. Distribution of income: if distribution of income terms unequal GDP growth fails to reflect arise in
social welfare. India is facing this situation at present. While per capita GDP is rising, starvation deaths
are hitting the headlines more often than ever before. Because the distribution of income is becoming
increasingly unequal.
2. Distribution of GDP: composition of GDP may not be welfare oriented. Increase in the production of
defence goods does not lead to any direct increase in welfare of the people. Of course strong defense
offers a peaceful environment in the country but it contributes to social welfare only indirectly.
3. Non monetary exchange: In rural economics better systems of exchange still prevail to some extent.
Payments for farm labourers are often made in kind rather than in cash. All such transactions remain
unrecorded. These causes under estimation of GDP. To the extent GDP remains under estimated it
remains an inappropriate index of welfare.
4. Externalities: it refers to the good and bad impact of an economic activity without paying the price or
penalty for that. There are both positive and negative externalities. Negative externalities occur when for
example smoke emitted by factories causes air pollution or industrial waste is given into rivers causing
water pollution. It causes a loss of social welfare. But most of the time we do not include it during the
calculation of GDP. Hence, it is an inappropriate index of welfare.
(MCQ)
1. The difference between gross and net is:
(a) Depreciation (b) NFIA (c) Net Indirect Tax (d) Subsidies
2. The difference between domestic income and National income is____.
(a) NFIA (b) Net Indirect Tax (c) Depreciation (d) All of the above
3. If NFIA is negative,
(a) Factor income to abroad will be less than Factor income from abroad
(b) Factor income to abroad will be equal to Factor income from abroad
(c) Factor income to abroad will be more than Factor income from abroad
(d) None of the above
4. If NFIA is positive,
(a) NDPFC = NNPFC (b) NDPFC > NNPFC (c) NDPFC < NNPFC (d) None of the above
5. Which of the following is correct?
(a) GDPMP = Value of Output- Intermediate Consumption
(b) NDPFC = Value of Output- Intermediate Consumption
(c) GDPFC = Sales+ change in stock
(d) NDPMP = Sales + change in stock
6. Which of the following is not a component of factor income?
(a) Compensation of employees (b) Operating surplus

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(c) Sales of goods and services (d) Mixed income of self employed
7. Which of the following is a component of profits?
(a) Corporate tax (b) Dividends (c) Retained earnings (d) All of the above
8. Which of the following is a part of gross domestic capital formation?
(a) Gross fixed capital formation (b) Inventory investment
(c) Both (a) and (b) (d) None of the above
9. The output at current year price is called:
(a) Nominal GDP (b) Real GDP (c) National GDP (d) None of the above
10. If population increase, then:
(a) GDP rise (b) Welfare rise (c) Welfare decrease (d) Both (a) and (c)
Q. 1 Difference between Stock and flow.
Stock Flow
1. It means that quantity of an economic 1. It is that quantity of an economic variable
variable which is measured at a particular which is measured during a specified period
point of time. of time.
2. It has no time dimension. 2. It has time dimension.
3. It is a static concept. 3. It is a dynamic concept
4. Examples: Wealth, water on a tank, bank 4. examples: income, investment, capital
deposits etc. formation, consumption of sugar etc

Q.2 Distinguish between domestic product and national product.

Ans: - Difference between domestic product and national product
Domestic Product National Product
Domestic product is the money value of all the National product is the money value
final goods and services produced within of all the final goods and services produced by the
domestic territory of a country during a financial normal residents of a country during a financial year.
year.
It includes the income of all the residents of the It includes the income of only normal
country. residents of the country.
Net factor income from abroad Net factor income from abroad (NFIFA) is
(NFIFA) is not included in it. included in it.

Q 3. Distinguish between Intermediate good and Final Goods.

Intermediate goods Final goods

The goods which are purchased for resale or
further production are called Intermediate goods.
These goods lie within the production boundary
so further value can be added in these good.
These goods are not included in estimation of
national income.
The goods which are meant for final consumption and
investment are called final goods.
These goods lie out of the production boundary so
further value cannot be added in these goods.
These goods are included in estimation of national
income.

Q 4. Distinguish between Nominal NNP and Real NNP

National Income at current Price. National Income at constant Price
Nominal National Income Real national income
It is money Value of final goods and services It is money Value of final goods and services
produced in a year, measured at prices of the produced in a year, measured at prices of the Base

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 current year. year.

Nominal national income can increase without the It can rise only if there is rise in physical Output.
increase in Physical output
Nominal National Income does not eliminate the It eliminate the effect of change in price
effect of change in price.

Q.5 Explain the meaning of GDP Deflator (price Index)?

Ans: GDP Deflator is used to eliminate the effect of price changes and to determine the real change in physical
output of current year. It measurers the average level of prices of all goods and services taken to final GDP.
Real GDP
𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥 𝑜𝑟 𝐺𝐷𝑃 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟 = x 100
Nominal GDP

Q. 6 What is double counting? How can it be avoided?

Ans: Counting the value of commodities at every stage of production more than one time is called double
counting.
It can be avoided by
a) Taking value added method in the calculation of the national income.
b) By taking the value of final commodity only while calculating N.I

Q. 7 How are these treated in estimation of national income of India. Give reasons.
a) House rent allowance to teachers by school management is treated as compensation of employees, and
so accounted in the income method of estimating national income.
b) School fees paid by students is final consumption expenditure of households because it is a payment in
return for the services rendered by the school is accounted in the expenditure method of estimating
national income.
c)Debenturerepresents a loan by a production unit. So, interest paid on debentures is a factor payment. It
is included in national income through income method.
d)Medical expenses of employees borne by the employers is compensation of employees because it is a
payment for the services rendered by the employees. It is therefore, included in national income.
e) Interest on public debt is interest payment by general government on loans taken to meet the
government’s consumption expenditure. Interest on consumption loans is a transfer payment and not
included in national income.
f) Expenses on electricity by a factory is intermediate cost of the factory and accounted through the value-
added method of estimating national income.
g) Increase in the price of stocks lying with a trader is a capital gain and does not lead to any new
production. Capital gain is transfer income and not included I the national income.
h) Purchase by foreign tourists is treated as export and included through the expenditure method.
Q. 8 Calculate (i) Gross domestic product at factor cost

Items Rs. (in Crores)

(i) Net indirect tax 130
(ii) Government final consumption expenditure 100
(iii) Profit 90
(iv) Net domestic capital formation 120
(v) Change in stocks (–) 10

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 (vi) Private final consumption expenditure 500
(vii) Net imports 20
(viii) Net current transfers to abroad 10
(ix) Net factor income to abroad 30
(x) Gross domestic capital formation 160
Q. 9 From the following data calculate GNP at FC by (a) Income method (b) Expenditure method

Items Rs. (in Crores)

(i) Net domestic capital formation 500
(ii) Compensation of employees 1850
(iii) Consumption of fixed capital 100
(iv) Govt. final consumption expenditure 1100
(v) PVT. final consumption expenditure 2600
(vi) Rent 200
(viii) Interest 500
(ix) Net Exports (-) 100
(x) Profits 1100
(xi) NFIA (–) 50
(xi) Net Indirect taxes 250
Q. 10 There are only two producing sectors A and B in an economy. Calculate: (a) Gross value added at market
price by each sector (b) National income.
Items Rs. (in Crores)
(i) Net factor income from Abroad. 20
(ii) Sales by A 1000
(iii) Sales by B 2000
(iv) Change in stock of B (–) 200
(v) Closing stock of A 50
(vi) Opening stock of A 100
(vii) Consumption of fixed capital by A and B 180
(viii) Indirect taxes paid by A and B 120
(ix) Purchase of raw material by A 500
(x) Purchase of raw material by B 600
(xi) Exports by B 70
Q. 11 From the following data, calculate (a) Gross Domestic Product at Factor Cost (GDP FC) and (b) Factor
income to abroad.

Items Rs. (In Crores)

(i) Gross Domestic Capital formation 600

(ii) Interest 200
(iii) Gross national product at market price 2800
(iv) Rent 300
(v) Compensation of employees 1600
(vi) Profit 400
(vii) Dividends 150
(viii) Factor income from abroad. 50
(ix) Change in stock 100
(x) Net indirect taxes 240
(xi) Net fixed capital formation 400
(xii) Net Export (–) 30
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Q. 12 Calculate (a) Gross domestic product at market price (GDPMP) (b) Factor income from abroad.

Items Rs. (in Crores)

(i) Profit 500

(ii) Export 40
(iii) Compensation of Employees 1500
(iv) Net current transfer from Row 2800
(v) Rent 90
(vi) Interest 300
(vii) Factor income to abroad 400
(viii) Net indirect tax 120
(ix) Gross fixed capital formation 250
(x) Net domestic capital formation 650
(xi) Gross fixed capital formation 700
(xii) Change in stock 50

Money and Banking

Money: Money is anything which is generally used as a medium of exchange, measure of value, store of value
and means of standard deferred payment.

MONETARY SYSTEM IN INDIA

● In India, monetary authority is ‘Reserve Bank of India’.
● Paper currency standard is followed in India.
● Coins are regarded as limited legal tender money.
● RBI has sole monopoly to issue currency in India.
● Ministry of Finance issues 1 rupee coins and notes in India.
● India follows Minimum Reserve System for issuing notes. It means that RBI has to keep a minimum of
Rs. 200 crores as gold and foreign exchange with the World Bank for issuing coins and notes.

Barter Exchange System: It implies the direct exchange of goods for goods without the use of money.

Money Supply: It refers to the total stock of money held by public at a particular point of time in an economy.
It is a stock concept because it is measured at a particular point of time.

MEASURES OF MONEY SUPPLY

(i) M1: It is the first and basic measure of money supply. It includes currency held by the public, demand
deposits of commercial banks and other deposits with the RBI.
M1= Currency and coins with public+ Demand deposits with commercial banks+ Other deposits with RBI

(ii) M2: It is a broader concept of money supply as compared to M1. It also includes savings deposits with the
post office saving bank.
M2 = M1 + Savings deposit with Post office saving bank

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(iii) M3: It also includes net time deposits in addition to M1 measure of money supply.
M3 = M1 + Net time deposits with banks

(iv) M4: It includes total deposits with post office savings bank in addition to M3 measure of money supply.
M4 = M3 + Total deposits with post office saving bank
● M1 is the most liquid form of money supply while M4 is the least liquid.
● M1 and M2 are considered the narrow concept of money supply while M3 and M4 are the broader
concept of money supply.

HIGH POWERED MONEY

● High powered money is the money produced by RBI and the government.
● It includes currency held by the public and the cash reserves held by the banks.
● It is denoted by symbol (H).
● It is different from money because money consists of demand deposits while it includes cash reserves
which act as a base for generating demand deposits.
Functions of money:-
a) Primary functions:-
i. Medium of exchange: - It shows the purchasing power of individual. It is readily acceptable everywhere.
Anything can be exchanged with money at any time. Money has solved the problem of double coincidence of
wants.
ii. Measure of value: - It acts as a standard value. All the goods and services are measured in terms of money.
The value of each goods and services are expressed as its price.
b) Secondary functions:-
i. Store of value: - Money can be stored in bank accounts as well as in lockers. It enables us to save money for
future use. Money occupies less space for storage in comparison with goods.
ii. Transfer of value: - Money can be transferred from one place to another through cheques or drafts. It helps to
transfer the purchasing power from present use to future use.
iii. Standard of deferred payments: - It means ―Buy now, Pay later . With the help of money one can opt for
future payments. Money makes possible the credit transactions to happen when payments are not to be made
immediately.
Banks: - It can be defined as accepting deposits from public and lending money to public in the form of loans. It
acts as intermediary between depositors and borrowers.
Credit creation/ Money Multiplier:-
 The capacity of commercial banks to create credit depends on two factors: - Primary deposits and LRR.
 The deposits of households and firms held by a bank are called Primary deposits.
 LRR- Legal Reserve Ratio It is the fraction of deposits of commercial banks which is legally compulsory
for the commercial bank to keep in the form of cash (CRR) and liquid assets (SLR) as reserves.
 Money multiplier= 1/Legal reserve ratio.
 Process of Credit Creation:- Let us assume primary deposit is equal to 1000.
Banks know from their experience that all depositors do not demand all the money at the same time, only
some portion of it may be demanded at any time. Suppose bank decides to keep 10% as cash reserves of
their deposits. Then remaining can be given as loan.

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 So, now bank can give remaining 900 as a loan to the public. Bank never offers loan in cash, rather banks
open the account of the borrower and this loan money is deposited in their account. The amount which is
given as loan is known as secondary deposit. Further again bank will keep 10% of 900 with them and
excess can be given as loan and this process will go on. Total credit creation= Primary deposit x 1/LRR.
The Central Bank:- Central bank is regarded as an apex financial institution in the banking system. It is
considered as an integral part of the economic and financial system of a nation.
Functions of central bank:-
1. Bank of Issue:- RBI has the legal and sole right to issue currency. It is the primary and very important
function of RBI. RBI issues currency by keeping 200 cores of reserves out of which 115 crore is gold and
85 crore is foreign securities. It leads to uniformity in note circulation and builds up faith in the currency
system.
2. Banker to the government:- The central bank makes and receives payment on behalf of the government
and carries out all banking businesses of government. The central bank acts as an agent of government as
they conduct sale and purchase of government securities and also manage the national debt and foreign
debt. The central bank also acts as advisor to the government especially on matters of finance.
3. Banker’s Bank and supervisory role:- The central bank holds a part of the cash reserves of banks because
commercial banks are supposed to deposit CRR with central bank. Central bank holds excess reserves of
banks to meet any clearing drains due to settlement with other banks. The claims of one bank against
other are conveniently settled by simple transfers from and to their accounts from these cash reserves.
The central bank supervises, regulates and controls the commercial banks.
4. Lender of last resort:- As commercial banks lend money to individuals, similarly central banks lend to
commercial bank during the time of crisis. When commercial bank runs out of its cash reserves then
central bank makes short term credit available to them against approved securities.
5. Custodian of foreign exchange:- The central bank is the custodian of foreign exchange reserves. All
receipts and payments in foreign currency are approved and made by RBI. Central bank tends to purchase
and sale foreign currency with a view to achieve stability of exchange rate for domestic currency.
6. Controller of credit: - As a credit controller, the central bank uses a number of tools to maintain the
liquidity of the commercial banks and regulate money supply. The central bank as a credit controller
increases interest rates to control money supply in the economy and decreases interest rates to rise money
supply in economy.
Atrenatives:

a. Both Assertion and Reason are true and Reason is the correct explanation of Assertion
b. Both Assertion and Reason are true and Reason is not the correct explanation of Assertion
c. Assertion is true but Reason is false.
d. Assertion is false but Reason is true.

Q.1 Assertion (i): Commercial Bank acts as a banker to the Government

Reason (ii): Reserve Bank is the only institution which can issue currency

Q. 2 Assertion (A): Money supply is a flow concept.

Reason (R): Money Supply always measured at a particular point of time.

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Q.3 Assertion (A): To boost the falling demand in the economy. Reserve bank of India recently reduced repo rate
and bank rate.

Reason (R): Decrease in repo rate and bank rate causes decreases in the rate of interest which leads to rise
demand of credit because of which more money flows into the economy, purchasing power of people
increases. Thus, aggregate demand rises and deficient demand is corrected.

Q.4 Assertion (A): Currency held by public is a monetary liability of central bank.

Reason (R): Central bank controls credit, whereas commercial banks create credit with

currency held by public.

Q.5 Assertion – Credit multiplier is inversely related to CRR and is the reciprocal of CRR.

Reason – In times of inflation, RBI raises the CRR to control money supply in the

economy.

Choose the correct Alternative

a. Both the statements are true

b. Both the statement are false
c. Statement 1 is true and statement 2 is false
d. Statement 1 is false and statement 2 is true
Q.1 Statement 1 Central bank is the custodian of foreign exchange reserves and exercise managed floating.
Statement 2 flexible exchange rate helps ensure stability of exchange rate in the international money market.
Q.2 Statement 1 M1= C +DD +Time Deposit.
Statement 2M1 has most liquidity.
Q.3 Statement 1 There will be expansion of credit if SLR decreases.
Statement 2 Commercial banks issue coins.
Q4. Statement 1 All financial institutions are not banking institution.
Statement 2All financial institutions are treated as banking institutions.
Q5. Statement 1 Currency created by RBI is called-High-powered Money.
Statement 2Currency notes and coins are called legal tenders.
Case Based Questions

Q. 1 The power of commercial banks which enables them to expand their deposits through loans is called credit
creation. Legal Reserve Ratio is the minimum reserve that a commercial bank must maintain in a liquid form as
per the instructions of the Central banks. LRR has 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.

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

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1.Which bank is called the factory of credit creation?

a. Govt. b. Commercial Bank c. LIC d. None of these

2.If CRR=5% and LRR=20% then what is the SLR?

a.5% b.10% c.15% d. None of these

3.Which of the following are the assumptions of credit creation process?

a.There is a single banking system in the economy.

b. All transactions are outed through the banks.

c.Both a and b

d.None of these.

Important Short and Long Answer Questions:

1. Calculate the value money multiplier and the total deposit created if initial deposit is Rs. 500 crores and
LRR is 10%.
2. Bring out the role of Central Bank as the controller or money supply or credit.
3. Explain the following functions of the Central Bank of India.
 Bank of Issue
 Banker’s bank
 Lender to the last resort
 Banker to the government
4. State the functions of money.
5. How does money overcome the problems of barter system?
6. Why only a fraction of deposits is kept as Cash Reserves?
7. Explain the concepts of:-
a. Demand deposits held by commercial banks
b. Currency and coins with public

DETERMINATION OF INCOME AND EMPLOYMENT

Aggregate Demand : Aggregate demand (AD) refers to the total value of final goods and services which all the
sectors of an economy are planning to buy at a given level of income during a period of one accounting year.
Components of Aggregate Demand:
(i) Private (Household) Consumption Expenditure ( C )
(ii) Investment Expenditure (I)
(iii) Government Expenditure (G)
(iv) Net Export (X- M)

Average propensity to consume (APC) - Average propensity to consume refers to the ratio of consumption
expenditure to the corresponding level of income.
Consumption (C)
APC =
Income (Y)

17
 Income (Y) Consumption (C ) APC-= C/Y
0 40 -
100 120 1.20
200 200 1
300 280 0.933
400 360 0.90

Marginal propensity to consume (MPC) -- Marginal propensity to consume refers to the ratio of change in
consumption expenditure to change in total income.
𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑪𝒐𝒏𝒔𝒖𝒎𝒑𝒕𝒊𝒐𝒏(∆𝑪)
𝑴𝑷𝑪 =
𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑰𝒏𝒄𝒐𝒎𝒆 (∆𝒀)

Income (Y) Consumption Change in Change in MPC= ∆𝑪/∆𝒀

(C ) consumption Income
∆𝑪 ∆𝒀
0 40 - - -
100 120 80 100 0.80
200 200 80 100 0.80
300 280 80 100 0.80
400 360 80 100 0.80
Average propensity to save (APS) -Average propensity to save refers to the ratio of saving to the corresponding
level of income.
Saving(S)
APS =
Income(Y)

Income(Y) Saving (S) APS = S/Y

0 -40 -
100 -20 -0.20
200 0 0
300 20 0.067
400 40 0.10
Marginal propensity to save (MPS) - Marginal propensity to consume refers to the ratio of change in
consumption expenditure to change in total income.
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑆𝑎𝑣𝑖𝑛𝑔 (∆𝑆)
𝑀𝑃𝑆 =
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐼𝑛𝑐𝑜𝑚𝑒 (∆𝑌)

Change in Change in
Income (Y) Saving (S) saving ∆𝑺 Income ∆𝑰 MPS
0 -40 - - -
100 -20 20 100 0.20
200 0 20 100 0.20
300 20 20 100 0.20
400 40 20 100 0.20
INCOME DETERMINATION AND MULTIPLIER

18
 An economy is in equilibrium when aggregate demand for goods and services is equal to aggregate supply during
a period of time.
So equilibrium is achieved when
AD = AS
We know , AD is the sum total of consumption ( C ) and investment (I)
AD = C + I
Also AS is the sum total of consumption (C ) and saving (S)
AS = C + S
We get C + S = C+ I
Or S = I
Two Approaches for determination of equilibrium level
1. Aggregate Demand – Aggregate supply approach (AD- AS Approach)
2. Saving- Investment Approach (S-I Approach)

1. Aggregate Demand – Aggregate supply approach (AD- AS Approach)

The equilibrium level of income is determined where planned level of aggregate demand (AD) is equal to
planned level of aggregate supply (AS).
Income (y) Consumption(c ) Saving (S) Investment(I) AD= C+ I AS = C+S Remark

0 50 -50 100 150 0 AD>AS

100 100 0 100 200 100 AD.AS
200 150 50 100 250 200 AD>AS
300 200 100 100 300 300 AD=AS
400 250 150 100 350 400 AD<AS
500 300 200 100 400 500 AD<AS

Observation-
AD is C+ I curve as demand is for consumption and investment in a two sector economy.
AS is total amount of goods and services or national income. that is 45 line.
E is equilibrium point where AD = AS
When AD > AS = It means that consumers and firms are planning to buy more goods and services than what
producers are planning to produce. In this situation, inventory level (stock of goods) starts falling and comes
below the desired level to maintain full employment equilibrium.
To bring the inventory back to the desired level, firm would resort to increase in employment and output until
the economy is back at output level OY, where AD becomes equal to AS and there is no further tendency to
change.

