Economic Indicators

Table of Contents

1. INDICATORS – UNEMPLOYMENT

To prepare for INDIAN ECONOMY for any competitive exam, aspirants have to know about Economic Indicators. It gives an idea of all the important
topics for the IAS Exam and the Economy syllabus (GS-II). Important Economic Indicators terms are important from Economy perspectives in the UPSC
exam. IAS aspirants should thoroughly understand their meaning and application, as questions can be asked from this static portion of the IAS Syllabus in
both the UPSC Prelims and the UPSC Mains exams.

An economic indicator is a statistic about an economic activity. Economic indicators allow analysis of economic performance and predictions of future
performance. One application of economic indicators is the study of business cycles.

NATIONAL INCOME

National Income is the total value of all final goods and services produced by the country in certain year. The growth of National Income helps to
know the progress of the country.
In other words, the total amount of income accruing to a country from economic activities in a year’s time is known as national income.
National Income includes payments made to all resources in the form of wages, interest, rent and profits.

NATIONAL INCOME ACCOUNTING (NIA)

National Income Accounting is a method or technique used to measure the economic activity in the national economy as a whole.
It is the bookkeeping system which measures the level of economic activity in a given time period
NIA sets rules and definition to measure aggregate economic activity and tries to summarise the performance of the economy

NIA is mainly done for:

Policy Formulation: It helps in comparing the estimates of the past from the future and also forecast the growth rates in future. For example, if a
country has a GDP of Rs. 103 Lakh which is 3 Lakh rupees higher than the last year, it has a growth rate of 3 per cent.
Effective Decision Making: To estimate the contribution of each of the sectors of the economy. It helps the business to plan for production.
International Economic Comparison: It helps in comparing the level of development of countries and provides useful insight into how well an
economy is functioning, and where money is being generated and spent. One can compare the standard of living of different nations and its growth
rate.

Uses of NIA

Indicates the performance of the economy signifying the economy’s strength and failures
It helps to find out structural changes in the economy. E.g. – Proportional share of primary sector is declining and tertiary sector is proportionately
increasing since late 1990.
It helps in assessing the current standard of living
Helps in comparison among nations with respect to national income, per capita income.
Data help in making suitable changes in policy and approaches to achieve rapid economic development

PROBLEMS FACED IN THE ESTIMATION OF NATIONAL INCOME

1. Conceptual problems: what should be included or excluded in NI?

g. which activities of foreign firms or the govt should be considered productive?

Services of household – not included as there is no income, no price and no market for service rendered for the household work done
Domestic servants are to be included- but quantifying becomes difficult
Farm products kept for self-consumption are to be estimated by guess.
Output from veggies grown from home garden or terrace garden –not included as there is no accurate estimate for the produce.

2. Practical or Statistical problems:

Small shopkeepers, casual workers etc don’t keep a proper record of their income/expenditure;
Non-market activities (self- consumption) are tough to estimate
Reliable information is not available due to illiteracy
Statistical staff is untrained and inefficient
Large regional diversity – language , customs – create a problem in computing the estimates
Issue with multiple counting

PROBLEMS IN CALCULATING

Black money outside the estimates.

Non monetisation such as barter system in rural areas are kept out of transaction
Household services like care economy not included
 Social service ,voluntary and charitable work ignored.
Environmental cost

PHYSICAL QUALITY OF LIFE INDEX

Introduced by M D Morris in 1979, it is the average of three statistics:

1. Basic literacy rate (at the age of 15 years),

2. Infant mortality (death of children under the age of one year), and
3. Life expectancy at age one,

All equally weighted on a 0 to 100 scale.

It was widely used till 1990, when HDI was introduced.

INDICATORS
GDP
Unemployment
Inflation

Indicators: GDP

Gross Domestic Product is the market value of all the goods and services produced within the domestic territory of a country during a specified
time period, usually one year.
Accounting Year = Fiscal Year; for India it is 1st of April to 31st of March (next year)
Will include the income generated by MNCs in India

Domestic Territory = Political frontiers of the country including its territorial waters+ Embassies/Consulates + Military Establishments of the country
abroad + Ships/Aircrafts/Fishing Vessels/Oil Rigs belonging to the residents of the country

GDP does not include :

Capital goods (e.g. machinery) are included in GDP, but intermediate goods (e.g. raw materials) are not.
Intermediate goods and services are not included to avoid double counting.
Same good can be final (you consuming milk ) or intermediate (milk in the restaurant) depending on the usage.

Limitation to usefulness of GDP

Impact on environment may be harmful despite increase in GDP.

Only give average figure and hide stratification
Conditions of poor not indicated
Gender disparities not revealed.
Does not matter how wealth increase… by war or demand
Does not measure sustainability of growth.

METHODS OF GDP CALCULATION

1. EXPENDITURE METHOD

If anything is produced in India then someone must have paid money for that. So, accordingly we can derive GDP = C + I + G + X -M

GDP Expenditure Method

Examples
Purchasing new car, mobiles, computer etc. Both India made
& (Imported) foreign made are counted.

If existing house, its ‘notional rent’ is counted (i.e. even if

you did not rent the property.)

DOESN’T INCLUDE:

(C) Consumption of final Purchase of second hand goods, because we are only
goods and services measuring ‘new’ things “MADE in India” in present year.
IGNORE of new house is not counted here, it’s counted in
(I)
 Purchase of tangible capital assets like New House, Land,
Building, Factory, Truck, Machinery.

Purchase of intangible capital assets like IPR / Patents,

Computer Software etc.

Purchase of raw material & intermediate goods, wages to

workers for production.

Unsold inventory.

(I) Investments
DOESN’T INCLUDE:

Savings in bank, shares and bonds etc.

Because it’d have been given to

entrepreneur as ‘Capital’ to buy above things.

Salaries to employees, Procurement of computer, stationery,
fans, tube lights, vehicles etc.

DOESN’T INCLUDE:

Government’s scholarship,

Subsidy, ‘Transfer Payments’- pension, maternity benefit,

(G) Government Purchases
employment allowance. They’re counted in “C” (Private)
consumption by the respective beneficiaries.

– Export is added because it means a foreigner must have

bought goods/services “MADE in India” so it’s part of
India’s GDP.

– Whereas, Import is subtracted because some Indians must

have Consumed (C) foreign products that were not “MADE
(X-M) Export in India”, So if you do not subtract the ‘Import(M)’, it will
give wrong estimation of India’s GDP.
MINUS Imports

The GDP thus arrived is called GDP at Current Market

Price. When we adjust it with inflation against base year
2011 → GDP at Constant Market Price
Total = GDP

PRODUCTION/GVA METHOD

Estimated by adding the value added by all the firms

Value added = Value of Output – Intermediate good = GVA at FC
If manage it with taxes and subsidies then It gives GDP at Market Price (MP) – because it includes depreciation (therefore ‘gross’) and taxes (therefore
‘market price’)
To reach National Income (that is, NNP at FC)

1. Add Net Factor Income from

Abroad:
2. Subtract Depreciation:
3. Subtract Net Indirect Taxes:
GNP at MP = GDP at MP + NFIA
NNP at MP = GNP at MP – Depreciation
NNP at FC = NNP at MP – NIT

While GVA gives a picture of economy from the producers’ side or supply side, the GDP model gives the picture from the consumers’ / demand side
perspective. (Because it considers Indirect taxes and subsidies).
Therefore, from 2018-April, RBI decided to use GDP instead of GVA to measure the economic activities for its policy making & big data analytics.

MISMATCH IN CALCULATION

Theoretically, the GDP calculated by production method should equal to GDP by expenditure method.
However, in real life, GDP (production ) does not equal to the GDP (expenditure);attributed to factory production data is systematically captured
by Government machinery such as Corporate Affairs ministry’s MCA-21portal, NSO’s Annual Survey of Industries (ASI) But, all of the final
private consumption may not be captured in the official statistics due to unreported transactions (e.g. due to black money etc.)
 As a result, mismatch /discrepancy will be observed in GDP (expenditure) figures, and mentioned in the official NSO report.
Therefore, GDP (Production Method GVA) is considered more accurate method among the three methods (Production, Expenditure, Income).
So, while NSO computes data using all 3 methods, but official GDP & growth figures are presented based on the ‘Production GVA’ method.

GDP CALCULATION METHOD → VIA INCOME (WIPR)

This method follows the simple idea that whatever is “MADE in India”, its revenues must have been distributed among the factors of production.

GDP = Wages to labourers (W) + Interest on Capital to Lenders (I) + Profits to Entrepreneur / Owners of the firm (P) + Rent on land (R).

Estimated by adding all the factors of production (rent, wages, interest, profit) and the mixed income of self-employed.
In India, one-third people are self-employed
Will get GDP at factor cost.
The GDP thus arrived is called GDP at Current Factor Cost.

GDP CALCULATION METHOD → VIA INCOME (CSO REAL LIFE)

Theoretical CSO’ real life income formula
Compensation (i.e. Employees salary + Employer’s
Wages contribution to his Social Security Account e.g. EPFO
/ ESIC).
(+) Interest (+) Operating Surplus, Mixed Income. (Because in a
family run farm / enterprise it is difficult to separate
(+) Profit income and profit, unlike a corporate balance sheet)
(+) Rent (+) Consumption of fixed assets during production
Total= “GDP at Factor
Here total is called “GVA at Factor Cost”
Cost”

GROWTH RATE &GDP DEFLATOR

Growth Rate (%) = [GDP (Present year – Last Year) / Last Year] x 100
But, quantitatively the production may not have improved (From 1 kg garlics to 2 kg garlics), and only because of inflation in the prices (₹ 10/kg garlic
to ₹ 100/kg) the growth rate may be appear high.
Therefore (to remove the inflation impact on growth rate), we must select a base year, and convert the current prices to constant prices.
The ratio of these GDPs is called ‘GDP deflator’, it presents a picture of inflation like CPI and WPI but, unlike CPI & WPI it’s not based on a fixed
basket of commodities.
These figures are revised as the new data arrives / previous data is cross verified & corrected.
g. 2019-Jan – NSO says 7.2% growth forecasted for 2018-19 (ending at 31 march 2019), then in 2019-Feb revises it downwards to 7.0%, then 2020-
Jan = it says 6.8% (this figure given in Economic Survey 2020), then 2020-Feb NSO says 6.1% was the growth rate in 2018-19
NSO will also prepare quarterly growth rates (compared to previous quarters) and then engage in upwards / downwards revision.
Similarly, RBI, IMF, Rating Agencies will forecast & then revise it upwards and downwards.

