ECONOMICS

FY-BA-LLB

PROF. SWATI MOHITE

 SYLLABUS

Module I Foundation of Economics

1. The Nature and Significance of economic science and its relevance to law, Difference
between Micro and Macro Economics, Positive economics and Normative economics
2. Law of demand, Elasticity of Demand and Law of supply
3. Market structure- Features of Perfect Competition, Monopoly, Monopolistic Competition
and Oligopoly
4. Circular Flow of Income
5. National Income and its measurement (GDP, NDP,GNP, NNP, PCI, GVA, Green GDP)
6. Trade Cycles-Phases

Module II Indian Economy

1. Salient features of Indian Economy and Structural changes
2. Causes of Low Agricultural Productivity and Government measures to improve its
productivity
3. Poverty- Poverty Line, Causes and its alleviation strategies
4. Population- Size and composition, Causes of high growth and Demographic Dividend
5. NITI Aayog- Structure and Functions
6. Food Security and recent trends
7. New Industrial Policy,1991
8. Micro, Small and Medium Enterprises (MSMEs) – Problems and Policies

Module III Financial Markets and Fiscal System

1. Indian Money Market- Features and recent trends
2. Indian Capital Market- Features and Growth
3. Measures of Money Supply in India
4. Indian Tax Structure- Direct and Indirect Taxes
5. Sources of Public Revenue
6. Public Expenditure- Classification and Causes of growth of Public Expenditure
7. Intergovernmental Fiscal Relations in India- Centre- State Fiscal Relationship and Finance
Commission

Module IV External Sector

1. Structural changes in India’s foreign trade since 1991
2. Balance of Payments- Structure and Disequilibrium
3. WTO, SAARC,BRICS
4. Commercial trade policy
 1
1 Introduction to Micro Economics and Macro Economics
Let's recall :
You have already studied in Class XI,
the meaning and definitions of economics
given by different economists.
Fig. 1.1
Introduction :
Micro economics and Macro economics are
the two main branches of modern economics.
The term ‘micro’ is derived from the Greek word,
‘Mikros’ which means small or a millionth part.
The term ‘macro’ is derived from the Greek
word, ‘Makros’ which means large. These terms
were coined by Norwegian Economist Ragnar
Frisch of Oslo University in 1933.
Main Branches of Economics
Micro Economics Macro Economics
Do you know?
Ragnar Anton Kittil Frisch (1895-1973),
a Norwegian econometrician
and economist was a joint
winner with Jan Tinbergen
of the first Nobel Prize for
Economics in 1969. He was
a pioneer of econometrics-
the application of mathematical models and
statistical techniques to economic data and
theories. He coined many economic terms.
In an article on business cycles, Frisch was
1
likely the first person to have referred to the
study of individual firm and producer as
“Microeconomics.” Moreover, he referred
to the study of the aggregate economy as
“Macroeconomics.”
You should know :
Historical review of Micro Economics :
Micro Economic analysis was developed
first. It is a traditional approach. Origin
of this approach can be traced back to the
era of Classical Economists- Adam Smith,
David Ricardo, J. S. Mill etc.
It was popularized by Neo-Classical
Economist, Prof. Alfred Marshall in his
book, 'Principles of Economics', published
in 1890. Other economists like Prof. Pigou,
J. R. Hicks, Prof. Samuelson, Mrs. Joan
Robinson, etc. have also contributed to the
development of Micro Economics.
Historical Review of Macro Economics :
Macro Economics did exist in the past
before the evolution of Micro Economics.
In the 16th and 17th century, followers
of Mercantilists (a group of English
merchants) advocated policies to the
government which were based on macro
approach. In the 18th century, Physiocrats
(French Thinkers) tried to analyse the
concept of national income and wealth.
Even the Classical Economic theories
of Prof. Adam Smith, Prof. Ricardo and
Prof. J. S. Mill discussed the determination
of national income and wealth. But their
macro analysis was combined with micro
analysis. Thus, micro analysis ruled the
world of economics till the Great Depression
of 1930s.
After the Great Depression, Lord John
 2
Maynard Keynes published his famous
book the "General Theory of Employment,
Interest and Money" in 1936. Keynes
used macro economic approch to analyse
economic problems. The credit for the
development of macro economic approach
goes to Lord Keynes. Besides Keynes,
Malthus, Wicksell, Walras, Irving Fisher
are other economists who have contributed
to the development of macro economics.
Meaning of Micro Economics :
Micro means a small part of a thing. Micro
economics thus deals with a small part of the
national economy. It studies the economic
actions and behaviour of individual units such
as an individual consumer, individual producer
or a firm, the price of a particular commodity or
a factor etc.
Definitions of Micro Economics :
You have already studied some important
definitions of micro economics, let us review
some more definitions :
1) Maurice Dobb - “Micro economics is in
fact a microscopic study of the economy.”
2) Prof A. P. Lerner - “Micro economics
consists of looking at the economy through
a microscope, as it were, to see how the
millions of cells in the body of economy – the
individuals or households as consumers and
individuals or firms as producers play their
part in the working of the whole economic
organism.” The following chart gives an
idea of the scope of micro economics.
Scope of Micro Economics
Theory of Theory of Theory of
Product Pricing Factor Pricing Economic
Welfare
Rent
Wages
Demand Supply
Analysis Analysis Interest
Profit
Efficiency in Efficiency in Overall Economic
Production Consumption Efficiency
2
(a) Theory of Product Pricing : The price of
an individual commodity is determined by
the market forces of demand and supply.
Micro economics is concerned with demand
analysis i.e. individual consumer behaviour,
and supply analysis i.e. individual producer
behaviour.
(b) Theory of Factor Pricing : In Micro
economics, land, labour, capital and
entrepreneur are the factors that contribute
to the production process. Micro economics
helps in determining the factor rewards for
land, labour, capital, and entrepreneur in
the form of rent, wages, interest, and profit
respectively.
(c) Theory of Economic Welfare : Theory of
Welfare basically deals with efficiency in
the allocation of resources. Efficiency in the
allocation of resources is attained when it
results in maximization of satisfaction of
the people. Economic efficiency involves
three efficiencies :
• Efficiency in production : Efficiency in
production means producing maximum
possible amount of goods and services from
the given amount of resources.
• Efficiency in consumption : Efficiency
in consumption means distribution of
produced goods and services among the
people for consumption in such a way as to
maximize total satisfaction of the society.
• Overall economic efficiency : It means the
production of those goods which are most
desired by the people.
  Micro economic theory shows under what
conditions these efficiencies are achieved.
 Thus, the focus of micro economics
is mainly confined to price theory and
resource allocation. It does not study the
aggregates relating to the whole economy.
This approach does not study national
economic problems such as unemployment,
 3
poverty, inequality of income etc. Theory of
growth, theory of business cycles, monetary
and fiscal policies etc. are beyond the limits
of micro economics.
Features of Micro Economics :
1) Study of Individual Units : Micro
economics is the study of the behaviour
of small individual economic units, like
individual firm, individual price, individual
household etc.
2) Price Theory : Micro economics deals with
determination of the prices of goods and
services as well as factors of production.
Hence, it is known as price theory.
3) Partial Equilibrium : Equilibrium is
the balance between two factors. Micro
economic analysis deals with partial
equilibrium which analyses equilibrium
position of an individual economic unit
i.e. individual consumer, individual firm,
individual industry etc. It isolates an
individual unit from other forces and studies
its equilibrium independently.
4) Based on Certain Assumptions : Micro
economics begins with the fundamental
assumption, “Other things remaining
constant” (Ceteris Paribus) such as perfect
competition, laissez-faire policy, pure
capitalism, full employment etc. These
assumptions make the analysis simple.
5) Slicing Method : Micro economics uses
slicing method. It splits or divides the whole
economy into small individual units and
then studies each unit separately in detail.
For example, study of individual income
out of national income, study of individual
demand out of aggregate demand etc.
6) Use of Marginalism Principle : The
concept of Marginalism is the key tool
of micro economic analysis. The term
'marginal' means change brought in total by
3
an additional unit. Marginal analysis helps
to study a variable through the changes.
Producers and consumers take economic
decisions using this principle.
7) Analysis of Market Structure : Micro
economics analyses different market
structures such as Perfect Competition,
Monopoly, Monopolistic Competition,
Oligopoly etc.
8) Limited Scope : The scope of micro
economics is limited to only individual
units. It doesn’t deal with the nationwide
economic problems such as inflation,
deflation, balance of payments, poverty,
unemployment, population, economic
growth etc.
Importance of Micro Economics :
1) Price Determination : Micro economics
explains how the prices of different
products and various factors of production
are determined.
2) Free Market Economy : Micro economics
helps in understanding the working of a free
market economy. A free market economy
is that economy where the economic
decisions regarding production of goods,
such as ‘What to produce?, How much to
produce?, How to produce? etc.’ are taken
at individual levels. There is no intervention
by the Government or any other agency.
3) Foreign Trade : Micro economics helps
in explaining various aspects of foreign
trade like effects of tariff on a particular
commodity, determination of currency
exchange rates of any two countries, gains
from international trade to a particular
country etc.
4) Economic Model Building : Micro
economics helps in understanding various
complex economic situations with the help
 4
of economic models. It has made a valuable
contribution to economics by developing
various terms, concepts, terminologies, tools
of economic analysis etc. Economic models
are built using various economic variables.
5) Business Decisions : Micro economic
theories are helpful to businessmen for
taking crucial business decisions. These
decisions are related to the determination
of cost of production, determination of
prices of goods, maximization of output
and profit, etc.
6) Useful to Government : It is useful to
government in framing economic policies
such as taxation policy, public expenditure
policy, price policy etc. These policies
help the government to attain its goals
of efficient allocation of resources and
promoting economic welfare of the society.
7) Basis of Welfare Economics : Micro
economics explains how best results can
be obtained through optimum utilization
of resources and its best allocation. It also
studies how taxes affect social welfare.
Meaning of Macro Economics :
Macro economics is the branch of
economics which analyses the entire economy.
It deals with the total employment, national
income, national output, total investment, total
consumption, total savings, general price level
interest rates, inflation, trade cycles, business
fluctuations etc. Thus, macro economics is the
study of aggregates.
Definitions of Macro Economics :
1) J. L. Hansen - “Macro economics is that
branch of economics which considers the
relationship between large aggregates such
as the volume of employment, total amount
of savings, investment, national income
etc.”
4
2) Prof Carl Shapiro - “Macro economics
deals with the functioning of the economy
as a whole.”
The following chart gives an idea about
the scope of macro economics.
Scope of Macro Economics
Theory of Theory of Theory of Macro
Income and General Economic Theory of
Employment Price Growth and Distribution
Level and Development
Inflation
Theory of Theory of
Consumption Investment
Function Function
Theory of
Business Cycles
i) Theory of Income and Employment :
Macro economic analysis explains which
factors determine the level of national
income and employment and what causes
fluctuations in the level of income, output and
employment. To understand, how the level of
employment is determined, we have to study
the consumption function and investment
function. Theory of Business Cycles is also a
part and parcel of the Theory of Income and
Employment.
ii) Theory of General Price Level and
Inflation : Macro economic analysis shows
how the general price level is determined and
further explains what causes fluctuations
in it. The study of general price level is
significant on account of the problems
created by inflation and deflation.
iii) Theory of Growth and Development :
Macro economics consists of the theory
of economic growth and development. It
explains the causes of underdevelopment
and poverty. It also suggests strategies for
accelerating growth and development.
iv) Macro Theory of Distribution : Macro
theory of distribution deals with the relative
 5
shares of rent, wages, interest and profit in various factors that contribute to economic
the total national income. growth and development. It is useful in
Features of Macro Economics : developing growth models. These growth
models are used for studying economic
1) Study of Aggregates : Macro economics
development. For example, Mahalanobis
deals with the study of economy as a whole.
growth model emphasized on basic heavy
It is concerned with the aggregate concepts
industries.
such as national income, national output,
national employment, general price level, 7) General Price Level : Determination and
business cycles etc. changes in general price level are studied in
macroeconomics. General price level is the
2) Income Theory : Macro economics studies
average of all prices of goods and services
the concept of national income, its different
currently being produced in the economy.
elements, methods of measurement and
8) Policy-oriented : According to Keynes,
social accounting. Macro economics deals
macro economics is a policy oriented
with aggregate demand and aggregate
science. It suggests suitable economic
supply. It explains the causes of fluctuations
policies to promote economic growth,
in the national income that lead to business
generate employment, control of inflation,
cycles i.e. inflation and deflation.
and depression etc.
3) General Equilibrium Analysis : Macro
Importance of Macroeconomics :
economics deals with the behaviour of
1) Functioning of an Economy : Macro
large aggregates and their functional
economic analysis gives us an idea of the
relationship. General Equilibrium deals
functioning of an economic system. It helps
with the behaviour of demand, supply and
us to understand the behaviour pattern
prices in the whole economy.
of aggregative variables in a large and
4) Interdependence : Macro analysis takes complex economic system.
into account interdependence between
2) Economic Fluctuations : Macro economics
aggregate economic variables, such as
helps to analyse the causes of fluctuations
income, output, employment, investments,
in income, output and employment and
price level etc. For example, changes in
makes an attempt to control them or reduce
the level of investment will finally result
their severity.
into changes in the levels of income, levels
of output, employment and eventually the 3) National Income : Study of macro
level of economic growth. economics has brought forward the immense
importance of the study of national income
5) Lumping Method : Lumping method is the
and social accounts. Without a study
study of the whole economy rather than its
of national income, it is not possible to
part. According to Prof. Boulding, “Forest
formulate correct economic policies.
is an aggregation of trees but it does not
4) Economic Development : Advanced studies
reveal the properties of an individual tree.”
in macro economics help to understand the
This reveals the difference between micro
problems of developing countries such as
economics and macro economics.
poverty, inequalities of income and wealth,
6) Growth Models : Macro economics studies differences in the standards of living of the

5
 6
people etc. It suggests important steps to
achieve economic development. Tools Individual Aggregate
Demand and Demand and
5) Performance of an Economy : Macro
Individual Aggregate
economics helps us to analyse the
Supply Supply
performance of an economy. National
Income (NI) estimates are used to measure Scope Demand, National
the performance of an economy over time supply, prod- income,
by comparing the production of goods and uct pricing, general
services in one period with that of the other factor pricing, price level,
period. production, employment,
consumption, money etc.
6) Study of Macro economic Variables : To
economic
understand the working of the economy,
welfare, etc.
study of macro economic variables are
important. Main economic problems are Importance Price Economic
related to the economic variables such determination, fluctuations,
as behaviour of total income, output, Model Study of
employment and general price level in the building, national
economy. Business income,
decisions etc. Economic
7) Level of Employment : Macro economics development
helps to analyse the general level of etc.
employment and output in an economy.
Theory Price Theory Income and
You should know : Employment
Theory
Micro Economics and Macro Economics
Examples Individual National
at a glance
income, income,
Basis for Micro Macro Individual National
comparison economics economics
output etc. output etc.
Meaning Micro Macro
economics economics
studies the studies the Try this :
behaviour of behaviour of 1) Visit the vegetable market in the nearest
individual aggregates of area and try to get information about
unit of an the economy income and expenditure items of a
economy as a whole particular seller

6
 7

Nature and scope of economics

Economics as a science

Lord Robins, Walrus, Cournot, Antoine Augustin and Senor Nassau William considered
economics as a science. Science is a systematic and comprehensive study of facts which
explain the cause and effect Relationship science must have the following features:
1) A science is a systematized study of a subject.
2) Science establishes the relationship between cause and effect of a fact.
3) Laws of science are universal.
Professor Robbins says, “The prepositions of economics are on all fours with the prepositions of
all other services”. Robertson says, “That the last three letters of the word Economics i.e ‘-ics’
present a clear proof that it is a science like physics and dynamics which have ‘-ics’ at the end
as Economics”.

Arguments in favor of economics as a science

1) Systematized study – In economics, there is a systematized collection, classification and
analysis of economic facts. The subject matter of economics is systematically divided
into consumption, production, exchange and distribution.
2) Consisting of laws- Laws of economics or similar to the laws of other sciences. In
economic laws, we establish the cause and effect relationship of economic activities. For
example, ‘The law of Demand shows the relationship between a change in price and
change in demand.
3) Experiments – Economics carry several experiments with the laws of economics. The
experiments of economic laws are not made in laboratories, but in the real world and
with the men in society.
4) Majoring rod of money- Economic facts are measured with the measuring rod of money.
Economics has the quality of quantitative measurement of events.
5) Universal – All the economic laws are universally true. The laws of Economics are
equally applicable to capitalist, socialist and mixed economy.

Arguments in favour of economics is not a science:

Some economists, like Marshall, do not regard economics as a pure science . The main
reasons for these are as under:
1) The laws of economics or not universal – The applicability of economic laws is limited by
the differences in physical, social and cultural factors between different countries. The
laws of economics are based on the habits and tastes of the people. These laws differ
for different countries. therefore the laws of economics are not so universal
2) Laws of economics are not so exact - The laws of economics are not so exact, as they
Are conditional, and with the phrase, ‘ other things, remaining the same.’ But the laws of
pure sciences are exactly applicable under similar conditions.
3) No possibility of laboratory experiments - In economics experimentation is not possible
as the object of its study is man. The conditions around a man are not fully controllable.
The data available to economists from the real world is not controllable. Hence,
economics is not a pure science.
 8

4) Conflicting views- Mrs Wooten has remarked, ‘ Wherever six economists are gathered.
There are seven opinions.’ The lack of unanimity of opinion among economists proves
that it is not a science of exactness.
5) Difficulties in making predictions – The difficulty in making correct predictions in
economics is due to its inexact laws. Therefore, economics cannot be considered as a
pure science.
There is a difference of opinion among economists regarding Economics as a pure science or
not. But it can be considered as a social science.

Is Economics a positive science or a normative science?

A positive science may be defined as a body of systematized knowledge concerning what is, a
normative science or a regulative Science is a body of systematized knowledge relating to the
criteria of ‘what ought to be’ and consent with the ideal, as distinguished from the actual. The
objective of a positive science is the Establishment of uniformatives of a normative science, the
determination of ideals. Positive economics employs a scientific methodology in formulating its
generalizations, laws or theories. Normative economics is invariably based on some value
judgements that is judgment about ‘ what is good’ or ‘what is bad’ some economists like
Robbins, Friedman, senior, etc. consider Economics as a positive science, and some other
economists like Marshall, Pigou, Howtrey, etc. considered economics as a normative science.
Economics as a positive science
The science studying facts is known as positive science because it explains the facts as they
are. According to RT Bye, “ Positive science confines itself to accurate description of a
phenomenon, it explains what is, how it works, and what are its effects” . Robbins says, “ The
function of an economist is to explore and explain, and not to advocate or condemn.”
Arguments in favor of Economics being a positive science.
1) Based on logic – Lord Robbins, says that Economics is a positive science as it is based
on logic. With the help of logic, it establishes the relationship between cause and effect.
2) Things as they are – Economic concepts explain their cause and effects. Positive
economics deals with how economic problems are solved. We study economics, what
are the forces which influence the determination of the rate of interest and what
determines the rate of interest in a community.
3) More neutral – Economics is strictly neutral. As regards ends. It refuses to pass moral
judgements.
4) More uniformity – Economics as positive science will be more uniform in decisions
regarding different problems.

Economics as a normative science

The following arguments are given by different economists in favor of economics as a normative
science:
1) Man is not only logical, but also sentimental– Man cannot always behave as a rationalist.
He behaves sometimes in relation with the binding forces of relationship, and sometimes
with the influence of demonstration effect.
2) A means of social betterment – Economics is regarded as a normative science due to
the fact that Economics is an engine of social betterment. Economists suggested the
 9

policy of lazes, fair, removal of unemployment, checking the rising population etc. To
promote human welfare. So it is a normative science.
3) Basis of economic planning – Economic planning has been suggested for economic
development. In economic planning, economic policies should be prescribed. Therefore,
economics is a normative science dealing with what ought to be.
4) Economics is not neutral – The market mechanisms decide the value through the forces
of demand and supply at equilibrium level. But the equilibrium price level does not mean
that it is the optimum price level for the society and that the government should take no
steps to curb the price level. In reality, the government undertakes various measures to
curb the rising prices. So economics is not neutral as regards ends. hence, it is a
normative science
Economics is considered both a positive and a normative science. As it has both the
characteristics. The function of the economist is not only to explain and explore but also to
suggest and condemn.

Relevance of economics to Law

Law (state or government laws)
The consists of rules made by authority for the proper regulation of community or society.
According to Austin, “ law is a rule laid down for the guidance of a being by an intelligent being
having power over him.” law means any set of uniform prior principles which is generally
followed. It refers to those rules which are issued by the state for determining the relationship of
men in organized society. The purpose of lawyers is to regulate and control human action in
society.

Salient features of laws:

1) The laws are made in the form of ‘rules’ and ‘acts’ and they are universal in character
2) The laws are made by the legislature and issued by the sovereign authority in the form
of commands;
3) The laws forbid certain type of actions which are harmful;
4) The laws prescribe penalty or punishment for breaking them and they are enforced by
sanctions;
5) The laws conform rights and create obligations in specific relations;
6) The laws have to be obeyed not as optional, but as obligations; and
7) Courts interpret the laws and fix the punishments to offenders and compensation to the
victims according to the law.
Law is enacted to regulate the social and economic actions of individuals. The ultimate end of
the law is social and economic welfare and prosperity. To be judicious, every legal person
should have the knowledge of social sciences, especially the knowledge of economics.

Economics
According to Marshall, “economics is a study of mankind in the ordinary business of life. It
examines that part of individual and social action which is most closely connected with the
attainment and with the use of material requisites of well-being” .
 10

Further, according to Robins, “ economics is the science which studies human behaviour as a
relationship between ends and scarce means which have alternative uses”. Thus, economics is
related to human welfare with scarce resources. The unlimited wants of the people and the
scarce resources of the community lead to the origin of economic problems in production and
distribution. The major economic problems are economic progress, economic stability, human
welfare and economic inequalities, the state has to enact legal laws to solve these problems.
Thus the economic problems are the basis for law making? The relevance of economics to the
law has to be evaluated with this background.

Economic welfare and law

Economics is the study of wealth which is the basis for the welfare of society. So it is called the
science of human welfare. At the same time, law is also a social science and a powerful
instrument of social welfare. According to judge Cardoze, “ welfare of society is becoming the
greatest directive force of law in modern times”. Social welfare means and includes the all-round
development of the society in which all will be happy to achieve this social welfare economic
welfare is required.
For the economic welfare of the working class, the acts such as factories act, the work, men’s
compensation act, the employees State insurance act, maternity benefit act, the employees
Provident fund act, the employees family pension scheme, payment of gratuity act are made.
These acts of social security lead to the workers welfare.

Consumer protection and law

Consumers welfare depends on their achievement of maximum satisfaction. If the consumer is
provided with the bad quality of goods and is charged with high prices, his satisfaction will be
low. To protect the consumers welfare the acts such as Consumers Protection Act, the
Essential Commodities Act, The Sale of Goods Act, the Drugs and Cosmetics Act, the Drugs
and Magic remedies (objectionable advertisements) act, the prevention of Food adulteration act,
the Protection of Civil Rights act, the Trade and Merchandise Marks act, the Water (Prevention
and Control of Pollution) act, the Standard of Weights and Measures act, the Prevention of
Black Marketing and Maintainence of Supplies of Essential Commodities act, the Bureau of
Indian standards act, the Environment (protection) Act are made.

Economic inequalities and law

Every society contains a range of diversities. A major source of diversity is economic inequality.
The purpose of law is to promote relative equality of citizens. The government has to declare,
regulate, protect and enforce rights, relations, obligations and liabilities to achieve this justice of
equality.
To remove economic inequalities, the government uses the tool of fiscal measures. For this, the
government acts, the progressive tax laws such as the income tax act, the wealth tax act, the
gift tax act, the estate duties act, etc. Land, the source of income is concentrated in the hands of
new landlords. Further, there is absentee landlordism. This leads to concentration of wealth. To
reduce the inequalities of wealth. The land of rich people has to be re-distributed among the
landless poor. To achieve this social justice, acts such as the land reforms act, the land
 11

acquisition act, the tenancy act are enacted. Thus, the removal of economic inequalities is the
basis for the above enacted laws.

Economic growth and law

Mostly economic growth depends on the factors of production, productivity and trade. To
regulate trade, acts such as the Indian contract act, the partnership act, the sale of goods act,
the higher purchases act, the Indian companies act, etc, are made. These acts are based on the
concept of economic growth through the expansion of trade.

Economic growth depends on international trade also. To regulate the foreign trade, such acts
as the foreign exchange regulation act, the customs act, the
Indian arbitration acts are made.

This economic growth depend on the availability of capital to provide capital to businessmen,
and a commercial banking system came into existence. For sale in the operation of the money
market.

Acts such as the Indian banking act, the insolvency act, negotiable instruments act etc. Or
made.
The growth of the industrial sector depends on the productivity of labor. The productivity of labor
depends on the standard of living and the wage lavel. The acts such as the minimum wages act,
the payment of wages act, the trade union act, payment of bonus act or based on the concept of
labor productivity.

Economic crimes and law

Most of the civil and criminal cases arise due to disputes of land and other properties. The law
has to punish the crimes. Even artha shastr of Kautilya explains the principles of administration
and gives the scale of punishments for various crimes – social and economic. In modern times,
the criminal procedure code, the Indian penal code, evidence act, the civil procedure code, etc.
are intended to deal with the civil and criminal cases.

Such other laws and statutes enacted to curb antisocial activities that hinder economic
development, growth and prosperity, like FEMA, COFEPOSA, PCA, PFAA are based on the
application of economic principles in the society.

Economic concepts and policies are the basis for mini statutory laws and at the same time the
acts were intended for economic welfare. Thus, Economics stands as the means and ends of
law. This signifies the relevance of economics to laws.
 12
3A Demand Analysis
Introduction :
You have already studied the concept of
utility in the previous chapter. Utility is the basis
of demand. Utility may generate a desire or a
need to have a particular commodity, but utility
on its own cannot generate demand for the
commodity. This chapter is an effort to analyse
the concept of demand. Demand analysis is
concerned with consumer behaviour.
Meaning of Demand :
In ordinary language, demand means a
desire. Desire means an urge to have something.
In Economics, demand means a desire which is
backed by willingness and ability to pay.
For example, if a person has the desire to
purchase a television set but does not have
the adequate purchasing power then it will be
simply a desire and not a demand.
Thus, demand is an effective desire. All
desires are not demand.
In short,
Demand = Desire + willingness to
purchase + Ability to pay.
Try this :
Identify the concepts :
1) A poor person wants to have a car ……
2) A rich person bought a car ……
Definition of Demand :
According to Benham, “the demand for
anything at a given price is the amount of it,
which will be bought per unit of time at that
price.”
  Thus, following are the features of demand :
1) Demand is a relative concept.
2) Demand is essentially expressed with
reference to time and price.
17
Demand Schedule :
Demand schedule is a tabular representation
of the functional relationship between price and
quantity demanded for a particular commodity.
A demand schedule may be either individual
demand schedule or market demand schedule.
Individual Demand Schedule :
Individual demand is the quantity of a
commodity demanded by a consumer at a given
price during a given period of time.
Individual demand schedule is a tabular
representation showing different quantities of
commodities that an individual consumer is
prepared to buy at various prices over a given
period of time.
This can be explained with the help of the
following individual demand schedule.
Individual demand schedule :
Table 3.1
Price of commodity Quantity demanded of
‘x’ ( ` ) commodity ‘x’ (in kgs)
10 1
8 2
6 3
4 4
2 5
Table 3.1 shows different quantities of
commodity ‘x’ purchased by an individual
consumer at various prices. It can be observed
that less quantity of commodity is demanded at
rising prices and more quantity of commodity
is demanded at falling prices. It indicates an
inverse relationship between price and quantity
demanded.
Individual Demand Curve :
Individual demand curve is a graphical
representation of the individual demand
schedule.
Fig. 3.1 represents an individual demand curve
 13
which is based on table 3.1 the demand of all consumers at various prices.
Individual Demand Curve It also indicates an inverse relationship between
price and quantity demanded.
Y
This can be explained with the help of
D DD = Demand Curve
10 following market demand schedule.
8 Market demand schedule :
Price in `

Table. 3.2
6
Price of Quantity of ‘x’ Market
4 commodity demanded Kgs. demand
Con- Con- Con-
2 D ‘x’( ` ) A+B+C
sumer sumer sumer
A B C
0 1 2 3 4 5 6 7 X
10 5 10 15 30
Quantity Demanded in (Kgs) 8 10 15 20 45
Fig. 3.1 6 15 20 25 60
4 20 25 30 75
In figure 3.1, X axis represents quantity
2 25 30 35 90
demanded and Y axis represents the price of
the commodity. The demand curve DD slopes Table 3.2 shows different quantities of
downward from left to right, indicating an commodity x purchased by different consumers
inverse relationship between price and quantity (A, B, C) at various prices. It can be observed
demanded. that less quantity of commodity is demanded at
rising prices and more quantity of commodity
is demanded at falling prices. Thus, there is an
inverse relationship between price and quantity
demanded.
Market Demand Curve :
Graphically, the market demand curve is
a horizontal summation of individual demand
curves. It is based on the market demand schedule.
Fig. 3.3 represents the market demand curve
Market Demand Curve
Y DD = Market Demand Curve
D
Fig. 3.2 Individual Demand 10
Market Demand Schedule : 8
Price in `

Market demand is total demand for a

6
commodity from all the consumers at a given
price during a given period of time. 4
Market demand schedule is a tabular 2 D
representation showing different quantities of
commodity which all consumers are prepared to 0 20 40 60 80 100 X
buy at various prices over a given period of time. Quantity Demanded in (Kgs)
It is obtained by a horizontal summation of Fig. 3.3
18
 14
In figure 3.3, X axis represents market
demand and Y axis represents the price of the
commodity. The market demand curve ‘DD’
slopes downward from left to right, indicating an
inverse relationship between price and market
demand.
Fig. 3.4 Market Demand
Try this :
Prepare a monthly demand schedule of
your family for various commodities. For
example, vegetables, fruits, medicines etc.
Reasons justifying downward sloping demand
curve are as follows :
1) Law of Diminishing Marginal Utility :
We have seen that marginal utility goes on
diminishing with an increase in the stock
of a commodity and vice-versa. Therefore,
a consumer tends to buy more when price
falls and vice-versa. This implies that
demand curve is downward sloping.
2) Income effect : In the case of normal goods,
when price falls, purchasing power (real
income) of a consumer increases which
enables him to buy more of that commodity.
This is known as income effect.
3) Substitution effect : In case of substitute
goods, when the price of a commodity
rises, the consumer tends to buy more of
its substitute and less of that commodity
whose price has increased. This is known
as substitution effect.
19
4) Multi-purpose uses : When a commodity
can be used for satisfying several needs, its
demand will rise with a fall in its price and
fall with a rise in its price.
5) New Consumers : When the price of a
commodity falls, a new consumer class
appears who can now afford the commodity.
Thus, total demand for commodity increases
with fall in price.
Try this :
Complete the following hypothetical
demand schedule.
Price of commodity ‘x’(`) Qty. Demanded kgs
350 3
300
250 10
200
150
100 30
Types of Demand :
1) Direct demand
2) Indirect demand
Types of
3) Complementary/ Joint demand
Demand
4) Composite demand
5) Competitive demand
1) Direct demand : It is the demand by
the consumer for goods which satisfy
their wants directly. They serve direct
consumption needs of the consumers. Thus,
it is the demand for consumer goods. For
example, demand for cloth, sugar, etc.
2) Indirect demand : Indirect demand is
also known as derived demand. It refers
to demand for goods which are needed
for further production. It is the demand
for producer's goods. Hence, all factors of
production have indirect or derived demand.
For example, demand for workers in a sugar
factory is derived or indirect demand.
 15
3) Complementary/Joint demand : When 2) Income : Income of a consumer decides
two or more goods are demanded jointly to purchasing power which in turn influences
satisfy a single want, it is known as joint or the demand for the product. Rise in income
complementary demand. For example, car will lead to a rise in demand for the
and fuel etc. commodity and a fall in income will lead to
a fall in demand for the commodity.
4) Composite demand : The demand for a
commodity which can be put to several 3) Prices of Substitute Goods : If a substitute
uses is known as composite demand. For good is available at a lower price then
example, electricity is demanded for several people will demand cheaper substitute good
than costly good. For example, if the price
uses such as light, fan, washing machine etc.
of sugar rises then demand for jaggery will
5) Competitive demand : It is demand for rise.
those goods which are substitute for each
4) Price of Complementary Goods : Change
other. For example, tea or coffee, sugar or
in the price of one commodity would also
jaggery etc.
affect the demand for other commodity. For
Try this : example, car and fuel. If the price of fuel
rises, then demand for cars will fall.
Complete the table
5) Nature of product : If a commodity is a
Type of demand Example
necessity and its use is unavoidable, then
Direct demand
its demand will continue to be the same
Workers in cotton textile irrespective of the corresponding price.
industry
For example, medicine to control blood
Joint demand Coffee
Powder pressure.
For 6) Size of population : Larger the size of
preparing population, greater will be the demand
Coffee
for a commodity and smaller the size of
population smaller will be the demand for
CNG and petrol, pen and
a commodity.
pencil
Tea 7) Expectations about future prices : If
Curd the consumer expects the price to fall in
Milk Direct future, he will buy less in the present at the
consumption
Sweets
prevailing price. Similarly, if he expects the
price to rise in future, he will buy more in
the present at the prevailing price.
Determinants of Demand :
The demand for goods is determined by the 8) Advertisement : Advertisement, sales
promotion scheme and effective sales-
following factors :
manship tend to change the preferences
1) Price : Price determines the demand for a of the consumers and lead to demand for
commodity to a large extent. Consumers many products. For example, cosmetics,
prefer to purchase a product in large tooth brush etc.
quantities when price of a product is less and 9) Tastes, Habits and Fashions : Taste and
they purchase a product in small quantities habits of a consumer influence the demand
when price of a product is high. for a commodity. If a consumer likes to
20
 16
eat chocolates or consume tea, he will
demand more of them. Similarly, when a
new fashion hits the market, the consumer
demands that particular type of commodity.
If a commodity goes out of fashion then
suddenly the demand for that product tends
to fall.
10) Level of Taxation : High rates of taxes on
goods or services would increase the price
of the goods or services. This, in turn would
result in a decrease in demand for goods or
services and vice-versa.
11) Other factors :
1) Climatic conditions
2) Changes in technology
3) Government policy
4) Customs and traditions etc.
Law of Demand :
Introduction :
The law of demand was introduced by
Prof. Alfred Marshall in his book, ‘Principles of
Economics’, which was published in 1890. The
law explains the functional relationship between
price and quantity demanded.
Statement of the Law :
According to Prof. Alfred Marshall,
“Other things being equal, higher the price of a
commodity, smaller is the quantity demanded
and lower the price of a commodity, larger is the
quantity demanded.”
In other words, other factors remaining
constant, if the price of a commodity rises,
demand for it falls and when price of a
commodity falls demand for the commodity
rises. Thus, there is an inverse relationship
between price and quantity demanded.
Symbolically, the functional relationship
between demand and price is expressed as :
Dx = f (Px)
Where D = Demand for a commodity
21
x = Commodity
f = Function
Px = Price of a commodity
Assumptions :
Law of demand is based on the following
assumptions :
1) Constant level of income : If the law
of demand is to find true operate then,
consumers' income should remain constant.
If there is a rise in income, people may
demand more at a given price.
2) No change in size of population : It is
assumed that the size of population remains
unchanged. Any change in the size and
composition of population of a country
affects the total demand for the product.
3) Prices of substitute goods remain constant
: It is assumed that the prices of substitutes
remain unchanged. Any change in the price
of the substitute will affect the demand for
the commodity.
4) Prices of complementary goods remain
constant : It is assumed that the prices
of complementary goods remain unchanged
because a change in the price of one good
will affect the demand for the other.
5) No expectations about future changes in
prices : It is assumed that consumers do not
expect any further change in price in the
near future. If consumers expect a rise in
prices in future, they may demand more in
the present even at existing high price.
6) No change in tastes, habits, preferences,
fashions etc. : It is assumed that consumers'
tastes, habits, preferences, fashions etc.
should remain unchanged. Any change
in these factors will lead to a change in
demand.
7) No change in taxation policy : Taxation
policy of the government has a great impact
on demand for various goods and services.
 17
Therefore, it is assumed that there is no In fig. 3.5, X axis represents the demand for
change in the policy of taxation declared the commodity and Y axis represents the price
by Government. of commodity x. DD is the demand curve which
The law of demand is explained with the slopes downward from left to right due to an
help of the following demand schedule and inverse relationship between price and quantity
diagram. demanded.
Demand schedule :
Try this :
Table. 3.3
Draw a demand curve from the following
Price of Quantity demanded of
demand schedule :
commodity ‘x’ (`) commodity ‘x’ (in kgs.)
50 1 Price of Apple (`) Quantity demanded
per kg (in kgs.)
40 2
40 5
30 3
50 4
20 4
60 3
10 5
70 2
As shown in Table 3.3 when price of 80 1
commodity ‘x’ is ` 50, quantity demanded is 1
kg. When price falls from ` 50 to ` 40, quantity Exceptions to the Law of Demand :
demanded rises from 1 kg to 2 kgs. Similarly, at
There are certain exceptions to the law
price ` 30, quantity demanded is 3 kgs and when
of demand. It means that under exceptional
price falls from ` 20 to ` 10, quantity demanded
circumstances, consumer buys more when the
rises from 4 kg sto 5 kgs
price of commodity rises and buys less when
Thus, as the price of a commodity falls,
price of commodity falls. In such cases, demand
quantity demanded rises and when price of
curve slopes upwards from left to right. i.e. the
commodity rises, quantity demanded falls. This
demand curve has a positive slope as shown in
shows an inverse relationship between price and
fig. 3.6.
quantity demanded.
Exceptional Demand Curve
Demand Curve
Y DD = Exceptional Demand curve
Y
D
D
50
40
Price in `
Price in `