19
When AD < AS = It means that consumers and firms are planning to buy less goods and services than what
producers are planning to produce. In this situation, inventory level (stock of goods) starts rise and comes the
desired level to maintain full employment equilibrium.
To clear the unwanted increase in inventory, firms plan to decrease the employment and output until the
economy is back at output level OY, where AD becomes equal to AS and there is no further tendency to change.
2.Saving- Investment Approach (S-I Approach) –According to this approach the equilibrium level of
income is determined at a level , when planned saving (s)is equal to planned investment(I).
S= I
Income (y) Consumption(c ) Saving (S) Investment AD= C+ I AS = C+S

0 50 -50 100 150 0

100 100 0 100 200 100
200 150 50 100 250 200
300 200 100 100 300 300
400 250 150 100 350 400
500 300 200 100 400 500

Observation – The economy is in equilibrium at point E where saving and investment curves intersect each
other.
The saving curve slopes upwards implying positive relation between saving and income.
When S >I ----- If planned saving is more than planned investment, i.e. after point E it means that households are
not consuming as much as the firms expected them to . As a result , the inventory (stock of goods) rises above
the desired level.
To clear the unwanted increase in inventory, firm would plan to reduce the production till saving and investment
become equal to each other.
When S <I I If planned saving is less than planned investment, i.e. before point E it means that households are
consuming more and saving less than what the firms expected them to . As a result , the inventory (stock of
goods) would fall below the desired level.
To bring the the inventory back to the desired level firm would plan to increase the production till saving and
investment become equal to each other.
Concept of Investment Multiplier --- Multiplier (K) is the ratio of increase in national income (Y) due to an
increase in investment (I).

Working of Multiplier ------

Investment multiplier is the ratio between change in income and change in investment.
Δ
K=
Δ
20
It shows the number of times income would rise as a result of an initial rise in investment.
MPC (marginal propensity to consume) is the principal determinant of K higher the value of MPC, higher should
be the value of K.
Following table explains how the multiplier process works. It is based on the assumption that I (Leading to
increase in expenditure in the economy) = 100 crores and that MPC = 0.5
Working Multiplier

Round Change in Change in Change in Leakage/ saving

investment (∆𝑰) income (∆𝒀) consumption(∆𝑪)

1 100 100 50 50
2 - 50 25 25
3 - 25 12.5 12.5
- - - - -
- - - - -
And so on
Total 100 200 100 100

Full Employment : Full employment refers to a situation in which all those people, who are willing and able to
work at the existing wage rate, get work without any undue difficulty.
Involuntary Unemployment : Involuntary unemployment refers to an unemployment in which all those people
who are willing and able to work at the existing wage rate, do not get work.
Excess Demand: Excess demand refers to a situation when AD > AS corresponding to full employment in the
economy. It causes inflationary gap.
Deficient demand: Deficient demand refers to a situation when AD< AS corresponding to full employment in
the economy. It causes deflationary gap.

1 MARKS QUESTION
1. AD curve is represented by_________ curve in the income determination analysis
a) Consumption=saving+ investment b) Consumption+ saving
c) Saving+ investment d) Consumption+ investment
2. Keynesian theory of employment is based on the assumption of
(a) short-run (b) long-run (c) full employment (d) none of these
3. If APC of an economy is 0.6, savings at the income level of Rs. 1,000 crore will be
(a) Rs. 100 crore (b )Rs. 300 crore (c) Rs. 400 crore (d) Rs. 600 crore
4. 45° line in the context of equilibrium income is a:
(a) Line of reference. (b) Line of identity.
(c) Line of equality between AD and AS.(d) Both (a) and (c).
5. Marginal Propensity to Consume is equal to:
21
 A. ∆Y / ∆C B. Y / C C. ∆C / ∆Y D. C / Y
Choose Correct Alternative:
(a) Both Assertion (A) and Reason (R) are true and Reason is the correct explanation of Assertion.
(b) Both Assertion (A) and Reason (R) are true and 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.
6. ASSERTION (A): APS can never be one or more than one.
REASONING (R): APC increases with increase in income.
7. ASSERTION (A): MPC of poor is more than that of rich.
REASONING (R): MPC falls with successive increase in Income.
8. ASSERTION (A): Multiplier explains how many times the income increases as a result of an increase in
the investment.
REASONING (R): There is an inverse relationship between the value of marginal propensity to save and
investment multiplier.
9. ASSERTION (A): Full employment is that situation in the economy when AS = AD along with fuller
utilization of the resources. But it does not mean a situation of zero unemployment in the Economy.
REASONING (R): Full employment means absence of unemployment in the economy.
10. Assertion (A): There is direct relationship between Saving and demand for goods and services in the
economy.
Reason(R): As people save more and more, the demand for goods and services fall in the economy.

Choose Correct Alternative:

e. Both the statements are true
f. Both the statement are false
g. Statement 1 is true and statement 2 is false
h. Statement 1 is false and statement 2 is true

11. Statement 1: The value of marginal propensity to consume can be greater than one.
Statement 2: Minimum level of expenditure is dependent on the level of income in the economy.
12. Statement 1: When the value of average propensity to save is negative, the value of marginal propensity
to save will also be negative.
Statement 2: The value of MPC is always equal to 1.
13. Statement 1: High propensity to consume is a virtue, while high propensity to save is not.
Statement 2: In two sector economy, if income is zero, APC will also be zero.
14. Statement 1: According to Keynesian theory of employment, a state of underemployment can never exist
in an economy.
Statement 2: Unplanned inventories accumulate when planned investment is less than planned saving.
Case Based Question
State Bank of India’s latest edition of ECOWRAP has noted that many households may have marginal
propensity to consume less because several types of spending are not easily available amid social distancing
constraints. Analysing the trends in deposits since the lockdown was first imposed, on May 25, the bank noted
that the data revealed that
deposits (savings, current and term) increased significantly during Lockdown-1 as
people were apprehensive in the beginning about spending, and turned frugal. During
Lockdown-2, there was a 25% decline in bank deposits, but term deposit accrual was
very healthy.
Source: Business Standard; June 2nd, 2020
Questions:
22
1.____________ is the ratio of change in consumption to change in income. (APC/MPC)
2. According to given article, many households may have marginal propensity to
consume because several types of spending are not easily available amid social
distancing constraints.
(a) no change (b) more (c) less (d) None of these
3. There was a 25%__________ in bank deposits, but term deposit accrual was very
healthy during lockdown 2.
4. The sum of APC and MPC is ___________ .
(a) one (b) zero (c) both (a) and (b) (d) None of these

3 MARKS QUESTIONS
1. What is aggregate demand. Name the principal components of aggregate demand in an open economy.
Ans. Aggregate demand is the total demand for goods and services in an economy, measured in terms
of total expenditure.
The principal components of aggregate demand are:
(i) Private consumption expenditure ( C)
(ii) Private investment expenditure ( I)
(iii) Government expenditure( G )
(iv) Net Export(X-M)
2. State and discuss the components of aggregate demand in a two sector economy.
Ans. Components of aggregate demand in a two sector economy are as these:
(i) Consumption Expenditure (C) : It is also called household consumption expenditure. It comprises
demand for all goods and services by the households of a country during an accounting year.
Generally, it depends on the level of personal disposable income. Higher the level of personal
disposable income, higher is private consumption expenditure, and vice versa.
(ii) Private Investment expenditure: It refers to expenditure by private investors on the purchase of such
goods which add to their stock of capital. Implying increase in the stock of capital, is also called
capital formation. Rate of interest is the principal determinant of private investment. Higher rate of
interest generally implies lower investment expenditure.
3. “Economists are generally concerned about the rising Marginal Propensity to save (MPS) in an
economy “. Explain why?
Ans. Since the sum of MPC and MPS is unity, any increase in Marginal propensity to save (MPS)
would directly lead to decrease in Marginal propensity to consume (MPC). This means that lesser
proportion of additional income is going to consumption, which is a vital factor of Aggregate
Demand/ Expenditure. This may further lead to fall in equilibrium level of income in the economy.
4. Estimate the value of aggregate demand in an economy if:
(a) Autonomous investment ( I )= Rs. 100 crore
(b) Marginal propensity to save (MPS)= 0.2
(c) Level of income (Y)= Rs. 4000 crores
(d) Autonomous consumption expenditure (C ) = Rs. 50crores
Solution
Given autonomous investment (I) = Rs. 100 crore
Marginal propensity to save (MPS) = 0.2
Level of income (Y) = Rs. 4000 crore
Autonomous consumption expenditure (C) = Rs. 50 crores
Marginal propensity to save (MPS) = 1- MPS
= 1- 0.2 =0.8
We know that,
AD = C+ I
23
 AD= (C) + MPC (Y) + I
= 50 + 0.8 (4000) + 100
= 50 + 3200 +100
= 3350
Aggregate demand = Rs. 3350 crores

5. Give meaning of (i) involuntary unemployment (ii) Full employment

Ans. Full Employment : Full employment refers to a situation in which all those people, who are willing
and able to work at the existing wage rate, get work without any undue difficulty.
Involuntary Unemployment : Involuntary unemployment refers to an unemployment in which all those
people who are willing and able to work at the existing wage rate, do not get work.
6. Explain the concept of Inflationary gap with the help of a diagram?
Ans. Inflationary Gap is the excess of aggregate demand over and above its level required to maintain
full employment equilibrium in the economy.
Full employment equilibrium is struck at point E. If the level of demand increase to AD1, it is in Excess
of what is required to maintain full employment. This causes inflation. Hence, the difference between
AD1 and AD (EF) is called inflationary gap.

7. Discuss the role of bank rate in correcting inflationary gap in an economy.

Ans. Bank rate is the rate at which the central bank lends money to the commercial banks. To correct
the situation of inflationary gap, bank rate is increase. As a follow –up action, the commercial banks
raise the market rate of interest. This decrease demand for credit. Consequently, consumption
expenditure and investment expenditure are decreased, implying a decrease in aggregate demand, as
required to correct inflationary gap.
8. Discuss the role of margin requirements in correcting deficient demand in an economy.
Ans. Margin requirements refer to minimum down payment that the borrowers have to make as a
percentage of their total borrowing from the commercial banks. To correct the situation of deficient
demand, margin requirement is reduced. Lower margin requirement acts as an incentive to borrow.
This induces borrowers to raise more credit. Implying a rise in aggregate demand, as desired to correct
deficient demand.
9. “To boost the falling demand in the economy, the Reserve Bank of India recently reduce the Cash
Reserve Ratio.” Elaborate the rationale behind the steps taken by the Central Bank.
Ans. Cash reserve ratio (CRR) requires the commercial banks to maintain certain minimum cash
reserves with the Reserve Bank of India, as a percentage of their total deposits.
To boost the falling demand in the economy, CRR is reduced. A cut in the cash reserve with RBI raise
24
 cash balances with the commercial banks. And a rise in cash balances with the banks causes a
multiple-times rise in their demand deposits. Accordingly, flow of credit in the market is increased,
aggregate demand is increased, as required to boost falling demand.
10. ‘India’s GDP contracted 23.9% in the April-June Quarter of 2020-21 as compared to same period of
2019-20, suggesting that the lockdown has hit the economy hard’.
- The Hindustan Times, 1st September 2020
State and discuss any two fiscal measures that may be taken by the Government of India to correct
the situation indicated in the above news report.
Ans. The situation suggests that the production activity in the domestic economy has tended to
retard, owing to lockdown. The economy has witnessed a loss of employment and the consequent fall
in income and expenditure. The economy is drifting towards a recessionary trends. Following two
fiscal measures may be taken to correct this situation:
(i) Increase in Government Expenditure: The government should increase its expenditure. This
includes both consumption expenditure a well as investment expenditure. A rise in
government expenditure leads to a rise in AD which is what is required to combat recession
in the economy.
(ii) Modify Tax Structure: Tax structure should be modified to induce private investment. The
focus should be on such areas of production activity which generate employment, like real
estate.
6. MARKS QUESTIONS
1. What are the two alternative ways of determining equilibrium level of income? How are these related?
Ans. Two alternative ways of determining equilibrium level of income are as these:
(i) Equilibrium is struck when: AD = AS and
(ii) Equilibrium is struck When: S=I
These two approaches are related to each other in this manner:
AD = AS
Or
C+I = C+S
Or
S = I
The first approach says that equilibrium is struck when planned demand is equal to planned supply in the
economy. The second approach says that equilibrium is struck when withdrawal of expenditure (in the form
of saving) is equal to injection of expenditure ( in the form of investment).

2. Assuming that increase in investment is Rs 1000 crore and marginal propensity to consume is 0.9,
explain the working of multiplier.
Ans. Muiltiplier is the ratio between change in income and change in investment.
25
 Δ
K=
Δ

Following table explains how the multiplier process works. It is based on the given value that
I(leading to increase in expenditure in the economy)= Rs1000, crore and that MPC= 0.9
Working of Multiplier (Rs. In crore)

Round ∆𝐼 ∆𝑌 Induced change in consumption Leakage/saving

MPC (∆𝑌)
1 1,000 1,000 900(=0.9x1,000) 100
2 - 900 810(=0.9x900) 90
3 - 810 729 (= 0.9x810) 81
4 - 729 656.1(=0.9x729) 72.9

And so on…
∆𝐼 = 1,000 ∆𝑌= 10,000 9,000 1,000

The table shows that in round-I, additional investment of Rs. 1,000 crore leads to additional income of Rs.
1000 crore. But in every subsequent round 90% of additional income is spent (as MPC= 0.9.The remaining
10% leads to leakage/ Saving (as MPS = 0.1). Thus in round-2, additional income=Rs. 900 crore
(0.9x1000), in round-3 it is = Rs810 crore (0.9x900), in next round it is = Rs 729 crore(0.9x810, and so on
till the sum total of additional income = Rs 10,000 crore.
K= 1/1- MPC
= 1/ 1-0.9 = 1/0.1=10
Given that ∆𝐼=1000, and K= 10,
∆𝑌 = 10 𝐱 𝟏, 000
= Rs 10,000 crore

UNIT- 4: GOVERNMENT BUDGET & THE ECONOMY

Government budget is the annual statement of estimated receipts and expenditure of government during a fiscal
year.
Objectives:
a.Re-locative objectives
 Through budgetary provisions government reallocates its resources in order to achieve the objective of growth
with social justice and equity. This is done in two ways.
 Economic objectives(Profit Maximization)
To bring economic growth via maximization of profit government invests more on the sectors which makes more
profit and disinvestments in the sectors which makes losses
 Social Objectives (Social Welfare)
To bring social welfare government produce those goods in which the private sectors fails to produce
Sometimes it gives tax concession and subsidies to the private sectors to produce those goods which are socially
desired and enhances welfare of the public
b. Re-distributive objectives
 Through budgetary provisions government redistributes income among the people to bring equity by reducing
the inequality. This is done by the following ways.
 It imposes higher taxes on the rich people
26
 The amount collected through tax is given to the poor in the form of subsidies
 By this way the gap between the poor and rich is bridged
c. Stabilization objectives:
 Through budgetary provisions govt. brings economic stability by preventing fluctuation arise due to inflation
and deflation
 This is done with the help of its fiscal policy instruments. i.e. govt. expenditure and taxation
 During inflation govt. curtails its expenditure and during deflation it gives tax concession
 In brief it followed the policy of surplus budget and deficit budget to combat inflation and deflation
respectively
d. Management objectives
 Through budgetary provisions govt. regulates the public sectors to refrain them from the tendency of
monopolies
 To bring fiscal discipline and enhancing efficiency of PSUs govt. infuse investment in the profit making PSUs
and make disinvestment in the loss making PSUs
e. Economic Growth
 Economic growth refers to the country’s capacity to produce more output. It is indicated by rise in GDP
 Budget is an indispensable tool to ensure economic growth in any socio economic setup in the following
manner
 Through budget govt. gives various incentives to the productive units in the form of input subsidies , tax
concession and tax holidays , which stimulates investments in the economy
 Through budget govt. made expenditure in the form of infrastructural development which enhances the
production activities in the economy , thereby increase in the production of output and GDP
STRUCTURE or COMPONENTS OF BUDGET

(A) BUDGET RECEIPTS

Budget receipts refer to the estimated receipts of the government from all sources during a fiscal year. It is two
types
Revenue receipts:
 Revenue receipts are those receipts which neither create any liability nor reduce any assets
 Example: tax receipts, fees, fines etc.
 Revenue receipts are basically two types
(a) Tax revenue
(b) Non tax revenue
(a) Tax Revenue
Tax is a compulsory payment made by an individual or an entity to the government without involving any
direct quid-pro-quo relationship
Types: it is of two types on the basis of shifting of burden
(i) Direct tax
(ii) Indirect tax
Difference between Direct Tax and Indirect Tax
Basis Direct Taxes Indirect Taxes
Meaning Those taxes in which the initial money burden Those taxes in which the initial money
(impact) and the final money burden burden (impact) and the final money
(incidence) falls on the same person/entity burden (incidence) falls on different
person/entity
Shifting of Not possible Possible
burden
Nature Regular Irregular
27
Imposed on Income and property Purchase of goods and services

Example Income Tax , wealth Tax , Property Tax , Sales Tax , Excise Duty , GST , Service Tax
Corporation Tax
(b) Non Tax Revenue
All the revenue receipts of the government except tax are called Non-Tax Revenue. These are of the following
types.
(i) Commercial Revenue
Those revenue received by the government in the form of prices paid for govt. supplied commodities and
services Example: Postage, .tolls, railway services etc.
(ii) Administrative Revenue
That revenue which arises on account of administrative function of the government. Example: Fees, Fines,
Forfeiture, Escheat etc.

Capital receipts:
Capital receipts are those receipts which either create any liability or reduce any assets
Example: Borrowings, Disinvestment, Recovery of Loans etc.
DISTINCTION BETWEEN REVENUE RECEIPTS AND CAPITAL RECEIPTS

Basis Revenue receipts Capital receipts

Meaning Those receipts which neither create any Those receipts which either create any liability
liability nor reduce any asset nor reduce any asset

Example Income Tax , Fees , Fines Borrowings, Disinvestment

Nature Regular & recurring Irregular & non-recurring
Future No future obligations Future obligation
obligation
(B) BUDGET EXPENDITURE
It refers to the estimated expenditure of the government during a fiscal year. It is of two types
(i) Revenue Expenditure
(ii) Capital expenditure
 Revenue expenditure:
Those expenditure which neither create any asset nor reduce any liability. Example:
Scholarship, Salary by the govt., Grants given by the Central Govt. to state govt. , Payment
of interest on loans etc.
 Capital expenditure
Those expenditure which either create any asset or reduce any liability. Example: Repayment
of Loans, construction of School buildings, hospitals etc.
DISTINCTION BETWEEN REVENUE EXPENDITURE AND CAPITAL EXPENDITURE

Basis Revenue Expenditure Capital Expenditure

MeaningThose expenditure which neither create any Those expenditure which either create any
asset nor reduce any liability asset nor reduce any liability
ExamplePayment of interest on loans , scholarship Repayment of loans , construction of schools,
hospital buildings

Nature Regular & recurring Irregular & non-recurring

MEASURES OF BUDGET DEFICITS
28
 (a) Revenue deficit:
 Revenue deficit is the excess of Revenue Expenditure over Revenue receipts
Revenue Deficit = Revenue Expenditure – Revenue Receipts
Implications:
 It gives information on what the government is borrowing for
 In the analogy of household the revenue deficit tells the amount the householder is borrowing to
pay the grocer , rather than add a roof to the house
 A repayment burden in the future not matched by any benefits via investment
 Borrowed funds are used to finance consumption requirements of the government leading to
inflationary situation
(b) Fiscal Deficit:
 Fiscal deficit is the excess of total expenditure over total Non-borrowing receipts. In other words it
is the excess of total expenditure over total receipts except borrowings
Fiscal Deficit = (Revenue Exp. + Capital Exp.) – (Revenue Receipts + Capital Receipts –
Borrowings)
Note: Fiscal Deficit = Borrowings
Implications:
 The extent of the Fiscal Deficit is an indication of how far the exchequer is living beyond its
means
 It indicates the amount of borrowing the government has to do
 A large fiscal deficit implies a large amount of borrowing
 It creates correspondingly large burden of interest burden of interest payments in the future
 A large fiscal deficit may also fuel inflationary pressures
(c) Primary Deficits:
 It is the difference between Fiscal Deficit and interest payments
Primary Deficit = Fiscal Deficit – Interest Payments
Implications:
 Primary Deficit implies how much government borrowing is going to meet expenses other than interest
payments
 It reflects the extent to which current government policy is adding to future burdens stemming from past
policy
 It is often used as a basic measure of fiscal irresponsibility. In other words, it is a measure of how much
the government is borrowing in continuance of its profligate ways
 A low or zero primary deficit means that while its interest commitments on earlier loans have compelled
the government to borrow, it is aware of the need to tighten its belt.
(MCQs)
1. In India the Financial Year runs from ______
(a) 1st January to 31st December
(b) 1st March to 28th February
(c) 1st April to 31st march
(d) 1st July to 30th June
2. The budget document relates to the receipts and expenditure of the government to the current financial
year only are included in the
(a) Financial Budget
(b) Revenue Budget
(c) Capital Budget
(d) Primary Budget
29
 3. The budget document relates to the receipts and expenditure of the government that concern the assets and
liabilities of the government are included in the
(a) Financial Budget
(b) Revenue Budget
(c) Capital Budget
(d) Primary Budget

4. The interest payments as per the government budget id Rs. 1, 40,000 crore. If total borrowing
requirements of the government are estimated at rs. 2, 70,000 crore. How much is the Primary Deficit?
(a) Rs. 1,40,000 crore
(b) Rs. 2,70,000 crore
(c) Rs. 4,10,000 crore
(d) Rs. 1,30,000 crore
5. From the following information calculate revenue receipts. Non Debt creating Capital Receipts = 25000 ,
Revenue Deficit = 12000 , Interest payments = 7000, Revenue Expenditure = 20000 , Capital Expenditure
= 35000 (All figures are in Rs. Crore).
(a) Rs. 8000 crore
(b) Rs. 43000 crore
(c) Rs. 15000 crore
(d) Rs. 25000 crore
choose the correct alternatives:
(a) Statement 1 is true and statement-2 is false
(b) Statement 1 is false and statement-2 is true
(c) Both Statement 1and statement-2 are true
(d) Both Statement 1and statement-2 are false