GDP replaced GVA (2018)

While GVA gives a picture of economy from the producers’ side or supply side, the GDP model gives the picture from the consumers’ / demand
side perspective. (Because it considers Indirect taxes and subsidies).
Therefore, from 2018-April, RBI decided to use GDP instead of GVA to measure the economic activities for its policy making & big data analytics.

GDP AND BACKSERIES CONTROVERSY

During Manmohan Singh govt (PM), GDP base year was 2004-05.
In 2015, PM Modi changed GDP base year to 2011-12. Then, Manmohan Singh govt. updated / re-adjusted GDP figures as per the new base year.
The (new) GDP-data thus re-produced for 2005-2011 is called “Back series” data.
In August 2018: National Statistical Commission (MoSPI) → Committee on Real Sector Statistics under the Chairmanship of Dr. SudiptoMundle
discussed various approaches to prepare such Backseries.
In November 2018, NITI released backseries data, showing UPA/Congress times GDP growth was pathetic.

Critiques alleging “Methodology is misleading, and MoSPI/CSO should have released the report. NITI Aayog should not have released it on their behalf.
So, it’s all Modi govt’s manipulated data just to show his growth figures are higher.”

Base year
Average Growth rate Base year 2011
2004
~ 6.7%
UPA-1 era (2004-09) 8.1%
(using Backseries)
7.0% ~ 6.7%
UPA-2 era (2009-14)
(using Backseries)
Modi-era N/A ~ 7.4%
(2014-2018*)

Economic Survey 2020: India GDP is not overstated.

2015à India changed its GDP Base year from 2004 to 2011. It was done to comply with the System of National Accounts (SNA-2008) of the United Nations.

Using 2011 as base year prices, India’s-

Average annual GDP growth rate was approximately 7% (2011 to 2016).
Average annual GDP growth rate was approximately 7.5% (for the last five years that is
2015-2019).
2019-March: Former RBI Governor Raghuram Rajan expressed doubt over India’s 7%
growth rate. He felt it was overstated.
2019-June: Former CEA Arvind Subramanian published a research paper:

· He compared the growth rate figures against India’s exports, imports, loans to
industry, petroleum consumption, railway freight traffic, electricity consumption, etc.

· He did not find strong evidence of 7% GDP growth. He estimated it’s only 4.5%.

· That means, India’s growth rate has been overestimated by 7.0-4.5 = 2.5%.

· So, if Raghuram Rajan & Arvind Subramanian are right then either:

a) The Government’s data collection methodology is wrong and/or

b) Collected data is manipulated / doctored.

ES2020: CEA Subramanian K. has dedicated a entire chapter to prove how above criticism (By Raghuram Rajan and Arvind Subramanian) is invalid.

First rough estimate of National Income was done by Dadabhai Naoroji for 1867- 68; published in his book Poverty and Un-british rule in India
(famous for its Drain of Wealth theory)
First scientific estimate made by Prof V K R V Rao (1931-32)
GoI estimated the National Incomefor the first time in 1948-49 through the Ministry of Commerce
National Income Committee was set up in 1949 (Chairman – Dr P C Mahalanobis)

Shifting base years to 2017 & 18

2018-Feb: MoSPI declared that it’ll ‘initiate’ steps to change base years:

Proposed New Base

Indicator Present Base year
Year from 2019
GDP & IIP 2011 2017-18
CPI 2012 2018-19

This is proposed to ‘accommodate’ the changes take place in the economic scenario of the country (e.g. GST, Demonetization, RERA).

CRITERIA FOR SELECTION OF BASE YEAR

Normal year – neither too high nor too low

Latest possible year
Relevant data for that year should be readily available

CITY-LEVEL GDP (PROPOSED)

In 2018, the Ministry of Housing and Urban Affairs (MoHUA) asked the Economist Magazine’s EconomistIntelligence Unit (EIU) to prepare
feasibility of calculating City level GDP for Indian cities.
This can help the municipal administrators to know the economic potential of their area, and decide municipal property tax rates & user fees;
development projects for water / sanitation / transport / infrastructure accordingly.

ECONOMIC (BUSINESS) CYCLE

Business cycles are fluctuations in economic activity that an economy experiences over a period of time.
Business cycles are generally measured using the rise and fall in the real gross domestic product (GDP) or the GDP adjusted for inflation.
It is also known as the economic cycle or trade cycle.
The stages in the business cycle includeàexpansion, peak, recession or contraction, depression, trough, and recovery.
Business cycles are measured by the National Bureau of Economic Research in the United States
 This is the first stage.
When the expansion occurs, there is an increase in
employment, incomes, production and sales.
Expansion
The economy has a steady flow in the money supply and
investment is booming.

Peak is when the economy hits a snag,having reached

the maximum level of growth.
Peak Prices hit their highest level, and economic indicators
stop growing.

From peak prosperity to moving downwards.

Usually evident from continuous negative growth rate for
Recession Phase two successive quarters (6 months).E.g.USA 2007-09
in the aftermath of Subprime crisis

Severe and long lasting Recession e.g. USA 1929-39 in

the aftermath of stock market crash.
Depression Phase It resulted in great fall in GDP, income, employment,
industrial production, and wholesale-retail sales.
Consumer confidence and investment levels also drop.

This period marks the end of the depression, leading an

Trough economy into recovery.

The economy starts to turn around.

Low prices spur an increase in demand, employment and
Recovery production start to rise, and lenders start to open up their
credit coffers.
This stage marks the end of one business cycle.

Notable recessions in the past:

The Post-War Recession: (November 1948 – October 1949) – As returning veterans returned to the workforce in large numbers to compete for jobs
with existing civilian workers who had entered the workforce during the war, unemployment began to rise.
The Oil Crisis Recession: (November 1973 – March 1975) – This long, deep recession was brought on by the quadrupling of oil prices and high
government spending on the Vietnam War, which further led to stagflation and high unemployment.
The Iran/Energy Crisis Recession: (July 1981 – November 1982) – This long and deep recession was caused by the regime change in Iran, which
exported oil at inconsistent intervals and at lower volumes, forcing prices higher.
The Gulf War Recession: (July 1990 – March 1991) – Iraq invaded Kuwait. This resulted in a spike in the price of oil in 1990, which caused
manufacturing trade sales to decline.
The 9/11 Recession: (March 2001 – November 2001) – The collapse of the dotcom bubble, the 9/11 attacks contributed to this relatively mild
contraction of the U.S. economy.
The Subprime mortgage crisis/ Great Recession: (2007) – It was a period of marked general recession observed in national economies globally. It
was concluded as the most severe economic and financial meltdown since the Great Depression by the IMF. The emergence of sub-prime loan losses
in the US in 2007 began the crisis and exposed other risky loans and over-inflated asset prices.

COVID 19 and recession:

According to the latest United Nations Conference on Trade and Development (UNCTAD) analysis, the world economy will go into recession due
to the coronavirus pandemic.
The commodity-rich exporting countries will face a $2-$3 trillion drop in investments from overseas in the next two years.
This would spellserious trouble for developing countries, with the exception of China and India.
However, an explanation as to why and how India and China will be the exceptions is not given in the report.
Fiscal and forex constraints are bound to tighten further over the course of the year.
UNCTAD has hence called for a $2.5 trillion rescue package for these nations.

POST-COVID19:V-SHAPED RECOVERY FOR INDIA

If GDP growth suffers a sharp economic decline→ then quickly recovers. So graph will appear “V- shaped“.
1918- 1920: Spanish Flu: USA growth falls to (3.5%)→after wards quickly recovers to(7.5%)=V-shaped recovery.
2020:CEASubramanian K. predicts, “History will repeatit self for India-If Coronavaccine is found sooner.”

GDP GROWTH OF INDIA AND ECONOMIC SURVEY 2020

According to ES2020, GDP Growth rate of India & World is reducing.

2020-
Real Growth 2017-18 2018-19 2019-20
21(Estimated)
India 7.2% 6.8% 5.05 = 5.8% (IMF’s
world economic
outlook)

>> 5.8% World

Bank’s Global
 Economic
Prospects

GDP GROWTH OF INDIA AND ECONOMIC SURVEY 2020

Protectionism in Chinaand the USA, US-Iran geopolitical tensions which have affected global trade.
Consequently the investment and manufacturing production has decreaseeven in the G7 and OECD group of countries. India’s not the only country
suffering from exports.
Sharp decreasein the automobile purchase. This problem will further worsen with Bharat-6 emission norms. Such vehicles are more expensive
compared to the previous models.

2020-21
Real Growth 2017-18 2018-19 2019-20
(Estimated)
→ 6.0-6.5% as per
Economic

Survey 2019-20
3.3% (IMF’s
World 3.8% 3.6% 2.9% world economic

outlook)*

VIRTUOUS CYCLE OF GROWTH

In India, investment slowed down in the aftermath of mounting Non-performing assets – Twin balance sheet syndrome (TBS) & IL&FS-NBFC
Crisis
Although now things are improving, but, it takes two to four years for the cycle to restart again
IMF research found that if there is a sudden uptake in loans, it will increaseproduction, employment and demand. But this positive effect remains only
for a short term.
In the long term, it will cause a decrease in growth rate.
Same has happened in Indiaà during the mid-2000s (before the subprime crisis), the lending quantity was very high resulted into later
decreasein growth.
According to critiques, the demonetization and GST too have harmed the growth rate but ES20 chose to remain silent on that part.