30

20

10 D D
0 X
0 1 2 3 4 5 X
Quantity Demanded in kgs Quantity Demanded in kgs
Fig. 3.5 Fig. 3.6

22
 18
Following are the exceptions to the law of
demand:
1) Giffen's paradox : Inferior goods or low
quality goods are those goods whose
demand does not rise even if their price
falls. At times, demand decreases when the
price of such commodities fall.
  Sir Robert Giffen observed this behaviour
in England in relation to bread. He noted
that, when the price of bread declined,
people did not buy more because of an
increase in their real income or purchasing
power. They preferred to buy superior
good like meat. This is known as Giffen's
paradox.
2) Prestige goods : Expensive goods like
diamond, gold etc. are status symbol. So
rich people buy more of it, even when their
prices are high.
3) Speculation : The law of demand does
not hold true when people expect prices to
rise still further. In this case, although the
prices have risen today, consumers will
demand more in anticipation of further rise
in price. For example, prices of oil, sugar
etc. tend to rise before Diwali. So people go
on purchasing more at a high price as they
anticipate that prices may rise during Diwali.
4) Price illusion : Consumers have an illusion
that high priced goods are of a better
consumption, certain goods like tea is
purchased in required quantities even at a
higher price.
Find out :
Examples of the given exceptions to the
law of demand.
1) Prestigious goods –
2) Habitual goods –
3) Branded goods –
Variations in Demand :
When the demand for a commodity falls or
rises due to a change in price alone and other
factors remain constant, it is called variations in
demand. It is of two types :
1) Expansion of demand : Expansion of
demand refers to rise in quantity demanded
due to fall in price alone while other factors
like tastes, income of the consumer, size of
population etc. remain unchanged.
 Demand moves in downward direction
on the same demand curve.
 This is explained with the help of
following fig. 3.7
Expansion of Demand
Y
D
Price in `

P a
quality. Therefore, the demand for such
goods tend to increase with a rise in their b
P1
prices. For example, branded products
D
which are expensive are demanded even at
a high price. 0 Q Q1 X
5) Ignorance : Sometimes, due to ignorance Quantity Demanded in kgs
people buy more of a commodity at high Fig. 3.7
price. This may happen when consumer is  As shown in fig. 3.7, DD is demand
ignorant about the price of that commodity curve. A downward movement on the
at other places. same demand curve from point a to point b
6) Habitual goods : Due to habit of indicates an expansion of demand.

23
 19
2) Contraction of Demand : Contraction of Increase in Demand
demand refers to a fall in demand due to
rise in price alone. Other factors like tastes,
Y
income of the consumer, size of population
etc. remain unchanged.

Price in `
 Demand curve moves in the upward
D D1
direction on the same demand curve.
a increase b
 This can be explained with the help of P
following fig. 3.8 D D1
Contraction of Demand 0 Q Q1 X
Quantity Demanded in kgs
Y Fig. 3.9
As shown in fig. 3.9, DD is the original
Price in `

D demand curve. Demand curve shifts

P2 a outward to the right from DD to D1D1 which
indicates increase in demand.
P b
2) Decrease in demand : It refers to decrease
D in quantity demanded due to unfavourable
0 Q2 Q X changes in other factors like tastes, income
of the consumer, climatic conditions etc.
Quantity Demanded in kgs and price remains constant.
Fig. 3.8 Demand curve shifts to left hand side of
 As shown in fig. 3.8, DD is a demand the original demand curve. This can be
curve. An upward movement on the same explained with the help of fig. 3.10
demand curve from point b to point a shows Decrease in Demand
contraction of demand.
Changes in Demand : Y
When demand for a commodity increases
or decreases due to changes in other factors and
Price

price remains constant, it is known as changes in D2 D

demand. It is of two types :
P bdecrease a
1) Increase in demand : It refers to increase
D2 D
in quantity demanded due to favourable
changes in other factors like tastes, income 0 Q2 Q X
of the consumer, climatic conditions etc. Quantity Demanded
and price remains constant. Fig. 3.10
 Demand curve shifts to the right hand As show in fig. 3.10, DD is the original demand
side of the original demand curve. This can curve. It shifts inward to the left from DD to
be explained with the help of fig. 3.9 D2D2 which indicates decrease in demand.

24
 20
You should know :
1) Demand is a micro economic concept.
Demand is that quantity of a commodity
which a person is ready to buy at a
particular price and during a specific
period of time.
2) Aggregate demand is a macro economic
concept. It refers to the total amount of
sales proceeds which an entrepreneur
actually expects from the sale of output
produced at a given level of employment
during the year.

EXERCISE

Q. 1. Complete the following statments : Q. 2. Give economic terms :

1) The relationship between demand for a good 1) A situation where more quantity is demanded at
and price of its substitute is…….. lower price ………
a) direct 2) Graphical representation of demand schedule
b) inverse ………
c) no effect 3) A commodity which can be put to several uses
d) can be direct and inverse ………
2) The relationship between income and demand 4) More quantity is demanded due to changes in the
for inferior goods is……. factors determining demand other than price
a) direct ………
b) inverse 5) A desire which is backed by willingness to
c) no effect purchase and ability to pay ………
d) can be direct and inverse
Q. 3. Distinguish between :
3) Symbolically, the functional relationship
1) Desire and Demand
between Demand and Price can be expressed as
2) Expansion of demand and Contraction of demand
................
3) Increase in demand and Decrease in demand
a) Dx = f(Px)
b) Dx = f(Pz) Q. 4. State with reasons whether you agree or
c) Dx = f(y) disagree with the following statements :
d) Dx = f(T) 1) Demand curve slopes downward from left to
4) When less units are demanded at high price it right.
shows ............... 2) Price is the only determinant of demand.
a) increase in demand 3) When price of Giffen goods fall, the demand for
b) expansion of demand it increases.
c) decrease in demand
d) contraction in demand

25
 21

3B Elasticity of Demand

Introduction : unchanged. It is expressed as :

In the previous chapter you have already Percentage change in Qty. Demanded
Ey =
studied the law of demand which shows the Percentage change in Income
inverse relationship between quantity demanded Symbolically,
and price of a commodity. The law of demand % Q
Ey =
does not explain the extent of a change in % Y
demand due to a change in the price. Thus, Q Y
law of demand fails to explain the quantitative = ÷
Q Y
relationship between price and quantity Q Y
= ×
demanded. Therefore, Prof. Alfred Marshall Q Y
explained the concept of elasticity of demand. Where,

Concept of Elasticity of Demand :  = Represents change

The term elasticity indicates responsiveness
of one variable to a change in the other variable.
Elasticity of demand refers to the degree of
responsiveness of quanitity demanded to a
change in its price or any other factor.
According to Prof. Marshall, “Elasticity
of demand is great or small according to the
amount demanded which rises much or little for
a given fall in price and quantity demanded falls
much or little for a given rise in price.”
It is clear from the above definition that
elasticity of demand is a technical term which
describes the responsiveness of change in
quantity demanded to fall or rise in its price. In
other words, it is the ratio of percentage change
in quantity demanded of a commodity to a
percentage change in price.
Types of Elasticity of Demand :
1) Income elasticity
2) Cross elasticity
3) Price elasticity
1) Income elasticity : It refers to the degree
of responsiveness of a change in quantity
demanded to a change in the income
only, other factors including price remain
27
Q = Orignal demand
Y = Orignal income
Q = Change in quantity demanded
Y = Change in income of a consumer
You should know :
• Positive income elasticity
Normal goods for which demand
increases with increase in income.
• Negative income elasticity
Inferior or goods for which demand
decreases with increase in income of
consumer.
• Zero income elasticity
Necessary goods for which demand
remains constant with increase in income
of the consumer.
2) Cross elasticity : It refers to a change in
quantity demanded of one commodity due
to a change in the price of other commodity.
(Complementary goods or substitutes)
Percentage change in Qty. demanded of A
Ec =
Percentage change in Price of B
(A = Original commodity, B = Other commodity)
 22
% QA price
Symbolically, Ec =
% PB Types of Price Elasticity of Demand :
QA PB
  = ÷ 1) Perfectly Elastic Demand (Ed = ∞) :
QA PB
QA PB When a slight or zero change in the price
  = × P brings about an infinite change in the
QA B
quantity demanded of that commodity, it is
Where, called perfectly elastic demand. It is only
QA = Original quantity demanded of commodity A a theoretical concept. For example, 10%
QA = Change in quantity demanded of fall in price may lead to an infinite rise in
commodity A demand.
PB = Original price of commodity B Percentage change in Quantity Demanded
Ed = =∞
PB = Change in price of commodity B Percentage change in Price
Ed = ∞
You should know : Perfectly elastic demand
• Positive cross elasticity : Substitute goods. Y
Example, tea and coffee.
• Negative cross elasticity : Complementary
goods. Example, tea and sugar.
Price D D
P
• Zero cross elasticity : Non-related goods. Ed = ∞
Example, tea and books.

3) Price elasticity : According to Prof. Alfred 0 X

Marshall, price elasticity of demand is Quantity Demanded
a ratio of proportionate change in the
Fig. 3.11
quantity demanded of a commodity to a
In figure 3.11, the demand curve is a
given proportionate change in its price.
horizontal line parallel to the X axis indicating
Percentage change in Quantity Demanded
Ed = perfectly elastic demand.
Percentage change in Price
%Q 2) Perfectly inelastic demand (Ed = 0) :
Symbolically, Ed = , When a percentage change in price has
%P
no effect on the quantity demanded of a
Q P
Ed = ÷ commodity it is called perfectly inelastic
Q P
demand. For example, 20% fall in price
Q P
Ed = × will have no effect on quantity demanded.
Q P
%Q
Where, Ed =
%P
Q = Original quantity demanded 0
Q = Difference between the new quantity and Ed = = 0
20
original quantity demanded Ed = 0
P = Original price In practice, such a situation rarely occurs.
P = Difference between new price and original For example, demand for salt, milk.
28
 23
Perfectly inelastic demand Ed = 0 more than proportionate change in quantity
Y demanded, the demand is said to be relatively
elastic. For example, 50% fall in price leads
D to 100% rise in quantity demanded.
P1
%Q
Price

Ed =
P %P
Ed = 0
100
P2 Ed = ∴Ed = 2
50
D Ed > 1
0 Q X Relatively elastic demand
Quantity Demanded Y
Fig. 3.12
In figure 3.12, when price rises from OP to D

Price
P Ed > 1
OP1 or when price falls from OP to OP2, demand
P1 D
remains unchanged at OQ. Therefore, the demand
curve is a vertical straight line parallel to the Y
0 Q Q1 X
axis, indicating perfectly inelastic demand.
Quantity Demanded
3) Unitary elastic demand (Ed = 1) :
Fig. 3.14
When a percentage change in price leads to a
  In figure 3.14, when price falls from OP to OP1
proportionate change in quantity demanded
(50%), demand rises from OQ to OQ1 (100%).
then demand is said to be unitary elastic. For
Therefore, the demand curve has a flatter slope.
example, 50% fall in price of a commodity
leads to 50% rise in quantity demanded. 5) Relatively inelastic demand (Ed < 1) :
%Q 50 When a percentage change in price leads
Ed = = =1 ∴ Ed = 1 to less than proportionate change in the
%P 50
Unitary elastic demand quantity demanded, demand is said to be
Y relatively inelastic. For example, 50%
fall in price leads to 25% rise in quantity
demanded.
D
%Q 25
Price

P Ed = 1 Ed = = = 0.5
%P 50
P1 D Ed = 0.5 ∴Ed < 1
Relatively inelastic demand. Ed < 1
0 Q Q1 X Y
Quantity Demanded
Fig. 3.13 D
Price

In figure 3.13, when price falls from OP P

Ed < 1
to OP1 (50%), demand rises from OQ to OQ1
P1
(50%). Therefore, the slope of the demand curve D
is a 'rectangular hyperbola'.
0 Q Q1 X
4) Relatively elastic demand (Ed >1) :
Quantity Demanded
When a percentage change in price leads to Fig. 3.15
29
 24
In figure 3.15, when price falls from in price. Percentage method is also known
OP to OP1 (50%), demand rises from OQ to as Arithmetic method. Price elasticity is
OQ1 (25%). Therefore, the demand curve has a measured as :
steeper slope. Percentage change in Quantity demanded
Ed =
Percentage change in Price
Find out :
%Q
Identify the type of price elasticity of Ed =
%P
demand for the following goods.
Mathematically, the above formula can be
1) Cosmetics   2) Medicine
presented as under.
3) School uniform   4) Air conditioners
Q P Q P
Ed = ÷ ∴ Ed = ×
Q P Q P
Try this :
Complete the table Numerical example :
Sr. Degree of Types of Description Price Qty. Demanded Formula
No. elasticity elasticity Percentage (`) (in Kg)
of of 20 10 Q P
demand demand Ed = ×
25 09 Q P
1 Perfectly Change in
inelastic price does not Original Price, P = 20, New price P = 25
affect demand P = 5 (Difference between new and original
at all.
price)
2 Ed = 1 Change in
demand is Original Quantity Demanded, Q = 10, New
equal to demand = 9
change in
Q = 1 (Difference between new and original
price
quantity demanded)
3 Ed > 1 Relatively
elastic Q P
Ed = ×
4 Relatively Change in Q P
inelastic demand is 1 20
less than Ed = ×
10 5
change in
Ed = 0.4
price
5 Ed = ∞ Slight change Ed < 1
in price It means elasticity of demand is relatively
brings infinite inelastic.
change in
demand. Do you know?
While using percentage method of
Methods of Measuring Price Elasticity of measuring price elasticity of demand we
Demand : must keep following points in our mind :
1) Ratio or Percentage method : Ratio method
1) Value of elasticity of demand is negative
is developed by Prof. Marshall. According
because of the negative slope of demand
to this method, elasticity of demand is
curve but for the sake of simplicity we
measured by dividing the percentage
ignore negative sign.
change in demand by the percentage change
30
 25
` 10 per unit and quantity demanded is 6 units.
2) Price elasticity of demand is a pure
Therefore, total expenditure incurred is ` 60.
number. It does not depend upon units
When price rises to ` 20 quantity demanded falls
in which price of the commodity and its
to 5 units, the total expenditure incurred is ` 100.
quantity are measured.
In this case, total outlay is greater than original
2) Total Expenditure Method : This method expenditure. Hence, in this example elasticity
was developed by Prof. Marshall. In this of demand is greater than one. (Ed >1) that is
method, total amount of expenditure before relatively elastic demand.
and after the price change is compared. In example ‘B’, original price is ` 30 per
Here the total expenditure refers to the unit and quantity demanded is 4 units. Therefore
product of price and quantity demanded. total expenditure is ` 120. When price rises to
` 40 quantity demanded falls to ‘3’ units. Total
Total expenditure = Price × Quantity demanded
expenditure incurred is ` 120. In this case total
In this connection, Marshall has given the
outlay is same (equal) to original expenditure.
following propositions :
Hence, in this example, elasticity of demand
A) Relatively elastic demand (Ed >1) : is equal to one (Ed = 1) that is unitary elastic
When with a given change in the price of a demand.
commodity total outlay increases, elasticity In example ‘C’, original price is ` 50 per
of demand is greater than one. unit and quantity demanded is 2 units. Therefore
B) Unitary elastic demand (Ed = 1) : total expenditure is ` 100. When price rises
When price falls or rises, total outlay does to ` 60, quantity demand falls to 1 unit and
not change or remains constant, elasticity total expenditure incurred is ` 60. In this case
of demand is equal to one. total outlay is less than original expenditure.
C) Relatively inelastic demand (Ed <1) : Hence, elasticity of demand is less than one
When with a given change in price of a (Ed <1) that is relatively inelastic demand.
commodity total outlay decreases, elasticity
of demand is less than one. Find out :
  This can be explained with the help of the As the price of peanut packets increases
following example. by 5% the demand for number of peanut
packets falls by 8%. What is the elasticity
Table 3.4 : Total outlay method
of demand for peanut packets?
Price in Quantity Total Elasticity %Q
` (P) demanded outlay of Apply the formula, Ed =
%P
in units (Q) (P×Q) ` demand
10 6 60 3) Point method or Geometric Method :
A 20 Ed >1
5 100 Prof. Marshall has developed another
30 4 120 method to measure elasticity of demand,
B 40 Ed = 1 which is known as point method or
3 120
geometric method. The ratio method and
50 2 100
C 60 Ed <1 total outlay methods are unable to measure
1 60
elasticity of demand at a given point on the
In table 3.4 in example ‘A’ original price is demand curve.
31
 26
At any point on the demand curve,
elasticity of demand is measured with the
help of the following formula :
Lower segment of demand
curve below a given point (L)
Point elasticity
= P2A 2
of demand (Ed) Upper segment of demand
curve above a given point (U)
Demand curve may be either linear or
non-linear as shown below :
A) Linear Demand Curve : When the demand
curve is linear i.e. a straight line, we extend
the demand curve to meet the Y axis at ‘A’
and X axis at ‘B’. Price elasticity of demand
at ‘X’ axis is zero and ‘Y’ axis is infinite.
Elasticity of demand will be different at
each point.
Point method (Linear demand curve)
Y
A Ed = ∞
Price in `
Thus, at point P1, demand is relatively
inelastic (ed < 1)
3) At point P2, the point elasticity is measured
as :
PB 6
P2 = 2 = =3
Thus, at point P2, demand is relatively
elastic (ed > 1)
4) At point A, the point elasticity is ∞ because
upper segment is zero. (perfectly elastic
demand)
5) At point B, the point elasticity is zero
because lower segment is zero (perfectly
inelastic demand.)
B) Non-linear demand curve : When the
demand curve is non-linear i.e. convex
to origin, to measure price elasticity of
demand we have to draw a tangent ‘AB’
touching the given point on the demand
curve and extending it to meet ‘Y’ axis at
point ‘A’ and ‘X’ axis at point ‘B’.

P2 Ed > 1
Lower segment of the tangent
P Ed = 1
below a given point L
Ed = =
P1 Ed < 1 Upper segment of the tangent U
above a given point
Ed = 0
0 B X Point method - Non-linear demand curve
Quantity Demanded
Y
Fig. 3.16
A
Let us assume that AB is a demand curve d
and its length is 8 cm. Point elasticity at various
Price

points on a linear demand curve can be measured P E

as follows : d
1) At point P, the point elasticity is measured
as :
PB 4 0 Q B X
P = = =1
PA 4
Thus, at point P, demand is unitary elastic Quantity Demanded
(ed = 1) Fig. 3.17

2) At point P1, the point elasticity is measured If EB = EA (Ed = 1) - Unitary elastic demand
as : EB > EA (Ed >1) - Relatively elastic demand
PB 2
P1 = 1 = = 0.33 EB < EA (Ed <1) - Relatively inelastic demand
P1A 6

32
 27
Factors influencing the elasticity of demand : 8) Urgency of needs : Goods which are
Elasticity of demand depends upon several urgently needed will have relatively
factors which are discussed below : inelastic demand. For example, medicines.
1) Nature of commodity : By nature we Luxury goods which are less urgent have
can classify commodities as necessaries, relatively elastic demand.
comforts and luxury goods. Demand for 9) Time period : Elasticity of demand is
necessaries like foodgrains, medicines, always related to period of time. It varies
textbooks etc. is relatively inelastic and with the length of time period. Generally
for comforts and luxury goods like cars, speaking, longer the duration of period
perfumes, furniture etc. demand is relatively greater will be the elasticity of demand and
elastic. vice-versa. This is because a consumer can
2) Availability of substitutes : Demand for a change the consumption habits in the long
commodity will be more elastic, if its close run in favour of cheaper substitutes of the
substitutes are available in the market. For commodities.
example, lemon juice, sugarcane juice etc.
You should know :
But commodities having no close substitutes
Price
like salt the demand will be inelastic.
Determinants Nature elasticity of
3) Number of uses : Single use goods have a demand
less elastic demand. Multi-use goods have 1) Availability a) Abundant a) Relatively
more elastic demand, For example, coal, of factors elastic
electricity etc. b) Few b) Relatively
inelastic
4) Habits : Habits make demand for certain
2) Nature of a) Necessary a) Relatively
goods relatively inelastic. For example,
commodity goods inelastic
addicted goods, drugs etc.
b) Luxury b) Relatively
5) Durability : The demand for durable goods elastic
goods is relatively elastic. For example, 3) Habits a) Habituated a) Relatively
furniture, washing machine etc. Demand for inelastic
perishable goods is inelastic. For example, b) Not b) Relatively
milk, vegetables etc. Habituated elastic
4) Time period a) Short-run a) Relatively
6) Complementary goods : The demand for
inelastic
a commodity which is used in conjunction
b) Long-run b) Relatively
with other commodities to satisfy a single elastic
want is relatively inelastic. For example, 5) Postpone- a) Possibility a) Relatively
a fall in the price of mobile handsets may ment of of Postpone- elastic
lead to rise in the demand for sim cards. consumption ment
7) Income of the consumer : Demand for b) Impossible b) Relatively
to Postpone inelastic
goods is usually inelastic, if the consumer
6) Number a) Several a) Relatively
has high income. The demand pattern of a
of uses of a elastic
very rich and an extremely poor person is commodity b) Specific b) Relatively
rarely affected by significant changes in the inelastic
price.

33
 28
Importance of Elasticity of Demand :
The concept of elasticity of demand is of
great importance to producers, farmers, workers
and the Government. Lord Keynes considered
this concept to be the most important contribution
of Alfred Marshall. Significance of the concept
becomes clear from the following applications :
1) Importance to a Producer : Every producer
has to decide the price of his product at which
he has to sell it. For this purpose, elasticity of
demand becomes important. If the demand
for a product is relatively inelastic, he will fix
up a higher price and vice-versa. The concept
of elasticity of demand is also useful to a
monopolist to practice price discrimination.
2) Importance to Government : Taxation
policy of the Government is based on the
concept of elasticity of demand. Those
commodities whose demand is relatively
inelastic will be taxed more because it will
not affect their demand much and vice-versa.
3) Important in Factor Pricing : The
concept of elasticity of demand is useful
in determination of factor prices. The
factor of production for which demand is
relatively inelastic can command a higher
EXERCISE
Q. 1. Complete the following statements :
1) Price elasticity of demand on a linear demand
curve at the X axis is ...............
a) zero  b) one
c) infinity  d) less than one
2) Price elasticity of demand on a linear demand
curve at the Y-axis is equal to .................
a) zero  b) one
c) infinity  d) greater than one
3) Demand curve is parallel to X axis, in case of
................
34
price as compared to those having elastic
demand. For example, workers can ask for
higher wages, if the demand for the product
produced by them is relatively inelastic.
4) Importance in Foreign Trade : The
concept of elasticity of demand is useful to
determine terms and conditions in foreign
trade. The countries exporting commodities
for which demand is relatively inelastic can
raise their prices. For example, Organization
of Petroleum Exporting Countries (OPEC)
have increased the price of oil several times.
The concept is also useful in formulating
export and import policy of a country.
5) Public Utilities : In case of public utilities
like railways which have an inelastic
demand, Government can either subsidise
or nationalise them to avoid consumers
exploitation.
6) Proportion of expenditure : If the
proportion of expenditure in a person's
income is small, then demand for the product
is relatively inelastic. For example, news
papers. If the proportion of expenditure
is large, then demand for the product is
relatively elastic.
a) perfectly elastic demand   
b) perfectly inelastic demand
c) relatively elastic demand   
d) relatively inelastic demand
4) When percentage change in quantity demanded
is more than the percentage change in price, the
demand curve is ................
a) flatter
b) steeper
c) rectangular
d) horizontal
 29
4 Supply Analysis
Introduction :
The study of supply is as important as
the study of demand. Supply is a fundamental
economic concept that describes the total amount
of a specific good or service that is available to
a seller. The total amount of goods or services
available for sale at any specified price is known
as supply.
Concept of Total Output, Stock and Supply :
Total Output :
Output is produced in the process of
production. “Total output can be defined as
the sum total of the quantity of the commodity
produced at a given period of time in the
economy.’’ Production leads to consumption. In
the process of production inputs are converted
into output or final goods.
Stock :
Stock is the total quantity of commodity
available for sale with a seller at a particular
point of time. It is the source of supply. It is
potential supply. By increasing production,
stock can be increased. Without stock, supply
is not possible. Normally, stock exceeds supply
and it is fixed and inelastic. In case of perishable
goods such as milk, fish etc. stock may be equal
to supply. On the other hand, for durable goods
such as furniture, garments etc. stock can exceed
the supply.
Supply :
Supply is a relative term. It is always
expressed in relation to price, time and quantity.
Meaning of Supply :
The word ‘supply’ implies the various
quantities of a commodity offered for sale
by producers during a given period of time at
a given price. It is related to time and price.
37
Supply is a flow concept. It refers to the amount
of a commodity that the firms produce and offer
for sale in the market over a period of time, say
a day, a week, a month or a year.
Stock Supply
Fig. 4.1
Try this :
Distinguish between stock and supply.
Definition of Supply :
According to Paul Samuelson, “Supply
refers to the relation between market prices and
the amount of goods that producers are willing
to supply.’’
Supply refers to the quantity of a commodity
that a seller is willing and able to offer for sale
at a given price, during a certain period of time.
For example, a farmer's total output of rice is
4000 kgs. This is the total stock. If the price is `
40 per kg, he offers 1000 kgs for sale. This is the
actual supply.
Supply schedule :
A supply schedule is a tabular representation
of the functional relationship between price and
quantity supplied of a particular commodity.
1) Individual Supply Schedule : Individual
supply schedule refers to a tabular
representation showing various quantities
of a commodity that a producer is willing to
 30
sell at various prices, during a given period schedule refers to a tabular representation
of time. showing different quantities of commodity
Table 4.1 which all producers are prepared to sell at
Individual Supply Schedule different prices at a given period of time.
Price of a commodity Supply of a commodity Table 4.2
x (in ` per kgs.) x (in kgs.) Market Supply Schedule
10 100 Price of Quantity supplied Market
20 200 commodity (in kgs.) supply
(in `) (in kgs.)
30 300 Seller Seller Seller (A+B+C)
A B C
40 400
10 100 200 300 600
50 500
20 200 300 400 900
Table 4.1 explains the functional 30 300 400 500 1200
relationship between price and quantity supplied
40 400 500 600 1500
of a commodity. Lower the price, lower the
50 500 600 700 1800
quantity of a commodity supplied and vice
versa. At the lowest price of ` 10, supply is also In Table 4.2, market supply is obtained by
lowest at 100 kgs. At the highest price of ` 50, adding the supply of sellers A, B and C at different
quantity supplied is highest at 500 kgs. prices. At a highest price of ` 50, market supply
Individual Supply Curve : It is a graphical is the highest at 1800 kgs. At a lowest price of
presentation of individual supply schedule. ` 10 market supply is lowest at 600 kgs.
Individual Supply Curve Market Supply Curve : It is a graphical
SS = Individual Supply Curve presentation of market supply schedule.
Y Market Supply Curve
S SS = Market Supply Curve
50 Y
S
40 50
Price in `

30 40
Price in `

20 30
10 20
S
0 100 200 300 400 500 X 10 S

Quantity Supplied in kgs 0 300 600 900 1200 1500 1800 X

Fig. 4.2
Quantity Supplied in kgs
In figure 4.2, quantity supplied is shown on
Fig. 4.3
the X axis and price on the Y axis. Supply curve
In figure 4.3, quantity supplied is shown on
SS slopes upwards from left to right, indicating
the X axis and price on the Y axis. Supply curve
a direct relationship between price and quantity
SS slopes upwards from left to right, indicating
supplied.
a direct relationship between price and market
2) Market Supply Schedule : Market supply supply.
38
 31
Try this :
Draw a supply curve with the help of a
hypothetical supply schedule.
Determinants of Supply :
1) Price of commodity : Price is an important
factor influencing the supply of a
commodity. More quantities are supplied
at a higher price and less quantities are
supplied at a lower price. Thus, there is
a direct relationship between price and
quantity supplied.
2) State of technology : Technological
improvements reduce the cost of production
which lead to an increase in production and
supply.
3) Cost of Production : If the factor price
increases, the cost of production also
increases, as a result, supply decreases.
4) Infrastructural facility : Infrastructure
in the form of transport, communication,
power, etc. influences the production process
as well as supply. Shortage of these facilities
decreases the supply and vice versa.
5) Government policy : Favourable
Government policies may encourage supply
and unfavourable government policies
may discourage the supply. Government
policies like taxation, subsidies, industrial
policies, etc. may encourage or discourage
production and supply, depending upon
government policy measures.
6) Natural conditions : The supply of
agricultural products depends on the natural
conditions. For example, a good monsoon
and favourable climatic condition will
produce a good harvest, so the supply of
agricultural products will increase and
unfavourable climatic conditions will lead
to a decrease in supply.
7) Future expectations about price : If the
prices are expected to rise in the near future,
the producer may withhold the stock. This
39
will reduce the supply and vice versa
8) Other factors : It includes,
• nature of the market,
• relative prices of other goods,
• export and imports,
• industrial relations,
• availability of factors of production etc.
If all factors are favourable, supply of a
commodity will be more and vice versa.
Law of Supply
Introduction :
The law of supply is also a fundamental
principle of economic theory like law of
demand. It was introduced by Prof. Alfred
Marshall in his book, ‘Principles of Economics’
which was published in 1890. The law explains
the functional relationship between price and
quantity supplied.
Statement of the Law :
“Other things being constant, higher the
price of a commodity, more is the quantity
supplied and lower the price of a commodity less
is the quantity supplied”
In simple words, “other factors remaining
constant, a rise in price results in a rise in the
quantity supplied and vice-versa. Thus, there is
a direct relationship between price and quantity
supplied.
Symbolically,
Sx = f (Px)
S = Supply
x = Commodity
f = Function
P = Price of commodity
Assumptions of the law :
The law of supply is based on the following
assumptions :
1) Constant cost of production : It is assumed
that there is no change in the cost of
production .A change in cost of production
will affect the profits of the seller. Therefore
less quantity will be supplied at the same
price.
 32
2) Constant technique of production : It is
also assumed that technique of production
does not change. Improved technique of
production may lead to an increase in
production. This in turn may lead to an
increase in the supply at the same price.
3) No change in weather conditions : It is
assumed that there is no change in the
weather conditions. Natural calamities
like floods, earthquakes etc. may decrease
supply.
4) No change in Government policy : It is
also assumed that government policies like
taxation policy, trade policy etc. remain
unchanged.
5) No change in transport cost : It is assumed
that there is no change in the condition of
transport facilities and transport cost. For
example, better transport facility increases
supply at the same price.
6) Prices of other goods remain constant :
Prices of other goods are assumed to remain
constant. If they change, the law of supply
may not hold true because producer may
transfer resources to other products.
7) No future expectations : The law also
assumes that the sellers do not expect future
changes in the price of the product.
Law of supply is explained with the help of
the following schedule and diagram :
Table 4.3
Supply Schedule
Price of commodity x Supply of commodity x
(in `) (in kgs.)
10 100
20 200
30 300
40 400
50 500
Table 4.3 explains the direct relationship
between price and quantity of commodity
supplied. When price rises from ` 10 to 20, 30,
40 and 50, the supply also rises from 100 to 200,
300, 400 and 500 units respectively. It means,
40
when price rises supply also rises and when
price falls supply also falls. Thus, there is direct
relationship between price and quantity supplied
which is shown in following figure 4.4 :
Supply Curve
Y
50 S
40
Price in `
30
20
10
S
0 100 200 300 400 500 X
Quantity Supplied in kgs
Fig. 4.4
In the figure 4.4, X axis represents quantity
supplied and Y axis represents the price of the
commodity. Supply curve 'SS' slopes upwards
from left to right which has a positive slope. It
indicates a direct relationship between price and
quantity supplied.
Exceptions to the Law of Supply :
Following are the exceptions to the law of supply:
1) Supply of labour : Labour supply is the
total number of hours that workers to work
at a given wage rate. It is represented
graphically by a supply curve. In case of
labour, as the wage rate rises the supply
of labour (hours of work) would increase.
So supply curve slopes upward. Supply of
labour (hours of work) falls with a further
rise in wage rate and supply curve of
labour bends backward. This is because the
worker would prefer leisure to work after
receiving higher amount of wages. Thus,
after a certain point when wage rate rises
the supply of labour tends to fall.
 It can be explained with the help of a
backward bending supply curve. Table no.
4.4 and fig. no 4.5 explains the backward
bending supply curve of labour.
 33
Table. 4.4 Due to unfavourable changes in weather,
Labour Supply Schedule if the agricultural production is low, their
Wage rate (`) Hours of work Total amount supply cannot be increased even at a higher
per hour per day of wages (`) price.
100 5 500
3) Urgent need for cash : If the seller is in
200 7 1400
urgent need for hard cash, he may sell his
300 6 1800
product at which may even be below the
SAS1 = Backward bending market price.
labour supply curve
Y SA = Increasing supply curve 4) Perishable goods : In case of perishable
AS = Leisure time goods, the supplier would offer to sell more
Wage rate (`) per hour

quantities at lower prices to avoid losses.