6. Read the following statements carefully.

Statement-1 :Revenue receipts are non-redeemable.
Statement-2 :The redistribution objective of government budget is is sought to be achieved through
proportional income taxation.
7. Read the following statements carefully.
Statement-1 :All those receipts of government which creates assets or reduce liabilities are termed as
capital receipts.
Statement-2 ::All those receipts of government which creates liabilities or reduce assets are termed as
capital receipts.
8. Read the following statements carefully.
Statement-1 :Repayment of loans is called revenue expenditure
Statement-2 ::Payment of interest on loan is called revenue expenditure
9. Read the following statements carefully.
Statement-1 :The revenue deficit refers to the excess of government’s revenue expenditure over
revenue receipts
Statement-2 ::The fiscal deficit refers to the excess of government’s capital expenditure over capital
receipts.
10. Read the following statements carefully.
Statement-1 :The gross fiscal deficit is a key variable in judging the financial health of the public
sector and the stability of the economy.
Statement-2 ::A large share of revenue deficit in fiscal deficit indicates that a large part of borrowing is
being used to meet its consumption expenditure needs rather than investment.
Choose Correct Alternative
30
 11. Assertion (A) : Payment of interest on Loan is a Revenue Expenditure
Reason (R) : Those expenditure which neither create any assets nor reduce any liabilities are called
revenue expenditure
12. Assertion (A) :When a government spends more than it collects by way of revenue, it incurs a budget
deficit
Reason (R) : Fiscal deficit is the difference between the government’s total expenditure and its total
receipts excluding borrowing
13. Assertion (A) :Primary Deficit = Fiscal Deficit + Interest payments
Reason (R) : Fiscal deficit is the difference between the government’s total expenditure and its total
receipts excluding borrowing
14. Assertion (A) :Small Savings by Public in various government schemes is an example of Capital receipts
Reason (R) : Small savings reduces assets of the government
15. Assertion (A) :Public Goods are called Non-excludable
Reason (R) : Even if some users do not pay, it is difficult and sometimes impossible to collect fees for
the public good

Case Based Questions

Fiscal Responsibility and Budget Management Act, 2003 (FRBMA)
In a multi-party parliamentary system, electoral concerns play an important role in determining expenditure
policies. A legislative provision, it is argued, that is applicable to all governments – present and future – is likely
to be effective in keeping deficits under control. The enactment of the FRBMA, in August 2003, marked a
turning point in fiscal reforms, binding the government through an institutional framework to pursue a prudent
fiscal policy. The central government must ensure intergenerational equity and long-term macro-economic
stability by achieving sufficient revenue surplus, removing fiscal obstacles to monetary policy and effective debt
management by limiting deficits and borrowing. The rules under the Act were notified with effect from July,
2004.
Main Features
1. The Act mandates the central government to take appropriate measures to reduce fiscal deficit to not more
than 3 percent of GDP and to eliminate the revenue deficit by March 31, 2009and thereafter build up adequate
revenue surplus.
2. It requires the reduction in fiscal deficit by 0.3 per cent of GDP each year and the revenue deficit by 0.5 per
cent. If this is not achieved through tax revenues, the necessary adjustment has to come from a reduction in
expenditure.
3. The actual deficits may exceed the targets specified only on grounds of national security or natural calamity
or such other exceptional grounds as the central government may specify.
4. The central government shall not borrow from the Reserve Bank of India except by way of advances to meet
temporary excess of cash disbursements over cash receipts.
5. The Reserve Bank of India must not subscribe to the primary issues of central government securities from the
year 2006-07.
6. Measures to be taken to ensure greater transparency in fiscal operations.
7. The central government to lay before both Houses of Parliament three statements – Medium-term Fiscal
Policy Statement, The Fiscal Policy Strategy Statement, The Macroeconomic Framework Statement along with
the Annual Financial statement.
8. Quarterly review of the trends in receipts and expenditure in relation to the budget be placed before both
Houses of Parliament.
1. According to FRBMA 2003 , the Central Government should take appropriate measures to
(a) Reduce fiscal deficit to not more than 3 percent of GDP
(b) To eliminate the revenue deficit by March 31, 2009
(c) To build up adequate revenue surplus.
(d) All of the above
31
 2. According to FRBMA 2003 the central Government should ensure
(a) Long-term micro-economic stability
(b) Effective debt management by limiting deficits and borrowing
(c) Short-term macro-economic stability by achieving sufficient revenue surplus
(d) All of the above
3. If the Central Government is not able to reduce in fiscal deficit and revenue deficit each year through
tax revenues, what policy it has to adopt?
(a) Necessary adjustment has to come from increasing Non-tax revenue
(b) Necessary adjustment has to come from a reduction in expenditure
(c) Necessary adjustment has to come from a increasing borrowings
(d) All of the above
4. In which of the following cases the actual deficits may exceed the targets specified?
(a) only on grounds of national security
(b) Natural calamity
(c) Both (a) and (b)
(d) In no case the actual deficit should exceed the targets specified
5. Which of the following statement is true?
(a) The central government shall borrow from the Reserve Bank of India except by way of advances to
meet temporary excess of cash disbursements over cash receipts.
(b) The central government shall not borrow from the Reserve Bank of India except by way of
advances to meet temporary excess of cash disbursements over cash receipts.
(c) Quarterly review of the trends in receipts and expenditure in relation to the budget be placed before
the Lower Houses of Parliament.
(d) The Reserve Bank of India must subscribe to the primary issues of central government securities from
the year 2006-07.
3/4 Marks
1. State any two sources of non-tax revenue receipts.
2. Define tax. State different types of taxes.
3. How is primary deficit calculated?
Answer:It is the difference between Fiscal Deficit and interest payments
Primary Deficit = Fiscal Deficit – Interest Payments

4. State anythree objective of government budget.

Answer: Three objectives of Govt. budget are
 Reallocation of resources
 Redistribution of Income
 Economic Growth
5. How can budgetary policy be used in reducing inequalities of income?
Answer:Through budgetary provisions government redistributes income among the people to bring equity by
reducing the inequality. This is done by the following ways.
o It imposes higher taxes on the rich people
o The amount collected through tax is given to the poor in the form of subsidies
o By this way the gap between the poor and rich is bridged
6. Distinguish between revenue receipts and capital receipts in a government budget. Give two examples of
each.
7. Distinguish between revenue expenditure and capital expenditure in a government budget. Give two
examples of each.
8. Explain the concept of fiscal deficit in a government budget. What does it indicate?
32
 Answer:
 Fiscal deficit is the excess of total expenditure over total Non-borrowing receipts. In other words it
is the excess of total expenditure over total receipts except borrowings
Fiscal Deficit = Total Expenditure – (Total Receipts – Borrowings)
= Total Expenditure – Total Receipts + borrowings
= (Revenue Exp. + Capital Exp.) – (Revenue Receipts + Capital Receipts – Borrowings)
Note: Fiscal Deficit is equal to Borrowings because the government will have to finance Fiscal deficit
through borrowings
Fiscal Deficit = Borrowings
Implications:
 The extent of the Fiscal Deficit is an indication of how far the exchequer is living beyond its
means
 It indicates the amount of borrowing the government has to do
 A large fiscal deficit implies a large amount of borrowing
 It creates correspondingly large burden of interest burden of interest payments in the future
 A large fiscal deficit may also fuel inflationary pressures
9. Distinguish between direct tax and indirect tax.
Answer:
10. From the following data about a government budget , find out the following:
(i) Revenue deficit (ii) Fiscal deficit (iii) Primary deficit
Sl.No. Items Rs. (in Crore)
(a) Capital receipts net of borrowings 95
(b) Revenue expenditure 100
(c) Interest payments 10
(d) Revenue receipts 80
(e) Capital expenditure 110

Answer:
Revenue Deficit = 100 – 80 = Rs.20 crore
Fiscal Deficit = (100 + 110) – 95 = 210 – 95 = Rs. 115 Crore
Primary Deficit = Fiscal Deficit – Interest Payments = 115 – 10 = Rs. 105 Crore

BALANCE OF PAYMENTS (BOP)

Meaning:
BOP is the systematic records of all economic transactions between the residents of the reporting country and
the residents of foreign countries during a financial year.
 BOP takes in to account the exchange of both visible and invisible items
 Hence the BOP represents a complete picture of country’s economic transaction
 In accounting sense BOP always balances but in operational sense it may be surplus or deficit
Balance of Trade (BOT)
BOT is the systematic records of only visible economic transactions between the residents of the reporting
country and the residents of foreign countries during a financial year.
 BOT takes in to account the exchange of only visible items i.e. import and export of goods only
 Hence the BOT represents a partial picture of country’s economic transactions
 The difference between exports and imports of goods is called Trade balance
Trade Balance = Exports – Imports
 It may be Surplus , deficit of balance
Entries in BOP
 BOP statement has two entries. i.e. credit entry (+) and debit entry (-)
33
  Those transactions by which there is inflow of foreign exchange its value will be entered in credit (+) side
and those transactions by which there is outflow of foreign exchange its value will be entered in to debit (-
) side
Note: It is not the nature of transactions rather the inflow or outflow of foreign exchange that determines
entries in BOP
Difference between BOP and BOT
Basis Balance Of Payments (BOP) Balance Of Trade (BOT)
Meaning BOP is the systematic records of all BOT is the systematic records of only visible
economic transactions between the economic transactions between the residents of
residents of the reporting country and the the reporting country and the residents of
residents of foreign countries during a foreign countries during a financial year.
financial year
Components Visible as well invisible items Only visible items
Scope Broader , as it represents the complete Narrower , as it is a part of BOP and represents
picture of economic transactions partial picture of economic transactions
Nature of Includes current as well capital Includes only current transactions
transactions transactions
Position In accounting sense it is always balances , It may be balanced, surplus or deficit
may not be in operational sense
Structure /Components of BOP
 A BOP has two components
Current A/c and Capital A/c
 A BOP has two entries (Double Entry)
Credit entries (+) and Debit entries (-)
(a) Current A/c
 A current account records all the transactions which do not affect the assets and liabilities of a country
 These transactions are current nature only
Components of Current A/c
(i) Import and export of goods (Merchandise trade)
(ii) Import and export of Services (Invisible Trade)
(iii) Unilateral Transfers (Unrequited Transfers)
(b) Capital A/c
 A Capital A/c records all those transactions which affects the assets or liabilities of a country
 Capital account is concerned with financial transactions
 It does not have direct effects on income , employment and output of the country
 Capital A/c is prepared to overcome the weakness arise in Current A/c i.e. to rectify the surplus
/deficit arise in Current A/c
Components of Capital A/c
(i) Borrowings and Lending
(ii) Private transactions:
(iii) Official transactions
(iv) Direct Investments:
(v) Portfolio Investment:
(vi) Official Reserve Transactions
Balance of payments always balances:
BOP always balances. This statement can be proved from the following arguments
 BOP is based on the principles of Double Entry Book Keeping Systems
 Accordingly each transactions have dual entries (Contra entries)
 Each credit/debit entry has its equal size of debit/credit entry
34
  Hence the overall balance is zero
 So BOP always balances in accounting sense
 In operational sense it may not be. It may be surplus or deficit.
Items transacted in BOP
 The items transacted in BOP are of two types
Autonomous Items and Accommodating Items
(a) Autonomous Items
 It refers to the international economic transaction that take place due to some independent motive , may
be economic motive such as profit maximization
 These transactions are independent of the state of county’s BOP
 These items are recorded in both current A/c and Capital A/c of the BOP
 As these are above the statement of BOP , theses are also called “Above the Line Items”
(b) Accommodating Items :
 It refers to the international economic transaction that take place other activities in BOP such as
government financing
 These transactions are carried out to correct the disequilibrium arise in BOP
 For example: The Official settlements are seen as an accommodating items in order to keep the BOP
identity
 These are recorded only in Capital A/c of the BOP
 As these are within the BOP , these are also called “Below the Line Items”
Difference between Autonomous Items and Accommodating Items
Basis Autonomous Items Accommodating Items
Meaning It refers to the international economic It refers to the international
transaction that take place due to some economic transaction that take place
independent motive , may be economic other activities in BOP such as
motive such as profit maximization government financing
Purpose Independent motive , may be economic like to correct the disequilibrium arise in
profit maximization BOP
Relation Independent with the statement of BOP Transactions carried out to establish
with BOP BOP identity
Entries in Entered in both Current A/c and Capital A/c Entered only in Capital A/c
accounts
Alternative Above the Line Items Below the Line Items
Names
Example Export , import by private individuals Official settlement account
Disequilibrium in BOP
 Disequilibrium in BOP arises in the form of surplus or deficit in BOP.
 BOP disequilibrium is a serious issue for policy makers
 A chronic BOP deficit leads to downgrading the economy in the world community
 These are occur due to the following reasons
(a) Economic Factors
 Large scale developmental expenditure
 Cyclical fluctuations in general business activity
 Higher rate of inflation in domestic country
 Change in the pattern of demand by the people
(b) Political Factors
 Political instability may cause large scale capital outflow
35
  Changing government policies due to political disturbances causes loss of faith of investors
(a) Social Factors
 Change in taste , preference and fashion may affect imports and exports
 Demonstration effect leads to higher imports

Foreign Exchange Rate is defined as the price of the domestic currency with respect to another currency.

Types of Exchange Rate Systems

1. Fixed exchange rate System or Pegged exchange rate system:
Fixed exchange rate is determined by the government of the country or central bank and is not dependent on
market forces.
Advantages of Fixed Exchange Rate System
Following are some of the advantages of fixed exchange rate system

1. It ensures stability in foreign exchange that encourages foreign trade.

2. There is stability in the value of currency which protects it from market fluctuations.
3. It promotes foreign investment for the country.
4. It helps in maintaining stable inflation rates in an economy.
Disadvantages of Fixed Exchange Rate System
Following are some of the disadvantages of the fixed exchange rate system
1. There is a constant need for maintaining foreign reserves in order to stabilise the economy.
2. The government may lack the flexibility that is required to bounce back in case an economic shock engulfs the
economy.
2. Flexible Exchange Rate System: Flexible exchange rate system is also known as the floating exchange rate
system as it is dependent on the market forces of supply and demand. There is no intervention of the central
banks or the government in the floating exchange rate system.
Advantages of Floating Exchange Rate System
Following are the advantages of the floating exchange rate system
1. There is no need to maintain foreign reserves in this exchange system.
2. Any deficiencies or surplus in Balance of Payment is automatically corrected in this system.
Disadvantages of Floating Exchange Rate System
Following are some of the disadvantages of the floating exchange rate system
1. It encourages speculation that may lead to fluctuations in the exchange rate of currencies in the market.
2. If the fluctuations in exchange rates are too much it can cause issues with movement of capital between
countries and also impact foreign trade.
3. It will discourage any type of international trade and foreign investment.

Determination of Exchange Rate Exchange rate is determined by the demand and supply forces of foreign
exchange in foreign exchange market.
Determination of Equilibrium Rate of Exchange The equilibrium exchange rate is obtained at the point where
supply of foreign exchange equal to the demand for foreign exchange.

36
3. Managed floating exchange rate system: Managed floating exchange rate system is the combination of the
fixed (managed) and floating exchange rate systems. Under this system the central banks intervene or participate
in the purchase or selling of the foreign currencies.

1 Marks Questions

1. BOP 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 gold
(d) difference between all receipts of foreign exchange and payments of foreign exchange
2. In which of the following categories are the transactions of balance of trade recorded?
(a) Visible items (b) Invisible items
(c) Capital transfers (d) All of these
3. Invisibles balance refers to:
(a) Exports - Imports
(b) Trade balance + Balance of non-factor services
(c) Balance of non-factor services + Balance of transfer
(d) Exports - Imports + Balance of factor services
4. Exports = Rs 1,000 lakh, imports = Rs 1,650 lakh, balance of trade shows:
(a) surplus of Rs 650 lakh (b) deficit of Rs 650 lakh
(c) balance of Rs 2,650 lakh (d) none of these
5. When US dollar exchanges for Rs. 40 instead of Rs. 50 earlier, the domestic currency shows:
(a) Currency depreciation. (b) Currency appreciation.
(c) Currency devaluation. (d) None of these
6. Which of the following causes loss of foreign exchange?
(a) Grants from the rest of the world (b) Exports
(c) Imports (d) All of the above
7. Which of the following is a function of foreign exchange market?
(a) Credit function (b) Transfer function
(c) Hedging function (d) All of these
Choose Correct Alternative:
(A) Both Assertion and reason are true and reason is correct explanation of assertion.
(B) Assertion and reason both are true but reason is not the correct explanation of assertion.
(C) Assertion is true, reason is false.
(D) Assertion is false, reason is true.
8. Assertion (A): A country always tries to balance the BOP i.e., balance in current account equals to balance in
capital account.
Reason (R): Balanced BOP indicates stable economic relation with rest of the world.
9. Assertion (A): Accommodating items of trade are undertaken to maintain the balance in the BOP account.
Reason (R): Accommodating items are net consequences of autonomous transactions that are undertaken to
correct disequilibrium in autonomous items of BOP.
10. Assertion (A): Purchase of second-hand machinery from abroad is not recorded in balance of payment.
Reason (R): Sale and purchase of second-hand goods from abroad are not included in the estimation of national
income.
11. Assertion (A) : Rise in the value of domestic currency in terms of foreign currency in the market is called
appreciation of domestic currency.
Reason (R) : When there is appreciation of domestic currency, export of domestic country increases.
12. Assertion (A) : If US dollar exchanges for Rs 70, instead of Rs 64 earlier in foreign exchange market, it is
called depreciation of rupee.
37
Reason (R) : If US dollar exchanges for Rs 45, instead of Rs 60 earlier in foreign exchange market, it is called
appreciation of rupee.
Choose Correct Alternative:
i. Both the statements are true
j. Both the statement are false
k. Statement 1 is true and statement 2 is false
l. Statement 1 is false and statement 2 is true
13. Statement 1: Expenditure by the tourists is included in balance of trade.
Statement 2:Current account records all payments to rest of the world as debit.
14. Statement 1: Bop always balances when official reserves account is a part of capital account.
Statement 2:Financial transactions relate to international sale and purchase of real assets.
15. Statement 1: According to former RBI Governor Raghu ramRajan, India needs this (foreign exchange)
reserve buffer to insulate ourselves because we have no external support.
Statement 2:Building the reserve buffer will help India to become less dependent on foreign countries.
16. Statement 1: If there is revaluation of Indian Rupee, Indian import will decrease and export will decrease.
Statement 2:Export is an important source of supply of foreign exchange.

Case Based Question

MrShaktikanta Das, the RBI governor, said that COVID -19 economic crisis has hit the Indian economy hard but
has improved India’s BOP situation. He further added that we ave benefitted from falling prices in beginning of
COID crisis plus a weak demand for imported goods. This was backed by a boom in export of technology
focused services exootrs which led to a positive change in the current account balance.”GDP growth is slowly
turning the corner and a large capital expenditure announced by the government will support economic activity
and investment”, said RBI governor.
1.Large-scale export of technology focused service sector produce is a part of:
a.merchandise account b. balance of trade
c. unilateral transfer d. invisible items
2.Autonomous items in BOP accounting are a part of:
a.current account b. capital account
c. Both a & b d. none of these
3.Measures to improve the adverse BOP includes:
a. currency devaluation b. import substitution
c. exchange control d. all of these
4.Balance of payments is calculated as:
a. it reveals the debt status of the country
b. It includes the devaluation of country’s currency
c. It enables the government to decide on the fiscal and trade policies
d. all of these

3/ 4 Marks
1. Write any three points of difference between BOT and BOP.
2. Distinguish between current account and capital account of BOP.
3. How can deficit in BOP be financed?
4. What are the components of the current account of the balance of payment account.
5. Give difference between the autonomous and accommodating items included in BOP.
6. Distinguish between autonomous and accommodating transaction in the balance of payment account.
Give an example each.
7. Give three reasons why people desire to have foreign exchange.
8. Give any three/four sources of supply of foreign exchange.
38
 9. Explain the relationship between foreign exchange rate and demand for it.
10. Explain the relationship between foreign exchange rate and supply of foreign exchange.

Chapter 1: Indian economy on the eve of Independence.

Colonial Rule Resulted in Low-Level Of Economic Development (GDP)

 Before British rule, the Indian economy was self-sustaining.

 Agriculture, handicraft industries like silk, cotton, stone works etc and other activities helped many
people earn a living.
 Indian products had major global market potential due to their high quality and brilliant craftsmanship.
 The colonial economists focused on gaining higher interests for the British empire and none for the
welfare of the Indian public.
 There were insufficient attempts made to estimate the national and per capita income of India.
 Estimates made by some eminent persons like DadabhaiNaoroji, William Digby, Findlay Shirras, V.K.R
V. Rao, and R.C Desai were deemed noteworthy.

Conditions of various sectors of the Economy on The Eve of Independence

Agriculture sector

 Dependency on agricultural gains was prominent during that time, almost 85% of the Indian population
had farming as their major occupation.
 Lower agriculture productivity was observed, which led to various new introductions and revisions in
land settlement policies which led to some growth.
 The commercialisation of agriculture was the reason for planting cash crops in many regions.
 There was a slow development of the agriculture due to a lack of investment in terracing, flood control,
drainage, and soil desalination.

Industrial Sector

 The British prevented large industrial growth for their economic gains.
 India remained merely an exporter of raw materials for the development of modern industries in Britain.
 Finished goods from Britain were brought back to India to turn them into profitable products in the Indian
markets.
 Artisans and craftsmen were unemployed as the local industries declined.
 The modern industry progressed slowly during the second half of the 19th century.
 The majority of the cotton textile mills were located in the regions of Maharashtra and Gujarat, while the
majority of the jute mills were located in Bengal.

Foreign Trade

 The government imposed numerous restrictions on India’s exports to other countries in terms of volume,
composition, and structure, which had a negative impact on the economy.
 Raw materials like silk, cotton, wool, jute, and indigo were exported from India as primary products.
 Britain was a chief part of foreign trade. A few other countries like China, Sri Lanka and Persia (Iran)
were also permitted.
 Exploitation by the British led to a great drain of Indian wealth.