CHALLENGES OF DECLINING GROWTH RATE: ECONOMIC SURVEY 2020

US-Iran geo-political will increase crude oil price → weaker rupee → higher inflation → reduced consumption → GDP declines.
Even after the Insolvency Bankruptcy Code, the badloan resolution process has been very slow. Banks reluctant to give loans to the corporate sector
→ GDP unable to expand.
Government’s National Infrastructure Pipeline (NIP) aims to spend 102 lakh crore on infrastructure in the next five years. But then government
will have to borrow more money → rise in fiscal deficit → crowding out of the private investors → GDP unable to expand.
Unless real estate developers reduce home prices, It is difficult to sell the unsold homes → Builders will not build new homes → decrease in demand
of Steel and cement → GDP unable to expand.
2019: India is among the top 5 economies of the world in terms of GDP at current US$ trillion i.e. USA (21 Tn$), China ($14), Japan ($5), Germany
($3.9), India ($2.9)
2024-25: We plan to increase the size of our economy to 5 trillion. But to achieve this, we need 9% GDP Growth rate annually, which is rather
difficult because presently we are struggling around 5% & Corona lockdown will make the matters worst.

Global Risk Report

World Economic Forum’s (WEF’s) Global Risks Report 2020 shows that the global risks over the coming decade. Notable risks are:

2020: weather, climate, natural disasters, biodiversity loss, water crisis, weapons of mass destruction (WMD)

2019:similar to above and cyber security , data theft, data fraud.

Declining Growth rate and India

Among the BRICS Nations, India’s growth rate is still relatively better and stable than Brazil, China, Russia.

Even though the GDP growth rate is falling, Bombay Stock Exchange (BSE) SENXSEX is improving. Which means both domestic and foreign
investors are still investing enthusiastically in the shares of companies → Which means they are confident that the Indian economy will improve in the
upcoming days.
By doing the quarterly growth analysis since 1996, CEA Subramanian K. found India’s business cycle is about 13 quarters.
Meaning, after every 13 quarters, we will achieve the highest level and then it will start to fall.
Presently we are at the “Fall phase”, But definitely improve after that as per the historic trend of our business cycles.

World Bank-ICP’s GDP series based on PPP

UN Economicand Social Council→United Nation’s Statistical Commission→ International Comparison Program (ICP)
ICP’s goal is to convert data on Purchasing Power Parities (PPPs) so GDP and price levels can compared. More on PPP.
2020-JuneàWorldBankreleasednewdatasetsfor2017,usingICP.
 #3 India
GDP for 2017 Entire World #1 China #2 USA $1= rupee 21
(PPP)
(PPP $, Trillion) 120 Trillion Abt 20 trillion Abt 20 trillion 8 trillion
% of total 1005 16.4% 16.3% 6.7%

Budget-2019 and $5 Trillion Economy

Year India’s GDP in trillion $ (Current Prices)

2014-15 1.85 trillion
2018-19 2.70 trillion
2019-20 2.90 trillion
2024-25 5 trillion targeted

2019-Aug: GDP growth sharply fell, FPIs exiting on large scale from India. So, Finance Minister Nirmala. S announced Fiscal Stimulus.

1. Rangarajan(Former RBI Governor) opinion àIndia cannot achieve 5 trillion dollar economy by 2025, because to achieve it, we will have togrow
at 9-10% annually but at present we are struggling with 5-6% growth rate.

ES2020 strategy to Achieve $5 Trillion Economy

Savings – It’s the Income excess of Consumption. Subdivided into Private Savings [by households & business firm] and Public Savings by Govt
organizations.
Investment – It’s the domestic Savings + NET foreign money which is put in Real (physical) Assets like machines, tools, buildings, office spaces,
storehouses, roads, bridges, airports
GFCFà Gross Fixed Capital Formation Rate (GFCF) = INVESTMENT – DISPOSAL of assets (liquidation, condemnation). Thus, GFCF shows the
net increase in physical assets. It does not considers depreciation, and land purchases.
Capital Output RatioàIt is the amount of capital needed to produce one unit of output. It depends on factors such as technological progress, prices of
capital goods / machinery. In India, High Capital Ratio is among the reasons for subdued growth rates.

ES2018 had observed:

Pre-Subprime crisis, above indicators had peaked over 30% of GDP. But then falling down, then struggling zig-zag.
Pre-subprime crisis our growth rate was in peak 9%, presently struggling in ~7% range.
Some countries take as much as 17 years to come out of such crisis.
If we want to quickly recover, & bring our growth rate back to 9% then we mustincrease investment → GFCF will increase → then growth rate will
automatically increase → savings will automatically increase.

· Resolve TBS,

· Encourage Make in India & Startup India,

· Reforms in Tax Laws,

Increasing Investment / GCFC:
· Labour Laws,
should be our urgent priority:
· Environment Clearance,

· Faster FDI approval etc.

· PMJDY,

Increasing / mobilizing savings
is important but should not be
our urgent priority:
· Pension-Insurance schemes,
· Sovereign Gold Bonds,
· Unearthing black money,

· Demonetization etc.

Economic Survey 2019 also reiterated the similar theme, that private investment is necessary for boosting growth.

Q. Economic growth in country X will occur if______(CSE-2013)

 1. There is technical progress in the world economy.
2. There is population growth in X.
3. There is capital formation in X.
4. The volume of trade grows in the world economy.

Q. Despite being a high saving economy, capital formation may not result in significant increase in output due to____________(CSE-2018)

1. Weak administrative machinery

2. Illiteracy
3. High population density
4. High capital-output ratio

$5 Trillion Economy and strategy of NITI to Achieve

1. Increase the Gross Fixed Capital Formation (GFCF) from present 29% → 36% of GDP by 2022-23. To increase Public Sector and/or Government led-
investment:

Must improve Tax:GDP by combating tax evasion and tax avoidance.

Must decrease Revenue deficit by combating Subsidy leakage through JAM-trinity.
Government has to exit from loss making public sector enterprises.
To mobilize private households’ investment– PPP for Infrastructure.
To mobilize domestic & foreign companies’ investment – Addressing the NPA crisis, reforms in the FDI policy, Ease of Doing Biz etc.
Greater coverage in Sovereign Gold Bond, Jan Dhan Account, Pension-Insurance schemes etc; Preventing Ponzy& Chit Fund scams.

2. Increase India’s growth rate to 9- 10%. Increase size of Indian economy (GDP) to $5 trillion USD.For this we must increase our ‘Net Exports’:

Address various bottlenecks in our agriculture and manufacturing sector.

Ease the complex labour and land laws.
Industrial Revolution 4.0, artificial intelligence, IoT etc.
Skilling Youth, increasing female participation in labour force.
Renewable energy to decrease import bill.
Trade agreements with like-minded countries & regional blocks

5 Trillion economy: Conclusion

Higher economic growth can help increasing employment avenues for citizens & tax revenues for the Governments.
Collectively, this results in improved living standards through higher expenditure on health & education by both the citizens and the State.
Therefore, we must leave no stone unturned to accomplish above targets / address above challenges on priority basis.

Wealth Creation and ES2020

Until the entry of Europeans, India has been the dominant global economic power.
Then our GDP growth started to decline during British Raj and Nehruvian Socialism.
But since 1991’s LPG reforms, again we are back on track.

Benefits of wealth creation by private entrepreneurs: ES2020

Employees, suppliers, retailers à Increase income, jobs and employment opportunities.

Government àEnhancing and broadening of tax collection
Common citizen à Increased quality of roads, schools, hospitals created through the tax revenue

Ancient and modern thinkers/economists to suggest how to broaden our wealth: CEA Subramanian K

How CEA Subramanian K. links their ideas with

Thinker
wealth creation
Kautilya’s Arthshastra book is centred around
Varta(economic policy), Dandaneeti(law and
enforcement), Anvikshiki(philosophical and ethical
framework) and Trayi(cultural context)
Kautilya asked the King to remove all obstructions
to economic activity and provide economic
freedom to the citizens.
So, incumbent govt should also focus on Ease of
Doing Biz
Kautilya
Thiruvalluvar’sThirukural book advocates wealth
creation through ethical means.
Govt should provide equal opportunity for new
entrepreneurs, incumbent govt should avoid Pro-
Crony policies of Manmohan Singh Govt.→
improve EoD.
Thiruvalluvar Tamil poet There should be no shame in privatization
and philosopher (Strategic disinvestment) of the government
companies, Because after privatization their
profitability has increased.

Adam Smith’s book ‘An Inquiry into the Nature

and Causes of Wealth of Nations’ described
“Invisible hand of the free market is instrumental in
economic growth”.
But Government intervention in free market often
harms more than it helps.
Adam Smith

(Father of Economics)

“We should assume every man is a dishonest person,

his actions are always driven by private interest.
So, effective supervision required”.
So, we’ve to regulate the Shadow banking sector
more vigorously.
We must deal with the wilful defaulters
responsible for the high level of NPA. Use
Artificial intelligence, Machine Learning etc. also
envisaged and create PSBN network.
· American Share market regulators has 15x times
the number of employees than SEBI. So, we also
need to increase manpower in regulatory bodies.

David Hume, Scottish

Philosopher
Maslow’s Motivational Pyramidà “Individuals are
not driven just by physical / material, but they also
have needs of self-esteem and self-actualization”.

Confucius: “if Government guides the people with

penalties → they’ll shamelessly evade the law. But if
the Government guides them with virtue → people
will become upright.”
Motivation
Therefore we should use the ideas of behavioral
economics to increase their morale to: Give up
subsidies andHonestly pay taxes

Adam Smith’s book ‘The Theory of Moral

Sentiments’ described, “while people are sometimes
selfish, they also derive pleasure from seeing the
happiness of others.
Absence of such mutual sympathy / trust can result
in financial disasters, as seen in Subprime Crisis,
Global Financial Crisis, India’s NPA & Wilful
defaulters.
So, trust is a ‘public good’ similar to ‘public
park’– everyone benefits from it. Government
&entrepreneurs should try to build trust with citizens
and with each other.

Trust
Economic Policy Uncertainty and ES2019

Economic Policy Uncertainty Index (EPU) index Started in 2016, by three US-based economists—Scott Ross Baker, Nick Bloom and Steven J. Davis.
They capture countries’ newspapers’ headlines related to economic policy uncertainty, and then rank the nation accordingly.
2011-12: economic policy uncertainty was the highest in India.
2G Scam, Coal allocation scam, Subprime Crisis, Global Financial Crisis.
During this time, the government did not take the corporate friendly reform decisions or reverted its original decisions fearing the media scrutiny,
judicial scrutiny, protest by the labour unions.