S1
300 For example, vegetables, eggs etc.
5) Rare goods : The supply of rare goods
200 A
cannot be increased or decreased according
100 to its demand. Even if the price rises, supply
S remains unchanged. For example, rare
0 5 6 7 X paintings, old coins, antique goods etc.
Variations in Supply :
Supply of Labour (hours of work)
When quantity supplied of a commodity
Fig. 4.5
varies due to change in its price, other factors
In fig. 4.5, supply of labour (hours of
remaining constant, it is known as variations
work) is shown on X axis and wage rate
in supply. There are two types of variations in
per hour is shown on the Y axis. The curve
supply :
SAS represents backward bending supply
1) Expansion of supply : Expansion of supply
curve of labour. Initially, when the wage
refers to a rise in the quantity supplied due
rate is ` 100 per hour, the hours of work is
to a rise in the price of a commodity, other
5. The total amount of wages received is `
factors remaining constant. Expansion in
500. When wage rate rises from ` 100 to
supply leads to an upward movement on the
` 200, hours of work will also rise from 5
same supply curve due to a rise in price. It is
hours to 7 hours and total amount of wages
shown in figure 4.6
would also rise from ` 500 to ` 1400. At this
point, labourer enjoys the highest amount Expansion of supply
i.e. ` 1400, and works for 7 hours. If wage Y SS = Supply Curve
rate rises further from ` 200 to ` 300, total MN = Extension of supply
amount of wages may rise, but the labourer
will prefer leisure time and denies to work
for extra hours. Thus, he is ready to work S
Price

only for 6 hours. At the point A, the supply P1 N

curve bends backward, which becomes an M
exception to the law of supply. P
S
2) Agricultural goods : The law of supply
does not apply to agricultural goods as they 0 Q Q1 X
are produced in a specific season and their Quantity Supplied
production depends on weather conditions. Fig. 4.6
41
 34
In figure 4.6, quantity supplied is shown shifts to the right of the original supply
on the X axis and price on the Y axis. Quantity curve. It is shown in figure 4.8
supplied rises from OQ to OQ1, with a rise in Increase in supply
price from OP to OP1, resulting in an upward SS = Original supply curve
Y
movement from M to N along the same supply S1S1 = Shift in supply curve
curve SS. It is known as Expansion of supply.
2) Contraction of supply : Contraction of S
supply refers to a fall in the quantity supplied,

Price
S1
M N
due to fall in the price of a commodity, P
other factors remaining constant. In case of S
contraction of supply, there is a downward S1
movement on the same supply curve. It is
shown in figure 4.7 0 Q Q1 X
Contraction of supply Quantity Supplied
SS = Supply Curve
Fig. 4.8
Y
In figure 4.8, quantity supplied is shown on
NM = Contraction of Supply
the X axis and price on the Y axis. Supply rises
from OQ to OQ1 at the same price OP, resulting
S in an outward shift of the original supply curve to
Price

P N the right from SS to S1S1. It is known as Increase

in supply.
P2 M
2) Decrease in supply : Decrease in supply
S
refers to a fall in the supply of a given
0 Q2 Q X commodity due to unfavourable changes in
Quantity Supplied other factors such as increase in the prices
Fig. 4.7 of inputs, increase in tax rate, outdated
In figure 4.7, quantity supplied is shown technology, strikes by worker, while price
on the X axis and price on the Y axis. Quantity remains constant. The supply curve shifts
supplied falls from OQ to OQ2 with a fall in to the left of the original supply curve. It is
price from OP to OP2, resulting in a downward shown in figure 4.9
movement from N to M on the same supply curve Decrease in supply
SS = Original supply curve
SS. It is known as Contraction of supply. Y S2S2 = Shift in supply curve
Changes in Supply : S2
When other factors change and price remains
N M S
constant, it is known as changes in supply. There P
Price

are two types of changes in supply :

S2
1) Increase in supply : Increase in supply refers
to rise in the supply of a given commodity
S
due to favourable changes in other factors
such as fall in the price of inputs, fall in tax 0 Q2 Q X
rates, technological upgradation etc., while Quantity Supplied
price remains constant. The supply curve Fig. 4.9
42
 35
In figure 4.9, quantity supplied is shown on machinery etc.
the X axis and price on the Y axis. Supply falls Total Variable Cost (TVC) : Total variable
from OQ to OQ2 at the same price OP, resulting costs are those expenses of production
in an inward shift of the original supply curve to which are incurred on variable factors such
the left from SS to S2S2. It is known as Decrease as labour, raw material, power, fuel etc.
in supply. 2) Average Cost (AC) : Average cost refers to
cost of production per unit. It is calculated
You should know :
by dividing total cost by total quantity of
1) Supply : Supply is a micro-economic production.
concept. Supply refers to quantity of a TC
AC =
commodity that a seller is willing and able TQ
to offer for sale at a particular price, during AC = Average cost
a certain period of time. TC = Total cost
2) Aggregate supply : It is a macro-economic TQ = Total quantity
concept. It refers to the minimum amount of For example, If the total cost of production
sales proceeds which entrepreneurs expect of 40 units of commodity is ` 800 then the
to receive from the sale of output at a given average cost is :
level of employment. TC
AC =
TQ
Concepts of Cost and Revenue : 800
   =
A) Cost Concepts : 40
When an entrepreneur undertakes an act    = ` 20 per unit
of production, he has to use various inputs like 3) Marginal cost (MC) : Marginal cost is the
raw material, labour, capital etc. He has to net addition made to total cost by producing
make payments for such inputs. The expenditure one more unit of output.
incurred on these inputs is known as the cost of MCn = TCn – TCn-1
production. Cost of production increases with an
  n = Number of units produced
increase in need of output. There are three types
MCn = Marginal cost of the nth unit
of costs which are as follows :
TCn = Total cost of nth unit
1) Total Cost (TC) : Total cost is the total
expenditure incurred by a firm on the factors TCn-1 = Total cost of previous units
of production required for the production of If previous total cost of producing 4 units
goods and services. Total cost is the sum is ` 200 and total cost of producing 5 units
of total fixed cost and total variable cost at is ` 250, then :
various levels of output. MCn = TCn – TCn-1
TC = TFC + TVC   = ` 250 – ` 200
TC = Total cost   = ` 50
TFC = Total Fixed Cost
TVC = Total Variable Cost Find out :

Total Fixed Cost (TFC) : Total fixed costs If a firm produces 600 units of a
are those expenses of production which commodity in a day and incurs a total cost
are incurred on fixed factors such as land, of ` 30,000. Calculate the Average Cost.

43
 36
B) Revenue Concepts :
The term ‘revenue’ refers to the receipts
obtained by a firm from the sale of certain
quantities of a commodity at given price in the
market. The concept of revenue relates to total
revenue, average revenue and marginal revenue.
1) Total Revenue (TR) : Total revenue is the
total sales proceeds of a firm by selling a
commodity at a given price. It is the total
income of a firm. Total revenue is calculated
as follows :
Total revenue = Price × Quantity
For example, if a firm sells 15 units of a
commodity at ` 200 per unit TR is calculated
as :
TR = P × Q
= ` 200 × 15
= ` 3000
2) Average Revenue (AR) : Average revenue
is the revenue per unit of output sold. It is
obtained by dividing the total revenue by
the number of units sold.
TR
AR =
TQ
AR = Average Revenue
TR= Total Revenue
TQ =Total Quantity
For example, if the total revenue of 15 units,
is ` 3000, then average revenue is calculated as :
TR
AR =
TQ
3000
  =
15
  = ` 200
3) Marginal Revenue : Marginal revenue is
the net addition made to total revenue by
selling an extra unit of the commodity.
MRn = TRn – TRn-1
MRn = Marginal revenue of nth unit
TRn = Total revenue of nth unit
TRn-1 = Total Revenue of previous units
n = Number of units sold
For example, if the previous total revenue
from the sale of 20 tables is ` 4000 and
that from the sale of 21 tables is ` 4200,
marginal revenue is calculated as :
MRn = TRn – TRn-1
  = 4200 – 4000
  = ` 200 per table
Find out :
If a firm sells 400 units of a commodity
at ` 10 unit. Calculate the TR and AR.

EXERCISE

Q. 1. Complete the following statements : b) decrease in supply

1) When supply curve is upward sloping, it’s slope c) expansion of supply
is .............. d) increase in supply
a) positive   3) A rightward shift in supply curve shows
b) negative ................
c) first positive then negative a) contraction of supply
d) zero b) decrease in supply
2) An upward movement along the same supply c) expansion of supply
curve shows ................ d) increase in supply
a) contraction of supply 4) Other factors remaining constant, when less

44
 37

5 Forms of Market

Introduction : various criteria. This is shown in following

Market is generally understood as a
particular place or locality where goods are sold
and purchased. But, in economics, market refers
to an arrangement through which buyers and
sellers come in contact with each other directly
or indirectly and exchange of goods and services
takes place among them.
Definition of Market :
According to Augustin Cournot,
“Economists understand the term market, not
any particular market place in which things are
bought and sold, but the whole of any region
in which buyers and sellers are in such a close
contact with one another that the prices of the
same goods tend to equality easily and quickly.”
Thus, market is a network of dealings
between potential buyers and potential sellers. At
any point of time, a market will exist if there are :
1) Buyers and sellers
2) A product or service to be bought and sold
3) Price of the product
4) Close contact between buyers and sellers
5) Knowledge about market
Classification of Market :
Market can be classified on the basis of
Classification of Market on the basis of
I) Place II) Time
A) Local A) Very short period
B) National B) Short period
C) International C) Long period
D) Very long period
fig. 5.1.
I) On the basis of place :
1) Local market : Local market is a market
in which sellers sell and customers buy a
product in the region or area in which it is
produced.
2) National market : National market is
a domestic market in a given country.
Each national market is governed by the
regulation of its own country.
3) International market : International
market is a worldwide market in which
buyers and sellers trade in goods and
services across the national borders.
II) On the basis of time :
1) Very short period : Very short period is a
period in which supply is fixed and price is
determined by the demand. The time period
is for a few days or weeks in which the
supply of commodity cannot be increased.
2) Short period : Short period is a period of
less than one year. In this period, firms can
only make adjustments in inputs like labour
to increase the supply of goods and services.
3) Long period : Long run is a period of time
in which all factors of production and costs
III) Competition
A) Perfect
competition
B) Imperfect
competition

i) Monopoly ii) Oligopoly iii) Monopolistic competition

Fig. 5.1
46
 38
are variable. In the long run, firms are able
to adjust all costs. It is for a few years,
generally up to five years.
4) Very long period : Very long period is
a production time that is so long that all
inputs are variable. It is of more than five
years.
III) On the basis of Competition :
Competition among the sellers and buyers is
the most important criteria for classification of
markets in economics. Let us study the various
types of markets on the basis of competition
among the sellers :
A) Perfect Competition :
Meaning and Definition : Perfect
competition is an ideal and imaginary
concept of market rather than an actual
market. According to Mrs. Joan Robinson,
“Perfect competition prevails when the
demand for the output of each producer is
perfectly elastic.”
  A perfectly competitive market is
one in which the number of buyers and
sellers is very large. All the buyers and
sellers are engaged in buying and selling
a homogeneous product without any
restrictions. Moreover both buyers and
sellers possess perfect knowledge of market
conditions.
 Following are the features of Perfect
Competition :
1) Large number of sellers and buyers :
Under perfect competitions, there are large
number of sellers and buyers. As mentioned
earlier, each seller forms a negligible part
in the total market. Hence, none of them
is in a position to influence the price and
supply in the market. Thus, sellers are price
takers under perfect competition.
  The number of buyers is also large. The
share of each buyer is so negligible that
47
none of them is in a position to influence
the price in the market.
2) Homogeneous product : An important
feature of a perfectly competitive market
is that the product sold is homogeneous or
identical in respect of size, design, colour,
taste etc. All the products are perfect
substitutes to each other.
3) Free entry and exit : There are no barriers
to the entry and exit of firms. Any firm can
enter or quit the industry at its own will. If
there is hope of profit, the firm will enter the
market and if there is possibility of loss the
firm will leave the market.
4) Single price : A single uniform price
prevails under perfect competition which
is determined by the interaction of demand
and supply.
5) Perfect knowledge of market : The buyers
and sellers possess a perfect knowledge
about the market conditions. Every seller
and buyer has the knowledge about price,
quality, source of supply of products etc.
6) Perfect mobility of factors of production :
There is perfect mobility of factors of
production under perfect competition.
Labour and capital are mobile not only
geographically but also occupationally.
7) Absence of transport cost : In perfect
competition, price is uniform because we
assume that transport cost does not exist.
This assumption will lead to uniformity in
price.
8) No government intervention : Laissez-
faire policy is an important feature of
perfect competition. It means there is
absence of Government intervention in
economic activities.
Price determination under Perfect Competition:
The interaction of demand and supply
 39
determine price of the commodity in perfect diagram, X axis represents quantity demanded and
competition. This is known as ‘equilibrium quantity supplied, whereas Y axis represents the
price.’ Marshall has compared the process of price. DD is the downward sloping demand curve
price determination to the cutting of cloth with which shows inverse relationship between price
a pair of scissors. Just as both the blades of and quantity demanded. SS is the upward sloping
scissors are required to cut the cloth, both the supply curve which shows direct relationship
forces of demand and supply are essential to between price and quantity supplied. E is the
determine the equilibrium price in the market. equilibrium point where DD and SS curve intersect
This is explained with the help of the following each other. Accordingly ` 300 is the equilibrium
schedule and diagram. price and 3000 kgs. is the equilibrium quantity
Table no 5.1 Demand and Supply Schedule demanded and supplied. This equilibrium price is
Price per Quantity Quantity Relationship determined by market demand and market supply.
Kg. of demanded supplied between DD
Apples (in `) (in Kg.) (in Kg.) and SS
Y Excess Supply
100 5000 1000 DD > SS
200 4000 2000 DD > SS 500 D SS > DD S

Price (in `) per kg

300 3000 3000 DD = SS 400
400 2000 4000 DD < SS E
500 1000 5000 DD < SS 300 DD = SS

From the table no 5.1, following conclusions 200

can be drawn :
1) When price rises from ` 100 to ` 200
quantity demanded falls from 5000 kgs. to
4000 kgs. whereas supply increases from
1000 kgs. to 2000 kgs. This is because
demand falls with rise in price and supply
rises with a rise in price. This is the stage
where demand is greater than supply (DD >
SS).
2) When price rises to ` 300, quantity
demanded and quantity supplied become
equal that is 3000 kg. This is the stage of
equilibrium where demand and supply
become equal (DD = SS). Hence, ` 300
becomes the equilibrium price.
3) When price further rises from ` 400 to `
500, demand falls from 2000 kgs. to 1000
kgs. and supply rises from 4000 kgs. to 5000
kgs. Thus, supply is greater than demand.
(SS > DD).
The process of price determination is
explained in the following figure 5.2. In this
100 S
DD > SS
D
Excess Demand
0 1000 2000 3000 4000 5000 X
Quantity Demanded and Quantity Supplied (in kgs.)
Fig. 5.2
B) Imperfect Competition :
Imperfect competition is a type of market
showing some but not all the features of a
competitive market. Following are some of the
types of imperfect market.
I) Monopoly :
Meaning and Definition : The term monopoly
is derived from the Greek word ‘Mono’ which
means single and ‘poly’ which means seller.
Monopoly is a market in which there is only one
seller who controls the entire market supply for
a product which has no close substitute.
According to E. H. Chamberlin, “Monopoly
refers to a single firm which has control over
the supply of a product which has no close
substitute.”

48
 40
Following are the main features of
monopoly market :
1) Single seller : In monopoly, there is no
competition as there is only one single
producer or seller of the product. But, the
number of buyers is large.
2) No close substitute : There are no close
substitutes for the product of the monopolist.
Therefore, the buyers have no choice.
They have to either buy the product from
the monopolist or go without it. The cross
elasticity of demand for his product is either
zero or negative.
3) Barriers to entry : Entry of the rivals is
restricted due to legal, natural, technological
barriers which do not allow the competitors
to enter the market.
4) Complete control over the market supply:
The monopolist has complete hold over the
market. He is the sole producer or seller of
the product.
5) Price maker : A monopolist can fix the price
of his own product as he controls the whole
market supply. Monopolist is a price maker.
6) Price discrimination : Monopolist being a
price maker, he can charge different prices
to different consumers for the same product,
on the basis of time, place etc. Thus, price
discrimination is an important feature of
monopoly market. For example, students
and senior citizens are provided railway
tickets at concessional rates.
7) No distinction between firm and industry:
A monopolist is the sole seller and producer
of the product. A monopoly firm itself is an
industry.
Types of monopoly :
Following are some of the types of
monopoly :
1) Private monopoly : When an individual or
private body controls a monopoly firm it is
known as private monopoly. For example,
Tata Group.
49
2) Public monopoly : When the production
is solely owned, controlled and operated
by the Government, it is known as public
monopoly. It is usually welfare oriented.
For example, Indian Railways.
3) Legal monopoly : This monopoly emerges
on account of legal provisions like patents,
trade mark, copyrights etc. The law forbids
the potential competitors to imitate the
design or form of the product registered
under given branded names. For example,
Amul products.
4) Natural monopoly : The monopoly created
on the basis of natural conditions like
climate, rainfall, specific location etc. is
known as natural monopoly. For example,
wheat from Punjab.
5) Simple monopoly : In simple monopoly,
seller or a firm charges a uniform price for
its product to all the buyers.
6) Discriminating monopoly : In
discriminating monopoly, firm charges
different prices to different buyers for the
same product. For example, doctor charges
different fees to different patients.
7) Voluntary monopoly : To avoid cut
throat competition, some monopolists
voluntarily come together and form a
group of monopolists. This facilitates
them to maximise the profit. For example,
Organisation of Petroleum Exporting
Countries (OPEC).
You should know :
Price descrimination under monopoly
Personal Place wise Time wise Use
Doctors Differences ST bus fare Electricity
charge in house differs for charges are
different rent in rural over night different for
fees to and urban and day domestic and
different areas time travels commercial
patients uses
 41
Find out :
Types of monopoly for the following
products/services :
1) Tea in Assam
2) Atomic energy
3) Logo of a commercial bank
Do you know?
Monopsony is the converse of monopoly.
It exists when there are many sellers but
only one buyer. Buyer’s monopoly is rarely
found. A monopsonist can exploit the sellers
just as a monopolist may exploit the buyers.
In the labour market, a particular kind of
labour is used by one employer only.
II) Oligopoly :
The term oligopoly is derived from the
Greek words ‘Oligo’ which means few and
‘poly’ which means sellers. It is that market
where there are a few firms (sellers) in the
market producing either a homogeneous product
or a differentiated product. For example, mobile
service providers, cement companies etc.
Features of oligopoly :
1) Few firms or sellers : Under oligopoly
market, there are few firms or sellers. These
few firms dominate the market and enjoy
a considerable control over the price of a
product.
2) Interdependence : The seller has to be
cautious with respect to any action taken
by the competing firms. Since there are
few sellers in the market, if any firm makes
the change in the price, all other firms in
the industry also try to follow the same to
remain in the competition.
3) Advertising : Advertising is a powerful
instrument in the hands of oligopolist. A
firm under oligopoly can start an aggressive
and attractive advertising campaign with
the intention of capturing a large part of
market.
50
4) Entry barriers : The firm can easily
exit from the industry whenever it wants.
But has to face certain entry barriers
such as Government licence, patents etc.
5) Lack of uniformity : There is a lack of
uniformity among the firms in terms of their
size. Some firms may be small while others
may be of bigger size.
6) Uncertainty : There is a considerable
element of uncertainty in this type of market
due to different behaviour patterns. Rivals
may join hands and co-operate or may try
to fight each other.
III) Monopolistic competition :
Different brands of liquid cleaners :
Fig. 5.3
Meaning and Definition : Monopolistic
competition is very realistic in nature. In this
market there are some features of perfect
competition and some features of monopoly
acting together. Prof. E. H. Chamberlin coined
this concept in his book “Theory of Monopolistic
Competition” which was published in 1933.
According to Chamberlin, “Monopolistic
competition refers to competition among a large
number of sellers producing close but not perfect
substitutes.”
Following are the main features of
monopolistic competition :
1) Fairly large number of sellers : In
monopolistic competition, the number of
sellers is large but comparatively it is less
than that of perfect competition. Due to this
reason sellers’ behaviour is like monopoly.
 42
2) Fairly large number of buyers : In this
market there are fairly large number of
buyers. Consequently, no single buyer
can influence the price of the product by
changing his individual demand.
3) Product differentiation : Product
differentiation is the main feature of
monopolistic competition. In this market,
there are many firms producing a particular
product, but the product of each firm is in
some way differentiated from the product
of every other firm in the market. This is
known as product differentiation. Product
differentiation may take the form of brand
names, trade marks, peculiarity of package
or container, shape, quality, cover, design,
colour etc. This means that the product of
a firm may find close substitutes and its
cross elasticity of demand is very high. For
example, mobile handsets, cold drinks etc.
4) Free entry and exit : Under monopolistic
competition there is freedom of entry and
exit, that is new firms are free to enter the
market if there is profit. Similarly, they can
leave the market, if they find it difficult to
survive.
5) Selling Cost : Selling cost are peculiar to
monopolistic competition only. It refers to
the cost incurred by the firm to create more
EXERCISE
Q. 1. A) Choose the correct option :
1) In economic sense, market includes following
activities
a) The place where goods are sold and
purchased.
b) An arrangement through which buyers and
sellers come in close contact with each other
directly or indirectly.
c) A shop where goods are sold.
d) All of the above.
51
demand for its product and thus increase
the volume of sales. It includes expenditure
on advertisements, readio and television
broadcasts, hoardings, exhibitions, window
display, free gifts, free samples etc.
6) Close substitutes : In monopolistic
competition, goods have close substitutes to
each other. For example, different brands of
soaps, toothpastes etc.
7) Concept of group : Under monopolistic
competition, Chamberlin introduced the
concept of ‘Group’ in place of industry.
Industry means the number of firms
producing identical products. A ‘Group’
means a number of firms producing
differentiated products which are closely
related. For example, group of firms
producing medicines, automobiles etc.
Find out :
Close substitutes for the following
products.
Products Substitutes
1) Gemini Oil
2) Colgate Toothpaste
3) Red Label Tea
4) Bru Caffee
5) Activa Two-wheeler
Options :1) a and b 2) b and c
3) a, b and c 4) only d
2) Classification of markets on the basis of place
a) Local market, National market, International
market
b) Very short period market, Local market,
National market.
c) Short period market, National market,
International market.
d) Local market, National market, Short period
market.
 43
7 National Income
Fig. 7.1
Introduction :
National Income is one of the important
subject matter of macroeconomics. The national
economy comprises of all the firms and factories,
shops and markets, banks and financial
institutions, various departments and their offices
etc. National income is a composite measure
of all economic activities such as production,
distribution, exchange and consumption, but is
also an objective indicator of economic welfare
of the people in a country.
In India, establishment of the National
Income Committee (NIC) in 1949 marked the
beginning of Government efforts for regular
compilation of National Income estimates. At
present, Central Statistical Organisation (CSO)
compiles and publishes data on national income
and allied aggregates every year.
Meaning :
Modern economy is a money economy.
Hence, national income of a country is expressed
in terms of money.
The total income of the nation is called
national income.
In real terms, national income is the flow
of goods and services produced in an economy
during a year.
61
Definitions of National Income :
Following are some of the important
definitions of national income :
1) National Income Committee (NIC) : The
National Income Commitee was appointed
by the Government of India in August 1949
with Prof. P. C. Mahalanobis as Chairman
and Prof. D. R. Gadgil and Dr. V. K. R. V.
Rao as the members.
P.C.Mahalanobis V. K. R. V. Rao D. R. Gadgil
According to NIC “A national estimate
measures the volume of commodities and
services turned out during a given period
counted without duplication.”
2) Prof. A.C. Pigou : “National dividend is
that part of objective income
of the community including of
course income derived from
abroad which can be measured
in money.”
5) Prof. Irving Fisher : “National dividend
or income consists solely of
services as received by ultimate
consumers, whether from their
material or from their human
environments.”
Features of National Income :
1) Macro Economic concept : National
income represents income of the economy
as a whole rather than that of an individual.
Hence it is a macro economic concept.
2) Value of only final goods and services : In
order to avoid double counting in national
income, the value of only final goods and
 44
services produced in the economy are
considered. The value of intermediate goods
or raw materials is not considered. For
example, while estimating the production
of shirts, there is no need to take the value
of cotton, as it is already included in the
price of the shirts.
3) Net aggregate value : National income
includes net value of goods and services
produced and does not include depreciation
cost. (i.e. wear and tear of capital assets)
4) Net income from abroad : National
income includes net income from abroad i.e.
difference between export value and import
value (X-M) and net difference between
receipts from abroad and payments made
abroad (R-P).
5) Financial year : National income is always
expressed with reference to a time period.
In India, it is from 1st April to 31st March.
6) Flow concept : National income is a flow
concept as it shows flow of goods and
services produced in the economy during a
year.
7) Money value : National income is always
expressed in monetary terms. It represents
only those goods and services which are
exchanged for money.
Circular Flow of National Income :
Circular flow of income is the basic concept
in macro economics. The circular flow of income
refers to the process whereby an economy's
money receipts and payments flow in a circular
manner continuously through time.
Circular flow of income can be determined
for the following :
1) Two sector Economy (Households and
Business Firms.) Y = C + I
2) Three sector Economy (Households,
Business Firms and Government sector)
Y=C+I+G
3) Four Sector Economy (Households, Business
62
Firms, Government and Foreign sector)
Y = C + I + G + (X-M)
The circular flow of goods and money in a
two sector model is explained below :
Two sector model of Circular flow of National
Income :
There are two sectors, households and
firms. It divides the diagram into two parts. The
upper half represents the factor market and the
lower half represents the commodity market.
Fig. no. 7.2 explaines circular flow of
income and expenditure in a two sector model.
Land, Labour, Capital and Enterprise
Consumption Expenditure on
Goods and Services
Households Firms
Factor Income, Rent,
Wages, Interest, Profit
Flow of Goods and Services
Fig. 7.2
In the above figure 7.2, the factors of
production flow from the households to the
firms. The firms use these factors to produce
goods and services required by the households.
Thus, goods flow from the households to the
firms and from the firms back to the households.
It is called product flows.
In the same way, money flows from the
firms to the households in the form of factor
payments such as rent, wages, interest and
profit. Households use this income to purchase
goods and services. Thus, money flows from the
firms to the households and from the households
back to the firms. It is called money flows.
In the circular flow of income, production
generates factor income, which is converted
into expenditure. This flow of income continues
as production is a continuous activity due to
never ending human wants. It makes the flow of
income circular
 45
4) Net National Product (NNP) : Net National
Do you know?
I) Three Sector Model of Circular Flow
of National Income : Under a three sector
model, the government sector is added to
the existing two sectors i.e. households and
business firms.
II) Four Sector Model of Circular Income :
In an four sector model, foreign sector
is added to the existing three sectors
i.e. households, business firms and
government sector.
Different Concepts of National Income :
Following are some of the important
concepts related to national income.
1) Gross Domestic Product (GDP) : Gross
Domestic Product is the gross market value
of all final goods and services produced
within the domestic territory of a country,
during a period of one year.
∴ GDP = C + I + G + (X-M) ,
Where C = Private consumption expenditure
I = Domestic Private Investment
G = Government's consumption and Investment
Expenditures
X - M = Net export value (Value of Exports -
Value of imports
2) Net Domestic Product (NDP) : Net
Domestic Product is the net market value
of all final goods and services produced,
within the territorial boundaries of a
country, during a period of one year.
∴ NDP = GDP – Depreciation.
3) Gross National Product (GNP) : Gross
National Product means the gross value of
final goods and services produced annually
in a country, which is estimated according
to the price prevailing in the market.
∴ GNP = C + I + G + (X-M) + (R-P).
(R = receipts from abroad and P = payments
made abroad)
63
Product is the net market value of all final
goods and services produced by the residents
of a country, during a period of one year.
∴ NNP = GNP – Depreciation.
Find out :
India’s GDP data.
You should know :
Concept of Green GNP :
It is defined as, “Green GNP is an
indicator of sustainable use of natural
environment and equitable distribution of
benefits of development.”
Gross National product does not take
into consideration the cost in terms of (i)
Environmental pollution, (ii) Depletion of
natural resources caused by production of
output. Mere increase in GNP will not reflect
improvement in quality of life, when it
increases environmental pollution or reduce
available resources for future generations.
So Green GNP has been introduced while
measuring economic welfare.
Following are the characteristics of Green
GNP :
1) Sustainable economic development, i.e.
development which should not cause
environmental degradation (pollution)
and depletion of natural resources.
2) Equitable distribution of benefits of its
development.
3) Promotes economic welfare for a long
period of time.
Measurement :
Green GNP = GNP - (Net fall in stock of
natural capital + pollution load.)
 46
consumers. Hence, the value of final output
Find out :
includes the value of intermediate products.
Names of five countries making use of
  For example, the price of bread includes,
the concept of Green GNP. the cost of wheat, making of flour, etc.,
Methods of Measurment of National Income : wheat and flour are both intermediate goods.
Their values are paid up during the process
There are three methods of measuring
of production. In the final product i.e. bread,
national income.
the values of intermediate goods are already
1) Output Method/Product Method
included.
2) Income Method
 Thus, a separate accounting of the
3) Expenditure Method
values of intermediate goods, along with
Output Method
the accounting of the value of final product,
Methods of Measurement
Income Method would mean double counting. To avoid this,
of National Income
Expenditure Method
the value of only the final product or goods
must be computed.
1) Output Method :
ii) Value Added Approach / The Value
This method of measuring national income
Added Method : In order to avoid double
is also known as product method or inventory
counting value added approach is used.
method.
According to this approach, the value added
This method approaches national income
at each stage of the production process is
from the output side. According to this method,
included. The difference between the value
the economy is divided into different sectors,
of final outputs and inputs, at each stage of
such as agriculture, mining, manufacturing,
production is called the value added. Thus,
small enterprises, commerce, transport,
GNP is obtained as the sum total of the
communication and other services. The output or
values added by all the different, stages of
product method is followed either by valuing all
the production process, till the final output is
the final goods and services, produced during a
reached in the hands of consumers, to meet
year, at their market price or by adding up all the
the final demand. This can be illustrated
values at each higher stage of production, until
with the help of the following table.
these products are turned into final products.
Table No. 7.1 - Value Added Method
While using this method utmost care must
Production stage Value of Value of Value
be taken to avoid multiple or double counting.
output ` input ` added `
To avoid double counting this method suggests
Cotton 150 0 150
two alternative approaches for the measurement Yarn 250 150 100
of GNP. Cloth 400 250 150
i) Final Goods Approach / The Final Product Shirt (final goods) 500 400 100
Approach : Final goods are those goods Total value 500
which are ready for final consumption. Value added at each stage is calculated by
According to this approach, value of all final deducting the value of inputs from the value of
goods and services produced in primary, output produced. The sum total added at different
secondary and tertiary sector are included stages make GNP. In the above table the value of
and the value of all intermediate transactions final good (Shirt) is ` 500. The sum total of value
are ignored. Intermediate goods are involved added at each stage of production is also ` 500.
in the process of producing final goods, that Thus the total value added is equal to the value of
is, the final flow of output purchased by final goods. (150 + 100 + 150 + 100 = 500)
64
 47
Precautions :
While estimating national income by output
method, following precautions should be taken:
1) To avoid double counting, only the value of
final goods and services must be taken into
account.
2) Goods used for self consumption by
farmers should be estimated by a guess
work. Imputed value of goods produced
for self consumption is included in national
income.
3) Indirect taxes included in the market prices
are to be deducted and subsidies given by
the government to certain products should
be added for accurate estimation of national
income.
4) While evaluating output, changes in the
price level between different years must be
taken into account.
5) Value of exports should be added and value
of imports should be deducted.
6) Depreciation of capital assets should be
deducted.
7) Sale and purchase of second hand goods
should be ignored as it is not a part of
current production.
 Output method is widely used in the
underdeveloped countries. However, it
is less reliable because of the margin of
error. In India, this method is applied to
agriculture, mining and manufacturers,
including handicrafts. But it is not applied
for transport, commerce and communication
sectors in India.
2) Income Method :
This method of measuring national income
is also known as factor cost method. This
method estimates national income from the
distribution side.
According to this method, the income
payments received by all citizens of a country,
in a particular year, are added up, that is,
incomes that accrue to all factors of production
by way of rents, wages, interest and profits are
65
all added together, but income received in the
form of transfer payments are ignored. The data
pertaining to income are obtained from different
sources, for instance, from income tax returns,
reports, books of accounts, as well as estimates
for small income.
GNP can be treated as the sum of factor
incomes, earned as a result of undertaking
economic activity, on the part of resource
owners and reflected in the production of the
total output of goods and services during any
given time period.
Thus, GNP, according to income method, is
calculated as follows:
NI = Rent + Wages + Interest + Profit +
Mixed Income + Net income from abroad.
NI = R + W + I + P + MI + (X–M)
Precautions :
While estimating national income by
income method, the following precautions
should be taken.
1) Transfer incomes or transfer payments like
scholarships, gifts, donations, charity, old
age pensions, unemployment allowance
etc., should be ignored.
2) All unpaid services like services of a
housewife, teacher teaching her/his child,
should be ignored.
3) Any income from sale of second hand goods
like car, house etc., should be ignored.
4) Income from sale of shares and bonds
should be ignored, as they do not add
anything to the real national income.
5) Revenue received by the government
through direct taxes, should be ignored, as
it is only a transfer of income.
6) Undistributed profits of companies, income
from government property and profits from
public enterprise, such as water supply,
should be included.
7) Imputed value of production kept for self-
consumption and imputed rent of owner
occupied houses should be included.
In India, the National Income Committee
 48
of the Central Statistical Organization, uses
the income method for adding up the income
arising from trade, transport, professional
and liberal arts, public administration and
domestic services.
3) Expenditure Method :
This method of measuring national income
is also known as Outlay Method.
According to this method, the total
expenditure incurred by the society, in a
particular year, is added together. Income can
be spent either on consumer goods or on capital
goods. Thus, we can get national income by
summing up all consumption expenditure and
investment expenditure made by all individuals,
firms as well as the government of a country
during a year.
Thus, gross national product is found by adding
up     NI = C + I + G + (X–M) + (R–P)
1) Private Final Consumption Expenditure
(C) : Private Final Consumption Expenditure
(C) by households on non-durable goods,
such as food, which are used immediately;
expenditure on durable goods such as car,
computer, television set, washing machine
etc., which are generally used for a longer
period of time; and expenditure on services
like transport services, medical services, etc.
2) Gross Domestic Private Investment
Expenditure (I) : It refers to expenditure
made by private businesses on replacement,
renewals and new investment (I).
3) Government Final Consumption and
Investment Expenditure (G) :
i) Government's final consumption
expenditure refers to the expenditure
incurred by government on various
administrative services like, law and order,
defence, education, health etc.
ii) Government's investment expenditure refers
to the expenditure incurred by government,
on creating infrastructural facilities like
construction of roads, railways, bridges,
dams, canals, which are used by the
66
business sector for production of goods and
services in any economy (G).
4) Net Foreign Investment/Net Exports : It
refers to the difference between exports and
imports of a country during a period of one
year.
5) Net Receipts (R-P) : The difference
between expenditure incurred by foreigners
on domestic goods and services (R) and
expenditure incurred abroad by residents
on foreign goods and services (P).
Precautions:
While estimating national income by
Expenditure Method, the following precautions
should be taken.
1) Expenditure on all intermediate goods and
services should be ignored, in order to avoid
double counting.
2) Expenditure on the repurchase of second
hand goods, should be ignored, as it is not
incurred on currently produced goods.
3) Expenditure on transfer payments
like scholarships, old age pensions,
unemployment allowance etc., should be
ignored.
4) Expenditure on repurchase of financial
assets such as shares, bonds, debentures etc.,
should not be included, as such transactions
do not add to the flow of goods and services.
5) Indirect taxes should be deducted.
6) Expenditure on final goods and services
should be included.
7) Subsidies should be included.
  Out of these methods, the Output Method
and Income Method are extensively used.
In advanced countries like U.S.A. and U.K.
the Income Method is popular. Expenditure
Method is rarely used by any country
because of practical difficulties. In India,
the Central Statistical Organization (CSO)
adopts a combination of both output method
and income method to estimate national
income of India.
 49
You should know :
Mixed income refers to the incomes of
self employed persons who use their own
land, labour, capital and entrepreneurship
to produce various goods and services.
Difficulties in the Measurement of National
Income :
There are various difficulties in the
measurement of national income.
A) Theoretical Difficulties or Conceptual
Difficulties :
1) Transfer payments : Individuals get
pension, unemployment allowance etc. but
whether these transfer payments should
be included in national income or not, is a
major problem. On one hand they are a part
of individual income and on the other hand,
they are part of Government expenditure.
B) Practical
Hence, these transfer payments are not
Difficulties :
included in national income.
2) Illegal income : Illegal incomes like income
in the collection of statistical data required for
from gambling, black marketing, theft,
estimation of national income. Some of the
smuggling etc. are not included in national
practical difficulties are as follows :
income.
3) Unpaid services : For the purpose of
calculating national income, only paid
goods and services are considered. However,
there are a number of unpaid services which
are not accounted for in the calculation of
national income. For example, services of
housewives and the services provided out
of love, affection, mercy, sympathy, charity
etc. are not included in national income.
4) Production for self consumption : The
products kept for self consumption by the
farmers and other allied producers do not
enter the market. Hence, it is not accounted
for in the national Income.
5) Income of foreign firms : According to
IMF, income of a foreign firm, should
be included in the national income of the
country, where the firm actually undertakes
the production work.
67
6) Valuation of Government Services :
Government provides a number of public
services such as law and order, defence,
public administration, education, health
services etc. The calculation of these
services at market price is difficult, as the
real value of these services is not known.
Therefore, it is difficult to calculate national
Income.
7) Changing price level : Difficulties in
calculating national income also arise due
to changes in price levels. For example,
when the price level rises, the national
income may show an increase even though
the production may have decreased. Also,
when the price level falls, the national
income may show a decrease even though
there may be an increase in production.
Difficulties or Statistical
In practice, a number of difficulties arise
1) Problem of double counting : The greatest
difficulty in calculating national income is
of double counting. It arises from the failure
to distinguish properly, between a final and
an intermediate product. For example, flour
used by a bakery is an intermediate product
and that by a household is final product.
2) Existence of non-monetized sector : In
India, especially in rural areas, there exists
the non-monetized sector. Agriculture, still
being in the nature of subsistence farming, a
major part of production is partly exchanged
for other goods and services. It is excluded
while counting national income.
3) Inadequate and unreliable data : Adequate
and correct data on production and cost
data relating to crops, fisheries, animal
husbandry, forestry, construction workers,
small enterprises etc., are not available in
 50
a developing country. Besides this, data
on unearned incomes, consumption and
investment expenditure of rural and urban
population are also not available. This does
not reveal the actual size of national income.
4) Depreciation : Depreciation refers to wear
and tear of capital assets, due to their use
in the process of production. There are no
uniform, common or accepted standard
rates of depreciation applicable to the
various capital assets. Thus, it is difficult to
make correct deductions for depreciation.
5) Capital gains or losses : Capital gains
or capital losses, which accrue to the
property owners by increase or decrease in
the market value of their capital assets or
changes in demand, are not included in the
national income because these changes do
not result from current economic activities.
6) Illiteracy and ignorance : Due to ignorance
and illiteracy, small producers do not keep
an account of their production. So they
cannot give information about the quantity
or value of their output.
7) Difficulties in the classification of
working population : In India, working
population is not clearly defined. For
instance, farmers in India are not engaged
in agriculture round the year. Obviously, in
the off season, they engage themselves in
alternative occupations. In such a case, it is
very difficult to identify their incomes from
a particular occupation.
8) Valuation of inventories : Raw materials,
intermediate goods, semi-finished and
finished products in the stock of the
producers are known as inventories. Any
mistake in measuring the value of inventory,
will distort the value of the final production
of the producer. Therefore, valuation of
inventories requires careful assessment.
Importance of National Income :
The following points explain the importance
of the National Income :
68
1) For the Economy : National income data
are important for the economy of a country.
In present times, the national income data are
regarded as accounts of the economy, which
are known as ‘Social Accounts’. It tells us
how the aggregates of a nation's income,
output and product result from the income of
different individuals, products of industries
and transactions of international trade.
2) National policies : National income data
forms the basis of national policies such
as employment policy, industrial policy,
agricultural policy etc. These figures
enable us to know the direction in which
the industrial output, investment and saving
etc., change. National Income also helps
to generate economic models like growth
model, investment models etc. Thus, proper
measures can be adopted to bring the
economy to the right path.
3) Economic planning : For economic
planning, data pertaining to national
income is very essential. This includes data
related to a country's gross income, output,
savings, investment and consumption which
can be obtained from different sources.
4) Economic Research : National income
data are also used by the research
scholars of economics. They make use of
various data of the country's input, output,
income, savings, consumption, investment
employment etc., which are obtained from
social accounts.
5) Comparison of Standard of Living :
National income data helps us to compare
the standards of living of people in different
countries and of people living in the same
country at different times.
6) Distribution of Income : National income
statistics enables us to know about the
distribution of income in the country from
the data related to wages, rent, interest and
profits. We understand the disparities in the
incomes of different sections of the society.
 51