Demographic Condition
39
  There was irregular population growth in India.
 Over ten years, routine census operations were conducted.
 Low literacy rates, both overall and female, marked the country as socially and educationally backwards.
 Because there were insufficient medical facilities, diseases spread widely, and the mortality rate rose.
 Infant mortality rates were dangerously high, leading to estimations of low life expectancy within the
newborn population.

Occupational Structure

 The agriculture sector (70-75%) and manufacturing and services sector (15-20%) remained at the top for
employment generation within the workforce.
 Around 17.2% contributed to the service or tertiary sectors of the economy. This sector became popular
after independence and provided slow but steady growth to the Indian economy.
 Uneven distribution of wealth was observed as the economy spiralled into an uncontrolled state right
before independence.

Infrastructure

Railways, ports, and water transport developed to a huge level during British rule. These systems were
crucial for the foreign trade of Indian raw materials.
 Colonial interests in trade were always prioritised to achieve success for British finished goods.
 India’s export of raw materials increased after the launch of the railway transport system. This enhanced
efficiency and organised the trade methods for British bookkeeping.
 The growth and development of the Indian economy were always sidelined by the British to promote their
interests.
 The barter system was replaced by newer methods which introduced the usage of money in day-to-day
transactions, which helped the Indian economy’s division of labour and large-scale production.
Developing the Indian economy after gaining independence was a huge challenge as each sector was
adversely affected by British policies and rules. A crippled economy like India needed intensive attention and
well-executed plans for a bright and secure future.
Multiplechoicequestions(MCQs)
1. Choosethecorrectalternativeshowingchronologicalorderofthefollowingevents:
(i) TheYearofGreatDivide
(ii) GreatfaminesofBengalwhichclaimedalargetolloflives
(iii) FirstTrainrunfromBombay(Mumbai)toThane
(iv) OpeningofSuezcanal
Alternatives:
(a)(iv),(ii),(i),(iii)
(b)(i),(iv),(iii),(ii)
© (ii) (iii) (iv) (i)
(d)(iii),(i),(iv),(ii).

2. Assertion(A):IndiaexperiencedtradesurplusduringBritishrule.
Reason(R):BritishusedthetradesurplustofinancetheiradministrativeexpensesinIndia.

Alternatives:
(a) BothAssertion(A)andReason(R)aretrueandReason(R)isthecorrectexplanationofAssertion(A)
(b) BothAssertion(A)andReason(R)aretrueandReason(R)is
notcorrectexplanationofAssertion(A)
40
 (c) Assertion(A)istruebutReason(R)isfalse

(d) Assertion(A)isfalsebutReason(R)istrue

3.
Assertion(A):Indiabecameanexporterofprimaryproductsandanimporteroffinishedconsumerand
capitalgoodsproducedinBritain.

Reason(R):Restrictivepoliciesofcommodityproduction,tradeandtariffpursuedbythecolonialg
overnmentadverselyaffectedthestructure,compositionandvolumeofIndia'sforeigntrade.
Alternatives:
(a) BothAssertion(A)andReason(R)aretrueandReason(R)isthecorrectexplanationofAssertio
n(A)
(b) BothAssertion(A)andReason(R)aretrueandReason(R)is notcorrectexplanationofAssertion(A)

(c) Assertion(A)istruebutReason(R)isfalse
(d) Assertion(A)isfalsebutReason(R)istrue.

4. Assertion(A):Theagriculturalsectoraccountedforthelargestshareofworkforce
with approximately75%.
Reason (R): All the states witnessed an increase in dependence of workforce on the
agriculturalsector.
Alternatives:
(a) BothAssertion(A)andReason(R)aretrueandReason(R)isthecorrectexplanationofAssertion(A)
(b) BothAssertion(A)andReason(R)aretrueandReason(R)is notcorrect
explanationofAssertion(A)

(c) Assertion(A)istruebutReason(R)isfalse

(d) Assertion(A)isfalsebutReason(R)istrue

CASE STUDY -1
Inthepre-
colonialera,Indiaexportedmanufactureditemsthatwereinhighdemandallovertheworld.Indiawasredu
cedtoasupplierofrawcommoditiesduringcolonial
authority, such as jute, cotton, indigo, wool, and sugar, and an importer of
completedconsumergoods,suchassilkandwoollenclothingandlightmachinerymadeinBritishfactorie
s. The British government's influence over Indian international trade was
alsoexacerbatedbytheinaugurationoftheSuezCanal.Onlyasmallportionofinternational
tradewaspermitted,andthosenationswereChina,Ceylon(SriLanka),andPersia(Iran).It'sinterestingtoseeth
atthecoloniserscloselywatchedeventhiscommerce.However,itdid
not affect the country's economy. Commodities like food grains, clothes, kerosene hit thecountry
hard with its scarcity. Ironically, this export surplus never made its way to India. Itwas used to
make payments for an once set up in Britain, war expenses of the British
andimportofinvisibleitems.SuchbrutalitieseventuallyledtothedawnofarisingforeigntradeaspectofInd
ia
Questions:

1. HowdidtheBritishpeoplebenefitfromtheSuezCanal'sopening?
Thecostoftransportationwasreduced,anditwassimplertoaccesstheIndianmarket.

41
2. Theexport surplus wasused for the welfareof Indian Industry.(True/False)
Answer.False

3. Name the countries with which India had Foreign Trade.

Answer. Britain, China, Ceylon, Persia.
4. What is the reason for shortage of food grains?
Answer. Commercialization of Crops.

6marksQuestions
1. Discuss the positive contribution made by British in India.

Ans~Following are the contributions made by the British in India:

1. In the history of Indian agriculture, the commercialization of agriculture was significant. It aided in
achieving self-sufficiency in the production of food grains.
2. India was compelled to adhere to free trade, which raised the number of exports.
3. Development of railways and roadways to enhance business.
4.By encouraging the use of English, India was able to communicate with the outside world
5. The division of work led to a noticeable improvement in the monetary system and in production.
CHAPTER 2

INDIAN ECONOMY 1950-1990

 India opted for socialism being inspired from the extraordinary success results of planning of Soviet
Unions.
 Capitalist Economy is an economic system in which the means of production are privately owned for
profit motive, for example, Britain during the Industrial Revolution. The economic decisions are governed
by the market forces- demand and supply. It is also known as market economy.
 Socialist Economy is an economic system in which the means of production are owned by the
government, for example, USSR. The main motive for carrying out economic activities is to enhance
welfare and service motive.
 Mixed Economy is an economic system in which the ownership of means of production is held both by
the government as well as by the private individuals, for example, India is a mixed economy.
 An economic plan is a proposed list of goals that an economy wants to achieve within a specific record
of time. It suggests the optimum ways to utilise the scarce available resources to achieve the enlisted
goals.
 In India, planning is done for a period of five years; therefore, it is called Five Year Plans.
 The Planning Commission was set up in the year 1950 to conduct Five Year Plans with the Prime
Minister as its chairman.

 General Goals of Five Year Plans

 Economic Growth refers to the increase in the country’s GDP over a period of time.
 Modernisationis defined as greater acceptability and adoption of modern techniques and
technology in order to increase the overall productivity and total volume of production of goods
and services.
 Achieving the Status of Self Reliance- It implies promoting economic growth by using a
country’s own resources. This reduces the economic dependence on the foreign countries and the
country becomes self-reliable and self-sufficient.
 Equity refers to equitable distribution of GDP so that the benefits due to higher economic growth
are shared by all the sections of population. Equity implies egalitarian society with social justice.
42
 • Need for Land Reforms
o At the time of independence, Indian agricultural sector was featured with a very low productivity.
 This was due to the prevalence of Land Settlement System namely, Zamindarisystem that exerted
excessive pressure on the cultivators in the form of high taxes.
 Moreover, the land holdings were small in size and scattered. This obstructed the use of modern
farm techniques.
 There were acute inequalities in land holdings.
 Agriculture was basically of subsistence nature, i.e. primarily for self consumption and to earn
livelihood.
 Land ceiling means legislated fixed (maximum) amount of land that an individual may hold. The two
motives behind land ceilings were:
 to promote equality of ownership of land holdings
 to mitigate the concentration of land holdings in fewer hands.
 Due to introduction of use of HYV seeds, modern techniques and inputs such as, fertilisers, irrigation
facilities, and subsidised credit by the government, the production of food grains increased nearly by 25%
in the year 1967-68 . This substantial increase of food grains is known as ‘Green Revolution’.

 Marketable surplus refers to the difference between the total output produced by the farmer and his own-
farm consumption. That is, the amount of the farm production that can be offered for sale in the market.

Marketable surplus = Total farm output produced by farmer – Own consumption of farm output

 Subsidy means availing some important inputs to farmers at a concessional rate that is much lower
than its actual market rate.

 Arguments in favour of Subsidy

 Very important for marginal and landless farmers
 Convinces farmers to adopt modern techniques
 Helps in reducing rural inequalities
 Facilitates farmers to undertake risks

 Arguments against Subsidy

 Can be enjoyed by the potential farmers, thereby resulting in misallocation of resources
 Manipulates the market price, for example, electricity is supplied at concessional rate to farmers
that may lead to wastage of scarce resources.
 Should be provided initially, but should be stopped at a later stage after assessing the
performance.
 Favoursfertiliser industries, which need not to worry about their market share, and so, no attempts
are taken to improve the quality of fertilisers.

 Industrial Policy Resolution 1956 was a declaration of the government that was initiated with the purpose
of rapid industrialisation to achieve high economic growth with social justice. The resolution formed the
basis of second five year plan and a foundation stone to develop the socialist pattern of the society.
The principal elements of IPR 1956 are:
 Industries were classified into three categories:
Category 1: industries established and developed exclusively owned by the state.
Category 2: industries established both by private sector and public sector.
Category 3: remaining industries were left to the private sector.

43
  Industries in the private sector could be established only after obtaining license from the
government.
 Government offered various types of industrial concessions for establishing industries in the
backward areas in order to promote industrialisation and to eradicate regional disparity.

 Small Scale Industries (SSIs) are the small industrial units that can have investment up to five lakh
rupees. The features of SSIs are:
 These serve as means to promote rural development and to reduce regional disparity- as
recommended by Karve Committee.
 As SSIs employ labour intensive techniques, so they can generate newer employment
opportunities.
 SSIs cannot compete with large firms; so they require protection by the government.
 SSIs are given concessions in the form of lower excise duties and easy and cheaper loans.

 Trade Policy: Import Substitution Industrialisation

 It refers to an inward looking trade strategy that aimed at substituting imports with the goods
that can be produced domestically.
Importance of Import Substitution Industrialisation
 Insulated domestic industries from facing stiff competition from the foreign industries.
 Provided domestic industries a protected environment to grow.
 Helped to conserve scarce foreign exchange.
 Provided enough scope to initiate industrialisation process in India.
 Facilitated India to attain self-sufficiency and self-reliance, thereby reducing foreign
dependence.

 Tariffs refer to the taxes imposed on the imported goods. Imposition of tariffs make imports relatively
expensive than the domestic goods, thereby discouraging imports indirectly. Therefore, they help in
reducing excessive burden on the scarce foreign exchange reserves.

 Quantitative Restrictions (QRs) refer to the restrictions in the form of limits or quotas on the amount of
commodities that can either be imported or exported. QRs usually on imports (refers to non-tariff
measures) that are imposed to discourage imports of foreign goods and to reduce Balance of Payment
(BOP) deficits.

 Quotas are defined as the maximum quantity of goods that can be imported or exported by the
domestic producers.

 Achievements of Goals of Planning

 There has been increase in the national income by 4.1 % per annum during the period of
planning.
 Per capita income has risen at the rate of 2 % per annum after the initiation of planning process.
 The rate of capital formation (that depends on the rate of saving and investment) has
significantly increased.
 The initiation of land reforms and substantial technological improvement are the two significant
achievements of planning in the agricultural sector.
 Failures of planning
 Significant Poverty- Approximately 21.8 % of India’s population are still living below poverty
line.

44
  Unemployment- Achievement of jobless economic growth confirms the failure of the plans to
generate sufficient employment opportunities for the growing population.
 High Inflation Rates- The high rates of inflation has exaggerated the economic and income
inequality between the rich and poor.
 Inadequate Infrastructure- The quality of infrastructure, along with its inadequacy, has made it
difficult to penetrate the benefits of economic growth to the majority of population.

-Question Answer

Question 1:- Explain Growth with equity as a planning objective.

Question 2:- Why was public sector given a leading role in industrial development during the planning period.
Question 3:- Why and how was private sectore regulated under the IPR 1956.

Column – I Column – II
A. Land Ceiling i. Increase in production of food grain using high yielding variety
seeds
B. Land reforms ii. Portion of agricultural produce sold in the market
C. Green Revolution iii. Fixing the maximum limit of land holding for an individual.
D. Marketed Surplus iv. Change in the ownership of land (land to tillers)

Answers
A - III B – IV C- I D - II

Column – I Column – II
A. Partition of indiaI 1950
B. setting up of planning commission ii 1947
C. Incorporation of TISCO iii 1881
D. First official census of India iv 1907
Answer :-A - II B – I C - Iv D - III
Read the following passage and answer the questions
Industrial policy resolution 1956 was the clear declaration of the government on the
leading role of public sector in the process of industrialization. This resolution laid
the roadmap of second five-year plan also. In IPR-1956, industries were classified
into three categories. Public sector was given primary role in the industrial
development of the country. Industries in the private sector could be established only
through a license from the government. Main idea of industrial licensing was to
encourage industries in the backward regions of the country. Private sector was
offered many types of industrial concessions for establishing industries in backward
regions like tax holidays and subsidized power supply.
Karve committee (1955) also focused on the role of small-scale industries to achieve
the goal of industrial development. As far as possible, domestic industries were
protected from the foreign competition.
Protection was provided through: heavy imports tariffs and by fixing import quotas.
1. Rapid industrialization was the objective of which five-year plan?
2. Which sector was given primary role on the process of industrialdevelopment of the country?
3. What is the objective of licensing policy?
4. How domestic industries were protected from foreign competition?
Read the following passage and answer the questions

45
Green revolution was one such initiative taken by the government which hasincreased the production of food
grains like wheat and rice. Green revolution waspossible due to the use of HYV seeds, irrigation facilities and
fertilizers. This madeIndia not only self-reliant but also helped it to become an exporter of food grains. Buteffects
of Green Revolution were more prominent in few states like Punjab, Haryana
and Tamil Nadu. It was widened the gap between rich and poor in the ruler India.
1. Identify the element which is not related with green revolution.
a) Improved seeds b) New strategy for agriculture
c) Fertilizers d) Increase in population
2. Use of (HYV/HVY/Organic) seeds were promoted in green revolution.
3. Green revolution was comparatively more successful in which states?
4. Indian economy is marching towards progress but there is a need of improvement in
(primary/secondary/tertiary) sector.

ASSERTION REASON BASED QUESTIONS

1.Assertion (A) The major policy initiatives like land reforms and green
revolution helped India to become self -reliant in food grains productions
Reason (R) The proportion of people depending on agriculture did not decline
as expected.
a) Both Assertion and Reason are true and Reason is correct explanation of theAssertion.
b) Both Assertion and Reason are true but Reason is not correct explanation ofthe Assertion.
c) Assertion is true but Reason is false.
d) Assertion is false but reason is true.
2.Assertion (A): To increase foreign trade, government should resort to reducing tariffrates, giving credit
facilities to the exporters and provide them better infrastructuralfacilities.
Reason (R): Foreign Trade boost economy of the country.
a) Both Assertion and Reason are true and Reason is correct explanation of
the Assertion.
b) Both Assertion and Reason are true but Reason is not correct explanation of
the Assertion.
c) Assertion is true but Reason is false.
d) Assertion is false but reason is true

“Economic Reforms or New Economic Policy – 1991”

Meaning of Economic Reforms or New Economic Policy:-In June 1991, the NarasimhaRao government gave a
new direction to the Indian economy. This direction was implemented in the form of economic reforms across the
country in the form of liberalisation, privatization and globalization (known as the LPG model). Under this new
industrial policy, the government allowed private companies to enter many sectors that were earlier reserved only
for government sectors. The main reason behind the implementation of this new economic policy was the
continuing negative balance of payments (BOP). A new economic policy was adopted, under which a series of
economic reforms were proposed.
Economic reforms refer to a set of economic policies directed to accelerate the pace of 'growth and development'.
The following are the three broad components of the New Economic Policy:
(i) Policy of 'Liberalisation (L)' in place of 'Licensing (L)' for industry and trade.
(ii) Policy of 'Privatization (P)' in place of 'Quota (Q)' system for industrialists. and
(iii) The policy of 'Globalization (G)' in place of 'Permit (P)' for import and export.

Thus, LPG was set to replace LQP in 1991.

2. Elements of New Economic Policy: - These are three, (A) Liberalisation, (B) Privatisation and (C)
Globalisation
46
(A) Meaning of Liberalisation:- Liberation of the economy means freedom of the producing units from direct or
physical controls of the government.
Following reforms were made in it.
1.Industrial sector reforms: a) Abolition of industrial licensing, b) Decrease in the role of public sector,
c) De-reservation of production by SSI, d) Price determination by market forces, e) Import of capital goods
2. Financial Sector Reforms: a) Role of RBI as a facilitator of finance sector b) Establishment of private sectors
Banks c) Foreign investment FDI
3. Tax Reforms: a) Reduction in direct tax b) Reforms in indirect tax- GST c) Simplifying tax paying procedure

4. Foreign Exchange Reforms: a) Devaluation of Rupee b) Flexible foreign exchange rate determination
5. Trade and Investment Policy Reforms: a) Removable of quantity restriction of import and export b) Restriction
of tariff rate c) Removal of licensing procedure for import d) removal of import duty.

(B) Meaning of Privatisation:- This is the process by which the private sector becomes the owner or manages a
government enterprise
Need for Privatisation :- Due to the poor performance of public sector enterprises, the need for privatization was
given great importance. The industrial policy was proposed in 1956 during the Second Five Year Plan, there is no
doubt that during the period 1951-90, India could diversify its industrial base only through the expansion of
public sector enterprises. It was only through this that structural changes could take place and Indian farmers
started moving towards industries for livelihood, due to which the gross domestic product started increasing.
Going forward, gradually most of these industries became a social burden. The ever-increasing losses of these
industries became a headache for the government and leakages, inefficiency, theft and corruption in these
industries increased so much that privatisation became their only solution.
Advantages and Disadvantages of Privatization:-
Advantages of Privatization Disadvantages of Privatization
> Improvement in the size of GDP > Importance of self-interest in place of social
interest
>Improvement in international trade >There will be shortage of public sector undertakings

>Increase in the number of MNCs >Value of goods and services will increase
>Increase in production and productivity >Poor class will have to struggle more
> Increase in investment
(c) Meaning of Globalisation:-Globalisation means to relate the country's economy with the economies of other
countries of the world through free trade, free mobility of capital and labor etc.
Major policy formulas to encourage globalisation of the Indian economy: -
>Enhancement of foreign investment limit >Partial convertibility
>Long Term Trade Policy >Reduction in Tariffs
>Removal of quantitative restrictions
Evaluation of economic reforms or new economic policy:- Its evaluation means its good and bad effect-
New Economic Policy Good and Bad Effects
Good Effects of NEP:- Bad Effects of NEP:-
>Identification of India as an emerging economic >One way prosperity process
power
>Containment of fiscal deficit >Economic colonialism
>Inflation checked >Consumerism spread
>Consumer's supremacy >Agriculture neglected
>Increase in foreign exchange >Urban centralization of development process
>Shifting from monopoly market to competitive >Unemployment
market

47
 >vibrant economy > Fiscal Policy
>Motive of industrial production >Deceleration or slowdown in industrial growth
> Impact of Private Foreign Investment

Practice Questions
A. Multiple Choice Question:-
1. When were the new economic policy or economic reforms adopted?
(A) Year 1980 (B) Year 1991 (C) Year 1990 (D) Year 1995

2. With reference to the Indian experience, controls were imposed by the government:
(A) To stop the expansion of private monopoly farms
(B) To stop the control of the big industrial houses on the financial resources of the country
(C) Both (a) and (b) (d) (D) None of
these

3. Which of the following is an element of the financial sector of the economy?

(A) Banking and non-banking financial institutions (B) Stock exchange market
(C) Foreign exchange market (D) All of the above

4. World Trade Bank has been established in place of which of the following institution?
(A) International Monetary Fund (B) National Bank for Agriculture and Rural Development
(C) Trade and Customs Convention (D) International Bank for Reconstruction and Development

5. Which of the following is an example of an indirect tax?

(A) Goods and Services Tax (B) Wealth Tax (C) Income Tax (D) None of these

6. Which of the following is not a component of privatization?

(A) Purchase of shares of the sector by the government (B) Investment in public sector enterprises
(C) Sale of public sector shares (D) Contraction of public sector

7. How many Maharatna companies are there at present?

(A) 5 (B) 10 (C) 12 (D) 10

8. Which public sector company has recently been given Maharatna status in September 2022?
(A) Indian Railway Catering and Tourism Corporation (B) Non-Banking Financial Company
(C) Bharat Sanchar Nigam Limited (D) Hindustan Aeronautics Limited

Ans:- 1. B 2. C 3. D 4. C 5. A 6. A 7. C 8. B

B. Fill in the blanks:-

1. At present for how many industries it is mandatory to take license. (Five/Ten)

2. When was the Goods and Services Tax implemented in India? (1.07.2017 / 1.01.2020)

3. When was the World Trade Organization established? (1.01.1995 / 1.07.1980)

4. Outsourcing is an important result of the process of ________. (Liberalisation/Globalisation)

48
5. ____________ means giving primacy to 'self interest' over 'social interest'. (Liberalisation/Privatisation)

6. _____________ refers to 9 such profit making enterprises which are compared to the 9 courtiers in the court of
Maharaja Vikramaditya who were distinguished and highly intelligent persons. (Navratnas/Nine Jewels)

7. ___________ refers to the denomination of the value of the Indian Rupee in terms of the currencies of other
countries. (Revaluation/Devaluation)

8. Tax reform is a key component of ___________reform. (Monetary / Fiscal)

उ र:- 1. Five 2.1.07.2017 3. 1.01.1995 4.Globalisation 5. 6.Navratnas

Privatisation
7.Devaluation 8. Fiscal 9.Different

C. Identify the true or false statement:-

1. WTO was established in place of GATT on January 1, 1995, but GATT expired on December 31, 1995. (True /
False)
2. The Reserve Bank of India was established on January 1, 1935 and was nationalized on January 1, 1949. (True
/ False)
3. The program of economic reforms in India was started on 24 July 1991. (True / False)

4. Demonetisation was a major event of the year 2015. (True / False)

5. At present, the number of industries in the public sector has remained only three, of which the first is nuclear
energy, the second is railways and the third is defense equipment. (True / False)

Ans:- 1. True 2. True 3. True 4. False 5.True

ASSERTION AND REASON

In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Select the
correct option from the options given below:

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 and 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.