Economic Policy Uncertainty (EPU) Index

EPU index has been developed by Baker, Bloom and Davis.

The index is created by quantifying newspaper coverage of policy-related economic uncertainty.
The index reflects the frequency of articles in leading newspapers that contain ‘economic’ the following or triple: ‘economy”; ‘uncertain’ or
‘uncertainty”; and one or more policy related words like ‘fiscal policy’, ‘monetary policy’, ‘PMO’, ‘parliament’ etc.

2016-17: increased due to Demonetisation, GST. But during this stage it was not as bad as the uncertainty during 2011-12.
From 2014 onwards India’s EPU has declined although in a zigzag manner with occasional spikes during Demonetization – GST etc. Whereas Global
EPU has increased in zigzag manner- due to the Policies pursued by Donald Trump, BREXIT, Iran, N.Korea, OPEC, Trade war between USA and
China etc.
During high EPU: domestic investors hold up their decision to invest into financial market. They prefer to invest in gold (large BOP), land / real
estate (Black money). FPI inflows decline during are volatility of exchange rate.
However, the relationship between FDI growth and volatility of exchange rate is weak. Because Foreign Direct Investors are entering a market for
long term. They look at multiple factors beyond just the exchange rate. They look at taxation, monetary policy, consumer sentiment etc. all which are
reflected by EPU.
Low growth of FPI, FDI = Corporates are deprived of the new capital from the domestic and foreign investors → it affect the factory expansion, job
creation and GDP growth.

Addressing Economic Policy Uncertainty (EPU): ES2019

Reducing economic policy uncertainty is critical for both domestic investment and foreign investment. Therefore, ES2019 suggested following reforms:

Top-level policymakers must ensure that their policy

actions are predictable. E.g.

1. From which date Bharat Stage emission norms will

become effective?

2. From which date GAARor E-Way Bill will become

effective?

Union Budget (2016) proposed to impose income tax on

Makingpolicies more
predictable
Respect boundaries
the money withdrawn by subscriber from his EPFO
fund. Later, due to labour unions backlash it was
reverted.
Union Budget (2019) proposed to hike surcharge on the
income tax of super-rich, then due to a backlash by
foreign investors, it was reverted.
Judiciary, legislature and executive should respect
each other’s boundaries. Executive and legislature
should not create a vacuum which could encourage
Judicial Overreach such as firecracker ban, or no selling
of liquor on highway hotels, which may create new
challenges in economy.
Government / Regulators should maintain broad
consistency in actual policy with the forward guidance.
They should reduce ambiguity/arbitrariness in policy
implementation. E.g.

1. 2018-Dec: Monetary policy Committee keeping

“Calibrated Tightening”. Means in the next meeting
they would either ‘hold’, or ‘increase’ repo rate. No
chance of cutting the repo rate. Yet in 2019-Feb, they cut
the repo rate.

2. Similarly, Government should avoid changing the

goalposts and deadlines of Fiscal Responsibility and
Budget Management Act. Then consistency becomes
hard to find and harder to follow.
Keep consistency in promises

“What gets measured gets acted upon”. Therefore,

Government must monitor its performance in the
Economic Policy Uncertainty Index on a quarterly basis.
We should construct India-specific sub-indices of
economic uncertainty To monitor our performance.

The actual implementation of policy occurs at the lower

levels, where ambiguity gets created and it compounds
the economic policy uncertainty. Therefore, staff should
be trained and implementation processes should be
certified (by NITI etc) before implementing policy.

Poorly drafted laws full of ambiguities, amendments,

clarifications and exemptions = endless litigation. E.g.
Provisions related to Capital Gains Tax in the Income
Tax Act 1961: Vodafone-Hutch case.

Monitoring Policy
implementations
Policy Uncertainty: Conclusion

Indian faces economic uncertainty from many fronts which are beyond our control e.g. Poor monsoon, BREXIT, OPEC Oil cuts, Geopolitical
disturbance in the Korean Peninsula and Western Asia (Iran), protectionism and tariff wars.
While policymakers cannot control above ‘economic and diplomatic uncertainties’, they can definitely control economic policy uncertainty.
Successive economic surveys have found that greater private investment is necessary for economic growth in India. EPU can spook investors and spoil
the investment climate in the economy, therefore Government must strive for 100% policy certainty on the economic fronts.

$5 TRILLION ECONOMY AND ATMA-NIRBHAR BHARAT

2020-March: Government of India initiated nation-wide lockdown to prevent the spread of Corona/COVID-19 pandemic.
This lockdown affected the in come and livelihood of everyone from corporate companies to common citizens of India.
Therefore,to revive the economy ,PrimeMinister of India launched AtmaNirbharBharat stimulus package in 2020-May to revive the Indian economy.
It’scentred on five pillars of– Economy, Infrastructure, System, Demand and Vibrant Demography

Country Japan Malaysia Singapore India

Stimulus package
20% 16.2% 12.2% Just 10%
as a % of GDP

If govt. tried to give bigger fiscal stimulus then-

Rise in Fiscal Deficit will result into low rating by Credit Rating Agencies. This has impact on Flight of Foreign Investors
Currency exchange rate volatility.
If the deficit is monetized by RBI printing more currency → demand side inflation like Post-WW1.

Conclusion

Thus, Atmanirbharbharat focuses on the well-being of the poors, credit to MSME, ease of doing biz for the corporate sector, reforms in agriculture and
catalysing the development of infrastructure.

GNP TO NNP TO PER CAPITA INCOME

Primary income (or factor income) = wages, interest, profit, rent

Secondary income (or transfer payments) = gifts, donations, charities, fines
GNP is the total value of final goods and services by normal residents of India within an accounting year.
GDP includes the contribution made by non-resident producers – who work in the domestic territory of other countries – by way of wages, rent,
interest and profits. For example, the income of all people working in Indian banks abroad is the factor income earned abroad.
Net factor income from abroad is the difference between the income received from abroad for rendering factor services and the income paid for the
factor services rendered by non-residents in the domestic territory of a country.

GNP= India’s GDP + Primary income earned by residents from overseas- Primary income earned by non-residents from India.
In brief, GNP (Market Prices) = GDP + NFIA (net factor income from abroad).

GNP ignores secondary income, the incomes from sale of second hand (used) goods.
Whenever something is produced, capital assets get consumed due to wear and tear. This wear and tear is called Depreciation. Since, depreciation
does not become part of anybody’s income, so it has to be subtracted.

Net National Product (NNP at Market Price) = GNP – Depreciation.

Net Domestic Product (NDP) = GDP – Depreciation

However, here we are getting the NNP at ‘Market Prices’. We’ve to convert it to Factor cost.

NNP (Factor Cost) = NNP (Market Price) (-) Indirect Taxes (+) Subsidies.

Theoretically ‘net’ is a better measure of the health of an economy than ‘gross’ but it is difficult to estimate net values. So GDP & GNP are
commonly used measures .

Per Capita Income

2016 2017 2018-19 2019-20*
(प्रति व्यक्ति आय)
Population in
129 131 >133cr >134cr
Crores
Per capita income
104659 114958 >126000 >135000
@ Current Prices
At t Constant
Prices 82931 87623 >92000 >96000
(@BaseYear2011)

NET ECONOMIC WELFARE

The major problem of GNP as a measure of welfare is that it measures the commercial transactions taking place in the economy while the welfare of
the individuals depends on many other non- transactional aspects.
This concept of NEW was popularized by Paul Samuelson.
NEW ECONOMIC WELFARE = GNP + Housewives’ Services + Value of Leisure – Expenditure on defence – Cost of Environmental
degradation.
Practically, it is tough to estimate this. Therefore, it was not widely adopted.

PER CAPITA INCOME (PCI)

Per capita income (PCI) measures the average income earned per person in a given area, in a specified year.
It is calculated by dividing the area’s total income by its total population.
It is not a satisfactory indicator of economic development because it increases if the overall national income increases, without regard to the
composition of the national income.
For example, even if the govt produces a lot of weapons during war, PCI will go up.
It does not take into account the welfare dimension (poverty, literacy, political liberty, environment etc).

FC includes rent, wages, interest and profit. FC is used

for estimating growth (e.g. our annual GDP numbers)
Ø NNP (Factor Cost) is the National Income of India
MP = FC + Net Indirect Taxes (taxes on goods and
services )
Net Indirect Taxes = Indirect Taxes – Subsidies
Therefore, GDP at MP = GDP at FC + Net Indirect
Taxes
GDP at MP can increase merely by increasing the
taxes, even without increase in production
FACTOR COST (FC)
Vs MARKET PRICE
(MP)
Current Values estimated at prevailing (current) prices
GDP at current prices is called Nominal GDP
Govt always gets its data in terms of Nominal GDP
and then converts it to Real GDP
GDP at current price can increase because of inflation –
not a true indicator of increase in production. So it is
not used.

Constantà Values estimated at the prices of a base year

For India, the base year is 2011-12 (earlier it was 2004-
05)
GDP at constant prices is called Real GDP
CURRENT PRICES Growth is always estimated at constant price
So, when we say that the GDP growth rate of India in
Vs CONSTANT 2016-17 was 6.5 %, it is estimated at factor cost and
PRICES constant prices.
GDP at Constant Prices is called Real GDP – it cannot
increase without a real increase in production.

GDP AND NATIONAL INCOME

Gross National Income (GNI)

According to OECDà GNI as GDP + NET receipts from abroad (wages, interest, profit, rent) plus net taxes & subsidies receivable from abroad. Here,
‘Wages and salaries’ from abroad = ‘Guest’ workers who reside abroad for less than 12 months and whose centre of economic interest remains in their
home country

National Disposable Income

National Disposable Income= NNP + Other Current Transfers from rest of the world (remittances, gift, donations etc.)National Disposable Income
gives an idea of what is the maximum amount of goods and services the domestic economy has at its disposal.

Personal Disposable Income

Personal Income – Personal Tax Payments (e.g. income tax) – Non-tax Payments (e.g. fines)

World Development Report by World Bank

World Bank has published it annually since 1978.