SECTOR WISE GDP IN INDIA__ YEAR 2020-21

From the above flow chart it can clearly be seen that the
Service sector is the biggest contributing sector to the
GDP of India followed by the Industry sector and finally
the Agriculture sector with their contributing share
roughly being 54%, 26% and 20% respectively.
 52

Gross Value Added (GVA)

Gross Value Added is the measure of the total value of goods and
services produced in an economy ( area, region or country). The
amount of value-added to a product is taken into account.

What is the difference between GVA and GDP?

The difference between GVA and GDP is that GVA is the value added to
the product to enhance the various aspects of the product whereas
GDP is the total amount of products produced in the country.
53
 54

The four important features of Trade Cycle are (i) Recovery, (ii) Boom, (iii)
Recession, and (iv) Depression!

The trades cycle or business cycle are cyclical fluctuations of an economy. A full trade
cycle has got four phases: (i) Recovery, (ii) Boom, (iii) Recession, and (iv) depression.
The upward phase of a trade cycle or prosperity is divided into two stages—recovery and
boom, and the downward phase of a trade cycle is also divided into two stages—
recession and depression.

Phases of Trade Cycle:

The phases of trade cycle are explained with a diagram:

(1) Recovery:

In the early period of recovery, entrepreneurs increase the level of investment which in
turn increases employment and income. Employment increases purchasing power and
this leads to an increase in demand for consumer goods.

As a result, demand for goods will press upon their supply and it shall, thereby, lead to a
rise in prices. The demand for consumer’s goods shall encourage the demand for
producer’s goods.

The rise in prices shall depend upon the gestation period of investment. The longer the
period of investment, the higher shall be the price rise. The rise of prices shall bring
about a change in the distribution of income. Rent, wages, interest do not rise in the
same proportion as prices.
 55

Consequently, the margin of profit improves. The wholesale prices rise more than retail
prices. The prices of raw materials rise more than the prices of semi-finished goods and
the prices of semi-finished goods use more than the prices of finished goods.

(2) Boom:

The rate of investment increases still further. Owing to the spread of a wave of optimism
in business, the level of production increases and the boom gathers momentum. More
investment is possible only through credit creation. During a period of boom, the
economy surpasses the level of full employment and enters a stage of over full
employment.

(3) Recession:

The orders for raw materials are reduced on the onset of a recession. The rate of
investment in producers’ goods industries and housing construction declines. Liquidity
preference rises in society and owing to a contraction of money supply, the prices falls. A
wave of pessimism spreads in business and those markets which were sometime before
sellers markets become buyer’s markets now.

(4) Depression:

The main feature of a depression is a general fall in economic activity. Production,

employment and income decline. The prices fall and the main factor responsible for it is,
a fall in the purchasing power.

The distribution of national income changes. As the costs are rigid in nature, the margin
of profit declines. Machines are not used to their full capacity in factories, because
effective demand is much less. The prices of finished goods fall less than the prices of
raw materials.
 56

Items to be Included or Excluded in National Income with Reasons

Some of the major items whether included or excluded in national income are as follows:

1. Construction of a new house.

Yes, it will be included in the national income as it is a part of capital formation and leads to
production of goods and services in the economy.

2. Winning of a lottery prize.

No, it will not be included in the national income as it does not add to the flow of goods and
services in the economy.

3. Increase in the prices of stocks lying with a trader.

No, it will not be included in the national income as it does not amount to any flow of goods.

4. National debt interest.

OR

Interest on public debt.

No, it is not included in the national income as it is the interest paid on loans taken by
government to meet its consumption purposes.

5. Rent-free house given to an employee by an employer.

Yes, it is included in the national income by Income Method since it is a part of ‘wages in
kind’ paid to employees.

6. Profit earned by foreign banks in India

No, it is not included in the national income as it is a part of the factor income paid abroad. It
is subtracted from domestic income to get national income.

7. Purchases by foreign tourists.

OR

Food purchased by a foreign tourist at a hotel in New Delhi.

Yes, purchases by foreign tourists are ‘exports’ and, therefore, they are included in the
national income through the Expenditure Method.

8. Rent received by Indian residents on their buildings rented out to foreigners in India.

Yes, it will be included in the national income as it is a part of the factor income from abroad.
 57

9. Payment of fees to a lawyer engaged by a firm.

It is an intermediate expenditure for the firm because it involves purchase of services by one
production unit (firm) from another production unit (lawyer). So, it is deducted from the value
of output of the firm to arrive at the value added. So, it is not included in national income.

10. Free medical facilities by the employer.

OR

Free boarding and lodging provided to a domestic servant.

Yes. It will be included in national income as these free services are part of compensation to
employees.

11. Gifts received from abroad.

OR

Gift received from employer.

National income as gifts received are transfer incomes.

12. Profits of Reliance Industries from its chemicals business in Australia.

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

13. Salaries received by Indian residents working in Russian Embassy in India.

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

14. Subsidized lunch served to workers in a factory.

OR

Firm incurred expenditure on medical treatment of employee’s family.

Yes, it is a part of the compensation of employees and, therefore, it will be included in the
national income.

15. Old age pension

No, it will not be included in the national income as it is a transfer payment made by the
government and a transfer income for the receiver.
 58

Old age pension must not be confused with retirement pension. Old age pension is not
included in national income as it is a transfer payment. On the other hand, retirement
pension is included in national income as it is a part of COE.

16. Durable goods purchased by a household.

OR

Purchase of car by a household.

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

17. Profits earned by an Indian bank from its branches abroad.

Yes, they will be included in the national income as they are a part of the factor income from
abroad.

18. Earnings of shareholders from the sale of shares.

No, it will not be included in the national income as it is a financial claim and does not
contribute to any productive activity.

19. Expenditure on advertisement by a firm.

OR

Commodities used in scientific research.

No, it will not be included in the national income as it is a part of intermediate consumption
expenditure.

20. Petrol used in police vehicles.

No, it will not be included in national income as petrol is an intermediate good in this case. It
is used for the provision of the final product (maintenance of law and order by the police).

21. Financial help received by flood victims.

No, it will not be included in the national income as it is a transfer income.

22. Purchase of a machine by a factory. {CBSE, All India Comptt. 2006}

OR

Purchase of a new taxi by a taxi-driver.

 59

Yes, it will be included in the national income as it is a part of the gross domestic capital
formation.

23. Royalty

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

24. Commission on sale of second-hand goods.

OR

Brokerage payment on sale of shares.

Yes, it will be included in the national income as it is the income of a middleman for his
productive services to various parties.

25. Dividend received by an Indian from his investment in shares of a foreign company.

{CBSE, Delhi 2010} Yes, it will be included in the national income as it is factor income from
abroad.

26. Purchase of raw materials by a production unit.

OR

Milk purchased by a Sweet shop to make milk-cake.

No, it will not be included in the national income as it is a part of the intermediate
consumption expenditure.

27. Earnings of a self-employed doctor having a clinic at his own residence.

Yes, it will be included in the national income as it is a mixed income.

28. Money received from sale of second-hand goods.

OR

Money received by government from sale of a public sector firm to a private owner.

No, it will not be included in the national income because receipts from the sale of
second­hand goods are by virtue of transfer of an already existing object.

29. Imputed rent of self occupied houses.

Yes, it will be included in the national income as people living in such houses enjoy housing
services similar to those in rented houses.
 60

30. Contribution to provident fund by employer.

OR

Value of interest foregone on loans provided by employer to employee.

Yes, it will be included in the national income as it is a part of the compensation to

employees.

31. Wheat grown by a farmer but used entirely for family’s consumption.

Yes, it is included in the national income because it adds to the current flow of goods and
services. Therefore, its imputed value should be included.

32. Expenditure on the construction of a flyover by the government.

Yes, it will be included in the national income as it is a part of gross domestic capital
formation.

33. Commission received by a dealer from the buyer and seller of a house.

Yes, it will be included in the national income as it is the income of the dealer for his
productive services.

34. Growing vegetables in a kitchen garden of the house.

No, it will not be included in the national income as it is difficult to estimate the value of
production (It is a non-market transaction).

35. Services rendered by family members to each other

No, it will not be included in the national income as it is difficult to determine the value of
services provided by family members to each other.

36. Expenditure by government in providing free education.

OR

Expenditure on free services provided by government.

Yes, it will be included in the national income as it is a part of the government final
consumption expenditure.

37. Insurance premium paid by employees.

OR

Fees received from student.

 61

Yes, it is included in the national income as it is a part of the private final consumption
expenditure.

38. Mineral wealth of a nation.

It is a part of National wealth and is not included in national income. However, that part of
mineral wealth which has been extracted during the current year will be included in national
income under the product method.

39. Value of wood purchased for manufacturing a table.

OR

Expenditures on the purchase of cold drinks by a school canteen from the manufacturer.

OR

Transport expenses by a firm.

No, it will not be included in the national income as it is a part of intermediate consumption
expenditure.

40. Purchase of equipment’s for installation in a factory.

Yes, it will be included in the national income as it is a part of capital formation.

41. Payment of wealth tax.

OR

Payment of Death duty.

No, it will not be included in the national income as it is a compulsory transfer payment to the
government.

42. Entertainment tax received by the government.

No, it will not be included in the national income as it is an indirect tax and a compulsory
transfer payment received by the government.

43. Salaries paid to Russians working in Indian Embassy in Russia.

No, it is not included in the national income as it is a part of the factor income paid abroad. It
is subtracted from domestic income to get national income.

44. Capital gains to Indian residents from sale of shares of a foreign company.
 62

No, capital gains will not be included in the national income as they do not add to the current
flow of goods and services in the economy.

45. Harish works in USA and sends money to his family in India.

No, it will not be included in the national income as it is a transfer payment.

46. Destruction of building due to an earthquake.

No, it will not be included in the national income as it will not affect national product directly.

47. HP uses its own new Laptops in its office for self-consumption.

Yes, it is included in the national income as it adds to current flow of goods and services.
Therefore, imputed value of laptops should be included.

48. Purchase of a truck to carry goods by a production unit.

Yes, it will be included in the national income as it is a part of the gross domestic capital
formation.

49. Direct purchase made abroad by government.

Yes, it will be included in the national income as it is a part of the government final
consumption expenditure.

50. Earning from a part time job in McDonalds by a student.

Yes, it is included in the national income as it is an income received for productive services.

51. Receipt from sale of property, inherited from a relative.

No, it will not be included in the national income as receipt from sale of such property is by
virtue of transfer of an already existing object.

52. Entertainment allowance to an employee for entertaining business guests.

No, it will not be included in the national income as it is intermediate consumption

expenditure of the business.

53. Expenditure on the purchase of shares of a new company.

OR

Sale of bonds by a company.

No, it will not be included in the national income as it is a financial claim and does not
contribute to any productive activity.
 63

54. Goods lying within the production boundary.

No, such goods will not be including ‘ in national income as goods lying within the production
boundary are intermediate goods.

55. Money received by a family in India from relatives working abroad.

No, it will not be included in the national income as it is a transfer receipt.

56. Dividend received by a foreigner from investment in shares of an Indian company.

No, it is not included in the national income as it is a part of factor income paid abroad. It is
subtracted from domestic income to get national income.

57. Expenditure by father on marriage of his daughter.

No, it will not be included in the national income as it does not add to current flow of goods
and services.

58. Expenditure on the purchase of an old house.

OR

Purchase of house by the tenant.

OR

Purchase of rented factory building by the factory owner.

No, it will not be included in the national income because payment for purchase of
second­hand goods is due to transfer of an already existing object.

59. Insurance money received from Oriental Insurance due to destruction of factory due to
fire.

No, it is not included in the national income because it is a transfer receipt.

60. Interest paid by banks on deposits by individuals.

OR

Payment of interest by a government firm.

OR

Payment of interest by a firm

 64

Yes, it will be included in the national income as such interest is paid on loan taken for
productive purpose. It is a factor payment by a producer.

61. Interest received on loans given to a friend for purchasing a car.

OR

Interest payment on loan taken by an individual to buy a motor cycle.

OR

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

No, it will not be included in the national income because it is a non-factor receipt as the loan
is not used for production but for consumption.

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

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

63. Interest received on debentures.

Yes, it will be included in the national income as such interest received is a factor income
because debenture is a sort of loan taken by a production unit.

64. Expenditure on improvement of fixed capital asset.

OR

Expenditure on construction of a house.

OR

Expenditures on adding a floor to the building.

Yes, it will be included in the national income as it is a part of capital formation.

It must be noted that any expenditure on repairs of fixed assets will not be included in
national income.

65. Scholarship given to Indian students studying in India by a foreign company.

OR

Expenditure by the Government on scholarships to students.

No, it will not be included in the national income as it is a transfer payment.

 65

66. Value of bonus shares received by shareholders of a company.

No, it will not be included in the national income as such bonus shares are mere paper
claims and do not contribute to the production of goods and services.

67. Pension paid after retirement.

Yes, it is a part of the compensation of employees and, therefore, it will be included in the
national income.

68. Expenditure on maintenance of building.

OR

Expenditure on maintenance by a firm.

No, it will not be included in the national income as it is a part of intermediate consumption
expenditure.

69. Payment of interest on borrowings by general government.

No, it will not be included in national income because it is a non-factor payment as general
government borrows only for consumption purpose.

70. Family members working free on farm owned by family.

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

71. Payment of bonus by a firm.

Yes, it will be included in the national income as it is a part of the compensation to

employees.

72. Purchase of tractor by a farmer.

Yes, it will be included in the national income as it is a part of the capital formation or
investment by the farmer.

73. Expenditure on fertilizers by a farmer.

No, it will not be included in the national income as it is intermediate cost for the farmer and
deducted from value of output while arriving at national income.

74. Purchase of furniture by a firm.

Yes, it will be included in the national income as it is a part of the capital formation or
investment by the firm.
 66

75. Expenditure on education of children by a family.

Yes, it is included in the national income as it is a part of the private final consumption
expenditure.

76. Payment of electricity bill by a school.

No, it will not be included in the national income as it is intermediate cost for the school and
deducted from value of output while arriving at national income.

77. Payment of excise duty by a firm.

No, it will not be included in the national income as it is an indirect tax paid by the firm.

78. Festival gift from an employer.

No, it will not be included in the national income as it is merely a transfer payment.

79. Contribution to provident fund by employees.

No, it is not included in the national income because such contribution is made by the
employees from compensation of employees only. So, it is not separately included in the
estimation of national income.
 67

Indian Economy
Introduction:
•Salient Features of Indian Economy
•Indian economy is termed as the developing economy of the world.
Some features like low per capita income, higher population below
poverty line, poor infrastructure, agriculture based economy and
lower rate of capital formation, tagged it as a developing economy in
the world.
•Some features of Indian economy are given below:
1. Low per Capita Income: India’s per capita income is very less as
compare to developed countries. As per the estimates of the Central
Statistics Office (CSO), the per capita net national income of the
country at current prices for the year 2015-16 is estimated to attain
the level of Rs. 93231/-. The per capita net national income at
constant prices (2011-12) for the year 2015-16 is
•Estimated to attain the level of Rs. 77, 431/-. As per the CSO’s
estimates, the per capital net national income at current prices is
•2012-13 ……Rs. 71050/-
•2013-14 …… Rs. 79412/

•2014-15 …….Rs. 86,879/-

•The per capita net national income at constant prices (base year 2011-12)

•2012-13……. Rs. 65,664/-

•2013-14……. Rs. 68867/-

•2014-15. ……Rs. 72889/-

 68

2. Agriculture Based Economy: Agriculture and allied sectors

provide around 14.2% of Indian GDP while 53% of total Indian
population is based on the agriculture sector.

3. Over population: in every decade Indian population get

increased by about 20% . During the 2001-11 population increased
by 17.6%. Currently India is adding the total population of Australia
every year. India is the possessor of around 17.5% population of the
whole world.

4. Income Disparities: a report released by Credit Suisse revealed

that the richest 1% Indians owned 53% of the country’s wealth,
while the share of the top 10% was 76.30%. To put it differently, in
a manner that conveys the political economy of this stunning
statistic, 90% of India owns less than a quarter of the country’s
wealth.

5. Lack of Capital Formation: Rate of capital formation is low

because of lower level of income. Gross domestic capital formation
was 23.3% in 1993-94 increased up to the level of 38.1% in 2007-08
but declined up to 34.8% in 2012-13.
 69

6. Backwardness of Infrastructural Development: As per an

recent study, 25% of Indian families don’t have reach of electricity
and 97 million peoples don’t have reach of safe drinking water and
840 million people in India don't have sanitation services. India
needs 100 million dollar for infrastructural development up to 2025.

7. Market Imperfections: Indian economy doesn’t have good

mobility from one place to other which hinders the optimum
utilization of resources. These market imperfections create the
fluctuations in the price of commodities every year.

8. Economy is Trapped in the Vicious Circle of Poverty: Prof.

Ragner Nurkes says that ‘a country is poor because it is poor’. It
means poor countries are trapped in the vicious circle of poverty.

9. Use of Outdated Technology: It is very clear that Indian

production technique is more labour oriented in nature. So it
increases the cost of production of the products made in these
countries.

10. Traditional Set Up of Society: Indian societies are trapped in

the menace like casteism, communalist, male dominated society,
superstitions, lack of entrepreneurship, and ‘chalta hai attitude’ of
the peoples. These all factors hindered the growth of the country as
a whole.
 70

Structural Changes in Indian Economy

In order to study the structural change in any economy, one have to
analyse the contribution of various sectors to the national output.
We will study the trends in the distribution of national income by
industrial origin at 1980-81 prices.
The analysis of the above table gives us the idea about the structural
changes in Indian economy since 1950-51:

(i) Decreasing Share of Agriculture Sector:

The table shows that the share of agriculture sector to national
income has been constantly decreasing. In 1950-51, the share of this
sector was 55.4% and it decreased to 38.1 percent in 1980-81. In
1999-2000, the share came down to 25.2 percent. The history of
economic development of advanced countries indicates that the
contribution of agricultural sector to national income goes on
decreasing as the country develops.
 71

The contribution of agriculture sector to national income is 2 to 3

percent in advanced countries like U.S.A., U.K., Germany and Canada.
The decreasing share of agriculture to national income in India
indicates this broad trend. It shows that economy has been on the
path of development. The decreasing share of agriculture shows the
changes in the structure of production.
The share of agriculture to national income is quite high in relation
to advanced countries. Above all 60% of work force is employed in
agriculture while in U.K. and U.S.A. only 2% of their work force is
employed in agriculture. This shows that the occupational structure
in India could not match with the change in structure of production.

(ii) Increasing Share of Industries Sector:

In 1950-51, the share of this sector was 15 percent which increased
to 24.4 percent in 1980-81. In 1999-2000, its share rose to 24.7
percent. The increasing share of industrial sector shows that Indian
economy is on the way of development. The contribution of
industrial sector is very high in developed countries like U.K. and
U.S.A.
According to World Development Report 1995, the share of
industrial sector to national income in the U.K. and the U.S.A. was 33
percent each and in Japan it was 41 percent. In India though the
contribution of industrial sector is increasing, its progress is very
slow. Specially the share of manufacturing within the industrial
sector has been very slow since 1970-71. This is mainly responsible
for the slow rate of economic growth in the country.
 72

iii) Increasing Share of Service Sector:

The tertiary sector or service sector has been constantly increasing
its share in the national income. It includes transport,
communication, trade and commerce, banking, insurance,
community and personal services. In 1950-51, the share of service
sector in national income was 25.8 percent. It increased to 36
percent in 1980-81 and in 1999-2000 it has gone up to 47.8%.
During the said period, transport, communication and trade have
increased their share from 11 to 21.9 percent. It shows the
development of infrastructure in the economy. In advanced
countries, the contribution of service sector to national income is
the highest.
According to World Development Report 1995, the contribution of
service sector in the U.K. and the U.S.A was 65 percent each and in
Japan 57 percent. The increase in share of tertiary sector in national
income indicates the development of Indian economy.

(iv) Overall Assessment of Structural Change:

From the above discussion of India’s sector wise contribution to
national income, one gets a clear idea regarding the extent of change
in the structure of production in the process of development. The
share of agriculture has declined and that of industry and service
sectors has increased. This is the main structural change but this
change is very slow. It has virtually given a fillip to traditional and
stagnant economy. Now Indian economy is one of the most
promising developing economies of the world.
 73

Occupational Structure and Economic Development

Meaning:
Simply speaking the occupational structure of a country refers to the
division of its work force engaged in different economic activities.
Otherwise speaking how many of the total working population are
engaged in agriculture and allied activities and how many of them
are engaged in industrial and service sector can be known from the
occupational structure of the country.
While studying the structural change in any economy, it is important
to be familiar with occupational structure of the economy.

Occupational Structure and Economic Development:

Colin Clark in his book “Conditions of Economic Progress” is of the
view that there is a close relationship between economic
development and occupational structure of a country. According to
him, a higher per capita income is always associated with a higher
proportion of the working population employed in tertiary sector or
industries while a low per capita income is always associated with a
low proportion of working force employed in tertiary sector.
Otherwise speaking if the per capita real income of a country is low,
the proportion of working population engaged in agriculture is high.
For instance in the U.S.A. the per capita income was 2500 dollar in
1960. While 7% population was engaged in agriculture, 36% in
industry and 57% in service sector.
 74

According to the World Development Report 2002, while the per

capita income of the U.S.A increased to 36240 dollar, the percentage
of work force engaged in agriculture declined to 2 percent. In the
same year 26% and 72% of the work force were engaged in
industrial and service sector respectively. In other developed
countries like the U.K., Germany, Japan etc. We find the same
relationship, between the occupational structure and economic
development.
In less developed countries like India, more or less same trend is
observed. For instance the per capita income of India was 60 dollar
in 1960 and out of total work force 74% was engaged in agriculture
11% in industry and 15% in service sector.
In 2000, the per capita income rise to 460 dollar and people
employed in agriculture decreased to 61 percent. The following
table shows comparative picture regarding structural change and
change in the occupational pattern of some selected countries.
 75

The above table shows the structural changes including change in

occupational structure of both the developed and the under
developed countries.

From the data relating to occupational structure and changing

composition of GDP, the following inferences are drawn:
(a) In the preliminary stage of economic growth, the proportion of
the work force engaged in the agricultural and allied occupations
declines.
(b) In the higher level of economic growth, the decreasing tendency
increases and the absolute number of workers in primary sector
declines.
(c) During the process of economic growth, the increase in work
force in tertiary sector is more than that in secondary sector.
 76

SECTOR WISE GDP IN INDIA__ YEAR 2020-21

From the above flow chart it can clearly be seen that the
Service sector is the biggest contributing sector to the
GDP of India followed by the Industry sector and finally
the Agriculture sector with their contributing share
roughly being 54%, 26% and 20% respectively.
 77

Gross Value Added (GVA)

Gross Value Added is the measure of the total value of goods and
services produced in an economy ( area, region or country). The
amount of value-added to a product is taken into account.

What is the difference between GVA and GDP?

The difference between GVA and GDP is that GVA is the value added to
the product to enhance the various aspects of the product whereas
GDP is the total amount of products produced in the country.
78
 79

AGRICULTURE

Role of Agriculture in India

Agriculture is an important sector of the Indian economy. In India, about 57% of the
workforce is engaged in agriculture. Agriculture plays an important role in the
economic development of India.

The ROLE of agriculture in Indian economy is stated as follows:

1. Agriculture provides employment directly to about 57% of India's workforce.

2. It facilitates capital formation through savings and investment.
3. It helps in rural development through the creation of social and economic
infrastructure.
4. It contributes to the national income of the country, about 20% of GDP.
5. It boosts the service sector. i.e., banking, transport, etc.
6. It generates social order in the country due to employment.
7. It brings foreign exchange through export of commodities.
8. It facilitates industrial development by providing raw materials and creating
demand for agricultural goods like fertilizers, tractors, etc.
9. It helps to reduce income inequalities, especially in rural areas.

Trends in Agricultural Productivity in India

Agricultural productivity can be measured in terms of yield per hectare and yield per worker.
In other words, agricultural productivity has two dimensions:
● Land Productivity
● Labour Productivity.

LAND PRODUCTIVITY
Land productivity refers to yield per hectare of land. Due to limitations of land area, there is a
need to increase productivity of existing land in India. The land productivity can be improved
through:

● Introducing better inputs, such as High Yielding Varieties (HYV) of seeds and better
quality and quantity of fertilizers and pesticides.
● Introducing better techniques of production, such as better irrigation systems,
advanced machinery including tractors, and tools.
 80

The following table indicates land productivity between 1960-61 and 2003-04:

From the above table, it is clear that:

- Foodgrains Productivity: The productivity per hectare has increased for total foodgrains. In
1960-61. it was 710 kgs per hectare, which has increased to over 1700 kgs. per hectare in
2003-04. Among the foodgrains, wheat has shown considerable increase in productivity due
to better irrigation, improved inputs, and the use of advanced technology.

- Oil Seeds Productivity: In case of oil seeds, the productivity has increased from 507 kgs.
per hectare in 1960-61 to about 1070 kgs per hectare in 2003-04.

- Cotton Productivity: The productivity of cotton has improved from 1960-61 to 2003-04. It
was 125 kgs per hectare in 1960-61, and it has increased to over 300 kgs per hectare in
2003-04.

- Jute Productivity: The productivity of jute has increased. It was about 1200 kgs per hectare
in 1960-61, and it has increased to over 2200 kgs/ hectare in 2003-04.

International Comparison:
The productivity of all the crops in India is low as compared to other countries. India's
productivity of crops is low as compared to other countries like China. Japan. France, USA.
UK and so on.

The following table gives comparative figures for India and China in respect of two major foo
crops in 1998:
 81

From the above table, it is clear that:

● The productivity of rice in case of China is higher than that of India by over 2 times.
● The productivity of wheat in case of China is higher than that of India by over 1.4
times.