1 Assertion (A) Under the New Economic Policy, more reliance was placed on market forces.

Reason (R) Excessive government control led to the rise of corruption, undue delay and
inefficiency.
2 Assertion (A) India is emerging as an important external source of the world.

Reason (R) India provides an abundant supply of labor at low wage rates.

49
 3 Assertion (A) After liberalisation, tax evasion has come down due to reduction in tax rates.

Reason (R) Lower tax rate leads to tax-compliance and hence more tax revenue is generated for
the government.
4 Assertion (A) Under the new economic policy, the role of RBI has changed from a facilitator to a
regulator.
Reason (R) Now the interest rate structure, size and pattern of investment is determined by
market forces.
5 Assertion (A) The government has decided to develop Navratnas as international level industries in
their respective areas of industrialisation.
Reason (R) Navratnas were highly efficient profit making public enterprises and income
generators for the government.

ANSWERS:-
1. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
2. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
3. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
4. Assertion (A) is false but Reason (R) is true.
5. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).

Human Capital Formation

Human capital refers to the stock of skills and knowledge gained by a worker through education and experience
to perform labour so as to produce economic value.
Human Capital : Sources Investment in: i) Health ii) Education iii) On-the-job-training iv) Migration
Human Capital and Economic Growth • Enhanced productivity of human capital contributes substantially not
only towards increased labour productivity but also stimulate Economic Growth
Human capital formation and growth are positively correlated
Human Capital Formation Problems : i) High growth rate of population ii) Migration iii) Lack of proper
planning iv) Low level of academic standard v) Inefficient system vi) Poverty
Importance and Objectives of Education:
 Education produces good citizens
 It develops science and technology
 It facilities use of resources in the country
 It expands mental horizon of the people
 It helps in economic development through participation of the people in the process of growth and
development.
 It develops human personality
Problems Relating to Development of education in India i) Large number of illiterates, ii) Inadequate
vocationalisation, iii) Gender bias, iv) Low rural access level, v) Low government expenditure on education.
Important Dates:
Education commission recommendation to spend at least 6% of GDP on education(1964-66)
Tapas Majumdar committee appointed by Indian Government in 1998
‘Right to Education Act’wasenacrted by the Indian government to make free education a fundamental right of all
children in the age group of 6-14 years in 2009
India was declared a ‘Polio Free’ counrty by WHO in 27 th march 2014
The new education policy 2020 envisions a holistic and integrated education approach, focusing on skill
development, multi disciplinary learning and promoting creativity and critical thinking.

50
Multiple Choice Questions (MCQs):
1. The sources of human capital in a country are investment in ______ and _____
2. Which of the following is not a source of human capital formation?
a. education b. healthc. saving d. information
3. Identify, which of the following are asociated with the problem of human capital formation in India?
i) Brain drain iii) Low academic standards
ii) Rising population iv) Changes in social outlook
Alternatives:
a) (i) and (ii) (b) (ii) and (iii) (c) (i), (ii) and iii) (d) (i) and iv)
4. In ……………. , government of India made education free and compulsory for all children between 6-14
years
1991 b) 2009 c) 2014 d) 2017
5. Which of the following organisation regulates the health sector in India?
a) ICMR b) UGC c) AICTE d) RBI
6. In which five year plan importance of human capital recognise:
a) Third b) Sixth c) Seventh d) Eight
Assertion and Reason
7. Read the following statement :- Assertion (A) and Reason (R )
Choose one of the correct alternative given below:
Statement 1. Quality of education is measured in terms of year of schooling and enrolment rates.
Statement 2.Education provide knowledge to understand changes in society and scientific advancements.
Alternatives:
a) Both the statements are true.
b) Both the statements are false
c) Statements 1 is ture, but statement 2 is false.
d) Statement 2 is true, but statement 1 is false.
8. Read the following statement :- Assertion (A) and Reason (R )
Choose one of the correct alternative given below:
Statement 1. Human capital treats human beings as a menas to an end.
Statement 2. In the human development perspective, human beings are an end in themselves.
Alternatives:
e) Both the statements are true.
f) Both the statements are false
g) Statements 1 is ture, but statement 2 is false.
Statement 2 is true, but statement 1 is false.
9. Read the following statements carefully. True or False with a reason.
‘Skill India’ programme launched by the government is an attempt to increase human capitial formation.
10. India has a poor stock of technical manpower.
Ans (1) (Health and Education), (2) C, (3) C, (4) B, (5) A, (6) C, (7) D, (8) A
(9) True, Because ‘skill is an important element of human capital.
(10) False, India has a rich stock of scientific and technical manpower in the world. Also India has taken a
number of steps to improve it qualitatively and ensure that they are optimally utilised.

Very Short Aswer Type questions 1 Marks:

1. Define human capital.
Ans: Human capital refers to the stock of 'skill and expertise’ of a nation at a point of time.
2. Define ‘Human capital Formation’.
Ans: Human capital formation refers to the process of adding to the stock of human capital over time.
3. What are the possible sources of human capital formation?
51
 Ans: Source of human capital formation are: i) Expenditure on education, ii) expenditure on helath, iii) On-
the-job training, iv) study programmes for adults,
v) Migration and vi) Expenditure on information.
4. Why do we observe regional differences in educational attainment in India?
Ans: Regional differences in educational attainment in India can be due to: (i) Regional inequality in incomes
and (ii) disparities in expenditure by government on development of educational facilities.
Very Short Answer Questions for 3 Marks:
1. Human capital formation increases the efficiency of physical capital. How?
Ans: Human capital formation increases the efficiency of physical capital. How?
Ans: a. Human capital formation leads to higher level of skill and expertise. Accordingly, labour force is better
equipped to handle physical capital (plant and machinery). This raises the efficiency of physical capital by way of
higher output per unit input. b. Human capital formation leads to innovation.

2. Differentiate between human capital and human development

Ans: Human capital considers education and health as a method to increase labour productivity whereas human
development considers health and education as important to human well-being. Human capital treats humans as
a means to achieve the objectives whereas human development treats human beings as the objectives in
themselves.

3. Differentiate between physical capital and human capital.

Physical Capital Human Capital
It is tangible and can be easily sold in It is intangible and cannot be sold in the market.
the market.
It depreciates as time passes Depreciation in human capital can be reduced by
making continuous investments in health and
education
It is more mobile between countries It is less mobile between countries

It can be separated from its owner It cannot be separated from the owner

5. Education is considered an important input for the development of a nation.How?

Ans: Education is considered an important input for the development of a nation because:
i) Knowledge and skills: A better educated person has greater skill and knoledge which enhance
productivity and threfore provides a greater opportunity to work and earn higher income.
ii) Adoption of modern technology: Education develops the skills required for understanding and
adopting modern technology. This helps in increasing output and growth of the nation.
iii) Stanndard of living: Education raises the living standard of people by enhance their earning capacity.
iv) Reduction in income inequality: Education enhances the income earning capacity of people from
economically backward sections of the country and thus reduces the inequalities in the distribution of
income.
6. Does , it is essentialfor the government to regulste the fee sturcture in education and health care
institution?
Ans: Yes, it is essentialfor the government to regulste the fee sturcture in education and health care
institution beacause:
Individual consumers of these services donot have complete information about the quality of serviceds and
their costs of fees structure.
The providers of education and health service may acquire monomoly power and may get involved in
exploitation by charging exessive fees.
So, the role of governments is important to ensurethat the private provide of these services adhere to the
standards stipulated by the government and charge the correct fees.
52
7. Discuss the need for promoting women’s education in India.
Ans: Women have always been neglected when it comes to education in India. The access to education
has always been biased towards male population due to our social system which is patriachal.
There is an imminent need or promotion female education in India because of the following reasons.
I) Women education is essential for providing them economic independence and empowering them to
save them from expolitation and domestic violence.
II) Women education is essential in order to raise the social status of woemn. So that the quality of life
of women can be improved .
III) Educating a woman means educating a family. An educated women can inculcate moral values inher
children and can facilitate their education.

8. Discuss the need for on-job training for an employee.

Ans: Role of On-the job training
a) Every organisation often incurs expenditure on proving on the job training to their newly recruited
employees.
b) Such training programmes are provided with a view of generating benefits like increased efficiency,
familiarity with the work environment, better application of theoritcal concepts into practical situations.
9. Explain, how does ‘Investment in Human Capital’ contribute to growth of an economy.
Ans: Human capital formation (‘Investment in Human Capital’) leads to better utilisation of resources as it
enhances their skills,efficieny and work prodictivity. Increase in these factors leads to greater rate of
participation and thus ensure greater production of goods and services. Enhancement in production activity
involves, increase in income, imployment and output of the economy. The increased level of income in the
economy would then be used in greater expenditure on education and health which in turn, leads to Human
capital formation.
10. “Human Capaital Formation gives birth to innovation, invention and technological improvements.” Do you
agree with the given statement? Support your ansswer with valid arguments.
Ans: The given statement is correct. Human Capital formation not only increases the productivity of available
human resourcses but also stimulates innovation andcreates ability to adopt new thecnologies. Investment in
education creates ability to adopt newer technologies, facilities invention and innovation since educated
workforce generally adapt to modern techonologiesand innovation. (Any other valid argument may be)
11. Read the following news report and answer the following questions on the basis of same:
Education is perhaps the most fundamental element in determining a country’s human capital, Most recent
information put India’s adult literacy rate at 73.2 percent.
While the nation has gained huge progress in improving literacy, it is still home to 313million unskilled
population ;59% of them being women, with a purpose toeradicate the root cause, Prime Minister
Narendermodi’s literacy focused on achieving 100% or Total literacy by 2030 and necessary afrangements
were put in place.The agenda was to initate massive literacy projects in the tribal and forestareas,
prisons,slums, etc. with the help of technology. By inculcating technology, quality education could be
imparted in the backward areas with the help of e-book, mobile apps and much more.
Source: Finance Express, July 16,2021
1. Education plays an important role in the development of ___________capital of a country.
2. ‘PradhanLikhnaAbhiyan’ was lauched on International literacy dya to reduce ______________
(literacy, illiteracy) level in the country.
3. By inculcating technbology in literacty projects in______________areas, quality edeucation can be
imparted to unskillsed population.
a) Trible b) forest c) prisons d) all of these
4. With education and training economically weaker sections can be engaged in gainful employment and
________________ (Equalities/inequalities) in the distribution of income can be reduced.
Ans: 1) human 2) illiteracy 3) all of these 4) inequalities
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 RURAL DEVELOPMENT:
In India, majority of the poor people live in rural areas, where they do not have access to the basic necessities of
life. Around 22% of our total population still lives below the poverty line.
• Agriculture with maximum share of rural economy, has grown at a meagre rate of 2.7% in the last fifty
years. During 2007-12, agriculture output has grown at 3.2%.
• The share of agricultural sector to GDP was on a decline and there has been increase in the share of
industrial and service sector. However, the population dependent on agricultural sector did not show any
significant change productive enough to meet all their needs.
• Moreover, after the economic reforms of 1991, the growth rate of agricultural sector decelerated to 3%
p.a. during 1991-2012, which was lower than the earlier years.
 PROCESS OF RURAL DEVELPOMENT:
Process of rural development includes –
(i) Development of Human Resources
(ii) Development of Infrastructure
(iii) Land Reforms
(iv)Alleviation of Poverty
(v)Development of the productive resources
 RURAL CREDIT:
• Credit facilities in the rural areas have contributed a large increase in agricultural productivity and
employment facilities in non-agricultural sectors.
• The government had also provided long term loans which can be repaved in 15-20 years for improvement
of the land, digging tube well, purchase of tractors etc.
• There are some loans which are provided to farmers to celebrate religious ceremonies, marriages for
settlements of old loans and to support the family in case of a crop failure.
• These loans are called as unproductive loans.

 SOURCES OF RURAL CREDIT:

Rural Credit availability can be divided into 2 categories:
1. Non-institution Sources- These are the traditional sources of agricultural credit in India. They include money
lenders, relatives, traders, commission agents and land lords.
2. Institutional Sources- They are cooperative credit, land development banks, commercial banks, regional rural
banks, govt., national bank for agricultural and rural development (NBNR) and also self-help groups.
 Micro finance: is a credit scheme extended to the poor through Self Help Groups (SGHs)
 The Self-Help Groups (SGHs) have been set up to promote thrift in small proportions by a minimum
contribution from each member. From the pooled money, credit is given to the needy numbers to be repayable in
small instalments at reasonable interest rates.
 Agricultural Marketing System: Agricultural marketing is a process which involves assembling, storage,
processing, transportation, packaging, grading and distribution of different agricultural commodities across the
country.
 Measures to Improve Agricultural Marketing
(i) Regulated Markets- The first measure was regulation of markets, to create orderly and transparent marketing
condition. This is organized in order to protect farmers from malpractices of sellers and brokers.
(ii) Cooperative Marketing- Marketing societies are formed by farmers to sell the output collectively and to take
advantages of collective bargaining, for obtaining a better price.
(iii) Infrastructural facilities- Govt. had also provided infrastructural facilities like roads, railways, warehousing,
old storage and processing units.
(iv) Standardization and Grading- Grading And quality control helps farmers to get good price for quality
products produced by them.

54
(v) Minimum Support Price- To safeguard the Interest of the farmers government fixes the minimum support
price for agricultural products like wheat, rice, maize, cotton, sugarcane, pulses etc.
 Defects of Agricultural Market in India: The existing system of Agricultural marketing has no. of defects
the following are some of the defects due to which the marketing system is not properly organized.
(i) Lack of storage facility for food grain and crops has damaged the products either by rats or insects or due to
rain.
(ii) Distress Sale: Most Indian farmers are poor and they have no capacity to wait for better price. They sell the
commodities at whatever the price available immediately. As a result they go for distress sale of their output, to
the village money lenders or traders for poor price.
(iii) Lack of transportation as a result farmer cannot reach nearly mandis to sell their produce at a fair price.
(iv) Long chain of middleman or intermediaries between the cultivator and the consumer will also reduce the
profit of the producer.
(v)There are also other defects like lack of institutional finance, lack of guiding etc. This makes Indian marketing
system disorganized.
 Remedial measures for improvement of agricultural marketing
(i)Extension of storage facilities at the farm level and storage and warehousing facilities in the markets and
consumption centres.
(ii)Establishments of regulated markets.
(iii) Improvement of transport facilities between the village and the mandis.
(iv) Establishment of cooperation marketing societies.
(v) Provision of cheap credit, especially from institutional sources.
(vi)Provision for grading of the produce to ensure good quality to the consumers and better prices for the
producers.
(vii) Prompt supply of marketing information.
 Diversification of Agricultural Activity: This means the excess of people in agriculture can be given
gainful employment in some other allied activities in agriculture and non-farm activities. This is done in order to
overcome poverty, improve employment and make rural agricultural people fully employed. Diversification
includes 2 aspects:
(i) Diversification of crop production- This involves shift from single cropping system to multiple cropping
system. This also involves shifting cropping pattern from food grains to cash crops. The main aim is to promote
shift from subsistence farming to commercial farming.
(ii)Diversification of Productive Activities- As agricultural is already overcrowded the major portion of the
increasing labour force needs to find alternate employment opportunities in other non-farm sectors. This will
provide alternate sustainable livelihood and would raise the level of income. Some of the non- farm activities are
animal husbandry, dairy farming, fishers, horticulture, agro processing industries, food processing industries
leather industry, tourism etc. These sectors have the potential but they lack infrastructure and other financial
support.
 Operation flood initiated by Sir VERGHESE KURIEN, is a system, whereby all the farmers can pool
their milk produce according to different grading and the same is processed and marketed to urban centers
through cooperatives.
 The period of 1991-2003 is known as Golden Revolution because during this period, the planned
investment in horticulture became highly productive and the sector emerged as a sustainable livelihood option.
 Role of IT Industries in the development of agriculture
(i) Information Technology has revolutionized many sectors in Indian economy. There is a broad agreement that
IT will play critical role in achieving sustainable development and food security in the 20th century.
(ii) Through proper information and software tools, govt has been able to predict area of food insecurity and
vulnerability to prevent or reduce the livelihood of an emergency.
(iii) It also has a positive impact on the agricultural sector as it circulate information regarding technologies and
its application prices, weather and soil condition for growing different crops.
(iv)This has increased the knowledge about agriculture.
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(v)The aim for increasing the role of information technology is to make ever village a knowledge Centre, where
IT provides a sustainable option of employment and livelihood.
 Sustainable Development: It is the development which aims to develop the present generation without
affecting the quality of life of future generation. Sustainable development does not prohibit the use of any
resources, but aims to restrict their use in such a way it is left for the future generation.
 Organic Farming
(i) Organic farming is the process of producing food naturally.
(ii)This method avoids the use of synthetic chemical fertilizers and genetically modified organisms. (iii)It is very
eco-friendly and very essential for sustainable development. It has a zero impact on environment.
MULTIPLE CHOICE QUESTIONS
1. Rural development means:
A. Providing education to rural people B. Providing health facilities to rural people
C. Development of agriculture D. Which raises quality of life or standard of living of rural people 2.
Rural people require long term loans________________________.
A. To purchase agriculture machinery B. To buy fertilizers and seeds
C. To improve the land D. All of the above
3. Rural people require short term loans__________________________.
A. To buy factors and cattle B. To pay old debits
C. To meet consumption expenditure D. All of the above
4. Rural marketing is related to_______________________________.
A. Regulated markets B. Storage
C. Transportation Less use of pesticide D. All of the above
5. Organic farming is very useful due to _________________________.
A. Less use of pesticides B. Less use of insecticides
C. Improvement in soil fertility D. All of the above
6. Cow dung, urine, residuals of fruits, mobility of organic nutritious elements are trusted by farmer under
________________.
A. Organic farming B. Farming
C. Land holding D. Distress farming
7. Regional rural banks contribute in institution credit_____________________________.
A. 32% B. 22%
C. 12% D. 60%
ANSWERS :
1.(A) 2.(A) 3.(C) 4.(D) 5.(D) 6 .(D) 7.(C)
ASSERTION AND REASON BASED QUESTION
1. ASSERTION (A): Rural development is an action plan for complete and comprehensive development of rural
area.
REASONING (R): In required to increase the standard of living of Indians as two third of the population of India
lives in rural area.
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 and 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: (a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A)
CASE BASED QUESTIONS
1. Read the following News report :
The central government will spend Rs. 9800 crores on livestock development over the next five years in a bid to
leverage almost Rs. 55000 crore of outside investment into the Animal Husbandry Sector. It would do this by
merging a slew of schemes of the Department of Animal Husbandry and Dairying into three main programmes,
focused on indigenous cows and dairy development, livestock health and infrastructure development, an official
56
statement said. The Cabinet Committee on Economic Affairs approved the implementation of the special
livestock sector package by revising and realigning various components of the existing schemes in order to boost
growth and make animal husbandry more remunerative for the 10 crore farmers engaged in it.
Answer the following questions on the basis of above Paragraph :
1) Livestock production provides ------------- for the family without disrupting other food producing activities
(a)Increased stability in income (b) food security
(c)transport and fuel (d) all of these
Answer: (d) all of these
2) The central bank undertakes to invest on livestock development in ----------- (horticulture/ animal husbandry)
sector
Answer: animal husbandry
3) State one limitation of livestock sector in India
Answer: The livestock productivity is quite low as compared to other countries
QUESTIONS AND ANSWERS :
1. Discuss the importance of credit in rural development.
Ans: In agriculture due to long time gap between crop sowing and realisation of income, farmers are in strong
need for credit. Farmers need money to meet initial investment on seeds, fertilizers, implements and other family
expenses of marriage, death, religious ceremonies, etc. So, credit is one of the important factors, which contribute
to agricultural production. An efficient and effective rural credit delivery system is crucial for raising agricultural
productivity and incomes.
2. Why is agricultural diversification essential for sustainable livelihoods?
Ans : Agricultural diversification is essential for sustainable livelihoods because:
(i): There is greater risk in depending exclusively on farming for livelihood;
(ii): To provide supplementary gainful employment to rural people and to enable them to overcame poverty by
earning higher level of income.
3. What do you mean by agricultural marketing?
Ans :Agricultural marketing is a process that involves assembling, storage, processing, transportation, packaging,
grading and distribution of different agricultural commodities across the country.
4. Explain the term ‘Golden Revolution’.
Ans :The period of 1991-2003 is known as ‘Golden Revolution’ because during this period, the planned
investment in horticulture became highly productive and the sector emerged as a sustainable livelihood option.
5. Why have self-help groups (SGHs) been set up?
Ans : The self-help groups (SGHs) have been set up to promote thrift in small proportions by a minimum
contribution for each member. From the pooled money, credit is given to the needy members to the repayable in
small installments at reasonable interest rates.
QUESTION (6mark)
6. What do you mean by rural development? Bring out the key issues in rural development.
Ans :Rural development refers to continuous and comprehensive socio-economic process, attempting to improve
all aspects of rural life.
(i) Development of human resource: The quality of the human resource need to be improved by giving proper
attention to literacy and better health facilities.
(ii)Development of Infrastructure: It involves improvement in electricity, irrigation, credit, marketing and
transport facilities.
(iii)Land Reforms:
It includes:
(a) Elimination of exploitation in land reforms;
(b) Actualization of the goal of ‘land to the tiller’;
(c) Improvement of socio economic condition of rural poor by widening their land base;
(d) Increase agricultural productivity and production.