2020- theme: Trading for Development in the Age of Global Value Chains.
Earlier, World Bank used above income classifications for analytical purposes only. But since 2018, high income countries required to pay “extra
surcharge” on loan interest by International Bank for Reconstruction and Development (IBRD).

Defined in terms of gross national income

Types of country
(GNI) per person
High Income $12,376 or more e.g. Israel (its GNI >$40,000)
$3,996 and $12,375 e.g. China (its GNI
Upper – Middle Income
>$9,000)
Lower – Middle Income $1,026 and $3,995; e.g. India (its GNI >$2,000)
Low Income $1,025 or less

LIMITATIONS OF GDP

Impact on environment may be harmful despite increase in GDP.

Only give average figure and hide stratification
Conditions of poor not indicated
Gender disparities not revealed.
Does not matter how wealth increase… by war or demand
Does not measure sustainability of growth

CRITICISM OF GDP & PER CAPITA INCOME

1. GDP doesn’t give us true picture of Indian economy because:

Presence of unorganised sector of economy implies that, not all the production data is captured.
 To avoid any scrutiny by income tax and GST tax officials, the businessmen deliberately show low level of production during the surveys
conducted by CSO/NSSO/NSO/MOSPI.
Large size of parallel economy which functions on black money and cash.

2.Provides only quantitative picture and does not consider the qualitative aspects / negative externalities e.g. More coal based thermal power production=
more GDP, disregarding how much pollution it created.

So, Economist Peter Wood (1980s) came up with the Green accounting & Green GDP concept to consider environmental costs as well.

3.Ignores non-marketed activitiesg. domestic work done by mother.

4.Ignores the Opportunity Costg. A child labour produced ₹ 25000 rupees worth firecracker annually which will be added in GDP. But, child labourer
could not pursue education else he could have become a doctor/engineer and produced ₹ 5,00,000 worth of annual goods and services – such angles are not
considered in computing GDP.

5.Ignores inequality of income among people.

So, later on Gross Happiness Index, Physical Quality Of Life Index, Human Development Index etc were invented.

Two data collection agencies in India

Estimates National Income

Central Statistical
Organisation (CSO)
CSO with new series of national accounts with
2011-12 base year for computing size of economy
growth.
It includes data on unorganised manufacturing and
services.

Collects data on employment, poverty,

consumption, expenditure, etc
National Sample Sample Surveys conducted annually, but Large
Survey Organisation Sample Surveys conducted every 5 years .
(NSSO)

Economic Growth Vs Economic Development

If the production of goods and services increases, we call it

Growth
Economic Growth

It means that process of Economic Growth which leads to

improvement in the general welfare of people is called
Economic Development. It means progressive changes in
the socio-economic structure of the country.
Development

Sustainable Development is development that meets the needs of the present generation without compromising the ability of future generations to meet
their own needs.

GROWTH

Increase in production

Quantitative
Uni dimensional
Indicator are real GDP and real per capita income
Can happen without development

DEVELOPMENT

Increase prod. And welfare

Qualitative
Multi dimensional
Indicator are human development index, physical quality of life index, net economic welfare Cannot happen without growth

Q. Increase in absolute and per capita real GNP do not connote a higher level of economic development, if_______________(CSE-2018)
 1. Industrial output fails to keep pace with agricultural output.
2. Agricultural output fails to keep pace with industrial output.
3. Poverty and unemployment increase.
4. Imports grow faster than exports.

PREVIOUS YEAR QUESTIONS

Do you agree with the view that steady GDP growth and low inflation
2019 have left the Indian economy in 2019 good shape? Give reasons in
support of your arguments.
‘In the context of neo-liberal paradigm of development planning,
2019 multi-level planning is expected to make operations cost effective and
remove many implementation blockages.’-Discuss.
How are the principles followed by the NITI Aayog different from
2018
those followed by the erstwhile Planning Commission in India?
Among several factors for India’s potential growth, savings rate is the
2017 most effective one. Do you agree? What are the other factors available
for growth potential?
The nature of economic growth in India in described as jobless
2015 growth. Do you agree with this view? Give arguments in favour of
your answer.
Capitalism has guided the world economy to unprecedented
prosperity. However, it often encourages short-sightedness and
2014 contributes to wide disparities between the rich and the poor. In this
light, would it be correct to believe and adopt capitalism driving
inclusive growth in India? Discuss.

INDICATORS – INFLATION

Inflation is defined as a situation where there is sustained, unchecked increase in the general price level and a fall in the purchasing power of
money. Thus, inflation is a condition of price rise. The reason for price rise can be classified under two main heads:
1. Increase in demand
2. Reduced supply.
Deflation is inverse of above definition. Deflation occurs when the inflation rate falls below 0%

E.g.Suppose for Rs.100, last week you bought 10 pen. This means that the cost of 1 pen was Rs. 10. This week when you approached the same shop- keeper
and paid Rs.100 to get 10 pen, he gave only 5 pen. He also explained that the price of pen has increased, and now the price of one pen is 20.

INFLATIONARY AND DEFLATIONARY GAPS

In his book “General Theory on employment, interest, money”, British Economist J.M.Keynes (1883) said, “when economy is functioning at full
employment, aggregate supply will match aggregate demand.” At this equilibrium, we will have ‘General Price’ level → any increase → inflation, any
decrease → deflation.

Aggregate Demand = Consumption(C) + Investments(I) + Govt Purchases (G) + {Exports (X) –– Imports (M)}

Inflationary Gap

It could have occurred because of:

↑ Money supply
↑ Propensity to consume
↑ Investment expenditure
↑ Fiscal deficit
↑ NET exports
High growth → higher Aggregate demand → could lead to inflation.

Deflationary Gap

It could have occurred because of

↓ Money supply
↑ Propensity to save / Consumer delaying purchase with hopes of further fall in prices
↓ Investment expenditure
↑ Fiscal consolidation
↓ NET exports
Depression / Recession that results into falling ‘Aggregate demand’.
Deflationary gapà Aggregate supply > Aggregate demand (at full employment level)

When inflation increases, workers demand higher

wages to keep up with the cost of living → firms pass
these higher labor costs on to their customers →
Inflationary Spiral higher prices → more inflation → ……

Fall in prices → lower profit to firm → lower

production, lower wages / workers laid off → lower
demand → lower prices → and same cycle goes on.
Deflationary Spiral

Q. A rise in general level of prices may be caused by___________________________(CSE – 2013)

1. An increase in the money supply.

2. A decrease in the aggregate level of output.
3. An increase in the effective demand.

Answer Codes:

(a) 1 only

(b) 1 and 2 only

(c) 2 and 3 only

(d) 1, 2 and 3

Q. Economic growth is usually coupled with__________________________(CSE – 2011)

1. Deflation
2. Inflation
3. Stagflation
4. Hyperinflation

INFLATION: TYPES BASED ON CAUSATION

It is “too much money chasing too much goods”. Prices are

rising because people have excess money à demands for goods
Demand Pull Inflation and services exceeds the available supply. MGNREGA, pay
commission, PM KISAN scheme, Universal Basic Income
(UBI) could result into this.
Monetary inflation When RBI printing of more money results in inflation
Price rise due to increased cost of inputs e.g.

– Expensive crude oil → higher costs for Transport Companies.

– Trade / labour unions’ protests / strikes → wage hike.

– Natural disasters → Lower potato / chilly production →

Cost-Push Inflation
Chips makers have to pay more for inputs.
When Cartels / Monopolists / Oligopolists deliberately cut
down the supply / production or hike the prices because of
Profit – Push Inflation greed / profit motive. E.g. OPEC group oil production cut.

Linked to the “price/wage inflationary spiral” i.e. when

inflation rises, workers demand higher wages to keep up with
the cost of living → firms passing these higher labor costs on to
their customers as higher prices → more inflation.
Built-in-Inflation
During war, Govt imposes price controls and rationing to keep
prices under check. But the moment such controls are
withdrawn, prices will go up (because traders will want to
cover up their previous losses by raising prices). This is called
Repressed Inflation.
Repressed Inflation
Persistent high inflation, high unemployment and low growth
Stagflation resulting into a stagnant economy.

Term to denote episodic price rise in one / small group of

commodities while Inflation in the remaining goods and
services remain usual. E.g. pulse / tomato / onion inflation in
Skewflation India.

It is the measure of the total inflation within an economy,

Headline Inflation usually presented in the form of CPI or WPI.
Headline inflation minus inflation in food & energy articles.
Core inflation
Accordingly, it can be CPI (Headline) or WPI (Headline).

Philip curve we learned that deflation → unemployment, so,

RBI tries to stimulate economy by increasing the money
supply, Govt tries to give ‘fiscal stimulus’ by reducing taxes /
increasing public procurement…. Such actions take economy
from deflationary path towards inflation path, this is process is
‘Reflation’.
Reflation

Inflation that is part of a particular economic system. A

complete change in economic policy would be needed to get rid
of it. e.g.

– To keep farmers happy, Govt keeps raising MSP for wheat /

rice but not so much for pulses → inflation in pulses.

– APMC reforms not taken → cartelization & hoarding →

inflation in vegetables.

– When global crude prices are falling, Govt raises Excise /

VAT to get more money for their schemes, so, petrol-diesel not
getting cheaper & so on…
Structural Inflation
Hoarding inflation Accumulation of huge quantities of goods and releasing them
into the market in condition of scarcity at higher prices.
Country depends on imports has its prices rising due to
Imported inflation:
exchange rate.

Implications of Stagflation for policy making

Stagflation is considered to be a problematic condition for governments to handle. This is because;

It presents a situation when despite of low demand the prices keep going up.
When an economy is in recession, the governments try to revive the economy by cutting interest rates or increasing government spending to put
boost the demand, which leads to inflation.
However, these inflationary measures cannot be applied in stagflation because inflation is already very high and such measures would further result
in prices spiralling out of control.

INFLATION TYPES BASED ON SPEED OF INCREASE

~4% per annum. It’s regarded safe and essential for

Creeping Inflation:
job creation and economic growth.
Over 4% onwards → Running Inflation is when it
Walking / Trotting Inflation:
shifts to double digit.
Very high level. 20%-100% and sometimes even
10,000% or more, as observed in Germany after
Treaty of Versailles due to monetized deficit.
Modern day Venezuela and Zimbabwe due to mis-
governance of ruling parties resulting into broken
economy & shortage of essential commodities. Here,
money becomes quite worthless and new currency
Galloping / Hyperinflation: may have to be introduced.