LABOUR PRODUCTIVITY

Labour productivity can be defined as yield per worker engaged in agriculture. The available
data indicates that Indian agriculture labour productivity is very low as compared to other
countries like China, Japan, USA, UK, Canada, and so on.
For instance, in 1997, according to one study, it was estimated that the output per male
worker in India was 2.2 tones whereas; it was quite high in respect of other countries as
shown in the following table:

The low labour productivity is due to several factors, such as:

● Poor standard of living of Indian agricultural labour, which affects stamina to work.
● Poor farm related education/ knowledge.
● Use of outdated tools and machines, which brings down the overall productivity of
crops, which in turn brings down labour productivity.
● Use of poor quality of inputs like fertilizers and seeds, which also brings down the
overall productivity of crops, which in turn brings down labour productivity.
● Small size of land holding in India, and so on.
 82

CONSTRAINTS / PROBLEMS OF INDIAN AGRICULTURE

CAUSES OF LOW AGRICULTURAL PRODUCTIVITY

Indian agriculture is affected by low productivity and production due to various problems.
The problems of agriculture can be broadly divided into four groups as shown below.

I. TECHNICAL/CULTIVATION RELATED PROBLEMS

1. Lack of Irrigation Facilities: Indian agriculture depends upon monsoon to a good

extent. is The irrigated area is comparatively less in India as compared to other
countries like USA, UK, China, Japan, etc. For instance, in 2000-01, only 43.4% of
the total foodgrains crop area was under irrigation. The remaining 56.6% of the
foodgrains crop area had to depend upon monsoon. Also, in India monsoon is quite
erratic, especially in certain states such as Rajasthan, Gujarat, Madhya Pradesh,
Maharashtra, etc., and as such it affects production and productivity of crops.
2. Problem of Fertilizers: Indian agriculture is affected by the problem of fertilizers.
There is inadequate use of fertilizers and alsc poor quality of fertilizers. Even today,
some of the small and marginal farms use only natural fertilizers such as cow-dung,
and leaves as manure or fertilizers. They do not use good quality chemical fertilizers
and in proper quantity, which in turn affects agricultural production.
3. Poor Quality of Seeds: Indian farmers, especially the small and marginal farmers,
use poor quality of seeds. They use farm seeds rather than laboratory developed
seeds. The use of HYV seeds is limited in India. As a result of this, the agricultural
productivity is low in India.
4. Problem of Technology: Indian farmers, especially the small and marginal farmers
use outdated technology. They do not use the latest techniques such as tractors,
land tillers, etc. This is mainly due to financial problems. Only the large farmers do
get loans to purchase tractorsland tillers, etc. As a result of this, the agricultural
productivity of small farmers is affected.
5. Fragmented and Small Land Holdings: Over 90% of the Indian farmers belong to
the marginal and small farmers' category. The average size of land holding in India is
abom 1.5 hectares. Not only are the holdings small but also they are fragmented and
scattered in several places. The fragmented and small land holdings affect
agricultural productivity and production. This is because a good amount of land gets
wasted due to fencing between two plots of land belonging to two different farmers.
Also small land holdings do not max it possible to use farm machines such as
tractors.
 83

II. FINANCE RELATED PROBLEMS

6. Agricultural Indebtedness: It is said that Indian farmer is born in debt, lives in debt,
and dies in debt. A good number of Indian farmers, especially the small and marginal
farmers are subject to indebtedness. As a result, the production and productivity of
their land get affected, as they continue to repay debts, and are not in a position to
undertake farm development activities.
The small farmers continue to obtain loans from moneylenders at high interest rates
due to the difficulties in obtaining loans or credit from organized sectors like banks.
Some of the farmers are also ignorant about bank facilities.
7. Problem of Moneylenders: The farmers depend upon the unorganized sector, i.e.,
the moneylenders for their credit requirements. They borrow funds at high interest
rates, rangin from 15% to 24% per annum and even more. Again, the moneylenders
manipulate the loan records and cheat the illiterate farmers.
8. Problem of Institutional Credit: Indian farmers find it difficult to obtain institutional
financ due to various formalities in obtaining finance, and also due to inadequacy of
bank branches in rural areas. Some small farmers are not even aware of institutional
finance facilities. However, it is to be noted that over the years, the share of
institutional finance in agriculture credit has increased and that of non-institutional
sources has declined.

III. MARKETING RELATED PROBLEMS

9. Marketing Related Problems: Indian farmers face marketing problems. The

marketing problems indirectly affect agricultural productivity. Due to the
marketing problems. The farmers are not in a position to realize good prices for their
produce and as such there is a lack of incentive to improve production and
productivity. The marketing problems include:
• Inadequate transport facilities.
• Inadequate and poor warehousing facilities.
• Defective packaging, etc
.
10. Problem of Warehousing: Indian farmers face the problem of warehousing. There
are inadequate warehousing facilities. Therefore, the farmers have to go for distress
sale, which in turn results in lower prices to the farmers. Also a good amount of
agricultural produce gets damaged or destroyed due to poor quality of warehousing.

11. Inadequate Transport: Indian agricultural marketing is affected due to inadequate

transport facilities. Farmers face the problem of transportation to move the farm
produce from the farms to the marketplace. Quite often, there is a delay in
transportation, which damages or spoils the perishable agricultural produce.
It is estimated that about 3 lakh villages out of the total 6 lakh villages of India do not
have proper roads and transport facilities. Due to lack of transport facilities, the
farmers are forced to sell their produce in the local markets, and as such they realize
lower prices.
 84

12. Inadequate Credit Facilities: The farmers require credit facilities, especially during
the busy season (Oct. to June) for marketing purposes, i.e., warehousing,
transportation, etc.Quite often, the farmers do not get the right amount of credit from
the organized sector. Therefore, they have to depend upon the unorganized sector,
i.e ..., moneylenders, who exploit the farmers by charging high interest rates, and
also by manipulating the loan records.

13. Lack of Grading: The Indian farmer does not give much importance to grading. He
sells the farm produce in one lot to the traders. Therefore, the farmers get low prices
for their produce. The traders do the grading or sorting out of farm produce on the
basis of size, shape, weight, etc, and obtain better prices from the customers.

14. Problem of Market Information: Indian farmers find it difficult to get the right market
information in respect of demand, prices, and latest developments in the agricultural
sector, etc. This may be due to lack of proper data generation efforts or the farmers
are not interested in obtaining market information due to ignorance and illiteracy.
Therefore, the farmers may not be able to fix the right prices. They may also find it
difficult to plan their production properly.

15. Malpractices in Unregulated Markets: In India, there are several unregulated

marks There are several malpractices adopted by agents and traders in unregulated
markets. malpractices are:
Fraudulent weights and measures.
• Rigging of prices. • Higher market charges.
Such malpractices are to the disadvantage of the farmers. Even in regulated markets
there are malpractices to the disadvantage of the farmers.

16. Problem of Cooperative Marketing: There is less emphasis on cooperative

marketing. India in respect of agricultural produce. Farmers prefer to sell their
produce individually. The farmers often lack bargaining power. The manipulative
traders cheat the individu farmers by paying lower charges.

17. Problem of Handling: The quantity and quality of agricultural produce gets affected
while handling during transit. The workers are not trained to handle the produce
properly with loading and unloading. As a result, about 10% of the produce gets
damaged or destroyed due to poor handling.

18. Existence of Intermediaries: There are a large number of intermediaries between

the farmer and the consumer. There are agents, wholesalers and retailers. A long
chain of intermediaries increases the marketing costs due to commissions or margins
of the intermediaries. There are also cases where intermediaries provide finance at
the time of cultivation, and the farmers are forced to sell their produce at low prices to
such intermediaries.

19. Inadequate Packing: Indian agricultural marketing is affected due to inadequate or

unscientific packing. Quite often, the agricultural produce is packed unscientifically.
This affects the quantity as well as the quality of the produce. As a result of this the
Indian farmers stand to lose by way of lower prices for his produce.
 85

IV. GENERAL PROBLEMS

20. Low Labour Productivity: Average Indian farmer is weak both physically and
mentally:
- Physical weakness due to poor nutrition.
- Mental weakness due to poor farm-related education and training.
Therefore. the productivity of farm labour in India is low as compared to other
countries.

21. Problem of Agricultural Research: There is inadequate agricultural research in

India. The amount of morey spent on agricultural research is very low as compared
to other countries. Due to limited research, there is a limited effect both on
productivity and production of agricultural produce.
22. Social Factors: The social environment in rural areas is an important factor of low
agricultural productivity. Indian farmers are illiterate and conservative. They fail to
understand the benefits of technology and modern inputs to improve productivity.
The Indian farmer spends a lot of money on social and religious functions. This
affects savings, and as such they cannot invest in agriculture for better technology
like tractors.

23. Problem of Floods and Droughts: In India, there is a paradox of floods and
droughts. In other words, Indian agriculture is subject to floods as well as droughts. In
certain areas like that of Rajasthan, there is scarcity of rainfall which results in
droughts, and in certain north eastern parts of India like Assam receives heavy
rainfall which results in floods. The floods and droughts affect the productivity and
production of agriculture in India.

MEASURES TO OVERCOME AGRICULTURAL PROBLEMS

The following are the measures undertaken to improve the agricultural productivity:

1. Land Reforms: The government has introduced several land reforms after
independence.
Some of the important land reforms are as follows:
• Abolition of intermediaries.
• Regulation of tenancy rent.
• Ceiling on land holdings.
• Security of land tenure.
• Ownership rights to the tenants, etc.
The land reforms have benefited the farmers. However, the desired results are far
from satisfactory.
 86

2. Financial Facilities: The government has made efforts to provide financial support
to the agricultural sector. As a result of institutional credit support, the dependence
on unorganized sector has reduced. NABARD is the apex financial institution, which
facilitates agriculture credit through refinancing the banks that provide direct finance
to agriculture. The flow of institutional credit during 2003-04 is estimated as follows:

3. Marketing Facilities:

Regulated Markets: The state governments have set up regulated markets in order to
protect the farmers from the malpractices of traders and brokers. The regulated markets
ensure proper prices to the farmers.

Warehousing Facilities: A number of warehouses have been constructed for storin,

agricultural produce. In most of the states, warehousing corporations have been set up to
provide warehousing facilities to farmers. Due to warehousing facilities, farmers need not go
for distress sales, and as such they can realize better prices for their produce.

Other Marketing Facilities: Apart from regulated markets and warehousing, farmers are
provided with a number of other marketing facilities such as better transport facilities, quality
control laboratories, etc. The marketing facilities have enabled the farmers to solve their
marketing problems, and as such they have realized better prices. The marketing facilities
indirectly helped to improve agricultural productivity.

4. Irrigation Facilities: The government has increased investment in irrigation facilities.

In 1951, only 17% of the total crop area was under irrigation. In 2000-01, the total
foodgrains crop area under irrigation has increased to 44%. Among the food grains
crops, wheat crop area under irrigation is the highest at over 88%, followed by barley
at 63% and rice at 54% However, it is to be noted that in case of certain crops like
jowar and bajra, the total area under irrigation is only 8%, and in case of total pulses
only 13% of the crop area is under irrigation.
 87

5. Better Varieties of Seeds: India has developed better varieties of seeds in case of
rice wheat, maize, etc. Better varieties of seeds help to improve agricultural
productivity. For instance, the High Yielding Varieties (HYV) of seeds in the case of
foodgrains resulted in the increase of foodgrains production. Efforts are made by the
government to encourage farmers to use HYV of seeds.

6. Better Farm Technology: Farm technology has improved agricultural productivity.

Thi use of tractors and other farm equipment has increased productivity of labour and
land, and at the same time reduces overheads and increases production. Farmers
are encouraged to make use of the latest technology by making available loans at
lower rates of interest.

7. Fertilizers: Proper use of good fertilizers, especially nitrogen, phosphorus, and

potash can improve agricultural productivity. However, in India, the use of fertilizers is
low. It is less than 100 kgs per hectare, whereas it is nearly 4 times more in China.

8. Agricultural Research & Development: In India, Indian Council of Agricultural

Research (ICAR), various agricultural universities, and centers conduct agricultural
research. The research and development has helped to develop improved methods
of cultivation, soil conservation, protection to crop, etc.

Technology led development in agriculture has made India self-sufficient in foodgrains and a
leading producer of several agricultural commodities in the world. Due to contributions of
agriculture research, the following revolutions took place in the field of agriculture and
related areas:
• Green revolution in crops.
• Yellow revolution in oilseeds.
• White revolution in milk production.
• Blue revolution in fish production,
• Golden revolution in horticulture.

9. Water Management and Soil Conservation: Efforts are made to educate the
farmers to use irrigation water more efficiently. Several rural projects have been
undertaken for the purpose of water management, and soil conservation. Now water
management and soil conservation projects are undertaken under Swarnajayanti
Gram Swarozgar Yojana (SGSY).

10. Cooperative Farming: The government is encouraging cooperative farming.

Cooperative farming is a suitable remedy for solving the problem of small and
fragmented land holdings. Through cooperative farming, the small and marginal
farmers can pool their land and other resources, and undertake cultivation jointly.
They can also undertake cooperative marketing of their produce. However, the
progress in this area is very slow.
 88

GOVERNMENT MEASURES TO SOLVE MARKETING PROBLEMS

In order to solve various agricultural marketing problems, the Government has taken several
measures. These measures are briefly explained as follows:

1. Warehousing Facilities: In 1957, Central Warehousing Corporation was set up to

assist farmers in solving storage problems. A number of states have set up state
warehousing corporations. The warehousing facilities helped the farmers to reduce
distress sale immediately after harvesting. In other words, due to warehousing
facilities, farmers can get better prices for their produce. Again, against the
warehouse receipt, the farmers can obtain short-term loans from the banks, which in
turn help them to avoid distress sale. The Government of India has set up Food
Corporation of India: The FCI buys foodgrains from the farmers, and then stocks
them in its huge godowns spread across all the states in the country.

2. Credit Facilities: Credit facilities are made available to the farmers at village level. A
number of uncooperative credit societies have been set up. There are regional rural
banks, which provide credit facilities to the small and marginal farmers to meet their
working capital and other financial needs. The commercial banks also provide
finance to the farmers in the rural areas. The institutional sources provide credit to
farmers at low interest rates.

The finance provided by the banks in 2003-04 was estimated at Rs. 80,000 crore.
The share of banks in institutional finance in 2003-04 was as follows:
 89

3. Grading and Standardisation: The government has set up a Central AGMARK

Laboratory at Nagpur, and a number of (22) regional AGMARK labs. Samples of
important agricultural products are analysed for their physical and chemical
properties. After analysing, the Laboratory gives AGMARK.

The AGMARK creates confidence in the minds of consumers. As such, the

consumers would be willing to pay better prices for agricultural products with
AGMARK. So far AGMARK standards have been framed and notified in respect of
163 commodities which include food grains, fruits, vegetables, spices, oil seeds,
livestock, dairy and poultry products.

4. Market Information: A good deal of market information is supplied to the farmers

through radio, press, etc., in respect of prices and other matters. The government
authorities conduct market surveys from time to time. Information collected from such
surveys is passed on to the farmers

5. Regulated Markets: Regulated markets have been set up in most of the states in
order to protect the farmers against malpractices of traders and brokers.

The regulated markets perform the following functions:

- Fixing of market charges or costs.
- Fixing of prices for farm products.
- Ensures correct weights and measures, etc.

6. Use of Standard Weights: The government has introduced uniform weights and
measures throughout the country. Any trader found with defective weights and
measures is punished under the law. The regulated markets ensure the use of
correct weights and measures.

7. Fixation of Minimum Support Prices: In order to solve the problem of fluctuations

in agricultural prices, the government has set up the Commission for Agricultural
Costs and "Prices (CACP). The CACP announces minimum support prices for almost
all agricultural crops. Every year, there has been an increase in minimum support
crops. This has helped the farmers to secure better prices for their produce even
during bumper crops.

8. Cooperative Marketing: Government is encouraging cooperative farming and

cooperative marketing throughout the country. The small and marginal farmers are
encouraged to form cooperatives in order to market their produce. The cooperative
society assembles the agricultural produce from the members, and sells at better
prices in the market. Due to the cooperative societies, the farmers are in a better
position to get better prices.
 90

9. Directorate of Marketing and Inspection: The Directorate of Marketing and

Inspection has been set up by the Government of India in order to assist the Central
and StateGovernment to solve agricultural marketing problems.

This Directorate plays an important role in agricultural marketing. The role includes:

• Fixes grades and standards for agricultural products.

• Regulates market practices.
• Undertakes marketing research and surveys.
• Undertakes inspection of quality of agricultural produce.

10. Transport Facilities: Indian railways assist farmers in transporting the produce from
the farms to the markets in towns and cities.

The banks provide loans to the farmers or cooperatives to purchase trucks, tempos,
etc., to transport the farm produce.

Nowadays, private transport operators are provided loans by banks to purchase and
operate vehicles, which can be used to transport agricultural items from villages to
markets.

11. Commodity Boards: The Government of India has set up about nine commodity
boards to assist farmers in production and marketing of commodities. The boards
advice the farmers in respect to production, and provide assistance to promote and
market the commodities. The commodity boards include:

● Coffee Board. • Spices Board. • Central Silk Board

● Coir Board . • Tea Board. • Coconut Development Board
● Rubber Board. • Tobacco Board. • National Horticulture Board.

12. National Institute of Agricultural Marketing: The NIAM was set in 1988. This
institute plays an important role in agricultural pricing. The role of NIAM is as follows:
• It conducts training programmes in respect of agricultural marketing.
 91
CHAPTER - 8 : POVERTY IN INDIA

Multi-dimensional Poverty :
Concept of poverty in the conventional sense
was limited only to basic needs of life. However,
in modern times, the scope of the concept of
poverty has been enlarged. Of late, the concept
of multi-dimensional poverty has emerged.
Multi-dimensional poverty refers to
deprivation in terms of both material and non
material dimensions. Material dimensions relate
to deprivation in terms of food, clothing, shelter,
health, education, road connectivity, electricity,
access to safe drinking water and sanitation
facilities etc. The non material dimensions are
Fig. 8.1 : Poverty
associated with social discrimination.
Introduction :
Poverty is one of the major challenges faced You should know :
by Indian economy. It is a socio- economic According to Prof. Amartya Sen,
phenomenon. Poverty is perceived as ‘social “Poverty is not just a lack of money, it is not
exclusion’ of a certain section of people in the having the capability to realize one’s full
society. Deprivation of basic needs and denial of potential as a human being”. Capabilities
opportunities has led to social exclusion. refer to economic, social and political
Fig. 8.1 gives an idea about the concept
freedom. Lack of substantive freedom such as
of poverty.
freedom to satisfy hunger, lack of nutrition,
Poverty in India has a long history. healthcare and educational facilities, denial
Economic drain of resources, decline of of political and civil liberties lead to poverty.
handicraft and cottage industries, oppressive
economic policies, recurrence of famines etc.
were responsible for mass poverty among the Do you know?
people during the British period. Noted Indian Economist
and recipient of Bharat
Elimination of poverty has been the
Ratna, Prof. Amartya
top agenda of the Indian Government since
Independence. Policy measures such as Sen was awarded the
economic planning, economic reforms and anti- Nobel Memorial Prize in
poverty programmes such as 'garibi hatao' have Economic Science(1998)
helped in greater reduction of poverty . Prof. Amartya Sen for his contribution to
welfare economics and social choice theory
Meaning of Poverty : as well as for his interest in the problems
In the conventional sense, poverty refers to a of the society’s poorest members. In his
situation in which a major section of the people book, ‘Poverty and Famines: An Essay on
in the society are unable to fulfil even the basic Entitlement and Deprivation (1981)’, Prof. Sen
needs of life such as food, clothing and shelter revealed that declining wage, unemployment,
due to lack of sufficient income.
50
 92
rising food prices and poor food distribution
systems led to starvation among certain groups
in the society. His views encouraged policy
makers to pay attention not only to alleviating
immediate suffering but also finding ways
to replace the lost income of the poor. For
economic growth to be achieved, he argued
that social reforms such as improvements
in education and public health must precede
economic reforms.
Can you tell :
Express your opinion on the following :
• There is a thick line of rural-urban
economic divide in India .
• There is an equitable distribution of income
and wealth in the country.
• All the citizens have equal access to
education, health, energy and drinking
water.
• There is no hunger, starvation or
malnutrition in the country.
• There is lack of sanitation facilities in the
country.
• Poverty ratio is uniform across all the states.
Concepts of Poverty :
Poverty is multifaceted. The major concepts
of poverty in India include absolute poverty and
relative poverty.
a) Absolute Poverty : Absolute poverty is
measured in terms of minimum calorie
intake. Earlier, Planning Commission
determined per capita daily calorie
requirement of 2400 calories for a person
living in the rural area and 2100 calories
for a person living in the urban area.
On an average, the per capita daily calorie
requirement amounts to 2250 calories.
Absence of minimum income to satisfy the
desired level of calorie intake of food leads
to absolute poverty. It is mostly found in the
developing countries like India. Absolute
poverty can be eradicated through effective
poverty alleviation measures.
51
Find out :
Prepare a list of 5 Countries in the World
having Absolute Poverty with reference to
the latest World Bank Report.
b) Relative Poverty : It is difficult to define
the concept of relative poverty.
It is judged on the basis of comparison
of relative standards of living of different
sections of the people. Relative poverty
is measured with respect to differences in
the levels of income, wealth, consumption,
economic inactivity (unemployment, old
age) etc. Such poverty is found in all the
countries of the world. It is an universal
phenomenon. Relative poverty cannot be
completely eradicated. However, it can be
reduced to some extent through appropriate
policy measures.
Poverty Line :
Poverty line is an imaginary line that
divides the poor and non-poor. It is determined
in terms of per capita household expenditure.
Various Committees and Study Groups have
defined poverty line in different ways.
As per the Task Force on Eliminating
Poverty constituted by the NITI Aayog,
Poverty line is defined as "the threshold
expenditure or the amount necessary to
purchase a basket of goods and services that
are considered necessary to satisfy basic human
needs at socially acceptable levels".
Poverty line helps to fulfil the following
objectives :
1) To determine the population living above
poverty line (APL) and below poverty line
(BPL).
2) To identify the poor on the basis of the
household consumption expenditure.
3) To track poverty in a region over a period
of time and compare it across regions.
4) To provide an estimate of the required
expenditure on poverty alleviation
programmes.
 93
Poverty line differs from country to
country. According to World Bank, "Poverty
line was defined at $1.90 per capita per day
at 2011 prices on purchasing power parity
basis (PPP)". On this basis, 21.2% of India’s
population lived below poverty line.
Can you tell :
Place the following individuals as per
their income in the pyramid as given below:
1) Contract labourer
2) Salesman in a shop
3) CEO of a Multinational Company
4) Executive in a Company
High
Income
Upper Middle
Income
Middle
Income
Low
Income
Income Pyramid
Types of Poverty :
1) Rural poverty : Deprivation of basic needs
among certain section of the people living in the
villages is termed as rural poverty.
It is found among small and marginal farmers,
agricultural labourers, contractual workers and
landless labourers. Low agricultural productivity,
drought, poor rural infrastructure, illiteracy,
lack of alternative jobs, rural indebtedness have
aggravated the problem of rural poverty.
2) Urban Poverty : Absence of basic needs
among certain section of the population living
in towns and cities is termed as urban poverty.
Urban poverty is largely attributed to the
spillover effects of migration among the rural
poor, lack of affordable housing, illiteracy, slow
industrial growth, lack of infrastructure etc.
Urban poverty has led to the growth of slums
52
and informal sector as well as it creates law and
order problems in the society.
Find out :
Information about the informal sector and
list a few activities related to it as per your
observation.
Do you know?
Following are some of the food and non-
food items required to be on the poverty line.
Food Items Non Food Items
Cereals, pulses, milk Fuel and light,
and milk products, salt medical,
and sugar, edible oil, entertainment, durable
egg, fish and meat, goods, rent, clothing,
vegetables, fruits, bedding, footwear,
spices, beverages, education, toilet
processed food articles, conveyance
Try this :
1) Given the number of members in your
family prepare a list of food items and
non-food items purchased monthly.
2) Calculate the total monthly consumption
expenditure of your family’s consumption
basket as per the current prevailing prices.
3) What is the per capita monthly expenditure?
Extent of Poverty in India :
Extent of poverty is measured by the
poverty ratio. It is the ratio of the number of poor
to the total population. Studies were conducted
by individual economists as well as research
institutions to ascertain the extent of poverty in
India. Since 1962, the Planning Commission had
appointed several working groups, task force
and expert committees for estimation of poverty.
Estimates of Poverty :
Earlier, poverty lines were based on calorie
intake. It did not include the non food components
such as education, health etc. Government of
India had appointed various Committees to
 94
review poverty line from time to time. In 2012, Causes of poverty : Following are the major
an Expert Group, under the Chairmanship of Dr. causes of poverty in India :
C. Rangrajan, was constituted. This Committee 1) Population explosion : Unequal distribution
submitted its report in 2014. As per the report of resources among the rapidly growing
approved by this Committee, a new poverty line population has led to deprivation of basic
has been decided for rural and urban areas. facilities causing widespread poverty.
Table 8.1 provides estimates of poverty by 2) Slow Economic Growth : Due to slow
the Rangarajan Committee. agricultural and industrial growth, the
Poverty Estimates (2011-12) growth rate of national income and per
capita income has been slow over the
Poverty Line (in Rs.) years. This has resulted in poverty and low
Poverty Ratio (%)
(Consumption Expenditure)
standard of living among the people.
Rural Urban Rural Urban Total
3) Unemployment and Underemployment :
Rs. 972/- Rs. 1407/- 30.9% 26.4% 29.5% Poverty in the rural and urban areas has
Per month Per month also increased due to unemployment and
(Rs. 32/- (Rs. 47/- underemployment.
per day per per day per
4) Economic inequalities : Wide inequalities
person) person )
have been observed in the distribution of
Table 8.1 income, assets, consumption expenditure,
Source : Government of India, Planning Commission credit facilities, agricultural landholdings
Report, (June, 2014) etc. This has also led to a high incidence of
State-wise Poverty Ratios (2011-12) poverty.
5) Inaccessibility to infrastructural
State Ratio Poverty State Ratio Poverty
Ratio Ratio facilities : Due to lack of purchasing power
(2011-12) (2011-12) infrastructural facilities such as energy,
in in
Percent Percent transport, communication, health and
Andhra 9.20 Kerala 7.1 education are inaccessible to the poor. This
Pradesh perpetuates poverty.
Assam 31.9 Madhya 31.7 6) Inflation : Inflation refers to a continuous
Pradesh rise in the price level of essential
Bihar 33.7 Maharashtra 17.4 commodities especially the food items.
Chhatisgarh 39.9 Odisha 32.6 Growing demand for food and its
Gujarat 16.6 Punjab 8.3 insufficient supply causes the prices to
Haryana 11.2 Rajasthan 14.7 rise tremendously. This results in low
Himachal 8.1 Tamil Nadu 11.3 purchasing power making the poor still
Pradesh poorer. Food crisis has led to malnutrition,
Jammu and 10.4 Uttar Pradesh 29.4 hunger and starvation among the people.
Kashmir 7) Regional imbalance : Regional imbalance
Jharkhand 36.9 Uttarakhand 11.3 is also one of the causes of poverty. States
Karnataka 20.9 West Bengal 19.9 such as Orissa, Bihar, Madhya Pradesh,
Table 8.2   Source : Economic Survey 2017-18 Chhatisgarh, Jharkhand, Sikkim, Arunachal
Pradesh, Assam etc. lag behind in terms of
Find out : economic development and therefore have
From the above data on poverty ratios, find a high poverty ratio.
out Q3 and P10 and name the states as per the
8) Vicious Circle of Poverty : This concept
derived partition values.
is given by Prof. Ragnar Nurkse. The

53
 95
operation of vicious circle of poverty has • Poor people become vulnerable to diseases,
trapped Indians into miseries which in misery and economic hardships.
turn leads to low national income, low per
• Poverty also leads to environmental
capita income, low capital formation, low-
deterioration.
savings, low production, less employment.
Fig 8.2 explains the vicious circle of poverty.
Low You should know :
National Income

Less Low per

employment capita income

Low Low
production Savings

Low Low capital

investments formation

Fig. 8.2 : Vicious Circle of Poverty

9) Other Factors :
• Recurrence of natural disasters
• Caste, religious, racial and gender
discrimination
• Administrative inefficiency and corruption
• Leakages in the public distribution system
You should know :
Effects of Poverty :
• Poverty retards the economic progress of
a country.
• It leads to low national income and low
per capita income.
• It leads to low standard of living.
• It results in low savings, investment and
capital formation.
• It leads to concentration of economic
power and unequal opportunities.
• It results in class conflicts between the rich
and poor.
• Anti-social and anti- national activities
are on a rise due to poverty.
• Increase in subsidies have increased
government expenditure on welfare
programmes resulting in misallocation of
resources.
54
The UN Sustainable Development Goals
(SDGs) was adopted by the international
community in September 2015 to
comprehensively cover social, economic
and environmental dimensions. The SDGs
constitute a universal agreement to end
poverty in all its forms and dimensions. There
are 17 SDGs which have 169 targets to be
achieved by 2030. India played an important
role in shaping SDGs.
India being one of the signatories of United
Nations Sustainable Development Goals, it is
committed towards eradication of poverty by
2030 (SDG1).
General measures to eradicate poverty :
Policy measures undertaken for eradication
of poverty are as follows :
1) Control of population : Family Welfare
Programme and population policies have
been introduced to keep a check over the
population growth.
2) Agriculture : Farmers are provided with
cheap credit facilities to purchase agricultural
inputs. The Government also announces
Minimum Support Prices for selected crops
to ensure stable agricultural income.
 96
3) Rural Works : Employment opportunities
are provided to the poor through construction
of rural roads, irrigation projects, rural
electrification etc.
4) Rural industrialization : To promote
employment in the rural areas, emphasis
has been laid on setting up of small scale
and cottage industries.
5) Minimum Wages : Minimum Wages Act
was passed in 1948 to provide fair wages to
agricultural and industrial workers. It has
been revised from time to time.
6) Public Distribution System : To ensure
food security, food-grains are made
available to the poor people at highly
subsidized rates through ration shops under
the public distribution system.
7) Nationalization of Banks : To ensure
financial inclusion, credit facilities are made
available to the poor people at low rates of
interest. For this purpose nationalization of
banks was undertaken in 1969 and 1980.
8) Progressive Tax Measures : To reduce
inequalities in the distribution of income,
progressive income tax system has been
introduced.
9) Education : To increase the enrolment ratio,
primary education has been made free and
compulsory for all. Free education for girls,
mid-day meal programmes, sanitation and
safe drinking water etc. have also been
provided.
10) Affordable Housing : Slum rehabilitation
programmes and affordable housing
facilities are provided to the rural and
urban poor.
11) Health facilities : Primary health centres,
government hospitals have been established
to provide medical treatment at subsidized
rates to the poor people.
12) Skill development and self employment :
Skill development is considered one of the
important aspects for job creation in India.
For this purpose opportunities need to be
provided for skill based training. This will
55
inspire people towards entrepreneurship or
self employment.
Try this :
To ensure food security, the Government
of Maharashtra has introduced Tri Colour
Family Ration Card. Find out the income
criteria of each ration card on the basis of
information provided by the Food, Civil
Supplies and Consumer Protection Dept.,
GoM.
WHITE   SAFFRON YELLOW
Try this :
Correlate the following Poverty Alleviation
Programmes with the given points : food
security, wage employment, self employment,
education, health, sanitation, financial
inclusion, housing.
• Employment Guarantee Scheme (EGS)
• Swarnajayanti Gram Swarozgaar Yojana
(SGSY)
• Jan Dhan Yojana (JDY)
• Swachch Bharat Mission (SBM)
• Sarva Shiksha Abhiyaan (SSA)
• Antyodaya Anna Yojana (AAY)
• Mahatma Gandhi National Rural Employment
Guarantee Scheme (MGNREGS)
• Pradhan Mantri Awaas Yojana (PMAY)
• National Health Mission (NHM)
Do you know?
17th October is observed as International
Day for Eradication of Poverty.
Poverty retards the economic progress of
the country. Therefore, anti-poverty programmes
introduced by the government needs to be
monitored from time to time. Leakages and
bottlenecks need to be identified for its effective
implementation.
 97

Causes of Poverty in India

(i) Heavy pressure of population:
Population has been rising in India at a rapid speed. This rise is
mainly due to fall in death rate and more birth rate.
India’s population was 84.63 crores in 1991 and became 102.87
crores in 2001. This pressure of population proves hindrance in the
way of economic development.

(ii) Unemployment and under employment:

Due to continuous rise in population, there is chronic
unemployment and under employment in India. There is educated
unemployment and disguised unemployment. Poverty is just the
reflection of unemployment.

(iii) Capital Deficiency:

Capital is needed for setting up industry, transport and other
projects. Shortage of capital creates hurdles in development.

(iv) Under-developed economy:

The Indian economy is under developed due to low rate of growth. It
is the main cause of poverty.
 98

(v) Increase in Price ( Inflation)

The steep rise in prices has affected the poor badly. They have
become more poor. Inflation refers to a continues rise in the price
level of essentially the food items.

(vi) Net National Income:

The net national income is quite low as compared to size of
population. Low per capita income proves its poverty. The per
capita income in 2003-04 was Rs. 20989 which proves India is one
of the poorest nations.

(vii) Rural Economy:

Indian economy is rural economy. Indian agriculture is backward. It
has great pressure of population. Income in agriculture is low and
disguised unemployment is more in agriculture.

(viii) Lack of Skilled Labour:

In India, unskilled labour is in abundant supply but skilled labour is
less due to insufficient industrial education and training.
 99

(ix) Deficiency of efficient Entrepreneurs:

For industrial development, able and efficient entrepreneurs are
needed. In India, there is shortage of efficient entrepreneurs. Less
industrial development is a major cause of poverty.

(x) Lack of proper Industrialisation:

Industrially, India is a backward state. 3% of total working
population is engaged in industry. So industrial backwardness is
major cause of poverty.

(xi) Low rate of growth:

The growth rate of the economy has been 3.7% and growth rate of
population has been 1.8%. So compared to population, per capita
growth rate of economy has been very low. It is the main cause of
poverty.

(xii) Outdated Social institutions:

The social structure of our country is full of outdated traditions and
customs like caste system, laws of inheritance and succession. These
hamper the growth of economy.