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(iv) Alleviation of Poverty: It includes taking serious steps for alleviation of poverty and bringing significant
improvement in living condition of weaker sections.
(v) Development of the productive resources of each locality to enhance opportunities of employment.
7. Explain the steps taken by the government in developing rural markets.
Ans :The steps taken by the government in developing rural markets, including the following measures:
(i) Regulated market: Regulated markets have been organized with a view to protect the farmers from the
malpractices of sellers and brokers .This policy benefited farmers as well as consumers.
(ii) Infrastructures Facilities: The government aims to provide physical infrastructure facilities like roads,
railway, warehouses,godowns, cold storages and processing units.
(iii)Cooperatives Marketing :The aim of cooperatives marketing is to realize fair price for farmers products
.Under this marketing societies are formed by farmers to sell the output collectively and to take advantage of
collective bargaining in order to obtain better price.
(iv) Different policy instruments: in order to protect the farmer , the government has initiated the following
policies:
(a) Minimum support prices (MSP): to safeguard the interest of farmers, government fixes the minimum support
prices, which is regarded as an offer price, at which the government is willing to buy any amount of grains from
the farmers. (b ) Maintenance of buffer stocks: The food corporation of India (FCI) purchases wheat and rice at
the procurement prices , to maintain buffer stock . Buffer stock insure regularity in supply and stability in prices.
(c) Public distribution system (PDS): PDS operates through a network of ration shops and fair price shops , in
which essential commodities like wheat , rice, kerosene, etc. are offered at a price below the market price to the
weaker section of the society.

CHAPTER - 7
EMPLOYMENT: GROWTH, INFORMALISATION AND OTHER ISSUSES
IMPORTANT TERMS:-
1. Economic Activities refers to all those activities which are undertaken to earn some monetary reward in return,
e.g., teacher teaching in a class.
2. A worker is an individual who is in employment to earn a living.
3. Worker Population Ratio is the total number of workers divided by the population. It is in percentage form.
4. Self-Employed are the people who are engaged in their own business/profession.
5. Casual-wage labourers, Persons who are casually engaged in other’s farm or non-farm enterprises and get their
wages according to the work contract (daily/periodically).
6. Regular salaried employees are also called “wages employees.” Those workers who work in other’s enterprises
(farm or non-farm) on wage or salary on a regular basis.
7. When an economy produces more good s and services without generating employment opportunities, it is
jobless growth.
8. Casualisation of workforce refers to a situation when the percentage of casually hired workers in the total
workforce tends to rise over time.
9. When an individual is ready and willing to work at the prevailing wages rate, but he does not get the work to
do, then he is known as unemployed.
10. Disguised unemployment refers to a situation when more people are engaged in a production activity than
actually required, i.e., there are surplus people involved.
11. Some recently launched campaigns by the government of India to generate employment opportunities are
skill India, make in India and start-ups.

Multiple Choice Question:

1.Formal sector includes all those enterprises which employ
a) More than 10 workers b) 10 workers c) Both (a) and (b) d) Neither (a) and (b)
2. Specific programmers aiming at generation of self-employment:
a) Rural employment generation programmer b) SampoornaGrameenRozagYojana
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c) MNREGA c) None of these
3. Those who work in their won establishment using their own resources are called______________
a) Hired workers b) Casual workers c) Regular workers d) Self-employed

3 MARKS QUESTIONS
1. What makes casual labourers more vulnerable.
Ans. The casual labourers do not get regular income; they don’t have any protection or regulation from the
government and have no job security. They also lack social benefits which permanent workers get. This makes
the casual workers vulnerable.
3. How does jobless growth happen?
Ans. Jobless growth implies an overall acceleration in the growth rate of GDP in the economic which is not
accompanied by a commensurate expansion of employment opportunities. This means that in the Indian
economy, without generating employment we have been able to produce more goods and services.
The gap between growth rate of GDP and employment has particularly widened after the reforms in 1991.
5. “Though India has witnessed slow growth of employment, yet people cannot remain completely unemployed
for very long time in India.” Explain.
Ans. In India, people cannot remain unemployed for very long time because their desperate economic condition
does not allow them to be so. They accept job that nobody else would do, unpleasant or dangerous jobs in
unclean, unhealthy surroundings.
7. What activities you would suggest to generate employment in rural areas.
Ans. Suggestion for increasing employment opportunities:
Employment can be generated by the development of non-farm activities like reclamation work, machine
repair, rural transport services, certain of public assets, construction etc.
Diversification of activities
Development of village handicraft and cottage industries as these have a larger potential for absorbing
labour force.
Encouraging the informal sector.
8. Briefly explain:
(a) Disguised unemployment
(b) Seasonal unemployment
Ans.(a) Disguised unemployment. Disguised unemployment is typical phenomenon of Indian agriculture, where
more people are working of a piece of land than required. Theydon not contribute to productive work and when
withdrawn, do not result in a fall in output.
(b) Seasonal unemployment. Seasonal unemployment is found primarily in agriculture sector where people
do not get work for all the months in the year, due to the seasonal character of agriculture. During this time, they
may move to urban areas in search of casual employment.
10. Which are the sources of data available on employment in India.
Ans. There are three sources of data on unemployment:
i) Reports of Census of India
ii)National Sample Survey Organisation’s - It Reports Employment and Unemployment situation
iii) Directorate General of Employment and Training, It provides Data of Registration with Employment
Exchanges.
6 marks questions
1. ‘The nature of employment in India is multifaceted.’ Elaborate.
Ans. The above statement about the employment in India is absolutely correct.
This is mainly because of the variation in duration of employment. There are some of people who are
employed throughout the year, whereas there are others who are employed for only a few months and some get
work for only very few days in a year.

59
 We have rural workers and urban workers. In India a majority of the workers live in a rural areas , so their
proportion to the workforce is higher than their urban counterparts. The rural worker constituted about ¾ of the
total workforce of 460 million in 2004-2005.
Another noticeable feature is that 70% of the workers are men and the rest are women.
Women workers are 1/3 of the rural workforce and they are 1/5th of the urban workforce in the urban
areas.
Many workers do not get fair wages or payment for the work rendered by them i.e., they are underpaid
and thereby exploited by their employers.
In some areas women are neither paid in cash/kind, so they are not treated as workers, especially in doing
their domestic work. But the economist are of the opinion that they should treated as ‘worker’.
2. Discuss briefly the concept of ‘Informalisation of workforce’ in India.
Ans.Informalisation of workforce refers to a situation wherein there is a continuous decline in the percentage of
workforce in the formal sector and a simultaneous rise in the percentage of workforce in the informal sector.
In India, informalisation of workforce is a recent phenomenon. Growth and development generally leads to rise in
the number of individuals employed in the formal sector and fall in the number individuals employed in the
informal sector. However, in India, there has been a reversal of this trend. Estimates reveal that nearly 93% of the
workers in India are engaged in the informal sector, while only 7% engaged in the formal sector. Some argue that
this increase in the extent of informalistion is result of the reforms of 1991 which transformed India from a
“socialist” economy to a “market” economy.
In the end, we can say that workforce in India increasingly becoming informalised.
3. What is unemployment? Explain any three consequences of unemployment in India.
Ans. Unemployment refers to situation all those who, owning to lack of work, are not working, but either seek
work through employment exchange, intermediaries, friends or relatives or by making application to prospective
employers or express their willingness or availability for work under the prevailing condition of work and
remuneration.
The consequences of unemployment in India are:
Unemployment are not able to meet their financial obligations. So, this may lead to decline in their
standard of living.
Unemployment hampers the economic as well as the social status of society. Precious time lost in
unemployment can never be compensated.
Underemployment is one of the serious consequences of unemployment. As on losing jobs people are
compelled to take up jobs which don not fit their skill, experience and qualifications.
4. Discuss the growth and changes in workforce participation rate in formal and informal sector.
Ans. As a economy grows, more of more workers should became formal sector workerand the proportion of
workers engaged in the informal sector should decrease. But in India, the situation is very discouraging.

Changes in workforce in formal andInformal sector from 2011-12 to 2017-18 (%)

Sectors 2011-12 2017-18
Informal Sector 94 90.7
Formal Sector 6 9.3
Total 100 100
The above table shows only 6% of people are employed in the formal sector and rest 94% are in the informal
sector. But in 2017-18, 9.3% people are engaged in formal in sector and 90.7% are in informal sector.
This is due to failure of formal sector in generating employment. India started paying attention to
enterprises and workers in the informal sectors with the efforts of international labour organization. The Indian
government has initiated the modernisation of informal sector enterprises and provision of social security
measures to informal sectors workers.
5. Explain the concept of employment. with help of suitable examples.
Ans. The concept of ‘employment’ can be looked upon from various angles.
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 Self-employment is a phenomenon related to the workers who own and operate their enterprise to earn
their livelihood.
Casual wage employment refers to a phenomenon where the workers are casually engaged in someone
else’s farm or project, daily wage earners.
Regular employment refers to a phenomenon where workers are engaged by someone or by an enterprise
(Public sector/private sector) and are paid their wages/salary on regular basis. For example, people are working
on a permanent basis in an enterprise/school etc.
6. Define unemployment. Explain at least three forms of unemployment. Also explain the economic
consequences of unemployment.
Ans. NSSO defines unemployment as situation in which all those who, owning to lack of work, are not working,
but seek work either through the employment exchanges, intermediaries, friends or relatives or by making
application to prospective employers or express their willingness or availability for work under prevailing
condition of work and remuneration.
Forms of unemployment:
Open unemployment refers to that situation wherein although the worker is willing to work and his
necessary ability to work yet he does not get work. He remains unemployed for full time and fail get any work,
casual or full time.
Disguised unemployment is typical of Indian agriculture where more people are working on a piece of
farm than are required. They don not contribute to productive work and when withdrawn, do not result in a fall in
output.
Seasonal unemployment is found primarily in the agriculture sector where people do not get work for all
the months in the year due to the seasonal character of agriculture. During this time, they may move to urban
areas in search of casual employment.
Economic consequences of unemployment:
Unemployed individual have to go through a tight economic crunch. They are unable meeting their
financial obligations. This may lead to a declined in their standard of living. Unemployment hampers the
economic as well as the social status of people. The period lost in unemployment can never be compensated.
Underemployment is one of the serious consequences of unemployment. On losing jobs, people are
forced to take up jobs that do not fit their skill, experience and educational qualification.
7. Explain the main causes of unemployment in India.
Ans. The main causes responsible for unemployment in India are:
Rapid growth of population in the economy has been a major cause. As a matter of fact the numbers of
unemployed have actually increased overtime rather than decreasing.
Rate of economic growth has been quite slower than what was anticipated, basically because of faulty
planning.
Shortage of financial resources has been a big hindrance in employment generation. Further this had been
augmented by the increasing control of the government for many years.
8. Explain any three different types of unemployment prevailing in our economy.
Ans. The main types of unemployment prevailing in our economy are:
Open unemployment refers to a phenomenon when people go hunting for jobs to the employment
exchanges, offices, factories, schools etc. and give their bio-data. In the rural areas do not go asking for job but
they stay at home when there is no work.

Disguised unemployment is a common of unemployment in rural India. Now explaining this concept with
the help of an example.
Suppose in a farm of 5 acres if 2 hired workers and 4 sons of a farmer are employed. But the actual need is for 2
hired workers and 2 sons of the farmer only. Thus the remaining 2 sons of the given farmer actually do not
contribute productively so they are not required on the farm. Thus they are disguisedly unemployed.

Seasonal unemployment is found mostly in the rural areas because the work in agriculture is ‘seasonal’.
61
When there is no job to do on farms i.e. off-season, rural people migrate to urban areas looking for jobs. It is one
of the commonest form of unemployment found in India.

Case-Based Questions
9. Read the following case study carefully and answer the questions that follow.
There has been change in the structure of workforce in India. Newly emerging jobs are found mostly in the
service sector. The expansion of the service sector and the advent of high technology now frequently permit a
highly competitive existence for efficient small scale and individual enterprises or specialist workers side by with
MNCs ‘Outsourcing’ work is becoming a common practice.

Define the term ‘Workforce’.

Ans. Workforce refers to the number of persons actually working and does not account for those who are willing
to work but not able to get any work.
Which sector is taking a lead over primary sector and why?
Ans. Tertiary or service sector because people in urban areas are becoming increasingly conscious of their
quality of life, spending the bulk of their income on a variety of services.

To find number of unemployed persons, what is to be subtracted from labour force?

Ans. Workforce.

10. Read the following case study carefully and answer the questions that follow.
Labour Force Participation Rate (LFPR) is a measure of the proportion of the country’s population that is
engaged actively in the labour market, either by working or seeking work. It provides an indication of the size of
the supply of labour available to engage in the production of goods and services. The gap between average annual
growth of labour force and employment growth provides hints towards increase/decrease in the existing stock of
unemployment people. Work Participation Rate (WPR) is a measure of the proportion of the country’s labour
force who is engaged in work. It provides information on the ability of the economy to generate employment.

What is the main difference between Labour Force Participation Rate and Work Participation Rate?
Ans. Labour Force Participation Rate account for those who are willing to work but actually not working,
whereas Work Participation Rate does not account for those who are willing to work but actually not working.
Give the formula to calculate Participation Rate?
Ans. Participation Rate = (Total Workforce)/(Total Population) x 100
State whether the given statement is true/false.
“People who are not willing to work at existing wage rate are considered as unemployed.”
Ans.False.

Environment And Sustainable Development

Concept
Environment includes water air and land and the relationship inter relationship which exist among and
between water air land and human beings and other creatures plans microorganisms and properties.
Significance of environment
o Environment Offers Resources for Production.
o Environment Sustains Life.
o Environment Assimilates Waste.
o Environment Enhancers Quality of Life
Environmental crisis the reasons
o Carrying capacity of it refers to the state of balance between the rate at which natural resources are
exploited and the rate at which these resources are regenerated.

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 o Absorptive capacity of environment it refers to ability of the environment to absorb waste
occurring due to production and consumption activities in the economy.
o Environmental crisis occurs when carrying capacity of the environment is challenge through
excessive exploitation of natural resources or when generation of waste exceeds the absorptive
capacity of environment.
Causes of Environmental Crisis
o Population Explosion
o Widespread Poverty
o Increasing Urbanization.
o Increasing Use of Insecticides, Pesticides and Chemical Fertilizers.
o Rapid Industrialization.
o Multiplicity of Transport Vehicles.
o Disregard for the Civic Norms.
The major reasons for emission of greenhouse gases is: (i) burning of coal and petroleum product (emitting 〖CO
〗_2, methane, nitrous oxide), (ii) deforestation leading to increase in the amount of 〖CO〗_2 in the
atmosphere, (iii) increased cattle production and animal waste.
Kyoto protocol was signed in 1997 at a UN Conference on Climate Change held in Kyoto, Japan. The
agreement focuses on reductions in emissions of greenhouse gases by industrialised nations.
Ozone Depletion
This refers to reduction in ozone (a protective layer) in the stratosphere. This occurs going to the
excessive presence of chlorine and bromine compounds. As ozone depletes, there is a greater ultraviolet radiation
reaching the Earth which is a dangerous to living organisms.
State of environment in India
India certainly is in the midst of environmental crisis.
o Natural endowment is getting excessively exploited, exceeding the rate of its regeneration.
o Production and conception waste are being generated beyond the observation capacity of the
environment and
o Air pollution water pollution and sound pollution are picking up to the alarming limits.

 Principal concerns of environmental degradation in India

o Degradation of land,
o Air pollution (particularly in the form of vehicular pollution in urban areas),
o Water pollution and management of fresh water,
o Loss of biodiversity, and
o Solid waste management.
Sustainable Development
According to Brundtland commission (in 1987) is, “Sustainable development is development that makes
the needs of the present generation without impairing/reducing the ability of future generations to meet their own
needs”.
The competitive process of growth and development has led to environmental degradation and environmental
pollution to an alarming extent.
Strategies for Sustainable Development
Sustainable development doesn't mean a check on the existing pace of economic growth.
It only means judicious or optimum utilization of resources in a manner such that the pace of growth is sustained
without challenging the ability of the future generation to grow and prosper
Reliance on conventional source of energy
LPG, Gobar gas in rural areas: The Government of India has initiated UjjwalaYojana focused on
providing subsidized LPG to women below poverty line. In addition, Gobar gas plants are being provided
through easy loans and subsidy.
CNG in urban areas
63
 Wind power: Wind power can be harnessed without any adverse impact on the environment.
Solar power through photovoltaic cells: Solar energy and its conversion into electricity is an effective
answer not only to the problem of economic growth but also to the problem of sustainable development.
Mini hydel plants: Mini hydel plants are an environment friendly way to generate electricity specially in
the mountainous religions.
Traditional knowledge and practices
Traditional farming practices
Traditional health system of India
Biocomposting: The use of biofertilizers is also being promoted as a part of the skin scheme.
Biopest Control: Neem and their use is being encouraged. Mixed cropping and crop rotation are also
being encourage to minimize the pest attack.
Montreal protocol is the multilateral environmental agreement signed by the members of United Nations
that regulates the production and consumption of chemicals like carbon tetrachloride, trichloroethane (also known
as methyl chloroform), and bromine compounds known as halons referred to as ozone depleting substances.
Chronology of significant events
1. 1974: Government setup Central Pollution Control Board (CPCB)
2. 1986: Environment Protection Act
3. 1992: India signed Montreal Protocol
4. 2016: PradhanMantriUjjwalaYojana (PMUY) was introduced
Multiple Choice Question
1.UjjwalaYojana is focused on promoting use of:
a) LPG b) CNG c) Gobar gas d) Solar power
Ans: (a)
2. Mini-hydel plants are good for environment because:
a) they generate electricity only for local areas
b) the do not change the land use pattern
c) they rely on the perennial streams
d) Both (a) and (c)
Ans: (a)
3. The scheme focused on bio composting is:
National mission on sustainable agriculture
National mission on organic farming
National mission on bio composting
National mission on traditional agriculture practices
Ans: (a)
4. Which of the following is a strategy for sustainable development (1)
a) CNG in urban areas
b) Reliance on non- conventional sources of energy
c) Output efficient technology
d) Both (a) and (b)
Ans: (d)
5. Which of the following statements is not correct with regards to sustainable development?
a) Sustainable development aims to ensure that present needs are fulfilled without compromising ability of future
generations to meet their own needs.
b) A development path is sustainable if a stock of overall capital assets fall over time
c) The term sustainable development has its origin in the iucn 1980 world commission strategy report
d) Sustainable development is a development which ensures growth of agriculture manufacturing and service
sector to meet these needs
Ans: (b)
6. Carrying capacity implies...
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i) Resource extraction should remain below the rate of resource regeneration
ii) Resource extraction should remain above the rate of resource regeneration
iii) Generation of waste should remain within the absorption capacity of the environment
iv) Generation of waste should be more than the absorption capacity of the environment
a) (i) and (iv) b) (i) and (iii) c) (ii) and (iii) d) (ii) and (iv)
Ans: (b)

7. Assertion reasoning questions:

Read the following statement Assassin (A) and Reason (R). Choose one of the correct alternatives given below:
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 and Reason (R) is notthe 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.