Q. Which one of the following is likely to be the most inflationary in its effect? (CSE – 2013)

1. Repayment of public debt

2. Borrowing from the public to finance a budget deficit
3. Borrowing from banks to finance a budget deficit
 4. Creating new money to finance a budget deficit

Base Effect of Inflation

Suppose price of 1 kg tomatoes = 100 (2010), 110 (2011), 120 (2012). So, as such their price is increasing at the rate of ₹ 10 per year.
However, the percentage rise in inflation over previous year is 10% for 2011 (110 vs 100), and 9.09% for 2012 (120 vs 110).
Thus, the choice of base (denominator) could make the inflation look too high or too low even if the price rise has been same as the same.

Q. A rapid increase in the rate of inflation is sometimes attributed to the “base effect”. What is “base effect”?(CSE-2011)

1. It is the impact of drastic deficiency in supply due to failure of crops

2. It is the impact of the surge in demand due to rapid economic growth
3. It is the impact of the price levels of previous year on the calculation of inflation rate
4. None of the statements

EFFECTS OF INFLATION ON INDIVIDUALS

Effect During Inflation During Deflation

They make huge profits They make losses because

because the price of final prices of final products fall
product is rising at a much faster than the cost of
faster speed than the price of production→ lay-off
On raw materials. workers to cut salary bill.

Businessman, Borrowers

Salaried individual,
pensions suffer. While they will benefit
because the value
(purchasing power) of
Lenders suffer because even money will increase, but
if borrowed money is some workers / employees
returned their ‘real will lose their jobs during
Purchasing Power’ would deflation as per the Philip
On have declined due to the fall Curve.
in Real Interest Rate.
Fixed Income

Groups, Lenders

Since rupee’s purchasing

power will decline, its
exchange rate value will Reverse will happen.
weaken against foreign
currencies, as foreigners get
less keen to buy from India.

Currency itself

Q. Find correct statement(s): (CSE-2013)

1. Inflation benefits the debtors.

2. Inflation benefits the bondholders.
3. Both A and B
4. Neither A nor B

IMPACT OF INFLATION
Positive Impact:

Inflation is good for the economy upto reasonable limits. This according to RBI is 5%.
Moderate inflation stimulates growth.
 Moderate inflation allows adjustment of prices.
Moderate inflation allows adjustment of real wages.
Inflation may reduce the severity of economic recession.
Tobin effect- can increase the investment.

Negative Impact

Real income of people would decrease.

Inflation is regressive in nature.
Would increase income inequalities.
Capital formation is adversely affected.
Interest rates were increased by RBI.
Promote hoarding and speculation. Thus Promotes generation of Black Money.
Standard of living would reduce.

COMBATING INFLATION OR DEFLATION

Agency Fighting inflation Fighting deflation

Tight / dear / Hawkish Monetary Cheap / Easy / Dovish – to
RBI Policy to make the loans expensive make loans cheaper

Tax deduction / exemption /

subsidy benefits towards producers
to decrease the cost of production.
Tax deduction / exemption /
Curtailing Fiscal Deficit.
subsidy type benefits to
Curtailing schemes and subsidies
consumers to encourage
that are increasing money in the
purchase / consumption. (e.g.
hands of beneficiary without
cut GST on Television,
increasing production.Ordering
Computers, Cars) Increasing
RBI to issue inflation Indexed
the expenditure on public
Bonds, Sovereign Gold Bonds
projects e.g. highway, dam
Essential commodities act, Stock
etc. to boost demand in steel /
limits, minimum export price,
cement industry → workers
FCI’s Open Market Sale Scheme,
get money → demand →
Operation Greens for TOP, Price
towards inflation .
stabilisation fund, Offering higher
MSP to farmers to increase
cultivation of a particular crop etc.
Govt

CPI, WPI, IIP & OTHERS

German economist Etienne Laspeyres formula is

used in calculation of WPI, CPI and IIP index. It is a
weighted arithmetic mean (average) of a basket of
commodities that tracks price / production level against
the base year.
Laspeyre
German economist Hermann Paasche’s index tells us
what today’s “Basket” of commodities, would have
Paasche Index cost at the base year’s price.
American Economist Irving Fisher’s index is the
Geometric mean of (Laspeyrese and Passche), to give
Fisher Index a more accurate picture.

INFLATIONINDICES
Inflation Index Agency Base year
Consumer Price Index: 1) Rural

2) Urban 2012

3) All India.

NSO, MoSPI
Consumer Food Price Index (CFPI) 2012
CPI Industrial Workers (IW)
2001
Labour Ministry’s Labour
Bureau
CPI Rural labourers (RL),Agri.
labourers (AL) 1986

Wholesale Price Index (WPI) Economic Advisor to

DPIIT, Commerce 2011
Ministry

Q. Which of the following brings out the ‘Consumer Price Index Number for Industrial Workers?(CSE-2015)

1. The Reserve Bank of India

2. The Department of Economic Affairs
3. The Labour Bureau
4. The Department of Personnel and Training

CPI (All India), NSO and Base Year: 2012

Monthly CPI Components in (All India) Index →
Wt.
(decreasing order)
Food & Beverages 45.86
Services: (Transport & communication > Health > Education
20.62
> Recreation)
Housing 10.07
Fuel & Light 6.84
Clothing / footwear 6.53
Misc. Personal care (soap etc) 3.89
Household goods & Services 3.80
Pan Masala, Tobacco, Intoxicants 2.38
Total Weight 100

For Individual CPI for Urban and Rural areas, these weights are assigned differently. E.g. CPI rural has zero weight to housing & 54.18 weight to food and
beverages.

The inflation figure arrived based on all of the above

Headline CPI
components of CPI (All India).
Core CPI Headline CPI Minus Inflation in food & energy)

Inflation rate %: how is it calculated?

Index value of Headline CPI (All India) was 148.6 (2019-Nov) and 140.8 (2018-Nov). Therefore,

Trend

CPI was towards Inflationary path in UPA/Manmohan era.

CPI was towards Deflationary path during Modi 1.0 era (2014-19)- mainly due to falling food prices. Food commands ~46% weight in CPI
calculation.
Modi 2.0 era (2019-May onwards): back to inflationary path due to oil, onion etc.

Wholesale Price Index, EA-DPIIT, Base: 2011

Monthly WPI Components in descending order

Wt.
→
Manufactured products: Processed Food, Edible
Oil, Paper Products, Chemicals, Plastic,
-64%
Cement, Metal Products, Transport Equipments
etc.
Primary Articles: -23%

A. (Unprocessed) food articles, eggs, meat- -13%

fishes, oil seeds etc. (~19%)

B. Crude Petroleum (~2%)

C. Minerals (-0.8%)
Fuel & Power: High Speed Diesel (HSD) >
-13%
Petrol > LPG
Total 100

WPIà Monthly growth is zigzag although towards deflationary path nowadays. During initial Modi raj it even went into negative zone for some months due
to fall in global crude price (although since Union/State Govts kept raising Excise/VAT so it was not felt in real life).

Other Inflation Indices

Index Features
WPI covers only goods but not
services.

Whereas, PPI covers both goods and

Producer’s Price Index (PPI)
services. It measures price change
from sellers’ perspective. OECD
nations use PPI to measure inflation at
wholesale level. Their PPI only
measures price (and not PRICE +
Taxes).

2014: DPIIT setup Dr. B.N.Goldar

Committee to explore this for India.
EA to DPIIT preparing these
experimental indices separately for
Railway Services, Port Services, Air
Services, Postal Services, Telecom
Experimental Service Price Services, Banking Services,
Index Insurance,
It measures the inflation in the fees
charged by Banks for NEFT- RTGS,
Mobile Banking, Card Transactions,
Issuing Demand Drafts / Bank
Guarantee, annual fees for opening
Banking Business Service Price DEMAT account etc. [Base Year
by RBI. 2011]

RBI quarterly survey of ~5k

Inflation Expectation Survey
for households
households across 18 cities, asking
them what is their ‘expected level’ of
inflation for the next 3 months and 1
year.
Measures inflation in the residential
house prices in selected Indian cities.
2018

Reforms →

NHB changed base year from 2012 to

2017.

RESIDEX by National Housing NHB introduced new indices to

BankNHB) measure inflation in Land Price,
Building Materials & Housing Rental.

INFLATION OBSERVATIONS BY ES-2020

The World bank observed that Inflation has decreasing across developing nations between (119%) 1993 to 4.8%(2018) because of:

1. Monetary and fiscal policy

2. Structural reforms to raise production.

However, inflation is on rising trendin 2019 for India.

CPI (Urban) << CPI (Rural). But since 2018: CPI

(Urban) >> Rural due to higher level of food inflation
Before 2018

Some areas have witness higher level of inflation than

all India average. E.g. Lakshadweep Andaman
(geographical isolation), Manipur (frequent highway
2018-19 Bandh/blockades), Kerala (floods) etc.

Thalinomics byES-2020

Thalinomics is a concept to estimate how much ₹₹ a common person pays for a Thali (platter of food) across India.
Between 2015 to 2018, the Thali price has reduced:

1. Across all regions of India

2. For both veg and non-veg thalis.

While Thali prices reduced between 2015-18, they have increased in 2019.
But allover, thali’s affordability has increased for poor families.
Consequently, a family of five people is able to save >₹10,000/per year because of reduced prices.
ES-2020 appreciated various schemes of current govt. for:

1. Increasing food production and

2. Making food more affordable.

Index of Industrial Production (IIP)

IIP is a monthly index prepared by CSO, Base Year 2011 and Laspeyres Index Formula.
IIP measures production of 407 item groups related to:

1. Primary goodsàdirectly obtained from natural sources e.g. Ores, Minerals, Crude Oil; And energy goods such as Petrol, Diesel, Electricity (Both
Renewable and Non-Renewable).
2. Capital goodsàPlants & machinery used for further production e.g. Boilers, Air & Gas Compressors, Engines, Transformers, Commercial Vehicles etc.
3. Infrastructure/constructiongoodsàg.paints,cement, cables, bricks and tiles, rail materials, etc.
4. Intermediate goodsà which goes as input in production e.g. Cotton yarn, Plywood, Steel Tubes/ Pipes, Fasteners, etc.
5. Consumer durablesà Products directly used by consumers and having a longer durability (2 years or more). E.g. Pressure Cooker, TV, AC, Tyres,
Telephone , Mobile, Cars, Motorcycles, Scooters, Jewellery etc.
6. Consumer non-durablesàProducts that are directly used by consumers and can’t be preserved for long periods. e.g. Soyabean Oil, Milk Powder,
Maida, Rice, Biscuits, Sugar, Tea, Cigarettes etc.