(xiii) Improper use of Natural Resources:

India has large natural resources like iron, coal, manganese, mica
etc. It has perennial flowing rivers that can generate hydro
electricity. Man power is abundant. But these sources are not put in
proper use.
 100

(xiv) Lack of Infrastructure:

The means of transport and communication have not been properly
developed. The road transport is inadequate and railway is quite
less. Due to lack of proper development of road and rail transport,
agricultural marketing is defective. Industries do not get power
supply and raw materials in time and finished goods are not
properly marketed.

(XV) Regional imbalances-

Regional imbalances is also one of the causes of poverty. States such
as Orissa, Bihar, Madhya Pradesh, Chhatisgarh, Jharkhand, Sikkim,
Arunachal Pradesh, Assam etc. lag behind in terms of economic
development and therefore have a high poverty ratio.

(XVI) Vicious circle of poverty-

This concept is given by Prof. Ragner Nurkse.the operation of
vicious circle of poverty has trapped Indians into miseries which in
tern leads to low national income, low per capita income, low per
capital formation, low savins ,low production, less employment.
 101
CHAPTER - 6 : POPULATION IN INDIA

between 1865 and 1872 in different parts

of the country. However 1872 has been
popularly labelled as the first population
census of India.
• On 11th July 1987, world population crossed
500 crores. Hence, 11th July is observed as
'World Population Day'.
Source : Censusindia.gov.in

Stimulate your memory :

Find out the basic features of India’s
Fig. 6.1 : Population in India population that you have studied in Std.
Introduction : VIII and Std. X in the subject of Geography.
(e.g. Sex Ratio, Density of Population, Age
India is a developing country. The rate of
Composition, Urbanisation etc.)
economic development of a country depends on
its quantitative and qualitative growth which Trends in Population Growth :
can be measured in terms of population, national
India’s population is very large in size. It
income, per capita income etc.
is growing rapidly. Information regarding the
Population refers to the number of people size, structure and other characterstics of India's
living in an area at a given point of time. population is obtained through Census Survey.
Population of India is measured once in every
Table 6.1 reviews the trends in population growth:
ten years through a census survey. According
to 2011 census, India’s population was 121.02 Growth of Population in India
crores. India ranks second in the world next to Year Population Average Annual Growth
China. (In Crores) Rate (Percent)
India has 17.5% of the world population 1911 25.2 -
but it occupies only 2.4% of the world's land 1921 25.1 -0.03
area. Population stastistics are compiled and
1931 27.9 1.0
published by the Office of the Registrar General
and Census Commissioner of India. 1941 31.9 1.3
1951 36.1 1.3
You should know :
1961 43.9 2.0
Population Facts
1971 54.8 2.2
• Kautilya wrote ‘Arthashastra’ in the third
century B. C. It prescribed the collection of 1981 68.3 2.2
population statistics as a measure of state 1991 84.6 2.1
policy for taxation. 2001 102.7 1.9
• A systematic and modern population 2011 121.02 1.4
census in its present form was conducted
Table 6.1    Source : Census of India Reports

36
 102
1) Marginal Decline in population (1911-
1921) : There was a marginal decline in
population from 25.2 crores in 1911 to 25.1
crores in 1921. Thus, there was negative
growth rate due to spread of epidemics such
as influenza, cholera, plague, malaria etc.
2) Year of Great Divide : The decadal
growth of population was negative during
the period 1911 to 1921. After 1921, there
was a continuous increase in population.
Hence, then Census Commissioner of India
had designated the year 1921 as the 'Year
of Great Divide'.
3) Positive growth rate (1931-1941) : India
recorded an annual growth rate around 1 to
1.3% during this period.
4) Increase in population (1951 onwards) :
Between 1951 to 1971 population increased
from 36.1 crores to 54.8 crores. This
shows that after Independence, there was
tremendous rise in population.
5) Population Explosion (1971-2001) : During
this period, India experienced 'population
explosion' because during these three
decades, annual population growth rate
was more than 2%.
6) Slow down in population growth rate
(2001-2011) : There is an indication of
slow down in growth rate of population
from 1.9% in 2001 to 1.4% in 2011. This
shows that the average annual growth rate
is declining.
Theories of Population Growth :
1) Malthusian theory of population growth :
Thomas Robert Malthus propounded this
theory in his book, "An Essay on the Principle
of Population" in 1798 and modified some
of its conclusions in the next edition in 1803.
According to Malthus, population increases
in geometric progression (2, 4, 8, 16, 32, 64
etc.) and food supply increases in Arithmetic
progression (1, 2, 3, 4, 5, 6, 7, 8, 9 etc.), This creates
imbalance between population and food supply.
37
Malthus states that correction of the
imbalance can be done by introducing
'preventive checks' such as late marriage,
moral restraint etc. He also mentions about
'positive or natural checks' such as natural
calamities. Natural checks operate and wash
out the excess population and thus balance is
maintained. However, preventive checks are
more dependable out of the two.
Concepts related to population growth :
1) Birth rate : Birth rate means the number
of births occurring per thousand of the
living population during a year. It is also
known as fertility rate .
2) Death rate : The number of deaths per
thousand of the living population during
a year is called death rate. It is also called
mortality rate.
3) Survival rate : The difference between
the birth rate and death rate is known as
the survival rate. This shows the actual
rate of population growth.
Survival rate = Birth rate – Death rate.
2) Theory of Demographic Transition : The
theory of demographic transition was given
by A. J. Coale and E. M. Hoover, in the book,
"Population growth and Economic Development
in low-income countries" (1958).
According to this theory, every country
passes through three stages of demographic
transition. This theory explains the transition
from high to low birth rates and death rates.
Stages of Demographic Transition :
The theory shows a three stage relationship
between economic development and population
growth. According to this theory, as a country
advances economically, its population passes
through three stages as follows :
A) First stage (Low growth of population) :
It is pre-industrialised and primitive stage.
The birth rate and death rate both are
very high. All underdeveloped countries
 103
have passed through this stage. Social and Birth rate and Death rate in India
60
economic conditions such as mass illiteracy,
superstitions, mass poverty, orthodoxy, lack 50

Birth rate / Death rate

of medical facilities, spread of epidemics 40

etc. led to low growth of population. 30

Before 1921, India was in the first stage of 20

BR
demographic transition. 10 DR
0
B) Second stage (High growth of population) : 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011
Introduction of industrialisation and Years
Birth rate         Death rate
beginning of the process of economic
development is the indicator of the second Fig. 6.2 : Demographic transition
stage. Due to economic development death
rate started falling rapidly, but the birth Try this :
rate continued to remain high. This led Based on the table 6.2, explain how
to population explosion. All developing demographic transition theory is applicable
countries, including India are in the second to India.
stage of demographic transition. India is on
the verge of entering into the third stage. Population Explosion in India :
C) Third stage (Low or Stable population) :
Rapid industrialisation and urbanisation,
result in the spread of education and
consciousness about standard of living.
With economic development, both birth rate
as well as death rate tend to decline. All
developed countries are in this stage.
1961
Fig. 6.2 helps to understand the theory of
demographic transition.
Birth rate and Death rate in India
Year Birth rate Death rate
1901 49.2 42.6
1911 48.1 47.2
1921 46.3 36.3
1931 45.2 31.2
1941 39.9 27.4
1951 41.7 22.8
1961 41.2 19.0
1971 37.2 15.0
1981 32.5 15.0 2011
1991 29.5 9.8
2001 28.3 9.0
2011 20.97 7.48
Table 6.2    Source : Census of India Reports Fig. 6.3 : Population Explosion
38
 104
Can you tell :
Observe Fig. 6.3 and draw inferences
from it.
Population explosion is a situation where
the growth of population is faster than the growth
and development of the economy. Population
explosion in India is due to a high birth rate
followed by a low death rate.
Causes of high birth rate :
1) Illiteracy : The percentage of illiterates in
the country is reasonably high. The attitude
of illiterate people towards marriage and
child birth has remained rigid . Low level of
literacy among females is also responsible
for a high birth rate.
2) Universalization of marriage : In India,
marriage is considered as both religious
and social obligation. Even with the spread
of education, the attitude of people towards
marriage remains unchanged at large.
3) Age of marriage : In India, the legal age
of marriage is relatively lower compared to
other countries. It is 18 years for females and
21 years for males. Low age of marriage has
also resulted in a high birth rate.
4) Preference for male child : Many Indian
parents are opting to continue having children
until they have a son or desired numbers of
sons. This is known as son meta-preference.
5) Joint family system :There is no individual
financial responsibility in a joint family.
Hence, existence of joint family is also
responsible for high birth rate in India.
6) Dependence on Agriculture : Indian
agriculture is driven by manpower. In India,
there is overdependence on agriculture.
More number of children in the family
implies more labour force available for
field work.
7) Widespread Poverty : Poor people prefer
large families because they feel that more
children means greater economic support.
39
8) Lack of awareness about family welfare
services : Most of the people are ignorant
about the availability of various means and
techniques of family planning.
Find out :
Legal age of marriage for males and
females in different countries.
You should know :
• Underpopulation : Natural resources
exceed the population growth.
• Overpopulation : Population growth
exceeds availability of natural resources
• Optimum Population : There is a balance
between population growth and avilability
of natural resources.
Causes of low death rate :
1) Improvement in medical and health
facilities : Due to widespread increase in
medical and health facilities, epidemics
like plague, cholera, malaria, small
pox, tuberculosis etc. have almost been
eradicated.
2) Decline in Maternal Mortality Rate :
Over a period of time, death rate of women
dying during maternity has declined due to
improvement in medical facilities.
3) Fall in infant mortality rate : Due to
better medical facilities there has been a
decline in infant mortality rate from 146
per 1000 in 1951 to 64 per 1000 in 2002
and 47 per 1000 in 2011. Improvement in
literacy among women has also resulted in
better care for infants and as such there is a
decline in infant mortality rate.
4) Increase in literacy : Better education will
help the people to take care of their life and
the needs of their children in a better way.
Education has helped the people to come out
of their blind faith, beliefs and ignorance.
 105
5) Use of nutritious food : Education has
created awareness about health and
nutrition. Percentage of children and women
dying due to malnutrition and ill health was
quite high.These deaths are now brought
under control by providing nutritious diet.
e.g. Mid-day meal programme in schools.
6) Disaster management : The National
Disaster Management Authority (NDMA)
was constituted in 2005. This helps to
mitigate all types of disasters thereby
reducing the loss of lives.
7) Other factors : Education, social reforms,
rapid urbanization, improvement in standard
of living, publicity campaigns are also
responsible for creating awareness among
the people.
You should know :
Effects of population explosion
• Increased pressure on land
• Increased pressure on agriculture
• Pressure on infrastructure and basic
amenities
• Imbalance between demand for and supply
of food
• Inflation
• Environmental problems
• Social problems
• Low national income
Measures to check population explosion :
To control the problem of population
explosion in India, the following measures need
to be undertaken :
A) Economic measures : Economic measures
can raise the standard of living of the people
and help to reduce population growth. Some
of the important economic measures are as
follows :
• Expansion of industrial sector.
• Creation of employment opportunities.
• Removal of poverty
• Equitable distribution of income and wealth.
40
B) Social Measures : Population explosion
is a socio-economic problem. It is related
to illiteracy, superstition, orthodoxy, low
status of women. The following are the
social measures :
• Spread of education
• Improving the status of women
• Raising the minimum age of marriage
C) Population Policy of India : Population
policy was implemented through the
following programmes.
Fig. 6.4 : Small family
1) Family Planning Programme : It was
launched in 1952 with the objective of
reducing the birth rate. Family planning
refers to planned parenthood. It is a measure
in which birth of a child is determined by
choice and not by chance. Family planning
programme was not successful due to lack
of awareness among the people, false
religious beliefs and inconsistent policies of
the government.
2) Family Welfare Programme : Family
Planning Programme was renamed as
Family Welfare Programme in 1979. It
attempted to integrate family planning
services with those of maternal, child health
and nutrition.
3) National Population Policy, 2000 : In
the year 2000, the Government introduced
National Population Policy (NPP) to control
population and to improve its quality. Some
of the important features of NPP, 2000 are :
 106
1) Free and compulsory school education upto
the age of 14 years.
2) Reduce infant mortality rate to below
30/1000 live births.
3) Reduce Maternal Mortality Rate (MMR) to
below 100 per 1,00,000 live births.
4) Universal immunization of children against
all vaccine preventable diseases.
5) Delayed marriage for girls, not earlier than
18 and preferably after 20 years of age.
6) Prevention and control of communicable
diseases.
7) Achieve a stable population by 2045.
Population as a Human Resource
Introduction :
Population constitutes a nation’s valuable
resource. Nature’s bounty becomes significant
only when people find it useful. It is people with
their demands and abilities that turn them into
resources. Hence, human resource is the ultimate
resource. Healthy, educated and motivated people
develop resources as per their requirements.
Human resources like other resources are not
equally distributed all over the world. They differ
in their educational levels, age and sex. Their
numbers and characterisitcs also keep changing.
The United Nations Development
Programme (UNDP) has introduced the concept
of 'Human Development' in 1990.
Human Development embraces enlargement
of all human choices – economic, social, cultural
or political. It is the enrichment of human lives
which is the real wealth of the society.
Role of human resources in economic
development :
1) Human development is an end while
economic growth is a means to achieve
this end. So, human conditions should be
improved.
2) Human development can contribute to
reduction in civil disturbances in a society
and increased political stability.
3) Human development is concerned with
widening not merely income choices but
covering all aspects of human development
41
– economic, social, cultural or political.
4) Human resource development occurs through
provision of educational facilities. Increase
in literacy rate, especially among women,
tends to reduce birth rate and infant mortality
rate. This contributes to population control.
5) Human resource development contributes to
improvement in life expectancy and literacy
rate. This further improves the quality of life.
6) Human resource development helps to
bring about research and development. It
motivates research in various educational
institutions.
7) Human development leads to increase
in human productivity, i.e. investment in
nutrition, health and education which results
in higher productivity.
8) Concept of human development is universal
by nature. It applies to less developed as
well as highly developed countries. In short,
human development embraces the entire
society.
Do you know?
Population Education : It is essentially
related to human resource development. It
aims not only at creating awareness about
the population but also with developing
values and attitudes which take care of
quality and quantity of population. According
to UNESCO ‘‘Population Education is an
educational programme which provides for
a study of population situation of the family,
the community, nation and world with the
purpose of developing in the students rational
and responsible attitude and behaviour
towards the situation’’.
You should know :
Demographic Dividend : One of India’s
competitive advantages is its demographic
dividend. Demographic dividend occurs
when the proportion of working people to
the total population is high. This indicates a
high potential of human resources which can
contribute to economic growth.
 107

Causes of Population Explosion in India.

Population Explosion In India

The fastest rise in the population of India was during the period of
1951 to 1981, in which the population from 36 crores in 1951 was
reached around to 70 crores in 1981. During this period of 30 years,
population increased around 34 crores, which is the fastest rise in
the history of population statistics. Death rate has become
controlled due to modern health and medical facilities and it has
reduced to become 15 persons per thousand whereas; birth rate has
not got any significant reduction. That is why; this period from 1951
to 1981 is known in India as the period of Population Explosion.

Child Marriage and Multi Marriage System

In India the tradition of child marriage and multi-marriage system is
prevalent. Marriage of around 80% girls of the country is took place
at their young age of between 15 to 20 years. Thus, the result of long
married life comes in the farm of excessive childbirth. Tradition of
multi-marriage system increases the rotation of childbirth. Apart
from it, the increasing tendency of widow marriage, due to the social
reforms is also increasing childbirth up to some extent.

Religious Superstitions
Our religious Gurus say that if a Hindu person does not has son, then
who will perform the religious ritual in its absence. Due to this,
 108

person remains engage in the continuous process of giving birth,

one by one, in search of male baby. In the same manner, in Muslims
both male and female child is a boon (gift) sent by Allah, prevention
of their birth by using any means of family planning is a sin. Due to
these reasons, population is continuously increasing.

Illiteracy and Unawareness

In India around 36% males and 61% females are illiterate. Neither
they have full knowledge of family planning nor they know about
the consequences of excessive childbirth. This is one of the reasons
of rising population and the situation of Population Explosion’ is
emerged.

Poverty
Due to poverty, population is increased of the poor families of our
country. People lives in slum, uses their children as a tool, to earn
money, hence they always try to increase the number of children in
their families.

Birth Rate
In India the average age for marriage is very low, comparatively
other nations of the world. This is also a reason for population
explosion.
 109

Death Rate
In India the death rate from the year 1900 to 1910 was around 35 to
50 persons per thousand, which is now reduced to only 7 to 8
persons per thousand. This become ‘possible in the country by good
and hygienic food, pure drinking water, facilities of hospitals, good
cleanness, medical facilities at affordable rates and control over
Malnutrition, Pneumonia, Cholera, Epidemic etc. Along with, child
death rate has reduced to 69 per thousand, comparatively around
218 per thousand in between the years 1916 to 1920. Due to this
also, the position of Population Explosion occurred.

Indifferent towards Family Planning

Illiterate persons and people living in rural areas are indifferent
towards family planning. They feel fear even by the name of
‘Operation’. They are not interested even in the use of simplest and
cheapest means of family planning.

Lack of Social Security

Due to lack of social security system in India, every parent seeks.
shelter at the time of crises and for their old age, in childbirth.
Whether this would be son or daughter. In the fear of death of their
child at childhood, they give birth too many children, so that any of
them would be support of their old age.
 110

Causes of Unemployment:

1. High Growth rate of Population

In developing country like India, population growth rate tended to
be high due to social, economic and religious reasons. Due to high
growth rate of population, there is a tremendous increase in the size
of population every year.
But with the continues increase in workforce, employment
opportunities are increasing at slower rate in the labour market
which cannot create enough employment. So, lack of employment
opportunities creates the problem of unemployment and
underemployment.
According to United Nations Population Fund, India’s population
grew at an average annual rate of 1.2 percent between 2010 and
2019 to 136 crores.

2. Slow rise in Employment opportunities

Increase in employment and economic growth rate has strong
relationship which means economic growth increase investment
and production which create more employment opportunities in the
economy.
During the planning periods, India attained an average of almost 7
percent of economic growth. But employment opportunities cannot
be created for old and new entrant workforce which increased
unemployment.
 111

3. Low rate of Savings and Investments

Over the period, national income of country increased but at the
same time population also increased. As a result, per capita income
increased but at a lower rate than national income. Due to low per
capita income, rate of savings remained low in the economy which
resulted in low investments in industry, agriculture and other
sectors and increased the problem of unemployment.

4. Capital Intensive Production Technique

There is a scarcity of capital and abundance of labour in India. So,
considering such circumstances, the problem of unemployment can
be solved adopting labor-intensive techniques of production. But
initially, planning commission emphasized on development of heavy
and basic industries which had given more importance to capital
intensive technique than labour intensive technique.
Industrial sector had also adopted capital intensive production
technique to increase productivity and to get security against
organized labour unions.

5. Lack of Vocational Education

In modern time, labourers are required specialization, special skills,
knowledge and technical know-how to get a job and education
system has failed to prepare them for that. So, due to lack of skills
and knowledge they have to remain unemployed; they can even
become self-employed.
 112

6. Lack of Proper Manpower Planning

There was a lack of proper manpower planning during planning
period in India. Education and training of labour was not properly
planned as per the future requirement and industrial demand. It
means the available labour was ineligible to meet its demand.
The outdated education system in India only able to produce clerk
minded workforce or employees which only increase the problem of
unemployment. Even, people with higher degrees have to remain
unemployed in the country which encourage them to go abroad for
the sake of job.

7. Inefficiency of Public Sector

After independence, public sector was given more importance than
private sector for the development of all classes. Government
invested huge amounts in public sectors under five-year planning.
But the productivity of labourers in public sector units was low
which resulted in underutilization of resources and losses.
So, public sector units were not able to generate more employment
because of its low productivity which increases the problem of
unemployment.
 113

8. Negligence of Private Sector

The development of private sectors was controlled and only a few
sectors kept reserved for them by the government. So, which
created less employment opportunities and unemployment
increased.

9. Negligence towards Agriculture Sector

India is an agriculture based economy and most of its population
dependent on agriculture for employment. So, agriculture sector
should be planned in such a way that maximum employment can be
generated.
But during planning period, industrial sector given more importance
than agriculture sector which resulted in failure of agriculture in
generating more employment.
Uncertainty of monsoon, burden of population, lack of irrigation
facilities, lack of agricultural finance and lack of use of machines are
also responsible for poor development of agriculture which resulted
in seasonal and disguised unemployment.

10. Low Mobility of Workers

The mobilization of labour is low due to some social reasons, family
relations, language, religion, casteism, culture, lack of information,
lack of transportation facilities and problem of housing which
restrain them to mobilize and increase problem of unemployment.
 114

People with higher education are not interested in going to

backward or rural areas even they get employment as they don’t
want to lower their standard of living for the sake of employment
and prefer to remain unemployed.

11. Lack of Infrastructural facilities

India is developing country and major portion of the country still
lacks the basic infrastructural facilities like transportation,
electricity, banking, means of communication, insurance and health.
These are the reasons of low generation of employment
opportunities as it become difficult for the industries to survive in
such environment without basic facilities of development.
Apart from the above reasons, lack of national employment policy,
lack of conducive environment for development of industries and
trade, underutilization of natural resources etc. are also responsible
for unemployment in India.
 115

NITI Aayog

NITI Aayog Evolution

- The NITI Aayog was formed on January 1, 2015.

In Sanskrit, the word “NITI” means morality, behaviour, guidance, etc. But, in the
present context, it is a policy and the abbreviation NITI stands for “National Institution
for Transforming India”.

It is the country’s premier policy-making institution that is expected to support and

strengthen the economic growth of the country. It aims to construct a strong state that
will help to create a dynamic and strong nation. This helps India to emerge as a major
economy in the world.

The NITI Aayog’s creation has two hubs called “Team India Hub” and “Knowledge and
Innovation Hub”.

- Team India Hub: Team India Hub leads to the participation of Indian states with
the central government.

- Knowledge and Innovation Hub: The Knowledge and Innovation Hub builds the
institution’s think tank capabilities.

NITI Aayog is additionally creating itself as a State of the Art Resource Center, with the
essential resources, knowledge, and skills that will empower it to act with speed,
advance research and innovation, bestow crucial policy vision to the government and
manage unforeseen issues.

The reason for setting up the NITI Aayog is that people had expectations for growth and
development in the administration through their participation. This required institutional
changes in administration and active strategy shifts that could seed and foster
substantial scale change.
 116

Objectives of NITI Aayog

- The active participation of States in the light of national objectives and to provide
a framework ‘national agenda’.
- To promote cooperative federalism through well-ordered support initiatives and
mechanisms with the States on an uninterrupted basis.
- To construct methods to formulate a reliable strategy at the village level and
aggregate these gradually at higher levels of government.
- Act as an economic policy that incorporates national security interests.
- To pay special consideration to the sections of the society that may be at risk of
not profiting satisfactorily from economic progress.
- To propose strategic and long-term policy and programme frameworks and
initiatives, and review their progress and their effectiveness.
- To grant advice and encourage partnerships between important stakeholders
and national-international Think Tanks, as well as educational and policy
research institutions.
- To generate knowledge, innovation, and entrepreneurial support system through
a shared community of national and international experts, etc.
- To provide a platform for resolution of inter-sectoral and inter-departmental
issues to speed up the accomplishment of the progressive agenda.
- To preserve a state-of-the-art Resource Centre, be a repository of research on
good governance and best practices in sustainable and equitable development
as well as help their distribution to participants.
- To effectively screen and assess the implementation of programmes and
initiatives, including the identification of the needed resources to strengthen the
likelihood of success.
- To pay attention to technology improvement and capacity building for the
discharge of programs and initiatives.
- To undertake other necessary activities to the implementation of the national
development agenda, and the objectives.
 117

NITI Aayog Composition

The NITI Aayog will comprise the following:

1. Chairperson being the Prime Minister of India

2. Governing Council consisting of the Chief Ministers of all the States and Lt.
Governors of Union Territories in India.
3. Regional Councils will be created to address particular issues and possibilities
affecting more than one state. These will be formed for a fixed term. It will be
summoned by the Prime Minister. It will consist of the Chief Ministers of States
and Lt. Governors of Union Territories. These will be chaired by the Chairperson
of the NITI Aayog or his nominee.
4. Special invitees: Eminent experts, specialists with relevant domain knowledge,
which will be nominated by the Prime Minister.

The full-time organizational framework will include, in addition to the Prime Minister as
the Chairperson:
- Vice-Chairperson (appointed by the Prime Minister)
- Members (which include):
a) Full-time members
b) Part-time members: Maximum of 2 members from foremost universities, leading
research organizations, and other innovative organizations in an ex-officio
capacity. Part-time members will be on a rotational basis.
c) Ex Officio members: Maximum of 4 members of the Council of Ministers which is
to be nominated by the Prime Minister.
d) Chief Executive Officer: CEO will be appointed by the Prime Minister for a fixed
tenure. He will be in the rank of Secretary to the Government of India.

7 pillars of effective governance envisaged by NITI Aayog

The NITI Aayog is based on the 7 pillars of effective governance:

Pro-people: It fulfils the aspirations of society as well as individuals

Pro-activity: In anticipation of and response to citizen needs
Participation: Involvement of the citizenry
Empowering: Empowering, especially women in all aspects
Inclusion of all: Inclusion of all people irrespective of caste, creed, and gender
Equality: Providing equal opportunity to all especially for youth
Transparency: Making the government visible and responsive
 118

Food Security and Recent Trends

India has experienced remarkable economic growth in recent years and

remains one of the fastest growing economies in the world. However, poverty
and food insecurity in India are still areas of concern in spite of many strides.
Food is considered as a basic amenity essential for the sustenance,
development and growth of an individual.

India has ranked 101 among the 116 countries on the Global Hunger Index,
2021. According to the Food and Agriculture Organisation, the Food Price
Index has increased by 30% in the year 2021-22.

Although the Government of India has been actively addressing food security
at households for a long time through the Public Distribution System and the
National Food Security Act (NFSA) 2013, there are still concerns related to
Food Security in India amidst increasing population, climate change and
global supply chain disruption (Russia-Ukraine War) that need to be
addressed.

What is Food Security?

The concept of Food Security is multifaceted. Food is as essential for living as

air is for breathing. But food security means something more than getting two
square meals. It has following dimensions:

Availability: It means food production within the country, food imports and the
stock stored in government granaries.
Accessibility: It means food is within reach of every person without any
discrimination.

Affordability: It implies that having enough money to buy sufficient, safe and
nutritious food to meet one's dietary needs.
Thus, Food security is ensured in a country only when sufficient food is
available for everyone, if everyone has the means to purchase food of
acceptable quality, and if there are no barriers to access.
 119

What is the Current Framework for Food Security in India?

Constitutional Provision: Though the Indian Constitution does not have any
explicit provision regarding right to food, the fundamental right to life enshrined
in Article 21 of the Constitution can be interpreted to include the right to live
with human dignity, which may include the right to food and other basic
necessities.

Buffer Stock: Food Corporation of India (FCI) has the prime responsibility of
procuring the food grains at minimum support price (MSP) and stored in its
warehouses at different locations and from there it is supplied to the state
governments in terms of requirement.

Public Distribution System: Over the years, Public Distribution System has
become an important part of Government’s policy for management of the food
economy in the country. PDS is supplemental in nature and is not intended to
make available the entire requirement of any of the commodity.
Under the PDS, presently the commodities namely wheat, rice, sugar and
kerosene are being allocated to the States/UTs for distribution.
Some States/UTs also distribute additional items of mass consumption
through the PDS outlets such as pulses, edible oils, iodized salt, spices, etc.

National Food Security Act, 2013 (NFSA): It marks a paradigm shift in the
approach to food security from welfare to rights based approach.
NFSA covers 75% of the rural population and 50% of the urban population
under:

- Antyodaya Anna Yojana: It constitute the poorest of-the-poor, are

entitled to receive 35 kg of foodgrains per household per month.
- Priority Households (PHH): Households covered under PHH category
are entitled to receive 5 kg of foodgrains per person per month. The
eldest woman of the household of age 18 years or above is mandated
to be the head of the household for the purpose of issuing ration
cards.In addition, the act lays down special provisions for children
between the ages of 6 months and 14 years old, which allows them to
receive a nutritious meal for free through a widespread network of
Integrated Child Development Services (ICDS) centres, known as
Anganwadi Centres.
 120

What are the Challenges Related to Food Security in India?

Deteriorating Soil Health: A key element of food production is healthy soil

because nearly 95% of global food production depends on soil.
Soil degradation due to excessive or inappropriate use of agrochemicals,
deforestation and natural calamities is a significant challenge to sustainable
food production. About one-third of the earth’s soil is already degraded.
Invasive Weed Threats: In the past 15 years, India has faced more than 10
major invasive pest and weed attacks.
Fall Armyworm (Pest) destroyed almost the entire maize crop in the country in
2018. India had to import maize in 2019 due to the damage caused by the
pest in 2018.
In 2020, locust attack was reported in districts of Rajasthan and Gujarat.

Lack of Efficient Management Framework: India lacks strict management

framwork for food security. Public Distribution System faces challenges like
leakages and diversion of food-grains, inclusion/exclusion errors, fake and
bogus ration cards, and weak grievance redressal and social audit
mechanism.

Faults in Procurement: Farmers have diverted land from producing coarse

grains to the production of rice and wheat due to a minimum support price.
Further, there is a tremendous wastage of around Rs.50,000 crore annually by
both improper accounting and inadequate storage facilities

Climate Change: The monsoon accounts for around 70% of India's annual
rainfall and irrigates 60% of its net sown area. Changing precipitation patterns
and growing frequency and intensity of extreme weather events such as
heatwaves, floods are already reducing agricultural productivity in India,
posing a serious threat to food security.
To increase domestic availability amid low Kharif Crop productivity this year
(2022), the Government of India has banned the export of broken rice.

Supply Chain Disruption Due to Unstable Global Order: At a time when

the Covid-19 Pandemic had already impacted food supply around the world in
2020, Russia-Ukraine War in 2022 has disrupted the global supply chain and
resulted in food scarcity and food inflation.
Russia and Ukraine represent 27% of the world market for wheat, 26
countries, mainly in Africa, West Asia and Asia, depend on Russia and
Ukraine for more than 50% of their wheat imports.
 121

What Should be the Way Forward?

Moving Towards Sustainable Farming: For ensuring Food Security in India ,

improvement in productivity through greater use of biotechnology, intensifying
watershed management, use of nano-urea and access to micro-irrigation
facilities and bridging crop yield gaps across States through collective
approach should be at priority.
There is also a need to look forward towards establishing Special Agriculture
Zones through ICT based crop monitoring.
Towards Precision Agriculture: There is need to increase the use information
technology (IT) in agriculture to ensure that crops and soil receive exactly
what they need for optimum health and productivity.
By adopting precision agriculture with high-tech farming practices, farmers'
incomes will increase, input cost of production will be reduced, and many
other issues of scale will be addressed.

Revitalising Aadhaar Seeding of Ration Cards: To speed up the process of

Aadhaar linking to ration cards, ground monitoring measures must be taken
that will ensure no valid beneficiary is left out of their share of food grains that
can give thrust to the aim of zero hunger (Sustainable Development Goal- 2).
Direct Benefit Transfer (DBT) Through JAM: There is a need to streamline
food and fertiliser subsidies into direct benefit transfers to accounts of
identified beneficiaries through the JAM trinity platform (Jan Dhan, Aadhaar,
and Mobile) that will reduce huge physical movement of foodgrains, provide
greater autonomy to beneficiaries to choose their consumption basket and
promote financial inclusion.

Ensuring Transparency in Food Stock Holdings: Using IT to improve

communication channels with farmers can help them to get a better deal for
their produce while improving storage houses with the latest technology is
equally important to deal with natural disasters.
Further, foodgrain banks can be deployed at block/village level, from which
people may get subsidised food grains against food coupons ( that can be
provided to Aadhar linked beneficiaries).

Addressing Issues With an Umbrella Approach: By looking at diverse

issues from a common lens, such as inequality, food diversity, indigenous
rights, and environmental justice, India can look forward to a sustainable
green economy.
 122

NEW INDUSTRIAL POLICY, 1991

- The Goverrment of India announced the New Industrial Policy (NIP) on

24th July, 1991. The NIP aimed at liberalization of Indian industry.

- The main objectives of the NIP are:

(a) Attainment of international competitiveness through emphasis on
technology upgradation.
(b) Development of Backward Areas.
(c) Encouraging competition in the Indian industry.
(d) Improvementin industrial efficiency and productivity
(e) Full utilization of capabilities of Indian firms to generate employment.
(f) Revival of weak units.

The main features of IP, 1991 can be broadly divided into five groups as follows:

1. Industrial Licensing.
2. Foreign Investment.
3. Foreign Technology.
4. Public Sector Policy.
5. MRTP Act.

1. Industrial Licensing: The most important feature of NIP 1991 was in respect of
industry licensing. In this context, the following points are to be noted:

(a) Abolition of Industrial Licensing: The NIP 1991 delicensed all industries
except 18. The licensing was further reduced to six industries. Delicensing was
intended improve the efficiency and productivity of Indian industries. In respect of
delicensed industry, no approval is required from Government authorities for setting
up new projects or for expansion of existing capacities. However, entrepreneurs
were required to submit an Industrial Entrepreneur Memorandum (IEM) to the
Secretariat for Industrial Approvals (SIA).

At present, the six industries that are subject to licensing include:

● Alcohol
● Cigarettes
● Industrial Explosives
● Defense Products
● Drugs and Pharmaceutical
● Hazardous chemicals.
 123

(b) Abolition of Phased Manufacturing Programme: The NIP 1991 has suggested
for abolition of PMP, which was in force in engineering and electronic industries.
Under PMP, there was a need for domestic content (raw materials, components,
etc.) in production. The NIP abolished such programmes in future due to liberalised
import policy, and also due to devaluation of rupee.

(c) Liberalization of Industrial Location: The NIP 1991 stated that there is no need
to obtain approval from the Central Government to locate industries in areas 25 km
away from the cities having a population of more than one million. However,
industries subject to compulsory licensing, approval needs to be obtained. Industries
of non-polluting nature can be located within 25 km. of the periphery of cities of more
than 1 million population.

(d) Broad Banding of Industries: The broad banding of industries would be

permitted existing units, if it was done without additional investment. Broad banding
enables firms to club together related products into generic categories. It helps the
manufacturers to change the product-mix depending upon market demand or
situation without any procedural delays and costs involved in seeking changes in
their industrial licenses.