(i) Assertion (A): India supports approximately 17 per cent of the world's human and 20 per cent of livestock
population on a mere 2.5 per cent of the world's geographical area.
Reason (R): The high density of population and livestock along with the competing and diversified uses of land,
exert and enormous pressure on the country’s finite and resources. (1)
(ii) Assertion (A): People across the globe are facing a series of environmental challenges and it is feared that it
can adversely effect the quality of life of future generations.
Reason (R): In recent past, there has been excessive exploitation of natural resources and excessive generation of
wastes in order to accelerate the pace of economic growth. (1)
8. Define ‘Sustainable Development’.
9. Define ‘Carrying capacity of environment’.
10. Define ‘Absorptive capacity of the environment’.
11. Define ‘Bio- Compositing’.
12. Recently Indians have drifted away from the traditional knowledge and practices and caused large scale
damage to environmental. Explain how, adopting the traditional practices can be helpful in achieving the
objective of sustainable development?
13. India has been ranked 120 out of 165 countries according to Sustainable Development Goals Index and
Dashboards Report (2021). Suggest any four measures to improve India's performance on the parameters of
sustainable development.
14. Elaborate the picture:

DEVELOPMENT EXPERIENCE – A COMPARATIVE STUDY

(1) GDP Growth: - Growth story of China :-
I. In 2017, GDP in China was estimated to be 12.40 trillion US Dollars
II. China was achieved the distinction of 2nd largest economy in the world
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III. China achieved a breakthrough in GDP growth in early 1980’s, it increased from 4% per annum to 10%
per annum ,due to :- (a) Shift from a centrally planned economy to a controlled market economy (b)
Focus on export-related domestic production (c) Great leap forward(GLF) campaign (d)) Availability of
cheap labor force .
IV. Quantum jump in FDI was achieved through :- (a)China established SEZ (special economic zones) (b)
100% FDI (c) Increase domestic investment through GLF (v) Largest exporter in the global market .
Reasons for recent past GDP growth in China has slowed down: -
I. Slowdown in the global economy
II. Growth of domestic demand of China Slowdown
III. Corruption and economic crimes have tended to rise over time
IV. Chinese government is battling with the problem of environmental degradation.
Growth story of India:-
(i) In 2017, GDP of India was estimated to be 2.43 trillion US Dollars
(ii) India was achieved the distinction of 5th largest economy in the world
(iii) The GDP growth in India showed a substantial rise only after 1991, the year when new economic
policy was launched, The basic components of NEP are : (a) A massive shift towards privatization
(b) A transformation towards Liberalization (c) Greater reliance on export promotion rather than
import substitution (d) Greater reliance on FDI rather than domestic investment
(iv) The period 1991-2017, GDP growth rate of India increased to around 7% per annum. Reasons for
recent past GDP growth in India has slowed down: (a)High rate of inflation (b)Corruption and
economic crimes have tended to rise over time Policy (c) paralysis of the government, owing to
political instability (d) Drought of FDI, owing to poor credit rating of Indian economy.
Pakistan:
Pakistan: That Pakistan adopted various economic policies and these many Similarities with India. Pakistan also
follows the mixed economy model with co-existence of public and private sectors.
Growth story of Pakistan:-
I. In the late 1950s and 1960s, Pakistan introduced a variety of regulated policy framework (for import
substitution-based industrialisation).
II. In the 1970s, nationalisation of capital goods industries took place.
III. Pakistan then shifted its policy orientation in the late 1970s and 1980s when the major thrust areas were
denationalization and encouragement of private sector.
IV. In1988, reforms were initiated in the country.
V. In 2017, GDP of Pakistan was estimated to be 27.1 billion US Dollars
VI. Pakistan achieved a breakthrough in GDP growth in the mid-80’s it was as a consequence of economic
reforms, focusing on FDI.
Reasons for economic outlook in Pakistan turned to disappointing:-
(a)Pakistan has been gripped by the war of terror
(b) Corruption and political instability are the other factors.
Conclusion:-
(i) China has outpaced both India and Pakistan with regard to GDP
(ii) India has performed better than Pakistan
(iii) The relative success of China is credited to political stability in China.
(2) DEMOGRAPHIC INDICATORS:-
If we look at the global population, out of every six persons living in this world, one is an Indian and another a
Chinese. We shall compare some demographic indicators of India, China and Pakistan.
(i) Size of population :- (a) the population growth as being the highest in Pakistan, followed by India and China.
(b)India and China together are a habitat for 38% of the world’s population (c) China with nearly 1371 million
people (in 2015 ) is a habitat for nearly 20% of world population (d) India with
89 nearly 1311 million people (in 2015 ) is a habitat for nearly 18% of world population(e) Scholars point out
the one-child norm introduced in China in the late 1970s as the major reason for low population growth.
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(ii) Growth rate of population: -Annual growth rate of population in 2015 - India 1.2, Pakistan 2.1 and
China 0.5%, population size in India may soon exceed in China. (iii) Density of population: - It is estimated to be
146 persons per square kilometer in China, 245 persons per square kilometer in Pakistan, 441 persons per square
kilometer in India. (iv) Sex Ratio:- It is estimated to be 929 per thousand in
India, 941 per thousand in China and 947 per thousand in Pakistan. (v) Urbanisation :- In India, 33 % of
population is urbanized compared with 39 % in Pakistan and 56% in China.
(3)SECTORAL DISTRIBUTION OF OUTPUT (GROSS DOMESTIC PRODUCT AND SECTORS):
Observations of the sectoral distribution of output and employment in these nations:
1. In both India and Pakistan, the contribution of agriculture to GDP was 17 and 25 per cent, respectively, but the
proportion of workforce that works in this sector is more in India. In
Pakistan, about 42 per cent of people work in agriculture, whereas, in India, it is 43 per cent.
2. The sectoral share of output and employment also shows that in all three economies, the industry and service
sectors have less proportion of workforce but contribute more in terms of output.
3. In China, manufacturing and service sectors contribute the highest to GDP at 43 and 48 per cent, respectively
whereas in India and Pakistan, it is the service sector which contributes the highest by more than 50 per cent of
GDP.
4. The contribution of industries to GDP is at 30 per cent in India and 21 per cent in Pakistan.90
INDICATORS OF HUMAN DEVELOPMENT: -
Important indicators of human development are as : (a)Life expectancy -higher the better (b)Adult literacy rate -
higher the better (c)Percentage of population below poverty line – lower the better (d)Infant mortality rate - lower
the better (e)Maternal mortality rate - lower the better (f) Percentage of population having access to improved
sanitation higher the better (g) Percentage of population having access to improved water sources - higher the
better(h) Per capita GDP - higher the better. Based on indicators, a composite index is constructed, called
Human Development Index – Higher value of HDI points to a higher rank and higher level of growth and
development for a country.
China is moving ahead of India and Pakistan. This is true for many indicators —
1. Income indicator such as GDP per capita, or proportion of population below poverty line or health Indicators
such as mortality rates, access to sanitation, literacy, life expectancy or malnourishment.
2. Pakistan is ahead of India in reducing proportion of people below the poverty line and also its performance in
sanitation.
3. Maternal mortality: In China, for one lakh births, only 27 women die whereas in India and Pakistan, about
174 and 178 women die respectively.
4. The proportion of people below the international poverty rate of $ 3.20 a day, India has the largest share of
poor among the three countries. 91
5. Surprisingly all the three countries report providing improved drinking water sources for most of its
population.
6. Higher HDI ranking of China has performed better than India and Pakistan .HDI rank 2016-17 in China was 86
ranks, India was – 130rank and Pakistan was 150 ranks out of 189 countries in the world.
DEVELOPMENT STRATEGIES — AN APPRAISAL
COMMON SUCCESS STORY OF INDIA AND PAKISTAN:-
(i) Both India and Pakistan have succeeded in more than doubling their per capita incomes
(ii)Food production has successfully kept pacewith the rise in population
(iii)Food self- sufficiency has been accompanied with improved nutritional status
(iv) A well-developed modern sector
(v) Absolute poverty has been reduced.
COMMON FAILURES STORY OF INDIA AND PAKISTAN:-
(i) The relatively inward- looking economic policies
(ii) (ii) The mind-set of the politicians and bureaucrats has not shown a progressivechange
(iii) Fiscal management is grossly disappointing
(iv) (iv) Large proportion of tax revenue is spent tomeet defense expenditures
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 (v) Deficient urban service (water, electricity and transport)
(vi) A wide lag between the formulation of policies on the one hand and their implementation.
Areas where India has an edge over Pakistan:-
I. In the area of skilled manpower ,research and development institutions, India is better placed than
Pakistan
II. Human capital formation (iii) India has shown a remarkable breakthrough in the export of software
III. India also has a better record of investment in education
IV. Owing to rapid decline in population growth rate (fertility rate)
V. Issues ofhealth facilities in general India better than Pakistan .
Areas where Pakistan has an edge over India: -
I. Pakistan has achieved better results with regards tomigration of workforce from agriculture to industry
II. Pakistan growth strategy has a better than Pakistan
III. (iii)External trade has expanded much faster in Pakistan than India
IV. (iv) Pakistan has achieved better results as regards access to improved water resources.
Comparison Between Indian Economy and Pakistan’s Economy: -
(i) Both the countries have mixed economy
(ii) (ii) Economic reforms were interdicted in 1988 in Pakistan and India introduced reforms since1991
(iii) India is ahead of Pakistan in the areas of telecommunication, information, technology, human capital
formation
(iv) Pakistan is ahead of India in the areas of urbanization and sanitation facilities.

CHINA’S EDGE OVER INDIA:-We know that reforms were initiated in China in 1978.
(i)The Chinese reform process began more comprehensively during the 80s
(ii)Global exposure of theeconomy has far more wider in China than in India , Thus :- (a) china was liberal in
allowing FDI in retail (b) China allowed forging investors 100% equity investment (c)Establishing SEZ (iv)
China has emerged as the 2nd largest economy in the world (v) Chinese agriculture is a commune
system(collective cultivation) of farming .
CONCLUSION:-
India, China and Pakistan Till the late 1970s, all of them were maintaining the samelevel of low development.
India :
(i) India, with democratic institutions, performed moderately, but a majority of its people stilldepend on
agriculture.
(ii) Infrastructure is lacking in many parts of the country.
(iii) It is yet to raise the level of living of more than one-fourth of its population that lives below the poverty
line.
Pakistan:-
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 thePakistan
economy.
China:-
(i) China has used the market mechanism to ‘create additional social and economic opportunities’.
(ii) By retaining collective ownership of land and allowing individuals to cultivate lands, China
has ensured social security in rural areas.
(iii) Public intervention in providing social
infrastructure even prior to reforms has brought about positive results in human development indicators in China.
MCQ
Question 1: Arrange the following events in chronological order and choose the correct answer from the given
alternatives:
(i) Establishment of People’s Republic of China
(ii) Creation of Pakistan
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(iii) First Five-Year Plan of India (iv) First Five-Year Plan of China Alternatives :
(A) (i), (iv), (ii), (iii)
(B) (iii), (ii), (i), (iv)
(C) (ii), (i), (iii),(iv)
(D) (iv), (iii), (ii), (i)
Answer: (C) (ii), (i), (iii),(iv)
Q2. The main aim of ‘Great Leap Forward’ was to ensure rapid increase in (primary/secondary/tertiary) sector in
China. (Choose the correct alternative)
Ans: Secondary
Q3- Mao initiated the ‘Great Leap Forward’ in the year ___in China/ Pakistan
(A) 1951 (B) 1955 (C) 1958 (D) 1962
Ans: 1958, China
Q4.The system in which people collectively cultivated land in China is known as.
Answer: Commune System
Q5. Which of the following countries has the highest population growth rate?
(A) India (B) China (C) Pakistan (D) All of these:
Ans; (C) Pakistan
Q6. In which year, China announced its first five-year plan?
(A) 1950 (B 1951 (C) 1953 (D) 1954
Ans :) 1953
Q7. India introduced economic reforms in .
(A) 1990 (B) 1991 ( C) 1992 (D) 1995
Ans:1991
Q8. Chinas great leap forward was in the year .
(A) 1953 (B) 1955 ( C) 1958 (D) 1990
Ans: 1958
Q9. Commune system is the feature of (A)India (B) China (C) Pakistan (D) All the above
Ans : China
Q10. Reforms in ……………… were introduced in 1978.
(A) China, (B) Pakistan, (C) India) (D) None of these
Ans: China,
SHORT ANSWER TYPE QUESTION
Q1. “India, China and Pakistan have travelled more than seven decades of developmental path with varied
results.” Explain the given statement with valid arguments.
Answers- (i) Till the late 1970s, all the three countries were maintaining the same level of low development.
(ii) Over the last three decades, the three countries have taken different levels of development
India has performed moderately over the years. Majority of its people still depend on agriculture. Infrastructure is
lacking and more than one fourth of its population lives below poverty line. Pakistan performed low because of
political instability, overdependence on remittances and foreign aid along with volatile performance of
agriculture. China has used the market system to succeed in raising the rate of growth in economy with stress on
alleviation of poverty.
Q2. What similar developmental strategies have India and Pakistan followed for their respective developmental
paths?
ANSWER: India and Pakistan both have followed a similar developmental strategy. The main similarities
between the developmental strategies can be summed up as:
(i) India and Pakistan both have started their developmental programmes based on economic planning
soon after their independence in 1947.
(ii) (ii) Both the countries relied on the public sector for initiating the process of growth and
development.

69
 (iii) (iii) Both of them have followed the path of mixed economic structure involving the participation of
both the state as well as the private sector. (iv)Both of them introduced economic reforms at the same
time to strengthen their economies.
Q3. Mention the salient demographic indicators of China, Pakistan and India.
Ans:. Following are the salient demographic indicators of China, Pakistan and India:
i) Population: The population of Pakistan is very small and accounts for roughly about one- tenth of China and
India.
ii) Population Density: Though China is the largest nation geographically among the three, but its density is the
lowest.
iii) Population Growth: Population growth is highest in Pakistan followed by India and China. One-child norm
introduced in China in the late 1970s is the major reason for low population growth. But this measure led to a
decline in the sex ratio.
iv) Sex Ratio: The sex ratio low and biased against females in all the three countries. There is strong son-
preference prevailing in all these countries as the reason.
LONG ANSWER TYPE QUESTION
Q 1. Compare and contrast India and China’s sectoral contribution towards GDP.What does it indicate?
Answer. Sectoral Distribution of Output and Employment:
(i) Agriculture Sector. China has more proportion of urban people than India. In China in the year 2009, with 54
per cent of its workforce engaged in agriculture, its contribution to GDP is 10 per cent. In India’s contribution of
agriculture to GDP is at 17 per cent.
(ii) Industry and Service Sectors. In both India and China, the industry and service sectors have less proportion of
workforce but contribute more in terms of output. In China, manufacturing contributes the highest to GDP at 46
per cent whereas in India it is the service sector which contributes the highest. Thus, China’s growth is mainly
contributed by the manufacturing sector and India’s growth by service sector.
Q2.China’s rapid industrial growth can be traced back to its reforms in 1978. Do you agree? Elucidate.
ANSWER: Yes, it cannot be denied that China’s rapid industrial growth is an aggregate outcome of the various
economic reforms that were introduced in phases since 1978.
In the initial phase, reforms were initiated in agriculture, foreign trade and investment sectors. The system of
collective farming known as Commune System was implemented. Under this system, land was divided into small
plots that were allocated to the individual households. These households were allowed to keep the remaining
income from land after paying the taxes to the government. In the later phase, reforms were initiated in the
industrial sector. During this phase, the private firms and village and township enterprises were allowed to
produce goods and services and to compete with the State Owned Enterprises. The reforms also included dual
pricing. The dual pricing implies that 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. Gradually, with the rapid increase in the aggregate production in the later years, the quantities
traded in the market increased by many folds.
The reforms also included setting up of Special Economic Zones to attract foreign investors. Therefore, China’s
rapid industrial growth is attributable to the success ofdifferent phases of its economic reforms.
Q3. Mention the salient demographic indicators of China, Pakistan and India.
Ans:. Following are the salient demographic indicators of China, Pakistan and India:
i) Population: The population of Pakistan is very small and accounts for roughly about one- tenth of China and
India.
ii) Population Density: Though China is the largest nation geographically among the three, but its density is the
lowest.
iii) Population Growth: Population growth is highest in Pakistan followed by India and China. One-child norm
introduced in China in the late 1970s is the major reason for low population growth. But this measure led to a
decline in the sex ratio.
iv) Sex Ratio: The sex ratio low and biased against females in all the three countries. There is strong son-
preference prevailing in all these countries as the reason.
70
Case based Question
1. Read the following text carefully and answer question number 1and 2 given below:
SINO-PAK FRIENDSHIP CORRIDOR
The China-Pakistan Economic Corridor (CPEC) has strengthened the relationship between the two nations. But it
has also sparked criticism for burdening Pakistan with mountains of debt and allowing China to use its debt
strategic assets of Pakistan. The foundations of CPEC, part of China’s Belt and Road Initiative, were laid in May
2013.At that time, Pakistan was reeling under weak economic growth. China committed to play an integral role in
supporting Pakistan’s economy. Pakistan and China have a strategic relationship that goes back decades. Pakistan
turned to China at a time when it needed a rapid increase in external financing to meet critical investments in hard
infrastructure, particularly power plants and highways. CPEC’s early harvest projects met this need, leading to a
dramatic increase in Pakistan’s power generation capacity, bringing an end to supply-side constraints that had
made rolling blackouts a regular occurrence across the country.
China As Pakistan’s Largest Bilateral Creditor: China’s ability to exert influence on Pakistan’s economy has
grown substantially in recent years, mainly due to the fact that Beijing is now Islamabad’s largest creditor.
According to documents released by Pakistan’s finance ministry, Pakistan’s total public and publicly guaranteed
external debt stood at $44.35 billion in June 2013, just 9.3 percent of which was owed to China. By April 2021,
this external debt had ballooned to $90.12 billion, with Pakistan owing 27.4 percent —$24.7 billion — of its total
external debt to China, according to the InternationalMonetary Fund
Q.1Outline and discuss any two economic advantages of China Pakistan Economic Corridor (CPEC) accruing to
the economy of Pakistan.
Q2 Analyze the implication of bilateral ‘debt-trap’ situation of Pakistan vis-à-vis the Chinese Economy.
Answer1. Economic advantages of China Pakistan Economic Corridor (CPEC) to the economy of Pakistan are:
i. China provided financial and technical expertise to help Pakistan build its road infrastructure, supporting
employment and income in the economy
ii. CPCE has led to a massive increase in power generation capacity of Pakistan. It has brought an end to supply-
side constraints in the nation, which had made blackouts a regular phenomenon across the country.
Answer 2: China has become famous for its ‘Debt Trap Diplomacy’ in recent times. Under this China provides
financial and technical expertise/assistance to help various nations to bring them under its direct or indirect
influence.
The first and the foremost implication of the diplomacy is that Beijing has now become Islamabad’s largest
creditor. According to documents released by Pakistan’s finance ministry, by April 2021, external debt had
ballooned to
$90.12 billion, with Pakistan owing 27.4 percent —$24.7 billion — of its total external debt to China,

Case Study based questions-2

The basic reason for fast industrial growth in China can be traced back to the reforms introduced in phases in
1978. In the initial phase, reforms were initiated in agriculture, foreign trade and investment sectors. In
agriculture, commune lands were divided into small plots which were allocated to the individual households.
They were allowed to keep all income from the land after paying stipulated taxes. In the later phase, reforms were
initiated in the industrial sector. Private sector firms and township and village Enterprises were allowed to
produce goods. At this stage, Enterprises owned by government (known as state-owned Enterprises or SOEs),
were made to face competition. Dual pricing system was adopted during the reform. This means fixing the prices
in two ways. One for the farmers and industrial units which required buying and selling fix quantities of inputs
and outputs on the basis of prices fix by the government and other price for the inputs and outputs that were
purchased and sold at the market. Special Economic Zones (SEZ) were set up in order to attract foreign investors
and to boost trade.

a. Mention the sectors in which reforms were initiated in the initial phase in China.
Ans: Agriculture, foreign trade and investment sectors
b. What do you understand by dual pricing system adopted by China?
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 Ans: This means fixing the prices in two ways. One for the farmers and industrial units which required
buying and selling fix quantities of inputs and outputs on the basis of prices fix by the government and
other price for the inputs and outputs that were purchased and sold at the market
c. What is a SEZ?
Ans: A special economic zone (SEZ) is an area in that is subject to different economic regulations than
other regions within the same country. Special economic zones (SEZs) are created i to facilitate rapid
economic growth by providing tax incentives to attract foreign investment and technological
advancement.
While many countries have set up special economic zones (SEZs), China has been the most successful in
using SEZs to attract foreign capital.
Case Study based questions-3
The population of Pakistan is very small and accounts for around one-tenth of china or India. Population of China
is largest in the world followed by India and geographically has the largest area among the three nations; hence
its density is the lowest. Density population is highest in India. The population growth rate is highest in Pakistan,
followed by India and China. The sex ratio is low and biased against females in all three countries. Scholars cite
son preference prevailing in all these countries as the reason. The fertility rate is also low in China and very high
in Pakistan. Urbanization is high in china with India having 33 per cent of its people living in urban areas.
On the basis of selective Demographic Indicators given in the table below answer the question in the end of table.
Country Estimated Annual Density Sex Fertility Urbanisation
Population Growth of (per sq. Ratio Rate (2018)
(in Population Km) (2018) (2017)
millions) (2018) (2018)
India 1352 1.03 455 924 2.2 34
China 1393 0.46 148 249 1.7 59
Pakistn 212 2.05 275 943 3.6 37

a. Mention the country which has highest annual growth rate and fertility rate:
Ans: Pakistan
b. What is the prevailing reasons cited by scholars for low sex ratio in all three countries?
Ans: Scholars cite son preference prevailing in all these countries as the reason.
c. What is the reasons for low growth rate of population in China?
Ans: One child policy norm.

KENDRIYA VIDYALAYA SANGATHAN

RANCHIREGION
SAMPLE PAPER (2023– 24)
Class: XII Max. Marks :80
Subject: Economics Max. Time allowed :3 hours
GENERAL INSTRUCTIONS:

1.All questions in both the sections are compulsory

2.Question Nos. 1-10 and 18-27 are very short-answer questions or multiple choice questions carrying 1 mark
each. They are required to be answered in one sentence each/one word each.

3 Question Nos. 11-12 and 28-29 are short-answer questions carrying 3 marks each Answer to them should not
normally exceed 60 – 80 words each.
72
4.Question Nos. 13-15 and 30-32 are also short-answer questions carrying 4 marks each. Answer to them should
not normally exceed 80 - 100 words each.

5.Question Nos. 16-17 and 33-34 are long-answer questions carrying 6 marks each. Answer to them should not
normally exceed 100 – 150 words each.

6Answer should be brief and to the point and the above word limit to be adhered as far as possible.
SECTION - A
Q QUESTIONS MA
. RK
N
O
1 Those goods which satisfy human wants directly are called. 1
a) Intermediate goods(b)Consumer goods
(c)Capital goods(d) None of these
2 Surplus of current account is: - 1
A) Excess of imports over exports
B) Excess of exports over imports
C) Excess of current account receipt over payments
D )Shortfall of current account receipts over payments

3 Disinvestment of equity in public sector undertaking is a................................ Policy 1

instrument.
A ) Monetary
B) Fiscal
C) Both a and b
D )Neither a nor b
4 If Interest rates are increased in domestic market, then how it will affect BoP: - 1
a) Increase in foreign exchange inflow and improve BoP
b) decrease in foreign exchange inflow and improve BoP
c) Increase in foreign exchange inflow and worse BoP
d) Decrease in foreign exchange inflow and improve BoP

5 If current account is imbalanced then how it could be balanced: - 1

(A)Through borrowings and lending
(B)Through imports and exports of factor services
(C)Through remittance
(D) Through imports and exports of goods

6 Money supply is which concept? 1

(a) Stock (b) Flow ( c) Monetary ( d) None of the above

7 M1 of Money supply does not include. …………………. 1

(a) Currency held by public (b) Other deposit in RBI (c) Demand
deposit with commercial Bank ( d) Net time deposit with commercial bank

8 Assertion (A): the point at which saving curve intersects the X axis is known as break even point. 1
Reason (R): at this point, S=0 and C = Y
73
 (A) Both Assertion(A) and Reason(R) are true , and Reason (R) is the correct explanation of the
Assertion(A)
(B) Both Assertion(A) and Reason(R) are true , but Reason (R) is not the correct explanation of
the Assertion(A)
(C) Assertion (A) is true, but Reason(R) is false.
(D) Assertion (A) is true, but Reason(R) is false

9 Assertion (A): APS can never be one or more than one. 1

Reason (R): APC increase with increase in the income with decreasing rate.
(A) Both Assertion(A) and Reason(R) are true , and Reason (R) is the correct explanation of the
Assertion(A)
(B) Both Assertion(A) and Reason(R) are true , but Reason (R) is not the correct explanation of
the Assertion(A)
(C) Assertion (A) is true, but Reason(R) is false.
(D) Assertion (A) is true, but Reason(R) is false.