Sector Weight% Item groups

Mining 14.373 1
Manufacturing 77.633 405
Electricity 7.994 1
Total 100 407

Observations of ES2020 on IIP

Compared to 2017, there has been a fall in IIP for 2018 and 2019 because:

NPA problem, ILFS-NBFC crisis – conracted amount of Loans moving toward the MSME
Protectionism in US/EU levying higher import taxes on Indian products → decreased demand of Indian goods in foreign market → decreased Indian
production.
Persistent decreasing demand in automobile, real estate sector → steel, cement production decreasing
Coal production decreases because of Excessive rainfall during monsoon, labour strike in mining States in 2019.
Trade war – Between china and USA impacted IIP in India.

Index of Eight Core Industries

Prepared by EA-DPIIT, Base Year 2011, It’s similar to IIP index focusing 8 core industries
Descending order of weight à Refinery Products > Electricity> Steel> Coal> Crude Oil> Natural Gas> Cement>Fertilizers.
Collectively, these 8 industries command 40.27% weight in the overall IIP.

Q. In the ‘Index of Eight Core Industries’, which one of the following is given the highest weight?(CSE-2015)

1. Coal production
2. Electricity generation
3. Fertilizer production
4. Steel production

Q.1 Which of the following are among the 8 Core Industries of IIP?______________(CSE-2012)

1.Cement

2.Fertilizers
 3.Natural Gas

4.Refinery products

5.Textiles

Answer Codes:

(a) 1 and 5 only

(b) 2, 3 and 4 only

(c) 1, 2, 3 and 4 only

(d) 1, 2, 3, 4 and 5

OTHER INDICES

Indexes Features

By CSO, covering all registered units

under factories act, and electricity
companies.
Not Surveyed: Defense Factories, Oil-
gas Storage, Restaurants, Hotels, Café,
Computer Services, Departmental Units
such as Railway Workshops, Govt.
Annual Survey Mints, Sanitary, Water Supply, etc.
of Industries (ASI)
Because IIP & ASI only cover
manufactured items &electricity, so,
Index of Service Production CSO working on (Experimental) Index
(ISP) of Service Production covering
Banking, Insurance, Education,
Telecom and transport.

Order Books, Inventories and Capacity

Utilization Survey.
Quarterly survey to assess consumption
& investment demand.
RBI’s OBICUS
HSBC’s Purchasing Manager Index
(PMI)àby surveying 400+ companies
senior executives.
SBI’s Composite Index based on its
loan portfolio, inflation, consumer
spending etc.
Suchindices have scale of 0-100
points.
Above 50 means economic growth,
Below 50 means contraction compared
Economic Health Indices by to previous period.
Commercial Banks
London’s Baltic Exchange measures
the cost to transport raw material by
sea. If increasing → world economy is
growing, and vice versa. Post-Subprime
crisis fell, then rose from 2016-18, then
again falling in 2018 due to
protectionism.
Baltic Dry Index

Q. Find correct statement(s):______(CSE-2013)

1. Inflation benefits the debtors.

2. Inflation benefits the bondholders.

Choose the correct option:

1. A only
2. B only
3. Both A and B
4. Neither A nor B
INDICATORS – UNEMPLOYMENT

Unemployment refers to a situation where a person of working age who is looking for work is unable to find employment.
According to the Bureau of Labour Statistics, for someone to be termed as unemployed, they have to meet these three conditions:
They do not have any job, not even a temporary or part-time job.
They are currently available for work.
They have actively searched for a job in the past four weeks.
According to BLS (Bureau of Labor Statistics), people who have stopped looking for work are not regarded as unemployed.
They are not even counted as part of the labor force.
If, for example, an unemployed person wins some money through the lottery and stops looking for work as they enjoy their new found wealth, that
person is not considered as unemployed.

Sustainable Development Goal – 8

A person is out of job on his own choice. Either

he wants higher wages or doesn’t want to work
at all. Voluntary unemployment is likely to
occur when the equilibrium wage rate is below
the wage necessary to encourage individuals to
supply their labour.
Voluntary Unemployment:
Involuntary Prevailing wage rates, but unable to find work
unemployment: due to factors beyond his control.

TYPES OF INVOLUNTARY UNEMPLOYMENT

Types Features
Economy goes through boom-bust cycles.
During bust / recession / depression when
workers are laid off on mass scale.
Cyclical unemployment exists when
individuals lose their jobs as a result of a
downturn in aggregate demand (Total
demand).If the decline in aggregate demand
is persistent, and the unemployment long-
term, it is called either Demand Deficient
Unemployment in general, or Keynesian
Cyclical unemployment.
E.g. Maruti removed 3000 workers in 2019-
Aug because car sales are dip.

Frictional unemployment, also called search

unemployment, occurs when workers lose
their current job and are in the process of
finding another one.
There may be little that can be done to
reduce this type of unemployment, other than
provide better information to reduce the
search time.
This suggests that zero unemployment is
impossible at any one time because some
workers will always be in the process of
changing jobs.

Frictional
It is a form of unemployment where it may
seem that some people are employed,
when in fact they are not. Also referred as
hidden unempl-oyment
Common in developing countries where
increasing populations result in a surplus in
the labor force, where employees are
working in a redundant manner.
Disguised Unemployment
 E.g. Farming family of 6 persons produces
400kgs of wheat, but even if you remove 3
persons still production remains at 400kgs of
wheat.

Labourers in Agriculture, Salt-pans, Sugar

Mills, Ice- factory, Tourist spots, Marriage
Catering-Orchestra etc.
Seasonal
Person is employed but not in a befitting
position or salary corresponding to his
Under employment
qualification.
Educated unemployment e.g. M.Com working as peon in MNCs, M.
Tech working as Bank clerk etc.

Technological unemployment occurs when

men are replaced with machines e.g. Textile /
Automobile.
2018-Sept: World Economic Forum released
“Future of Jobs Report”. It says, by 2025,
machines will do more work hours than
Technological humans in 12 industrial sectors. As a result,
75 million worker jobs may be lost, but 133
unemployment million new jobs may emerge in robot
repair/robot software design etc. Hence
urgently workers need to be reskilled.

Structural unemployment occurs when

certain industries decline because of long
term changes in market conditions creates a
mismatch between the skills needed by
employers and the skills that workers
possess.
Lack of jobs when person’s
skill/qualification is insufficient for the jobs
available in the market
e.g. An IT Graduate knows machine design
but demand is for Catia pro experts.

Open / Structural

unemployment

Q. Disguised unemployment generally means_____ (CSE-2013)

1. large number of people remain unemployed

2. alternative employment is not available
3. marginal productivity of labour is zero
4. productivity of workers is low

OTHER TYPES OF UNEMPLOYMENT

Classical Unemployment

Also referred to as induced unemployment or real wage unemployment. Caused when wages are ‘too’ high.
Occurs in situations where wages are higher than the laws of supply and demand, forcing companies to lay off the other employees.
It is caused by one of the following situations:
Powerful trade unions negotiate for salaries and benefits that are above the market equilibrium.
legal minimum wages are higher than the market equilibrium.
Wages set by long term contracts exceed the equilibrium due to recession, forcing a company to lay off some workers.
This explanation of unemployment dominated economic theory before the 1930s, when workers themselves were blamed for not accepting lower
wages, or for asking for too high a wage.

Regional Unemployment

When structural unemployment affects local areas of an economy, it is called ‘regional’ unemployment.
Labour market immobility is that it can create regional unemployment, which is a type of structural unemployment.

Natural Unemployment
 Natural unemployment is defined as the lowest rate of unemployment that an economy can support. It can be considered as a baseline below which
the levels of unemployment cannot decline. So, an economy that has reached this point is said to be at full employment.
It is termed as ‘natural’ because it is caused by other factors that are independent of the state of the economy. Natural unemployment may be
due to frictional, structural or classical unemployment.
No economic or market fix can be made to eliminate natural unemployment. Economists consider a natural unemployment rate of around 4%
to be an indicator of a healthy economy.

STRUCTURAL UNEMPLOYMENT AND LABOUR MOBILITY

Labour immobility is likely to increase structural un-employment. This is because those industries that are growing and need labour, often called
sunrise industries, are not necessarily able to employ the same workers who have been displaced in the declining, sunset industries.

There are three types of labour immobility:

Geographical immobility
Industrial immobility
Occupational immobility

Information failure also contributes to labour immobility because workers may be immobile because they do not know where all the suitable jobs
for them are.

Geographical immobility

Occurs when workers are not willing or able to move from region to region, or town to town.
Other factors such as strong social and family ties, and parents being unwilling to disrupt their children’s education by changing schools, immense
house price variation

Occupational immobility

Occupational immobility occurs when workers find it difficult to change jobs within an industry. For example, it may be very difficult for a doctor to
retrain to be a dentist.

Industrial immobility

Industrial immobility occurs when workers do not move between industries, such as moving from employment in motor industry to employment in the
insurance industry.