(e) Automatic Licence for Import of Capital Goods: Projects requiring import of
capital goods, automatic licence would be given in the following cases:

● Where availability of foreign exchange is ensured through foreign equity.

● If CIF value of the required imported capital goods is less than 25 percent of
the total value of plant and equipment, automatic licences upto maximum
value of Rs. 2 crore would be provided.

2. Foreign Investment: Prior to this policy, it was necessary to obtain approval from
the government in respect of foreign investment. This often caused delays and
bureaucratic hurdles. The NIP, 1991 liberalized foreign investment in India. In this
connection, the following points are to be noted:

(a) Automatic Approval: The NIP, 1991 specified a list of high investment and high
tech priority industries wherein automatic permission was to be given for direct
foreign investment up to 51% of equity. In 1997-98, equity investment up to 100% by
NRIs and Overseas Corporate Bodies was permitted in high priority industries such
as infrastructure industries. The foreign direct investment under the automatic route
was subsequently expanded to include a large number of Industries. At present, FDI
up to 100% is permitted under the automatic route in most of the sectors. Entry
under the automatic route only requires post-entry notification and no prior approval.
 124

(b) Guidelines for Foreign Investment: In 1997, the Government announced the
first ever guidelines for FDI in India for quick approval of foreign investment in areas
not covered under the automatic approval route. Priority areas for FDI were listed in
the guidelines which include infrastructure industries, export oriented units, large
scale employment generation industries, especially in rural areas, social sector areas
like hospitals, drugs and pharmaceuticals, and so on.

(c) Setting up of Foreign Investment Promotion Board: The Government has set
up FIPB. The FIPB plays an important role relating to FDI. The role of FDI is as
follows:
● To approve FDI in India.
● To negotiate with foreign firms to invest in India.

3. Foreign Technology Agreements: The NIP 1991 liberalised the import of foreign
technology. The foreign technology not only helps to improve the quality of products
and services, but also it helps to reduce the cost of production. Keeping in view the
objective of attaining international competitiveness. the NIP liberalized foreign
technology agreements. In this connection, the following points to be noted:

(a) Automatic approval to be given for import of foreign technology in high priority
industries up to a lump sum payment of 2 million US dollars, 5% royalty for domestic
sales and 8 per cent for exports, subject to a total payment of 8% of sales over a 10
year period from the date of agreement or 7 years from the commencement of
production.

(b) In industries other than high priority industries, automatic approval for import of
technology would be given if no foreign exchange is required for any payment.

(c) No permission required for hiring foreign technicians and for foreign testing of
indigenously developed technologies.

4. Public Sector Policy: On account of poor performance of the public sector, the NIP
1991 reduced the role of the public sector, and placed more focus on the role of the
private sector. In this connection the following points are to be noted:

(a) Dereservation of Public Sector: The NIP 1991 dereserved the public sector. Pr
1991, seventeen industries were reserved for public sector, which were reduced
industries which include:
● Defence ● Mining of Iron Ore, Manganese
● Atomic Energy Ore,
● Railways ● Specified Minerals
● Coal and Lignite ● Mining of Copper, Zinc, etc.
● Mineral Oils
 125

At present, there are only three items reserved for public sector which include:
● Railways
● Atomic Energy
● Specified Minerals

(b) Weak/Sick Units: The policy aimed at making public sector healthy and growth
oriented. For this purpose, it was proposed to refer the sick public sector units to the
Board for Industrial and Financial Reconstruction (BIFR). The BIFR would
recommend revival package for weak units, and for closure of non-viable units. A
social security mechanism was to be created to protect the interests of the workers
who would be affected by the rehabilitation process.

(c) Autonomy: The NIP 1991 stated the management of public sector units would be
provided greater degree of autonomy to improve managerial effectiveness in
decision making. The management autonomy would be granted through the system
of memorandum of understanding (MOU).

(d) Disinvestment: The Government also announced the disinvestment of selective

public sector units. The disinvestment would take place by offering a part of the
Government shareholding in the public sector units to mutual funds, financial
institutions, private investors, workers and to other corporate firms. The process of
disinvestment was started in 1991-92.

5. Other Features: Some of the other important clauses of the NIP 1991 were as
follows:

(a) Removal of Mandatory Conversion Clause (MCC): In India, banks and FIs
provide a large part of industrial finance. The banks and Fls had a clause in the loan
agreement to convert the loans into equity, if so required. This would create a threat
of takeover by FIs. Therefore, the NIP 1991 abolished MCC.

(b) Modification of MRTP Act: The new policy scrapped the threshold limit of
assets of Rs. 100 crore in respect of MRTP firms. Now there is no limit.

Prior approval of the central government for expansion, merger, appointment of

directors. etc., is not required. The focus would be on controlling the restrictive and
unfair trade practices by large firms. The MRTP Act has been replaced by the
Competition Act, 2002. The Competition Act, 2002 is a landmark legislation that aims
at promoting competition through prohibition of anti-competitive practices, abuse of
dominance and through regulation of companies beyond a particular size.
 126

EVOLUTION OF NEW INDUSTRIAL POLICY 1991

The Government of India announced the new industrial policy (NIP) on July 24,
1991. The NIP aimed at liberalisation of the Indian industry, so as to improve the
efficiency and accelerate industrial growth in the country.

The NIP 1991 is evaluated by analysing the failures and achievements. The main
failures and achievements of NIP 1991 are as follows:

- CRITICISMS/FAILURES OF NIP, 1991:

1. No Clear Evidence of Positive Impact on Growth: The NIP 1991 liberalised the
Indian industry with the main objective to accelerate industrial growth in the country.
However, there is no clear evidence of a positive impact of the policy on industrial
growth. Although, the Indian industry showed good growth from 1993 to 1996.
However, there was sharp decline in industrial growth since 1996. Also, there were
wide fluctuations in growth of the various sub-sectors of the industry.

2. Problem of Unemployment: The unemployment is on the increase due to

restructuring of large industries. For instance, there has been negative growth in
unemployment in the public sector as well as in the organised private sector since
2001. The employment in the public sector has dropped from 192 lakh in 1992 to
186 lakh in 2003.

3. Problem for Domestic Firms: The liberalised entry of foreign MNCs in the Indian
market can have serious consequences on the domestic industries. The domestic
firms may find it difficult to compete with high tech and highly professional foreign
MNCs.
However, this is the right time for the Indian firms to up-date and compete globally
with or without the support of foreign collaborations. It is the survival of the fittest, the
basic law of nature. The Indian firms will have to improve their efficiency if they want
to compete with foreign MNCs.

4. Problem of Delicensing: The NIP 1991 recommended the automatic expansion of

production capacities without government approval in all industries, except six
industries. This has resulted in heavy expansion of capacities in the 1990s in all
sectors of the industry. The expansion in capacities has resulted in recession as
supply far exceeded demand.

5. Problem of Foreign Technology: Critics point out that the foreign technology may
not suit to Indian conditions. Again, there is a possibility of overdependence on
foreign technology rather than developing indigenous technology.
 127

6. Problem of Foreign Investment: The NIP 1991 liberalised foreign investment in

India. At present FDI is allowed in several sectors. However, the MNCs are not very
much interested in infrastructural development projects involving long gestation
period. Also FDI results in outflow of foreign exchange due to payment of dividends
and royalties.

7. Problem of Dereservation of Public Sector: The NIP 1991 has dereserved

industries of public sector in favour of private sector. This has resulted in expansion
of capacities in the private sector, which in turn has resulted in recession in the
industrial sector.

8. Problem of Disinvestment: The NIP, 1991 advocated disinvestment of public

sector.
Accordingly, the Government of India started the process of disinvestment of public
sector. units on selective basis. However, disinvestment is criticized on several
grounds, such as:
● Disinvestment may be disadvantageous to the customers as the private
companies may tend to exploit customers by charging high prices.
● Disinvestment may also lead the reduction in employment, as private
companies would try to reduce overheads by downsizing the manpower.

- ACHIEVEMENTS

1. Recovery of Industrial Growth: The Indian industry, which was under severe
crisis in 1991-92, has been revived to a certain extent, in spite of global recession
during the 1990s.

In 1991-92, the industrial growth was miserably low of about 0.6%. The industrial
growth reached a high of 13% in 1995-96. However, it came down in subsequent
years, due to recession in the world economy and consequently in the Indian
economy. The industrial growth rate in 2003-04 was 7%.

2. Foreign Investment: The NIP 1991 liberalised foreign direct investment.

Automatic approval of foreign direct investment (FDI) was allowed upto 51% of
equity and even upto 100% in certain cases. FDI gives opportunities to Indian
industry for technological upgradation, gaining access to global managerial skills and
practices, to make optimum use of resources, and to attain international
competitiveness through higher efficiency.

The foreign direct investment has generated capital resources in the country. The
foreign direct investment has increased from US dollars 97 million in 1990-91 to a
high of 4734 million US dollars in 2000-01. Thereafter, FDI was on a decline. In
2003-04 India received FDI worth 3420 million US dollars.
 128

3. Foreign Technology: The NIP 1991 has liberalised foreign technology

agreements. Automatic permission is being granted for the import of foreign
technology with a lump sum payment of upto 2 million US dollars. This enabled the
import of foreign technology. The import of foreign technology has helped to improve
the international competitiveness of Indian firms. Again, the domestic consumers are
at an advantage due to improved quality of goods and services, and that too at
reduced prices.

4. Benefits of Delicensing: The NIP 1991 abolished licensing, except for 18

industries, which subsequently brought down to 6 industries. Due to delicensing.
Indian industrialists were freed from bureaucratic hassles and such they could
concentrate on production activities more effectively.

5. Benefits of Dereservation: The NIP 1991 dereserved public sector. At present,

there are only three units reserved for public sector units which include railways,
atomic energy and specified minerals. The dereservation has enabled the private
sector to enter in those areas which were earlier reserved exclusively for the public
sector. The dereservation has enabled the private firms to compete effectively, which
in turn improved the industrial efficiency and productivity.

6. Benefits of Disinvestment: The process of disinvestment of the public sector has

been started since 1991. The disinvestment of public sector is intended to achieve
certain objectives such as:

● Better service to the customers.

● Responsibility on the part of management of disinvested companies.
● Improvement in efficiency and productivity of disinvested units.
● Reduction in Government deficits.
● Effective utilisation of disinvestment funds by the Government, etc.
 129

MSME (Micro, Small, and Medium Enterprise)

Introduction

The year 2023 has started on an optimistic note. The economy seems to be on the
path of recovery post the challenges posed by the COVID-19 pandemic and the
Russia-Ukraine War, although global uncertainties remain. The Industrial sector has
received much attention especially the role of large businesses in economic
recovery. However the Micro, Small and Medium Enterprises (MSME) sector is more
crucial as MSMEs are the largest employers in India outside of agriculture. The
Union Budget 2023-24 has introduced several enabling provisions for the growth of
the MSMEs. However, MSMEs continue to face several challenges. Addressing
these challenges can ensure not only faster overall economic growth, but also make
the growth process more sustainable and inclusive.

What are the MSMEs?

- MSME (Micro, Small, and Medium Enterprise) are regulated under the Micro,
Small & Medium Enterprises Development (MSMED) Act, 2006.
- MSMEs are managed under the Ministry of MSME.
- Earlier, MSMEs were categorised based on the amount invested in plant and
machinery/equipment. With revised regulations effective from July 2020,
annual turnover has also been added as a criteria.

The classification criteria are:

(a) Micro Enterprise:

Investment in Plant and Machinery or Equipment is less than INR 1 crore and Annual
Turnover is less than INR 5 crore;

(b) Small Enterprise:

Investment in Plant and Machinery or Equipment is less than INR 10 crore and
Annual Turnover is less than INR 50 crore;

(c) Medium Enterprise:

Investment in Plant and Machinery or Equipment is less than INR 50 crore and
Annual Turnover is less than INR 250 crore.
 130

Statutory Bodies

- The Ministry of MSME heads 5 statutory bodies

- These bodies are responsible for aiding MSMEs with respect to Government
schemes and policies.

Khadi and Village Industries Commission (KVIC):

It is a statutory organisation engaged in promoting and developing khadi and village
industries for providing employment opportunities in rural areas, thereby
strengthening the rural economy.

The Coir Board:

It is a statutory body established for promoting overall development of the coir
industry and improving living conditions of workers in the industry.

National Small Industries Corporation Limited (NSIC):

It was established in 1955. It is responsible for promoting, aiding and fostering
growth of micro and small enterprises in the country, generally on commercial basis.

National Institute for Micro, Small and Medium Enterprises, (NI-MSME):

It was established in 1960. It is responsible for enterprise promotion and
entrepreneurship development, enabling enterprise creation, performing diagnostic
development studies for policy formulation, etc.

Mahatma Gandhi Institute for Rural Industrialisation (MGIRI):

The objectives of the Mahatma Gandhi Institute for Rural Industrialisation (MGIRI)
are to accelerate rural industrialisation for sustainable village economy, empower
traditional artisans, encourage innovation through pilot study and R&D for alternative
technology using local resources.
 131

What is the significance of MSMEs?

Contribution to GDP and Exports: In 2020-21, MSMEs accounted for 26.8% of

Gross Value Added (GVA). The contribution of MSMEs in exports stood at 42.6%
(April 2022-August 2022).The contribution of Manufacturing MSME Gross Value
Added (GVA) contributed 38.4% of India’s total Manufacturing GVA (2020–21).

As Indian economy is poised to reach US$ 5 trillion status, the Ministry of MSME has
set a goal of increasing its contribution to GDP to 50% by 2025.

Rural Development: 51% of MSMEs are located in rural areas. In contrast to large
corporations, MSMEs have aided in the industrialization of rural areas at a low
capital cost. The sector has made significant contributions to the rural socioeconomic
growth while also supplementing major industries.

Creation of Employment: MSMEs are India’s largest employer outside of

agriculture. They employ over 11.1 crore people, or 45% of all workers, and have low
capital and technology requirements. MSMEs are key to the Make in India mission.

Simple Structure: Given India’s middle-class economy, MSMEs offers the flexibility
of starting with limited resources under the owner’s control. As a result, making
decisions becomes easier and more efficient . A large corporation, on the other
hand, requires a specialist for every departmental function due to its complex
organisational structure.

Innovation Promotion: They support local resource mobilisation, capacity building,

industrial development in rural areas, and give aspiring entrepreneurs a chance to
develop innovative products. It has enormous potential for connecting India’s MSME
base with large corporations. Multinational corporations are increasingly purchasing
semi-finished and auxiliary products from small businesses.

Social Inclusion: According to the Annual Report of The Ministry of MSMEs (2021-
22), the socially backward groups owned almost 66.27% of MSMEs. In rural areas,
almost 73.67% of MSMEs were owned by socially backward groups.

MSMEs can play a significant role in creating an inclusive and sustainable society.
They encourage balanced regional development, gender equity, and the use of
banking services and products. In light of the information presented above, MSMEs
can become the ‘growth engine of the nation’.
 132

What are the challenges faced by MSMEs?

Financial Constraints: This is a significant impediment for the MSME sector. Only
16% of SMEs have timely access to finance, forcing small and medium-sized
businesses to rely on their own resources.

Lack of Formalisation: Almost 86% of the country’s manufacturing MSMEs are

unregistered. Only about 1.1 crore of the 6.3 crore MSMEs are registered with the
Goods and Services Tax (GST) regime, and the number of income tax filers is even
lower. As a result of limited availability and access to data, as well as legacy
underwriting methods, the credit requirement of Indian MSMEs’ have largely gone
unmet.

Access to Technology: Majority of MSMEs use outdated technology that prevents

them from keeping up with the modern world. Adoption of new technology and
training employees is difficult and expensive, especially in manufacturing where both
physical equipment and software are involved. Lack of access to IT education
contributes to the technological gap. Another significant factor is a lack of
awareness, which reduces willingness to invest in advanced technology solutions.

Skill Development: Skilled employees are critical for business growth. Multinational
corporations (MNCs) recognise this and place on-the-job training at the heart of their
operations. Unfortunately, small-scale businesses fail to upskill their workforce,
causing them to suffer unknowingly.

Creativity: Businesses are becoming more knowledge-based, and their success and
survival are inextricably linked to their creativity, and innovation. To remain
competitive, MSMEs must learn and incorporate the process of innovation into their
daily operations. However, they lack the resources and capacity to undertake
innovations.

Competition: Because of increased competition, Indian MSMEs are finding it difficult

to sell their products in both domestic and international markets. Small-scale
enterprises face stiff competition from global counterparts as well as domestic giants
due to their massive scale of operation (large corporations). While the government
does provide protection for such small-scale businesses, competition remains largely
one-sided.

Red-Tapism: MSMEs require various approvals and entrepreneurs are forced to

navigate various government departments in order to obtain construction permits,
enforce contracts, pay taxes, start a business, and trade across borders. In addition,
regulatory risks and policy uncertainty limit scaling-up of MSMEs.
 133

What steps have been taken to support MSMEs?

Credit and Financial:

Prime Minister’s Employment Generation Programme: The scheme,

implemented by the KVIC, aims to generate employment opportunities in rural and
urban areas by setting up new self-employment ventures/projects/micro enterprises.
The programme also aims to provide continuous sustainable employment to
prospective artisans and unemployed youth and increase the wage-earning capacity
of artisans and contribute to the growth of rural and urban employment.

Credit Linked Capital Subsidy Scheme: Its objective is to facilitate technology

upgrade among MSEs (Micro and Small) by providing capital subsidy of 15% (on
institutional finance of up-to Rs 1 crore availed by them) for induction of well-
established and improved technology in the specified 51 sub-sectors/products.

Credit Guarantee Trust Fund for Micro and Small Enterprises (CGTMSE): It
provides collateral-free credit to the micro and small enterprise sector.

Special Credit Linked Capital Subsidy Scheme (SCLCSS): This scheme will help
enterprises in the services sector meet various technology requirements. It also has
a provision to grant 25% capital subsidy for procurement of plant & machinery and
service equipments through institutional credit to MSMEs owned by SC/ST
entrepreneurs without any sector specific restrictions on technology upgradation.

Raising and Accelerating MSME Performance (RAMP): The scheme aims at

strengthening institutions and governance at the Centre and State, improving
Centre-State linkages and partnerships and improving access of MSMEs to market
and credit, technology upgradation and addressing issues of delayed payments and
greening of MSMEs..

Mudra Loan Scheme: It was launched in April, 2015 for providing loans up to INR
10 lakh to the non-corporate, non-farm small/micro enterprises. It encompasses 3
financing loans: Tarun (loans up to INR 10 Lakhs), Kishore (loan up to INR 5 Lakhs),
Shishu (loan up to INR 50,000).

Skill Development and Training

A Scheme for Promotion of Innovation, Rural Industry & Entrepreneurship

(ASPIRE): The objectives of this scheme are to create new jobs, promote
entrepreneurship culture in the country, promote innovation in the MSME sector.
 134

Entrepreneurship and Skill Development Programmes (ESDP): Under this, the

Ministry of MSME has been organising several programmes focussing on the
process of improving skills and knowledge of entrepreneur, and enhancing the
capacity to develop, manage and organise a business venture.

Infrastructure

Scheme of Fund for Regeneration of Traditional Industries (SFURTI): The

objectives are to organise traditional industries and artisans into clusters to make
them competitive and provide support for their long-term sustainability, enhance
marketability of products of such clusters, build innovative products, improve
technologies etc. The scheme cover three types of interventions, e.g., soft
intervention wherein activities are held to build general awareness, counselling, skill
development, etc.; hard intervention which includes creating common facility centers,
raw material banks, etc.; and thematic intervention on brand building, new media
marketing, e-commerce initiatives, research and development, etc.

Scheme for Micro & Small Enterprises Cluster Development Programme (MSE-
CDP): The Ministry of MSME has adopted the cluster development approach as a
key strategy for enhancing productivity and competitiveness as well as capacity
building of Micro and Small Enterprises (MSEs). The programme includes activities
such as support funding for setting up Common Facility Centres (CFC) and
Infrastructure Development Projects (IDP).

Technology Upgrade and Competitiveness

Financial Support to MSMEs in ZED Certification: The scheme promotes Zero

Defect and Zero Effect (ZED) manufacturing among MSMEs. It provides ZED
Assessment for their certification to encourage MSMEs to constantly upgrade their
quality standards in products and processes, promote adaptation of quality
tools/systems and energy-efficient manufacturing, and drive manufacturing by
adopting the Zero Defect production processes and without impacting the
environment.

Support for Entrepreneurial and Managerial Development of SMEs through

Incubators: The objective of the scheme is to promote and support the creativity of
MSME enterprises and encourage adoption of the latest technologies in
manufacturing as well as knowledge-based innovative MSMEs.

Digitalisation: Government initiatives such as the Digital Saksham and the

interlinking of the Udyam, e-Shram, National Career Service (NCS), and Atmanirbhar
Skilled Employee-Employer Mapping (ASEEM) portals show the promise of targeted
digitalisation schemes.
 135

Services

Building Awareness on Intellectual Property Rights (IPR) for MSMEs: It has

been launched to promote awareness about IPRs among MSMEs by assisting them
in technology upgrade and enhancing competitiveness and effective utilisation of IPR
tools.

Trade, Import and Export for MSMEs: MSME support and development
organisation, National Small Industries Corporation (NSIC), will assist MSMEs
working with the Agricultural and Processed Food Products Export Development
Authority (APEDA) across multiple areas. APEDA members will get access to NSIC
schemes, which would help them address issues pertaining to technology adoption,
skills, product quality and market access.

Miscellaneous

In June 2022, the Union Government announced a new initiative called ‘Promotion of
MSMEs in North Eastern Region and Sikkim‘. Its main purpose is to stimulate
MSMEs in the North East by establishing mini-technological centres, developing new
and existing industrial estates, and promoting tourism.

In November 2021, NITI Aayog released a discussion paper to introduce new

financial entities called ‘Digital Banks‘ that would fundamentally aim to bridge the
current credit gap among India’s MSMEs and get them into the formal financial fold.

Support by Private Sector

The Small Industries Development Bank of India (SIDBI) has inked a pact with
Google to pilot social impact lending with financial assistance up to INR 1 crore at
subsidised interest rates to micro enterprises. To reinvigorate the Indian MSME
sector, Google India Pvt. Ltd. GIPL, will bring a corpus of US$ 15 million for micro
enterprises as a crisis response related to COVID-19.

Digital freight forwarder Freightwalla, launched a shipment tracking service for

MSME exporters and importers based on predictive analytics to help businesses
tackle risks associated with shipment delays and improve supply chain efficiency.

Bombay Stock Exchange (BSE) announced that it has collaborated with the All-India
MSME Association (AIMA MSME) to encourage and promote the listing of MSMEs
and start-ups.

Meta India has announced the launch of online resource centre ‘Grow Your Business
Hub‘, to help MSMEs find relevant information, tools and solutions curated to cater to
their business goals.
 136

What more should be done to support MSMEs?

First, There is a need to push for for Digitisation of MSMEs. Owing to problems like
the dearth of proper infrastructure, finance, and limited knowledge, the MSME sector
has been slow in going digital. Digitising the sector could help in enhancing efficiency
and reliability, cutting costs, and keeping up with latest technological trends.

Second, The National Logistics Policy can also be used to boost the competitiveness
of MSMEs. The NLP aims to reduce logistics costs as a percentage of GDP from 13-
14 percent to 8%, putting the country on par with developed nations. While lower
costs will encourage more MSMEs to use logistics services powered by technology.

Third, with the advent of online e-commerce platforms, MSMEs have got access to a
channel to expand their markets. However, to meet the growing demand for e-
commerce in suburban and rural areas, they will require assistance. To that end, the
Government could enlist India Post as a technologically advanced last-mile delivery
partner capable of facilitating cash-on-delivery transactions at competitive rates.

Fourth, similarly, the unparalleled reach of Indian Railways can be leveraged to

quickly and cost-effectively ship goods to the most remote parts of the country. This
can expand the reach of products manufactured by MSMEs.

Conclusion

MSMEs can play a vital role in growth of the economy as India enters the Amrit Kaal
phase. They can help in inclusive and balanced development and make India a
global manufacturing hub. The Government has been supporting the MSMEs
through various initiatives, the need is to focus on the implementation and realizing
the outcomes.
 137
8 Public Finance in India
Fig. 8.1
Introduction :
Public finance is one of the old branches of
economics which highlights the role and functions
of the government in an economy. Government
is a formal or informal institution created by the
people in a specific region to perform various
functions such as protection from external
attacks, protection of private property of the
people, generation of employment, maintaining
internal law and order, provision of social needs
like education, health, etc.
These functions of the government can be
classified as :
1) Obligatory functions : Protection from
external attacks, maintaining internal law
and order etc. are obligatory functions of
the government.
2) Optional functions : Provision of education
and health services, provision of social
security like pensions and other welfare
measures etc. are optional functions of the
government.
70
Find out :
More examples of obligatory and
optional functions of the government.
Meaning and Nature of Public Finance :
To perform the above mentioned functions,
adequately and efficiently, any government
needs funds which can be received from various
sources. The concept of public finance is a
combination of two words ‘public’ and ‘finance,
‘Public’ is a collective for the individuals living
within an administrative territory. In economics,
it is used to signify the government which
represents the public. ‘Finance’ simply means
income and expenditure. Thus, ‘public finance’
is nothing but a study of the principles of income
and expenditure of the government at central,
state and local levels. This study is done under
the public finance branch in economics.
Definitions of Public Finance :
Different economists have defined public
finance in their own ways. Let us study some of
these definitions :
1) According to Hugh Dalton : “Public
finance is one of those subjects which are
on the borderline between economics and
politics. It is concerned with the income and
expenditure of public authorities and with
the adjustment of one with the other.” Since
we study the activities of the governments
in political science too, public finance also
constitutes a part of the study of political
science.
2) According to Prof. Findlay Shirras :
“Public finance is the study of the principles
underlying the spending and raising of
funds by public authorities.”
 138
Differences Between Public Finance and Private Finance :

Points of difference Public finance Private finance

1) Objectives To offer maximum social To fulfil private interests
advantage to the society
2) Determination of Government first determines the An individual considers his income
expenditure volume and different ways of its and then determines the volume of
expenditure expenditure
3) Credit status High degree of credit in the Credit of a private individual is
market limited
4) Right to print The Government can print notes Private individual does not enjoy
currency through Reserve Bank of India such right
5) Elasticity of finance Public finance is more elastic There is not much scope for
changes in private finance
6) Effect on economy Tremendous impact on the Marginal effect on the national
economy of country economy

Structure of Public Finance :

The components or scope of public finance can be shown as below :

Structure of Public Finance at a Glance

I) Public II) Public III) Public IV) Fiscal V) Financial

Expenditure Revenue Debt Policy Administration

A) Tax B) Non-Tax
Internal External

Direct Indirect
(Revenue expenditure
and debit policy for
1) Proportionate Goods and overall growth)
2) Progressive Services Tax
(GST) 1) Fees
3) Regressive
2) Prices of public good and service
1) Public expenditure
3) Special Assessment
2) Public revenue
A) Revenue expenditure 4) Fines and penalties
3) Public debt
B) Capital expenditure 5) Gifts, grants and donations
C) Developmental expenditure 6) Special levy
D) Non- Developmental expenditure 7) Borrowings

Fig. 8.2
On the basis of figure 8.2, the explanation is as follows :
71
 139
I) Public Expenditure :
Public expenditure is that expenditure which
is incurred by the public authority [Central,
State and Local Bodies] for protection of their
citizens, for satisfying their collective needs and
for promoting their economic and social welfare.
Till 20th century, the majority of the
governments had adopted a policy of laissez
faire. Under this policy, the functions of
government were restricted to the obligatory
functions. But, the modern governments not
only perform the obligatory functions such
as defence and civil administration, but also
perform optional functions for promoting social
and economic development of their countries.
Therefore, study of public expenditure is an
important part of study of public finance.
Classification of Public Expenditure :
Different economists have classified public
expenditure on different bases. We shall now
study some of the important classification of
public expenditure.
A) Revenue Expenditure : Revenue
expenditure of the government is for
incurred carrying out day-to-day functions
of the government departments and
various services. It is incurred regularly.
For example, administration costs of the
government, salaries, allowances and
pensions of government employees, medical
and public health services etc.
B) Capital Expenditure : Capital expenditure
of the government is expenditure for
progress and development of the country.
For example, huge investments in different
development projects, loans granted to
the state governments and government
companies, repayment of government
loans etc.
C) Developmental Expenditure : Government : As mentioned earlier,
Developmental expenditure is productive
in nature. The expenditure which results
72
in generation of employment, increase in
production, price stability etc. is known as
developmental expenditure. For example,
expenditure on health, education, industrial
development, social welfare, Research and
Development (R & D) etc.
D) Non-Developmental Expenditure : On the
other hand, that government expenditure
which does not yield any direct productive
impact on the country is called non-
developmental expenditure. For example,
administration costs, war expenditure etc.
These are unproductive in nature.
Do you know?
Trends in Public Expenditure in India
since Independence
Sr. No. Year Total Expenditure (` Cr.)
1 1991-92 72,317
2 2001-02 3,62,450
3 2005-06 5,06,123
4 2009-10 10,24,487
5 2015-16 11,95,025
6 2016-17 13,74,203
7 2017-18 14,35,233
8 2018-19 17,29,682
Source - Economic Survey, Government of India- 2018-19
Given table shows trends in public
expenditure in India since 1991-92 for
select years. It can be clearly observed
that there is tremendous growth in the total
public expenditure of the country over the
period.
Reasons for Growth in Public Expenditure :
It is observed that there is a continous
growth in public expenditure in a developing
country like India.
Let us study some of the important reasuns :
1) Increase in the Activities of the
the modern government performs many
functions for the social and economic
 140
development of the country. These functions
include spread of education, public health,
public works, public recreation, social
welfare schemes etc. It is observed that
new functions are continuously being
undertaken and old functions are being
performed more efficiently on a large scale
by the government. This leads to increase in
public expenditure.
2) Rapid Increase in Population : Population
of developing countries like India is
increasing fast. In 2011 Census, it was
121.02 crores. As a result, the government
has to incur greater expenditure to fulfil the
needs of the increasing population.
3) Growing Urbanization : Spread of
urbanization is a global phenomenon
of the day. This leads to increase in the
government expenditure on water supply,
roads, energy, schools and colleges, public
transport, sanitation etc.
4) Increasing Defence Expenditure : In
modern times, defence expenditure of
the government is increasing even in the
peace time due to unstable and hostile
international relationships.
5) Spread of Democracy : Majority of the
countries in the world are democratic in
nature. A democratic form of government is
expensive due to regular elections and other
such activities. This results in the increase
in total expenditure of the government.
6) Inflation : Just like a private individual, the
government has to buy goods and services
from the market for the spread of economic
and social development. Normally, prices
show a rising trend. Due to this, the
government has to incur increasing costs.
7) Industrial Development : Industrial
development leads to an increase in
73
production, employment and overall growth
in the economy. Hence, the government
makes huge efforts for implementing
various schemes and programmes for
industrial development. This results in
increase in government expenditure.
8) Disaster Management : Many natural and
man-made calamities like earthquakes,
floods, cyclones, social unrest etc. are
occurring more frequently. The government
has to spend a huge amount for the
disaster management which increases total
expenditure.
 Modern governments are working for
‘welfare state’. Hence, there is a continuous
increase in the public expenditure.
Find out :
Reasons for growth in public expenditure
other than given above.
Find out :
Important social welfare schemes by the
Govt.
II) Public Revenue :
Public revenue means the aggregate
collection of income with the government
through various sources. Public revenue holds
the permanent position in the study of public
finance which is part of study of economics.
Thus, the necessity of public revenue arises due
to public expenditure.
The main sources of public revenue are as
follows.
Sources of Public Revenue :
A) Taxes B) Non-tax Revenue :
A) Taxes :
1) According to Prof. Taussig : “The essence
of a tax as distinguished from other charges
by government is the absence of a direct
 141
quid pro quo between the tax payer and the
public authority.”
2) According to Prof. Seligman, “A tax is a
compulsory contribution from the person to
the government without reference to special
benefits conferred.”
 A tax possesses following essential
characteristics :
1) It is a compulsory contribution to the
government and every citizen of the country
is legally bound to pay the tax imposed upon
him. It is a major source of revenue to the
government. If any person does not pay a
tax, he can be punished by the government.
2) Tax is paid by a taxpayer to enable
government to incur expenses in the
common interests of the society.
3) The payment of a tax by a person does
not entitle him to receive any direct and
proportionate benefits or services from the
government in return for the tax.
4) Tax is imposed on income, property or
commodities and services.
You should know :
Canons (Principles) of Taxation :
Adam Smith, the founder of Modern
economics propounded the following four
canons of taxation :
1) Canon of Equity or Equality : Smith
suggested that every person will pay the
taxes to the government in proportion to
his ‘ability to pay’. It means rich people
should pay more tax compared to the poor.
2) Canon of Certainty : According to
Smith, the taxpayer should know in
advance how much tax he has to pay,
at what time he has to pay the tax and
in what form the tax is to be paid to the
government.
3) Canon of Convenience : According to
74
this canon, every tax should be levied in
such a manner and at such a time that it
becomes convenient to the tax payer.
4) Canon of Economy : According to this
canon, the cost of tax collection should
be the minimum. If a major portion
of the tax proceeds is spent on the tax
collection itself, then such a tax cannot
be considered as a good tax.
Types of Taxes :
   There are two main types of taxes. They are :
1) Direct Tax and 2) Indirect Tax.
Let us study in details :
1) Direct Tax : It is paid by the taxpayer on
his income and property. The burden of tax
is borne by the person on whom it is levied.
As he cannot transfer the burden of the tax
to others, impact and incidence of direct
tax falls on the same person. For example-
personal income tax, wealth tax etc.
2) Indirect Tax : It is levied on goods or
services. It is paid at the time of production
or sale and purchase of a commodity or a
service. The burden of an indirect tax can
be shifted by the taxpayer (producers) to
other person/s. Hence, impact and incidence
of tax are on different heads. For example,
newly implemented Goods and Services
Tax [GST] in India has replaced almost all
indirect taxes, custom duty.
Do you know?
Direct taxes are further classified into
three categories depending upon the rate of
tax. These are :
1) Proportionate tax : When a tax is levied
at the same and constant rate on all
incomes, it is called proportional tax.
2) Progressive tax : A tax, the rate of which
increases with every increase in income
 142
is called progressive tax. In India we
have progressive tax rate system.
3) Regressive tax : In regressive taxation,
the larger the income of a tax-payer, the
smaller is the proportion of the tax levied
on him.
B) Non-Tax Revenue Sources :
Public revenue received by the government
administration, public enterprises, gifts and
grants etc. are called as non-tax revenue. These
sources are different than the taxes. A brief
information about these sources are as follows :
1) Fees : A tax is paid compulsorily without
any return service whereas, fee is paid in
return for certain specific services rendered
by the government. For example- education
fee, registration fee, etc.
2) Prices of public goods and services :
Modern governments sell various types of
commodities and services to the citizens. A
price is a payment made by the citizens to
the government for the goods and services
sold to them. For example- railway fares,
postal charges etc.
3) Special Assessment : The payment made
by the citizens of a particular locality
in exchange for certain special facilities
given to them by the authorities is known
as ‘special assessment.’ For example-
local bodies can levy a special tax on the
residents of a particular area where extra/
special facilities of roads, energy, water
supply etc. are provided.
4) Fines and Penalties : The government
imposes fines and penalties on those who
violate the laws of the country. The objective
of the imposition of fines and penalties is
not to earn income, but to discourage the
citizens from violating the laws framed by
the Government. For example, fines for
75
violating traffic rules. However, the income
from this source is small.
5) Gifts, Grants and Donations : The
government may also earn some income
in the form of gifts by the citizens and
others. The government may also receive
grants from the foreign governments and
institutions for general and specific purposes.
Foreign aid has become an important source
of development finance for a developing
country like India. However, this source of
revenue is uncertain in nature.
6) Special levies : This is levied on those
commodities, the consumption of which
is harmful to the health and well-being
of the citizens. Like fines and penalties,
the objective is not to earn income, but to
discourage the consumption of harmful
commodities by the citizens. For example-
duties levied on wine, opium and other
intoxicants.
7) Borrowings : The government can borrow
from the people in the form of deposits,
bonds etc. It also gets loans from foreign
governments and organizations such as
IMF, World Bank etc. Loans are becoming
more and more popular source of revenue
for the governments in the modern times.
Do you know?
Goods and Services Tax [GST]
The Goods and Services Tax [GST]
came into effect in India on July 1, 2017. It
was proposed by the Kelkar Task Force on
Implementation of the Fiscal Responsibility
and Budget Management [FRBM] Act
in July, 2004. The 101st Amendment in
the Constitution Act, 2016 provided for
the constitution of the Goods and Services
Tax Council[GSTC] comprising the
Union Finance Minister, the Minister of
State[Revenue] and the Finance Ministers
of each state, empowering the Council to
 143
make recommendations on the GST rates, • Reducing final price of goods.
exemptions, thresholds of the tax etc. • Boost to the industrial sector.
GST is different from an excise or sales • Poverty Eradication by generating
tax imposed as a single-stage levy on the more employment and more financial
manufacture or sale of a product. It is a resources.
comprehensive tax base with nationwide Sample showing GST voucher
coverage of goods and service. GST would
replace the following taxes levied and
collected by the Centre and States such as
Central Excise Duty, Service tax, Additional
Duties of Customs, State Value Added Tax,
Entry Tax, Entertainment Tax etc.
Central Goods and Services Tax [CGST]
- It is a tax levied on interstate supplies
of both goods and services by the central
government which will be governed by the
CGST Act.
State Goods and Services Tax [SGST]-
This tax is received by the state in which
the goods or services are consumed and
III) Public Debt :
not by the state in which these goods are
Like a private individual, the government
manufactured.
also needs to raise loans. In fact, raising debt is
Integrated Goods and Services Tax
the most common activity of any government,
[IGST]- It is a tax levied on all interstate
because government expenditure generally
supplies of goods and services which will
exceeds government revenue. Public debt policy
be governed by the IGST Act.
of the government plays an important role in
Compensation Part - It is for the loss of
public finance.
expected income on the part of the State
There are mainly two types of public debt.
Governments.
They are :
Expected Benefits of GST : 1) Internal Debt and 2) External Debt
• Creation of a unified common national 1) Internal Debt : When a government
market for India. borrows from its citizens, banks, central
• Boost to foreign investments and ‘Make bank, financial institutions, business houses
in India’, campaign. etc. within the country, it is known as
• Harmonization of laws, procedures and internal debt.
rates of tax. 2) External Debt : When a government
• Boost export and manufacturing activity. borrows from foreign governments,
• Improvement in the overall investment foreign banks or institutions, international
climate in the country. organizations like International Monetary
Fund, World Bank etc., it is known as
• Simplifying the tax system in the country.
external debt.
76
 144

Money Supply

- Money Supply is the total amount of money (currency plus deposit money)
circulating in an economy at a given time.
- Currency in circulation and demand deposits are two common ways to characterize
money.
- Circulating money, also called the total amount in the economy, includes currency,
printed notes, money in deposit accounts, and other liquid assets.
- The Central Bank of the country keeps track of the overall money supply.
- A change in the supply of money in an economy can alter the price level of
securities, inflation, currency rates, corporate practices, and so on.