1 When Investment multiplier is 1, the value of MPC is also 1. 1

0 (a)True (b) false

1 What is fiscal deficit ? Explain its implications. 3

1
1 What is inflationary gap ?Explain the role of cash reserve ratio in removing this gap. 3
2
1 a.When price of foreign currency rises, its demand falls. Explain why ? 4
3 b)Mention Sources of Demand for foreign exchange.

1 In an economy The investment expenditure is Rs. 600 and the consumption function is C = 90 4
4 +0.7Y .Is the economy in equilibrium at an income level 2,000.?
OR
What is aggregate demand ?state its components.

Case based questions

1 Read the following case study paragraph carefully and answer the questions based on the same. 4
5 The central bank of India (Reserve Bank of India) is the apex institution that controls the entire
financial market. It’s one of the major functions is to maintain the reserve of foreign exchange.
Also, it intervenes in the foreign exchange market to stabilize the excessive fluctuations in the
foreign exchange rate. In other words, it is the central bank’s job to control a country’s economy
through monetary policy.
If the economy is moving slowly or going backward, there are steps that central bank can take to
boost the economy. These steps, whether they are asset purchases or printing more money, all
involve injecting more cash into the economy. The simple supply and demand economic
projection occur and currency will devalue. When the opposite occurs, and the economy is
growing, the central bank will use various methods to keep that growth steady and in-line with
other economic factors such as wages and prices.
Whatever the central bank does or in fact don’t do, will affect the currency of that country.
Sometimes, it is within the central bank’s interest to purposefully affect the value of a currency.
For example, if the economy is heavily reliant on exports and their currency value becomes too

74
 high, importers of that country’s commodities will seek cheaper supply; hence directly affecting
the economy.

1 Which of the following tools are used by the central bank to control the flow of money in
5 domestic economy?
A (a)Fiscal tools (b) Quantitative monetary tools
(c) Qualitative monetary tools (d) Both (b) and (c)

1 Money supply is a ------------- concept.

5 a) Flow (b) Stock (c) Ratio of stock and flow (d) None of above
B मु ाआपूितएक ------------- अवधारणाहै ।
(क) वाह (ख) ॉक (ग) ॉकऔर वाहकाअनु पात (घ) उपरो मसेकोईनही ं
1 Which of the following steps should take by the central bank if there is excessive rise in the
5 foreign exchange rate?
C a) Supply foreign exchange from its stock
b) Demand more of other foreign exchange
c) Allow commercial banks to work under less strict environment
d) Both (b) and (c)

1 Dear money policy of central bank, which is used to keep the growth steady and in-line with other
5 economic factors, refers to
D a) Tighten the money supply in the economy
b) Ease the money supply in the economy
c) Allow commercial banks to work under less strict environment
d) Both (b) and (c)

1 From the following data calculate National income by (a) Income Method and (b) Expenditure 6
6 method:
Items Rs.in crore
i.Compensation of Employees 1,000
ii Net factor income from abroad (-) 20
iii Net Indirect Tax 120
iv Profit 800
v Private final consumption expenditure 2,000
vi Net domestic capital formation 770
vii Consumption of fixed capital 130
viii Rent 600
ix Interest 620
x Mixed income of self employed 700
xi Net Export (-) 30
xii Government final Consumption expenditure 1,100
600

ORअथवा
How will the following be treated while estimating national income? Give reasons.
(a)Capital gain on sale of a house (b)Prize on a lottery ©Interest on public debt

1 Explain how the economy achieves equilibrium level of income using consumption and 6
75
7 investment (C+I) approach.

SECTION - B
1 Assertion(A):There was decay of Indian Handicrafts during the British Rule. 1
8 Reason(R):India was the net exporter of raw material in the world.
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 and 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.

1 TheTata Iron and Steel Company was established in:- 1

9 A)1857 (b)1907 (c)1921 (d)1951

2 In which year was planning Commission abolished? 1

0 (a)2014 (b) 2015 (c) 2016 (d) 2017

2 The ‘agenda’ 21 of RIO summit 1992 is related to - 1

1 ( a) sustainable development.
( b) polluter - pays principle
( c ) environmental education.
( d) preservation of ozone layer

2 When were economic reforms introduced in China? 1

2 [a] 1979
[b] 1977
[c] 1978
[d] 1980

2 In Industrial policy of 1956 , ………… industries were exclusively reserved for public sector. 1
3 (a) 2 (b) 7 (c) 15 (d) 17
2 Goods and service(GST) is a ...... Tax. 1
4 (a)Direct (b) Indirect (c)both (a) and (b) (d)none of these

2 Assertion(A):Indian agriculture was the primary source of employment. 1

5 Reason(R):There was under development in Indian Industries.
(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 and 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.

2 Which act has been enacted in place of MRTP Act? 1

6 (a)competition act (b)Monopoly Act
( c) Licensing act (d) Foreign exchange act

76
2 Which is the problem of human capital formation in India? 1
7 (a)Decreasing population (b) High academic level
(c) Brain drains (d)Gender equality

2 Read the passage given below and answer the question numbers. 3
8 Although India was a very independent economy before the British rule, towards the end, it was
exhausted. The Indian economy on the eve of independence was struggling to find the path of
development. The policies formulated by Britishers were only to promote their interests, India was
diverging from the path of prosperity. We were mere raw-material suppliers to the British. They
made use of our labour without treating them well.
The 200 years of British rule also took away our will to gain knowledge and awareness. Since we
were their slaves, we never got the right to proper education. And as a result of these actions,
towards the end of their reign, we were illiterate. The Indian economy on the eve of independence
was full of people who had absolutely no plan as how to help the nation.

2 Indian economy was…………on the eve of Independence.

8 (a)Developed (b)Underdeveloped (c)Backward (d)Both (B) and (C)
(
a
)
2 Which of the following stands true for India’s Consumption of Trade?
8 A)India was the net exporter of raw material.B)India was the easy market for finished
( goods.C)Both (A) and (B)D) none of these
b
)
2 The ------------ years of British rule also took away our will to gain knowledge and awareness.
8 (a)100 (b) 200 (c) 300 (d) 400
(
c
)
2 How does investment in human capital contribute to growth? 3
9
3 Explain four common goals (or objectives) of development plans in India. 4
0 OR
Why did India opt for planning ?Explain.

3 Sustainable development is a process to be adopted as a daily life activity. Write your 4

1 observations.

3 Why were reforms introduce in india? Explain 4

2
3 Do you think outsourcing is good for India? Why are developed countries opposing it? 6
3
3 What do you mean by human capital formation? What are the sources of human capital formation? 6
4 (explain any two sources)
OR
Discuss economic reforms in India in the light of social justice and welfare.

77
 KENDRIYA VIDYALAYA SANGATHAN
Answer key

SUB- Economics Class - XII

Q Answer mark
.
N
O
1 b 1
2 C 1

3 d 1
4 a 1
5 a 1
6 (a)Stock
7 D) Net time deposit with commercial bank 1
8 (A) Both Assertion(A) and Reason(R) are true , and Reason (R) is the correct explanation of the 1
Assertion(A)
9 A) Both Assertion(A) and Reason(R) are true , and Reason (R) is the correct explanation of the 1
Assertion(A)
1 false 1
0
1 Fiscal deficit is equal to the excess of all expenditures (capital and revenue) over the sum of revenue and 3
1 capital receipts excluding borrowings of the government. Implications:
(1) It shows the extent of dependence of the government on borrowings to meet its budget expenditure.
(2) It encourages wasteful and unnecessary expenditure on the part of the government.
(3) It leads to inflationary pressure in the economy.
(4) The entire amount of borrowing is not available for meeting expenditure because a part of it is used for
interest payments.

1 For correct explanation give 3 marks 1+2

2
1 When the price of foreign currency rises then it implies that foreign goods have become expensive for 2+2
3 the domestic residents of the country. This results in a fall in the demand for foreign goods by the
domestic residents. Consequently, the demand for foreign currency falls.
For example, suppose the rupee-dollar exchange rate (price of dollars in terms of rupees) rises from say,
from $1= Rs 50 to $1= Rs52. This implies that in order to purchase one dollar worth of foreign goods,
the domestic residents now have to pay Rs 52 instead of Rs 50. Thereby, the demand for foreign goods
decreases. Consequently, the demand for dollars decreases.
Three sources of demand or outflow of foreign exchange are:

1)Imports: It requires foreign exchange because payments for imports are made in foreign exchange only.
2)Foreign Investment: Investment in rest of the world is an important business activity. We need foreign currency
in which investment is to be made.
3)Direct purchase Abroad: Foreign exchange is needed to make direct purchases of goods and services from
abroad.

1 For correct formula 1 mark , for calculation 1 mark ,for correct answer 1 mark 4
4 For writing reason 1 mark
Y = 2300
OR
78
 For correct definition 1 mark, for explanation of its components 3 mark
1 (A)d (B) b (C) d (d)d 1+1+
5 1+1
1 National income (income method 3+3
6 (i)+(viii)+(ix)+(iv)+(x)+(ii) = 3700 cr. 3 marks
National income ( Expenditure method)
(v)+(xii)+(vi)+(xi) –(iii)+(ii) = 3700 cr 3 marks
OR
(a) Not included ,because it does not add to the flow of goods and services in the economy. 2 mark
(b) Not included, because it is windfall gain and therefore treated as a transfer payments 2 mark
(c) Not included, because It deemed as transfer payments. 2 mark

1 For correct explanation 3 marks 3+1+

7 For making correct diagram 1 marks 2
For correct explanation of diagrams 2 marks
1 Ans B)Both Assertion(A) and Reason(R) are true and Reason(R) is not the correct explanation of 1
8 Assertion(A
1 (b)1907 1
9
2 (b) 2015 1
0
2 a 1
1
2 C 1
2
2 (d) 17 1
3
2 b) Indirect 1
4
2 (B) 1
5
2 a)competition act 1
6
2 c) Brain drains 1
7
2 28 (a) (d)28(b) (C) 28(c) ( b)
8
2 For correct explanation give 3 marks. 3
9
3 For correct explanation give 4 marks 1+1+
0 1+1
3 For correct explanation give 4 marks 4
1
3 For correct explanation give 4 marks 4
2
3 Yes, it is good for India. These points below further help in justifying that: 1.5+
3 1. For a country like India which is developing, employment generation is a concern and outsourcing 1.5+
provides a solution for generating employment opportunities. 1.5+
2. It enables the transfer of knowledge about the processes and technology from developed countries to the 1.5
developing countries.
3. By providing outsourcing services India makes itself credible in the international market, it will help in
bringing international investment to India.
4. Outsourcing opens up avenues across service sectors and helps the educated youth in getting skills which
will result in human capital formation
79
 3 For correct definition 2 marks 2+2+
4 For correct explanation of any two sources 4 marks 2
OR
Ans. Economic reforms enabled India to be an able competitor in the international market. Here are other
positive points that happened as a result of the reforms
1. Movement of goods and services across the globe.
2. The inflow of foreign capital led to more investor interest
3. The boom in the service sector boosted Eco tourism
4. GDP increased multiple times
5. Employment opportunities
Negative points
1. No benefits for agriculture industry
2. Reforms benefitted the high-income group and made life tougher for low and middle class
3. Development of areas nearby metropolitan cities made rural areas underdeveloped.
Thus it can be said that economic reforms did not provide social justice and was unable to work for welfare
of general public.

KENDRIYA VIDYALAYA SANGATHAN

RANCHI REGION
Sample Paper -2
SESSION: 2023-24
CLASS: XII SUBJECT: Economics
Duration: 3 hrs M.M.: 80

General Instructions:

1 This question paper contains two parts: Part A - Macro Economics (40 marks) Part B - Indian
Economic Development (40 marks).

2 Question No. 1-10 and Question No. 18 – 27 (including two Case Based Questions) are 1-mark
questions and are to be answered in one word/sentence.

3 Case Based Questions (CBQ’s) are Question No. 7-10 and Question No. 24-27.

4 Question No. 11-12 and Question No. 28 – 29 are 3 marks questions and are to be

answered in 60 - 80 words each.

5 Question No. 13-15 and Question No. 30 – 32 are 4 marks questions and are to be

answered in 80-100 words each.

80
6 Question No. 16-17 and Question No. 33 – 34 are 6 marks questions and are to be

answered in 100-150 words each.

QUESTIONS

PART A - MACRO ECONOMICS

1) If in an economy, the value of Net Factor Income from abroad is` 200 crores and the value of 1
Factor Income to Abroad is ` 40 crores. Identify the value of Factor Income from Abroad.(Chose
the correct alternative)

(a) `200 crores (b) ` 160 crores

(c) ` 240 crores (d) ` 180 crores

OR

Define an intermediate good.

2) _____________ is an example of a non-tax revenue receipt. 1

3) How can the Government budget be used as an effective tool in the process of employment 1
generation?

4) Read the following statements – Assertion (A)and Reason(R).Choose one of the correct 1
alternatives given below:

Assertion (A):

Credit creation accelerates the process of growth by expanding the availability of credit for the
purpose of investment.

Reason (R):

Credit creation contributes to the process of growth by expanding the size of the market/aggregate
demand. The demand for consumer durables increases.

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 and 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.

81
5) Identify which of the following statements is true? (Choose the correct alternative) 1

a. The flexible exchange rate system gives the government more flexibility to
maintain large stocks of foreign exchange reserves.
b. In the Managed floating exchange rate system, the government intervenes to buy and sell
foreign currencies.
c. In the Managed floating exchange rate system, the central bank intervenes to moderate
exchange rate fluctuations.
d. In the Fixed exchange rate system, market forces fix the exchange rate.

6) Define Current Account Surplus. 1

Read the following news report and answer Questions 7 – 10 on the basis of the same:

RBI Monetary Policy 2021: The Reserve Bank of India’s (RBI) Monetary Policy Committee
(MPC) kept its repo rate unchanged at 4 per cent while maintaining an ‘accommodative
stance’ as long as necessary at least through the current financial year to the next year, RBI
Governor Shaktikanta Das announced-on Friday.

The RBI governor announced that the decision was taken unanimously and added that the reverse
repo rate too was kept unchanged at 3.35 per cent.

The central bank had slashed the repo rate by 115 basis points since late March 2020 to support
growth. This is the fourth time in a row that the MPC decided to keep the policy rate unchanged.

- The Indian Express; FERUARY 5, 2021

7) Cut in Repo rate by RBI is likely to ---------------- (increase/ decrease) the demand for goods and 1
services in the economy.

8) Why do you think the MPC decided to take this accommodative stance and maintain the status 1
quo regarding the interest rates?

9) What is reverse repo rate of RBI? 1

10) The difference by which actual Aggregate Demand exceeds the Aggregate Demand required to 1
establish full employment equilibrium is known as -----------

(Inflationary gap/ Deflationary gap)

11) (a) Discuss briefly how the money received from the sale of a second-hand car will be treated in 1
estimation of national income

(b) Distinguish between ‘Real Gross Domestic Product’ and ‘Nominal Gross Domestic Product.
2
OR

Define the following:

a) Capital Goods b) Income from property & entrepreneurship.

82
 c) Flow Variables

12) Using a hypothetical numerical example, explain the process of credit creation by a commercial
bank. 3

13) ‘The fiscal deficit for 2020-21 is believed to balloon to 18.49 trillion or 9.5 % of the GDP, against 4
the budgeted 3.5 %.’

(a) Give two reasons responsible for pushing up the Fiscal deficit in the current
Budget 2021

(b) Distinguish between fiscal deficit and revenue deficit in a Government

Budget.

14) In an economy, break-even point and equilibrium point may lie at the same level of income, if ex- 4
ante investments are .....................(Fill up the blank with correct answer)

Calculate the value of Marginal Propensity to Consume (MPC), if in an economy, autonomous

consumption is ₹ 500 crores, ex-ante investments are ₹ 4000 crores and equilibrium level of
Income of the economy is ₹ 18,000 crores.

OR

Define Investment multiplier

Suppose in a hypothetical economy, the savings increase by ₹ 20 crores when national income
increases by ₹ 100 crores. Compute the additional investments needed to attain an increase in
national income by ₹ 6,000 crores?

15) ‘‘A country deliberately keeps the value of its currency low under the managed floating system.’’ 4
Discuss briefly how it will affect the exports of the country.

16) 1. ‘Domestic/household services performed by a woman may not be considered as an 3

economic activity’.
Defend or refute the given statement with valid reason.
2. ‘Compensation to the victims of a cyclone is an example of a welfare measure taken by the
government.’
State with valid reason, should it be included/not included in the estimation of national
income of India.
OR

Suppose the Gross Domestic Product (GDP) of Nation X was ₹ 2,000 crores in 2018-19, whereas 3
the Gross Domestic Product of Nation Y in the same year was ₹ 120,000 crores. If the Gross
Domestic Product of Nation X rises to ₹ 4,000 crores in 2019-20 and the Gross Domestic Product
of Nation Y rises to ₹ 200,000 crores in 2019-20. Compare the rate of change of GDP of Nations
X and Y, taking 2018-19 as base year.

17) Explain ‘AD = AS ‘approach of the modern theory of income determination. Use diagram. 6

83
 PART B - INDIAN ECONOMIC DEVELOPMENT

18) Opening of ___________ Canal significantly reduced the cost of transportation of goods between 1
Britain and India. (Fill in the blank)

19) Identify the correct sequence of alternatives given in Column II by matching them with respective 1
terms in Column I:

COLUMN I COLUMN II

A. Study Group formed by Planning i. 2005

Commission for Poverty

B. ‘Task Force on Projections of the ii. 1962

Minimum Needs and Effective
Consumption Demand’

C. Mahatma Gandhi National Rural iii. 2014

Employment Guarantee Act

D. Jan Dhan Yojana iv. 1979

Choose the correct alternative:

a) ii, ii, iv, i

b) iii, ii, i, iv
c) i, ii, iii, iv
d) ii, iv, i, iii
20) Great Leap Forward (GLF) was the campaign launched by Mao in the year _________. 1

(Choose the correct alternative)

(A) 1952
(B) 1958
(C) 1960
(D) 1968

21) In China, commune system is related to ___________ sector. (Fill in the blank with the correct 1
alternative)

(A) agriculture (B) industry (C) service (D) informal

22) Read the following statements – Assertion (A)and Reason(R) Choose one of the correct 1
alternatives given below:

84
 Assertion (A):

WTO was set up to administer all multilateral trade agreements by providing equal opportunities
to all countries in the international market.

Reason (R):

To this end, it has established a rule-based trading regime in which nations cannot place arbitrary
restrictions on trade.

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 and 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.
OR
Read the following statements – Assertion (A)and Reason (R) Choose one of the correct
alternatives given below:

Assertion (A): The reform of land ceiling did not serve its purpose.

Reason (R): The planners took a lot of time to implement the reforms.

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 and 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.

23) Read the following statements – Assertion (A)and Reason (R) Choose one of the correct 1
alternatives given below:

Assertion (A):

The objective of growth, modernization and self-reliance may not improve the kind of life which
people are living until and unless equity is ensured among the masses.

Reason (R):

The benefits of economic growth have not been percolated to reach the poorest of the poor.

Alternatives:
a. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of
85
 Assertion (A)
b. Both Assertion (A) and Reason (R) are true and 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.
Read, the following hypothetical Case Study, carefully and answer the question numbers 24 - 27
on the base of the same.

The Report of the Agricultural Credit Review Committee (1989), known as Khusro Committee,
was one of the comprehensive studies undertaken by the RBI in the field of agricultural credit. In
the agricultural sector, the continuous declining size of farms, over exploitation of water in the
green revolution areas and the shortage of energy were identified as constraints on the existing
production. It was also observed that the greater growth of Indian agriculture will need agricultural
development programmes in different states supported by financial institutions to make
agricultural and rural economies more viable, productive, progressive and profitable. However, the
objective of increased credit flow to weaker sections and rural areas, has been achieved through
nationalisation of banks.

------ Gaikwad (2018),Ph.D. Thesis, Solapur University.

24) ______ (Minimum Support Price / Minimum Retail Price) is one of the policy instruments 1
important for making agriculture productive.

(Fill up the blank with correct alternative)

25) -------------- (NABARD/Regional Rural Bank) is the Apex bank working for the expansion of rural 1
credit.

(Fill up the blank with correct alternative)

26) State one measure to improve agricultural marketing in India 1

27) SHGs have emerged to address the inadequacies of the formal credit system. (True or False) 1

28) According to the Union Budget 2021, the government plans to extend the Ujjwala scheme, which 3
has benefited 80 million households, to cover 10 million more beneficiaries.

(a) What was this Ujjwala scheme?

(b) While Ujjwala scheme was extended, the outlay of another important employment
programme for rural unskilled workers was reduced. Name the scheme.
(c) ‘Poverty can be effectively eradicated through a process of social mobilisation.’ Explain.
29) Define the following: (a) Absorptive capacity of environment (b) Carrying capacity of 3
environment

OR

State and discuss any two principal causes of environmental degradation.

86
30) ‘Success of green revolution was experienced in 2 phases.’ Elaborate. 1

How did it benefit farmers in India? 3

OR

Explain the industrial sector reforms introduced under the New Economic Policy.

31 Compare India and Pakistan on the basis of their demography.

4

32 (a)Discuss briefly, how institutional reforms (land reforms) have played a significant role in
transforming Indian agriculture. 2

(b)Discuss briefly, the rationale behind “equity with growth” as planning objectives for Indian 2
Economy.

33 (a) Distinguish between ‘Green Revolution’ and ‘Golden Revolution’. 2

(b) How has women’s health become a matter of great concern in India? Explain. 4

34 (a) Comment upon the informalisation of labour force in India.

(b) Define the worker- population ratio. 4
OR

Critically examine the results of Poverty Alleviation Programmes implemented in India since 2
independence.

87