REASONS FOR UNEMPLOYMENT

Economic slowdown: Currently, sectors like auto, real estate, banking, construction, agriculture and MSMEs – which contribute a considerable
amount towards India’s GDP – are facing a sharp demand slowdown.
Preference of voluntary unemployment: Voluntary unemployment is preferred over low-paying jobs (i.e. adopting the ‘wait-and-watch’ policy for
the right job profile and remuneration.
Downgrading of employment: i.e. hiring of candidates, with higher but superfluous qualifications, for elementary positions (e.g. news reports of PhD
holders applying for peon vacancies)
Lack of Industry: Academia cohesion: Disparity between colleges’/universities’ curriculums and industry requirements/ expectations.
Lack of vocational training: which renders many unemployable

Government Steps for employment generation

MUDRA Bank Micro Units Development Refinance Agency (MUDRA) Bank

Start Up India and Stand Up India Schemes
Make in India Program profile and remuneration.
The apparel and garments sector received a special package
Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA)

WORKERS CLASSIFICATION BY NSO

· Those who work for themselves & charge ‘fees’.
They do not sell their labour power to anyone else
for a “wage”, so they are their own ‘boss’.

· Subcategories:

Self-employed 1) Own Account

2) Partners / Owners / Employers Of Business Firm

3) Unpaid Family Labourers

 They sell their labour to employer, for
Regular wage/salaried
predetermined wages/salary. Their job continuous
employees
round the year.
They sell labour for ‘wage’ but employerhires them
Casual workers for very short time period on daily or monthly
basis.

Table 2: Number of workers in each category in PLFS: 2017-18

High to low 1 2 3 4 5
Own Unpaid 2%
Casual salaried Employer
(Male, Female account family
workers employees (those who
Combined) workers labourer.
give jobs to
others)
Male only Same descendingorder as above.
Unpaid Own 0.5%
Casual salaried Employer
family account
Female only worker employee within
labourers workers
female
labourers

‍Census-2011 classification of workers

Worker type Employed for this much duration in a year

Main worker 6 months or more. (183 days to be precise)
Marginal worker Less than 6 months.

Unemployment And Unorganized Sector

An unorganized sector firm is not registered under any law such as Shop Establishment Act, Factory Act, Companies Act, Statutory Corporation,
Govt org etc.
Unorganized sector consists of individuals / self-employed workers engaged in non- trade-unionized casual / seasonal work with irregular payments &
lack of social security coverage like EPFO/ESIC.
Government has enacted Unorganized Sector Workers’ Social Security Act, 2008 to provide them with life and disability cover, health and
maternity benefits, old age protection etc.

Indicative Examples of Unorganized worker

Small and marginal farmers, landless agricultural

labourers, share croppers, fishermen, those engaged
in animal husbandry, beedi rolling, labelling and
packing, building and construction workers, leather
workers, weavers, artisans, salt workers, brick kilns
and stone quarries
Occupation wise
Attached agricultural labourers, bonded labourers,
Nature of employment
migrant workers, contract and casual labourers.
Toddy tappers, Scavengers, Carriers of head loads,
Specially distressed
Drivers of animal driven vehicles, Loaders and
categories
unloaders.
Midwives, Domestic workers, Fishermen and
Service categories women, Barbers, Vegetable and fruit vendors,
Newspaper vendors etc.
Cobblers, Hamals, Handicraft artisans, Handloom
weavers, Lady tailors, Physically handicapped self-
Miscellaneous employed persons, Rickshaw pullers, Auto drivers,
Carpenters, Tannery /Power loom workers and
Urban poor.

Unorganized worker is a Person working in above

sectors. There are more number of workers in
Unorganized unorganized sector, than in the organized sector.
worker

Informal worker is a Person who is not in the formal

records / contract of a firm. So he could be in
unorganized sector and he could be even in ‘organized
sector’ e.g. driver / Security Guard/ gardener, delivery
boy of Zomato etc.
Informal worker

Table: Number of workers in each category in PLFS: 2017-18

(image)

Approx.. Amt in cr Organized Unorganized = Total

Formal 4.4 0.3 4.7
Informal 4.6 37.7 42
= Total 9 38 47cr

NSO SURVEYS

Quinquennial
Employment and Periodic Labour Force Survey
NSO surveys Unemployment (PLFS)
Surveys

Every 5 years. Starting Annual, Startedsince2017

from 1972 Last survey
done in 2011-12. Then
Frequency discontinued 2017’sresultannouncedin 2019.
ofSurvey
75% of the surveyed house
Non-agricultural should have a minimum one
workers in rural and class10 pass person.
urban areas
Households which
are surveyed by Both urban & rural, agro & non-
NSO agro covered.

UNEMPLOYMENT RATE (UR)

Labour force Those who are ‘working’ (or employed) and those ‘seeking or available for work’ (may called as involuntarily unemployed).
Unemployment rate finds involuntarily unemployed persons via following formula:

Current
If not employed even 1 hr work in a week
Weekly Status
Current If not employed even 1 hr work in a day in a
given week.
Daily Status
It’s further subdivided into:

1. Principal Activity Status (PS)

2. Subsidiary Economic Activity Status (SS)

If person’s usual status (PP+SS) was

“Unemployed” for majority of the year →he is
deemed unemployed.
In official reports, this figure is given more
prominence.
2019-Jun: NSSO’s periodic labour force survey
Usual Status (PLFS) says unemployment rate is 6.1% as per (US
PS+SS: 2017) which is highest in last 45 years. **
(US)

WORKER POPULATION RATIO (WPR)

It is the percentage of employed persons in the population.

LABOUR FORCE PARTICIPATION RATE (LFPR)

LFPRis the percentage of a persons in labour force (i.e. working or seeking or available for work) in the population.

2017–37% (male + female in rural + urban combined). It can’t be 100% because there will be children, elderly outside the ‘15-59’ age group meant for
workers.

ES20 observed between 2004 to 2017, LFPR (Female: rural+urban) steadily decreasing because:

More and more proportion of women pursuing higher studies → their entry in the job market is delayed.
Rising in income of (some) rural men → their wives have stopped working as labourer and just playing domestic housewives role.
Increase dmechanization of agriculture & animal husbandry → Drop in demand for female agricultural workers.
Drop in textile/leather exports due to US/EU protectionism → decrease in demand for female workers
Drop in real estate sales → decreased construction of new buildings →drop in female laborers
Cultural factors, social constraints and patriarchal norms restricting mobility and freedom of women.
Many rural / small-town girls don’t have require knowledge of computer and English to get jobs in emergent Startup sector.

Prudential solution will be government schemes for skill development and entrepreneurship among women.

UNEMPLOYMENT DATA

E.g. Employment-Unemployment Survey (NSSO), Annual

Household Surveys: Labour Force Survey (Labour Bureau)

E.g. – Economic Census (by MOSPI), Annual Survey of

Industries (MoSPI), Unorganized Sector Surveys of
Industries and Services (NSSO), Quarterly Employment
Survey (QES) (Labour Bureau)
Enterprise Surveys:
E.g. – Employees’ Provident Fund Organization (EPFO),
Social Security Schemes: Employees’ State Insurance Corporation (ESIC)
It includes tax returns and filings, pension and medical
Administrative data:
insurance programs
It includes estimates via MGNREGA, MUDRA, job
Data from government creations under programs such as ICDS, PMKVY,
schemes: DDUGKY etc.
GSTN, Big Data analytics
Emerging sources:

URBAN EMPLOYMENT

India is in the midst of a massive job’s crisis. The unemployment rate has reached a 45-yearhigh (6.1%) in 2017-18 as per data from the Periodic
Labour Force Survey (PLFS) report of the National Sample Survey Office (NSSO).
According to the PLFS report, the unemployment problem is especially aggravated in India’s cities and towns.
Aside from unemployment, low wages and precarity continue to be widespread.
Centre for Sustainable Employment, Azim Premji University, recently published policy brief “Strengthening Towns through Sustainable
Employment”, which propose the creation of a National Urban Employment Guarantee Programme.

Idea of an urban employment programm

The idea of an urban employment programm is gaining traction in political and policy debates.
In Madhya Pradesh, the State government has launched the “Yuva Swabhiman Yojana” which provides employment for both skilled and unskilled
workers among urban youth.
Green New Deal: In the United States of America, ‘Green New Deal’ proposals provide for a ‘Green Job Guarantee’ which enshrines ‘a legal
right that obligates the federal government to provide a job for anyone who asks for one and to pay them a liveable wage’.
Given the State’s relative neglect of small and medium towns and to avoid migration to big cities, such a programme can cover all ULBs with a
population less than 1 million.
In the context of the present employment crises, it is worthwhile considering to introduce an employment guarantee programme in urban areas.

Conclusion

An urban employment guarantee programme not only improves incomes of workers but also has multiplier effects on the economy.
It will boost local demand in small towns, improve public infrastructure and services, spur entrepreneurship, build skills of workers and create
a shared sense of public goods.
 Hence, the time is ripe for an employment guarantee programme in urban India. Hence we need new ways to promote the sustainable
development of India’s small and medium towns.

WAYS TO CREATE JOBS

Shift development focus towards labour intensive sectors to create more jobs, such as food processing, leather and footwear, wood manufacturers
and furniture, textiles and apparel and garments.
Cluster development to support job creation in micro, small and medium enterprises (MSMEs), with a specific focus on incentivizing these MSMEs
to grow bigger to generate more jobs.
Formalisation of workforce – where growth in jobs must be inclusive and new jobs need to be decent and secure with better work conditions
including social security benefits and the right to organise.
Expansion of the organized sector to create well-paid high productivity jobs.
Greater focus is required on better and relevant skilling opportunities so as to compete with neighbours and global competitors.
Expansion in export market by developing Coastal Employment Zones (CEZ), using better technology, and improving on quality to remain
competitive.
Incentivizing industry – Reducing corporate tax, easing lending norms and relaxing GST rules on a short-term basis are some of the reforms that
could give companies more room for hiring and boosting productivity.
The public investments in health, education, police and judiciary to create many government jobs.
The government should introduce reforms to quell the wage gap and get more women to become a part of the country’s workforce.
India will have to shed its service-led structure and transform into an innovation-driven economy and focus on becoming a creator rather than an
adopter.

Skilling and Apprenticeship is the need of the hour

Another novel aspect is the creation of a skilling and apprenticeship programme for unemployed youth with higher education who can sign up for
a contiguous period of 150 days (five months), at Rs.13,000 a month for five months.

These employed workers can assist with administrative functions in municipal offices, government schools, or public health centres, and for the
monitoring, measurement, or evaluation of environmental parameters.

DOWNLOAD PDF