What is the Money Supply?

- The money supply is the country's economy's total currency and other liquid assets
on a given date.
- The amount of money in circulation consists of cash and deposits that may be
withdrawn almost instantly.
- Bank regulators influence the money supply available to the public by placing
reserve requirements on banks, choosing how to extend credit, and other money-
related concerns.

Who Regulates the Money Supply in India? (just for knowledge)

The Reserve Bank of India (RBI) manages the country’s money supply. The RBI is in
charge of India’s monetary policy. It sets interest rates and the reserves banks must
keep to control money circulation in the economy.

Types Of Money Circulated in the Economy (just for knowledge)

There are different types of money used in an economy:

- Full-bodied money: This money's value as a commodity is equal to its value

as money. An example is a gold coin.

- Token Money/Credit Money/Paper Money: This money's value as money

exceeds its commodity value. Paper currency is an example of this type.

- Representative full-bodied money: This is a type of token money backed by

an equivalent value of bullion (e.g., gold and silver) held by the issuing
authority.
 145

Measures of Money Supply

- The measures of money supply in India are classified into four categories M1, M2,
M3, and M4 along with M0. This classification was introduced in April 1977 by the
Reserve Bank of India.
- Central bank money is designated as M0 in money supply data, whereas commercial
bank money is subdivided into M1 and M3 components. Post-Office deposits are
also included in the M2 and M4 components.
- In general, commercial bank money that is valued in lesser quantities is classified in
the limited category of M1, but commercial bank money that is valued at higher
amounts is classified in M2 and M3. M3 is the most important of all money
aggregates.
- Monetary Aggregates are covered by the old convention as M1, M2, M3, and M4).
Aggregates are denoted as NM1, NM2, and NM3 under the new norm.

Measurement of Money Supply

Reserve Money/Central bank money(M0) – refers to a central bank’s responsibilities,

which include currency and central bank depository accounts. Reserve money, also
known as central bank money, monetary basis, base money, or high-powered
money, is a type of money that is held by the government. It is the money supply’s
starting point or its most powerful component. In the simplest terms, Reserve Money
is the currency in circulation plus commercial bank deposits with the RBI.
Commercial bank money (M1 and M3) – obligations of commercial banks, such as
current accounts and savings accounts.

- Mo = Currency in circulation + Bankers’ deposits with the RBI + ‘Other’ deposits with
the RBI = Net RBI credit to the government + RBI credit to the commercial sector +
RBI claims on banks + RBI’s net foreign assets + Government’s currency liabilities to
the public – RBI’s net non-monetary liabilities

- M1 (Narrow Money) = public currency + public deposit money (demand deposits with
the banking system + ‘Other’ deposits with the RBI).

- M2 = M1 + Savings deposits with post office savings banks

- M3 (Broad Money) = M1+ Time deposits with the banking system = Net bank credit
to the government + Bank credit to the commercial sector + Net foreign exchange
assets of the banking sector + Government’s currency obligations to the public – Net
non-monetary liabilities of the banking sector (Other than Time Deposits).

- M4 = M3 + All deposits with post office savings banks (excluding National Savings
Certificates).
 146

Instruments of measurement

Quantitative Instruments

The quantitative tools are also known as the general tools of the Reserve Bank of
India. As the name implies, these instruments are tied to the quantity and volume of
money. These instruments are employed to control the total amount of money in the
economy and the volume of bank credit. These are indirect tools for influencing the
amount of credit accessible in the economy. Some of these are discussed below:

- SLR: The statutory liquidity ratio, often known as the SLR, is the minimum
share of deposits that a commercial bank must keep in the form of cash, gold,
or other liquid assets.

- CRR: The amount of a bank’s total deposits that must be kept as liquid cash
is known as the cash reserve ratio (CRR).

- Bank Rate: The bank rate is the interest rate the central bank levies when
lending money to a commercial bank.

- Open Market Operations: An Open Market Operation, often known as an

OMO, is a task carried out by the central bank to provide or withhold liquidity
from a financial institution or a collection of financial institutions.

- Liquidity Adjustment Facility: A liquidity adjustment facility (LAF) is a

mechanism used in monetary policy, principally by the Reserve Bank of India
(RBI), that enables banks to get loans from the RBI through reverse repo
agreements or to borrow money through repurchase agreements.

- Repo Rate: Repo rate is the interest rate at which a nation’s central bank (in
India, the Reserve Bank of India) loans money to commercial banks in case of
a funding shortage. Monetary authorities use the repo rate to manage
inflation.

- Reverse Repo Rate: The Reserve Bank of India (RBI) borrows money from
banks on a short-term basis at a rate known as the Reverse Repo Rate.

- Marginal Standing Facility: The Reserve Bank of India has made a Marginal
Standing Facility (MSF) available so that scheduled commercial banks can
get liquidity overnight if interbank liquidity dries completely.
 147

Qualitative Instruments

- Qualitative instruments are monetary policy instruments that are used

selectively by the RBI.
- These tools differentiate between different types of credit, such as preferring
export credit over import credit or important credit supply over non-essential
credit supply.
- This method has an impact on both borrowers and lenders.
- Credit rationing is a strategy used by the Central Bank to set ceilings for a
particular -loan and advance categories in addition to limiting the total amount
of loans and advances that can be made.
- The regulation of consumer credit consists of establishing guidelines for
installment credit payments and maximum maturities for the purchase of
specific durable consumer goods.
- All bankers use the technique of a margin requirement to calculate the loan
value of security supplied as collateral by the borrower.
- Moral Suasion refers to the central bank’s attempts to convince commercial
banks to support the latter’s overall monetary policy through persuasion and
requests.
- Additionally, the central bank may encourage or suggest that commercial
banks refrain from requesting additional accommodations from her or from
funding speculative or unimportant activity.

Recent Trends in Money Supply in India (just for knowledge)

- In July 2022, India's money supply M3 increased to 210374.43 INR billion

from 208193.87 INR billion in June.
- The rise in money supply was due to RBI's rupee-dollar trading and bond
purchases to prevent currency appreciation and lower interest rates.
- Total money supply (M3) grew by 9.9% compared to the previous year,
reaching Rs 19,09,6038 crore as of June 4th, 2021.
- India's money supply has increased by 1.7% in the current fiscal year, with
currency in circulation rising by 13.1% yearly to Rs 2,87,8,270 crore.
- The surge is attributed to foreign currency inflows, boosting rupee demand
against the dollar.
- Covid-19 uncertainty increased the money supply, with the currency rising by
8.2% since March 31, 2020, while savings and current account deposits
decreased by 8%.
- Higher cash withdrawals and precautionary measures against job losses
during the lockdown contributed to the rise in the money supply.
- Lower money supply results from higher interest rates, making consumer
borrowing more expensive.
 148

The structure and flow of the money supply are as follows: (just for
knowledge)

Currency is a significant component of a country’s money supply. As previously

stated, the government issues currency in two forms – Paper currency and Coins.
As a result, money supply via currency can also be separated into Paper
Currency/Notes and Coins, which are discussed below.

Paper Currency/Notes
The government and the Reserve Bank of India control the manufacture of currency
notes. The government creates only one-rupee paper money in the country, whereas
the RBI generates all other currency notes.

Coins
The second kind of currency in India, coins, comes in two varieties –

Standard coins/full-bodied coins – Standard coins are ones whose face value is
equivalent to their intrinsic value. For example – A five rupee coin will be referred to
as a standard coin and accepted as full-bodied money if the metal content equals
five rupees.

Token coins – “crypto token” refers to a token or crypto currency denomination.

For example – Bitcoin & Ethereum.

How does the RBI control the money Supply in the economy? (just for
knowledge)
Monetary Policy Tools are tools used by the Reserve Bank of India (RBI) as part of
its monetary policy to control the money supply in the economy.
Monetary policy tools are classified as quantitative or qualitative and govern the
money supply indirectly or directly in the economy.
 149
9 Money Market and Capital Market in India
Introduction :
Finance is the backbone of an economy.
Finance, basically refers to the management of
money. It includes funds needed by individuals,
business houses and the Government for various
purposes. Thus, finance is categorized as
personal finance, corporate finance and public
finance. The financial system of the country is
responsible for the mobilization and allocation
of funds. It helps in creation of wealth which
is vital for the economic development of the
country. The financial system in India comprises
of financial institutions, financial markets,
financial instruments and financial services.
FINANCIAL INSTITUTIONS
FINANCIAL MARKETS
INDIAN
FINANCIAL
SYSTEM FINANCIAL INSTRUMENTS
FINANCIAL SERVICES
This chapter deals exclusively with
financial markets in India. Financial markets
are an important component of the financial
system.
Meaning of Financial Market :
Financial market refers to a market where
sale and purchase of financial assets such
as bonds, stocks, derivatives, government
securities, foreign currency etc. is undertaken.
Financial markets operate through banks, non-
banking financial institutions, brokers, mutual
funds, discount houses etc. Financial markets
include two distinct markets i.e. the Money
market and Capital market.
FINANCIAL MARKETS
MONEY MARKET CAPITAL MARKET
81
Try this :
From the given examples, identify the
type of finance involved (Personal finance/
Corporate finance /Public finance) :
• Building a retirement corpus
• Raising share capital through sale of
equity shares
• Collection of tax revenue
• Clearing home loan through EMI
(Equated Monthly Instalment)
• Expenditure on social infrastructure such
as health and education
• Managing working capital needs
A) Money Market in India :
Meaning :
Money market is a market for lending and
borrowing of short term funds. It is a market for
“near money” i.e. short term instruments such
as trade bills, government securities, promissory
notes etc. Such instruments are highly liquid,
less risky and easily marketable with a maturity
period of one year or less than one year.
Do you know?
Some Financial Instruments :
• Bonds refer to debt instruments issued by
companies or the government as a means of
borrowing long term funds.
• Equity shares refer to shares of a
company held by an individual or a group.
• Derivatives refer to a financial security
which derives its value/price from the
underlying assets such as bonds, stocks,
currency, interest rates, commodities etc.
• Government securities refer to debt
instruments issued by a government with a
promise of repayment at maturity.
 150
• Trade bills refer to bills of exchange
drawn on and accepted by a trader (trade
acceptance) in payment of goods.
• Promissory note is a financial instrument
that contains a written promise by one
party to pay another party a definite sum of
money, either on demand or at a specified
future date.
Structure of Money Market in India :
The money market in India is dichotomous
by nature. It comprises of both, the organized
sector as well as the unorganized sector. The
organized sector includes the Reserve Bank of
India (RBI), commercial banks, co-operative
banks, development financial institutions,
investment institutions and the Discount and
Finance House of India (DFHI). The unorganized
sector on the other hand, comprises of indigenous
bankers, money lenders and unregulated non-
bank financial intermediaries.
Money market centres in India are located
at Mumbai, Delhi and Kolkata. However,
Mumbai is the only active money market centre
in India with money flowing in from all parts of
the country.
The following chart explains the structure
of money market in India :
RBI
COMMERCIAL BANKS
ORGANIZED
CO-OPERATIVE BANKS
SECTOR
DEVELOPMENT FINANCIAL
INSTITUTIONS
DISCOUNT AND FINANCE
HOUSE OF INDIA
INDIGENOUS BANKERS
UNORGANIZED
MONEY LENDERS
SECTOR
UNREGULATED NON-BANK
FINANCIAL INTERMEDIARIES
Fig. 9.1
82
1) Organized Sector : The organised sector
of the money market consists of the
Reserve Bank of India, commercial banks,
co-operative banks, regulated financial
intermediaries etc. Let us now discuss the
organized sector of the money market in
India.
a) Reserve Bank of India (RBI): Every
country in the world has a Central Bank
which is at the apex of the banking system.
It is entrusted with the responsibility of
regulating the money market in the country.
Reserve Bank of India is the central bank of
our country. RBI was set up on the basis of
the recommendations of the Hilton Young
Commission. The RBI Act of 1934 provides
the statutory basis of the functions of the
bank. RBI commenced its operations on 1st
April, 1935 as a private shareholders’ bank.
RBI was nationalized on 1st January, 1949.
It is the most important constituent of the
money market.
Popular Definitions of Central Bank :
Dr. M. H. de Kock : “Central bank is one which
constitutes the apex of the monetary and banking
structure of the country.”
Prof. W. A. Shaw : “Central bank is a bank
which controls credit.”
Functions of Reserve Bank of India
1) Issue of Currency Notes : RBI has the
sole right to issue currency notes of all
denominations, except one rupee note
and coins. As per the ‘Minimum Reserve
System’ of 1957, RBI is required to maintain
minimum gold and foreign exchange
reserves of Rs 200 crores, out of which at
 151
least ` 115 crores should be in gold and the
remaining ` 85 crores should be in terms of
foreign currency and government securities.
2) Banker to the Government : RBI acts
as a banker, agent and advisor to the
Government. It transacts the business of
both, the Central and State Governments. It
accepts money as well as makes payments
on behalf these Governments. It also
undertakes the management of public debt.
It advises the Government on a wide range
of economic issues.
3) Banker’s Bank : RBI exercises statutory
control over the commercial banks. All
scheduled banks are compulsorily required
to maintain a certain minimum of cash
reserves with the RBI against their demand
and time liabilities. RBI provides financial
assistance to banks in the form of discounting
of eligible bills. Loans and advances are
also provided against approved securities.
4) Custodian of Foreign Exchange
Reserves : RBI acts as a custodian of the
country’s foreign exchange reserves. It has
to maintain the official rate of exchange of
rupee as well as ensure its stability. RBI also
undertakes to buy and sell the currencies
of all the members of the International
Monetary Fund (IMF).
5) Controller of Credit : As a supreme banking
authority of the country, RBI has the power
to influence the volume of credit created
by commercial banks. It also monitors
the purpose or use of credit. Quantitative
methods such as bank rate, open market
operations, variable reserve ratios such
as Cash Reserve Ratio (CRR), Statutory
Liquid Ratio (SLR) etc. control the volume
of credit created. Qualitative methods
such as fixing margin requirements, credit
rationing, moral suasion etc. regulate the
purpose or use of credit.
83
6) Collection and Publication of Data : RBI
collects and compiles statistical information
related to banking and other financial
sectors of the economy.
7) Promotional and Developmental
Functions : RBI also performs certain
promotional and developmental functions
such as extending banking services to semi-
urban and rural areas, providing security
to depositors, development of specialized
institutions for agricultural credit, industrial
finance etc.
8) Other Functions : RBI acts as a clearing
house for settling the accounts between
its member banks. As a lender of last
resort, it also provides liquidity to banks
experiencing financial difficulty.
Find out :
Names of the Central Banks of the
following countries :
• USA • UK (United Kingdom)
• CANADA • SWEDEN
• RUSSIA • FRANCE
• GERMANY • JAPAN
• CHINA • AUSTRALIA
b) Commercial banks : Commercial banks act
as intermediaries in the country’s financial
system to bring the savers and investors
together. They are profit seeking financial
institutions. Acceptance of deposits and
granting loans and advances are the
primary functions of commercial banks.
Commercial banks play an important role in
mobilizing savings and allocating them to
various sectors of the economy. It includes
both scheduled commercial banks and non-
scheduled commercial banks. Scheduled
commercial banks are those included in
the second schedule of the Reserve Bank of
India Act, 1934. In terms of ownership and
function, commercial banks in India can be
 152
classified into four categories:
• Public sector banks
• Private sector banks
• Regional rural banks
• Foreign banks
Popular Definitions of Commercial Bank :
Banking Regulation Act of 1949 : “Banking
means the accepting, for the purpose of lending
or investment, of deposits of money from the
public, repayable on demand or otherwise, and
withdrawable by cheque, demand draft, order or
otherwise.”
Prof. Cairncross : “A bank is a financial
intermediary, a dealer in loans and debts.”
Functions of Commercial Banks :
1) Acceptance of deposits : Deposits constitute
the main source of funds for commercial
banks. Savings lead to the creation of
deposits. Deposits are categorized as (i)
Demand deposits and (ii) Time deposits.
i) Demand Deposits : Deposits that are
withdrawable on demand are known as
demand deposits. They are in the form
of Current account and Savings account
deposits.
• Current account is usually opened by
businessmen, corporations, industrial
houses, trusts etc. They are provided
with overdraft facility. Overdraft means
withdrawal in excess of the balance in the
account.
• Savings account are operated by a large
number of people, particularly the salaried
class, small traders etc. who wish to save a
part of their income with the bank.
ii) Time deposits : Deposits that are repayable
after a certain period of time are known
as time deposits. They are in the form of
recurring deposits and time deposits
• Recurring deposit refers to a deposit
wherein a customer deposits a fixed amount
84
at regular intervals for a specified period of
time.
• Fixed deposits refer to a lumpsum amount
deposited by a customer for a specified
period of time. Compared to all other
deposits, fixed deposits carry a high rate of
interest.
2) Providing loans and advances :
Commercial banks mobilize savings
and lend these funds to institutions and
individuals for various purposes. Based on
the tenure, loans include call loans, short
term, medium term and long term loans.
Longer the duration of the loans, greater will
be the rate of interest. Besides this, banks
also provide cash credit, overdraft facility
as well as discount bills of exchange.
3) Ancillary functions : Commercial banks
also provide a range of ancillary services
such as transfer of funds, collection of
money, making periodical payments on
behalf of the customer, merchant banking,
foreign exchange, safe deposit lockers,
D-mat facility, internet banking, mobile
banking etc.
4) Credit Creation : Credit creation is an
important function of commercial banks.
Commercial banks are creators of credit.
Demand and time deposits constitute the
primary deposits of banks. After meeting the
reserve requirements out of the net demand
and time liabilities, the balance amount
is used for giving loans. Thus, secondary
deposits or ‘derivative deposits’ are
created out of the loans given by the banks.
   For instance, when the bank provides loan
to its customer, the loan amount is credited
into the bank account of the customer. The
bank that receives the loan amount as a
deposit, keeps aside a certain portion in the
form of reserves. After meeting the reserve
requirements, the bank lends the remaining
amount. This procedure is followed by the
 153
entire banking system in the country, leading co-operative banks and state co-operative
to creation of credit. In short, commercial banks.
banks create deposits out of the loans given Fig. 9.3 explains the structure of co-
thereby leading to crediton. operative banks in India :
Three Tier Co-operative Credit Structure

State Co-operative Bank

State (Apex Bank)
Level

District District Central

Level Co-operative Bank

Primary Primary Co-operative

Level credit Societie

Fig. 9.3

Try this :
Collect information of Co-operative
banks operating in your region at different
levels.

d) Development Financial Institutions

Fig. 9.2
Try this :
Pair the logos given with their respective
banks as given in the bracket below:
(State Bank of India, HSBC Bank, Union
Bank of India, Axis Bank, Standard
Chartered Bank, HDFC Bank)
(DFIs) : Development financial institutions
are agencies that provide medium and
long-term financial assistance. They help
in the development of industry, agriculture
and other key sectors. Industrial Finance
Corporation of India (IFCI) was the first
development financial institution to be
established in 1948.

c) Co-operative Banks : Co-operative banks
came into existence with the enactment of
the Co-operative Credit Societies Act of
1904. Co-operative banks supplement the
efforts of commercial banks by meeting
the credit needs of the local population.
It fulfills the banking needs of small and
medium income groups. The co-operative
credit sector comprises of co-operative
credit institutions such as primary co-
operative credit societies, district central
85
Let's recall :
You have already studied in class
XI about NABARD which is the apex
institution in the rural credit structure. It
provides credit for promotion of agriculture,
small-scale industries, cottage and village
industries, handicrafts etc.
Development financial institutions
have diversified their operations with the
advent of liberalization and globalization.
They have set up subsidiaries to offer a
wide range of new products and services
 154
such as commercial banking, consumer
finance, broking, venture capital finance,
infrastructural financing, e-commerce etc.
Thus, development financial institutions are
in the process of converting themselves into
universal banks. RBI has issued guidelines
for development financial institutions
to become commercial banks. For e.g.
ICICI (Industrial Credit and Investment
Corporation of India) has become a
universal bank by a reverse merger with its
subsidiary ICICI Bank.
e) Discount and Finance House of India
(DFHI) : The Discount and Finance House
of India (DFHI) was set up in 1988 as a
money market institution based on the
recommendations of the Vaghul Committee.
It is jointly owned by the RBI, public sector
banks and financial institutions to impart
liquidity to the money market instruments.
2) Unorganized Sector : The unorganized
money market in India comprises of
indigenous bankers, money lenders
and unregulated non-bank financial
intermediaries. The activities of the
unorganized money market are largely
confined to the rural areas.
i) Indigenous bankers : They are financial
intermediaries that function similar to
banks. They mostly deal in indigenous
short-term credit instruments such as
hundi. The rate of interest differs from one
market to another. Indigenous bankers are
mostly confined to certain social strata.
They are an important source of funds in
unbanked areas and provide loans directly
to agriculture, trade and industry.
ii) Money lenders : They mostly operate in
the villages. Money lenders usually charge
a high rate of interest. The loans provided
by money lenders are for both productive
and unproductive purpose. Agricultural
86
labourers, small and marginal farmers,
artisans, small traders etc. usually borrow
money from the money lenders. At present,
the activities of the money lenders have been
restricted by RBI due to their exploitative
tendencies.
iii) Unregulated Non-Bank Financial
Intermediaries : They include Chit funds,
Nidhi, loan companies etc. Under Chit
funds, members make regular contribution
to the fund. Bids or draws are made on the
basis of a criteria mutually agreed upon by
the members. Accordingly, the collected
fund is given to the chosen member. Chit
funds mostly operate in Kerala and Tamil
Nadu. Nidhi is also a type of mutual
benefit fund thriving on the contribution
of its members. Loans are provided to
members at reasonable rates of interest.
Loan companies are finance companies.
They provide loans to traders, small-scale
industries and self-employed persons.
Being unregulated, they charge a high rate
of interest on loans.
NIDHI
UNREGULATED
NON-BANK CHIT FUNDS
FINANCIAL
INTERMEDIARIES LOAN COMPANIES
Do you know?
Money market instruments :
The following instruments are traded in
the money market :
• Call / Notice Money Market : When
money is borrowed or lent for a day, it is
known as call (overnight) money. When
money is borrowed or lent for more than
a day up to 14 days, it is known as notice
money.
• Treasury Bills (TBs) : They are short
term instruments issued by the RBI on
 155
behalf of the government to meet temporary
liquidity shortfalls.
• Commercial Papers (CPs) : It is an
unsecured promissory note, negotiable and
transferable by endorsement and delivery
with a fixed maturity period.
• Certificate of Deposits (CDs) : They are
unsecured, negotiable instruments in bearer
form issued by commercial banks and
development finance institutions.
• Commercial Bills (CBs) : They are
short term, negotiable and self-liquidating
instruments with low risk.
Role of Money Market in India :
The following points outline the role of the
money market in India :
1) Short-term requirements of borrowers :
Money market provides reasonable access
for meeting the short-term financial needs
of the borrowers at realistic prices.
2) Liquidity Management : Money market
is a dynamic market. It facilitates better
management of liquidity and money in the
economy by the monetary authorities. This,
in turn, leads to economic stability and
development of the country.
3) Portfolio Management : Money market
deals with different types of financial
instruments that are designed to suit the risk
and return preferences of the investors. This
enables the investors to hold a portfolio of
different financial assets which in turn, helps
in minimizing risk and maximizing returns.
4) Equilibrating mechanism : Through
rational allocation of resources and
mobilization of savings into investment
channels, money market helps to establish
equilibrium between the demand for and
supply of short-term funds.
5) Financial requirements of the
Government : Money market helps the
87
Government to fulfil its short term financial
requirements on the basis of Treasury Bills.
6) Implementation of Monetary policy :
Monetary policy is implemented by the
central bank. It aims at managing the
quantity of money in order to meet the
requirements of different sectors of the
economy and to increase the pace of
economic growth. A well-developed money
market ensures successful implementation
of the monetary policy. It guides the central
bank in developing an appropriate interest
policy.
7) Economizes the use of cash : Money market
deals with various financial instruments
that are close substitutes of money and not
actual money. Thus, it economizes the use
of cash.
8) Growth of Commerce, Industry and Trade:
Money market facilitates discounting bills of
exchange to local and international traders
who are in urgent need of short-term funds. It
also provides working capital for agriculture
and small scale industries.
Problems of the Indian Money Market :
Compared to advanced countries, the Indian
money market is less developed in terms of
volume and liquidity. Following points explain
the problems of the Indian Money Market :
1) Dual Structure of the Money Market :
Presence of both, the organized and
unorganized sector in the money market
leads to disintegration, lack of transparency
and increased volatility. The unorganized
markets lack co-ordination and do not come
under the direct control and supervision of
the RBI.
2) Lack of uniformity in the rates of
interest : The money market comprises
of various entities such as commercial
banks, co-operative banks, non-bank
finance companies, development finance
 156
institutions, investment companies etc. The
category of borrowers is also different.
3) Shortage of funds : Money market faces
shortage of funds due to inadequate savings.
Low per capita income, poor banking
habits among the people, indulgence in
wasteful consumption, inadequate banking
facilities in the rural areas etc. have also
been responsible for the paucity of funds in
the money market.
4) Seasonal fluctuations : Demand for funds
varies as per the seasons. During the peak
season, from October to June, finance
is required on a large scale for various
purposes such as trading in agricultural
produce, investment in business activities
etc. This results in wide fluctuations in the
money market.
5) Lack of financial inclusion : Banking
facilities in the country are still inadequate
and inaccessible to the vulnerable groups
such as the weaker sections and the low
income groups. This shows lack of financial
inclusion.
6) Delays in technological upgradation :
Use of advanced technology is a pre-
requisite for the development and smooth
functioning of financial markets. Delays
in upgradation of technology hampers the
working of the money market.
Reforms introduced in the Money Market :
Following are some of the important
reforms introduced in the money market :
1) Introduction of new instruments such as
Treasury bills of varying maturity periods,
Commercial Papers (CPs), Certificate of
Deposits (CDs) and Money Market Mutual
Mutual Funds (MMMFs).
2) RBI Repos and Reverse Repos were
introduced under the Liquidity Adjustment
Facility (LAF).
3) Interest rates to be largely determined by
market forces.
88
4) National Electronic Fund Transfer (NEFT)
and Real Time Gross Settlement (RTGS)
were introduced as an improved payment
infrastructure.
5) Electronic dealing system was introduced
to bring about technological upgradation.
Do you know?
Recent developments in banking sector :
• Small Finance Banks : Small finance
banks aim to promote financial inclusion
through supply of credit to small business
units, small and marginal farmers, micro
and small industries and other unorganized
sector entities through high technology but
low cost operations.
• Payments Banks : A payments bank is like
any other bank, but operating on a smaller
scale without involving any credit risk. In
simple words, it can carry out most banking
operations but can’t advance loans or issue
credit cards. It can accept demand deposits
(up to ` 1 lakh), offer remittance services,
mobile payments / transfers / purchases and
other banking services like ATM/debit cards,
net banking and third party fund transfers.
• Universal Banks : Universal banks refer
to those banks that offer a wide range of
financial services, such as, commercial
banking and investment banking and other
activities especially insurance. It is a multi-
purpose and multi-functional financial
supermarket providing both banking and
financial services through a single window.
• Local Area Banks : Local area bank
scheme was introduced in August, 1996 to
enable mobilization of rural savings by local
institutions especially private local banks
and make them available for investments
in the local areas. This helps to bridge the
gap in credit availability and strengthen the
institutional credit from work in the rural
and semi-urban areas.

B) Capital Market in India :
Meaning :
Capital market is a market for long term funds
both equity and debt raised within and outside the
country. It is also an important constituent of the
financial system. Development of an effective
capital market is necessary for promoting more
investments as well as achieving economic
growth. The demand for long term funds comes
from agriculture, trade and industry. Individual
savers, corporate savings, banks, insurance
companies, specialized financial institutions are
the suppliers of long term funds.
Fig. 9.4
Structure of Capital Market in India :
The capital market in India comprises of
the Gilt-Edged or the Government Securities
Market, Industrial Securities Market,
Development Financial Institutions and
Financial Intermediaries.
Fig. 9.5, explains the structure of India’s
Capital Market.
Indian Capital Market
Government Securities Industrial Securities Market Development Financial Institutions Financial Intermediaries
New Issues Market Old Issues Market
IFCI ICICI SFCs
Merchant Banks Mutual Funds Leasing Companies
157
1) Government Securities Market : It is
also known as the gilt-edged market. It
deals in government and semi-government
securities. Such securities carry a fixed rate
of interest.
2) Industrial Securities Market : It deals
with the shares and debentures issued by
old and new companies. It is further divided
into Primary Market (New Issues) and
Secondary Market (Old Issues). Primary
market helps to raise fresh capital through
sale of shares and debentures. Secondary
market deals with securities already issued
by companies. Secondary markets function
through stock exchanges.
  Stock exchange is an important
constituent of the capital market. It is an
association or organization in which stocks,
bonds, commodities etc are traded. Bombay
Stock Exchange (BSE) and National Stock
Exchange (NSE) are the premier stock
exchanges in the country.
3) Development Financial Institutions
(DFIs) : They provide medium term and
long term financial assistance to the private
sector. They include Industrial Finance
Corporation of India (IFCI), Industrial
Investment Bank of India (IIBI), EXIM
Bank etc.
4) Financial Intermediaries : Financial
intermediary is an organization which
acts as a link between the investor and the
IDBI IIBI UTI
Venture Capital Companies Others
Fig. 9.5
89
 158
borrower to meet the financial objectives of
both the parties. They consist of merchant
banks, mutual funds, leasing companies,
venture capital companies etc.
Role of Capital Market in India :
1) Mobilizes long term savings : There
is an increasing demand for investment
funds by industrial organizations and
the government. But the availability of
financial resources is insufficient to meet
this growing demand. Capital market helps
to mobilize long term savings from various
section of the population through the sale of
securities.
2) Provides equity capital : Capital market
provides equity capital or share capital
to entrepreneurs which could be used to
purchase assets as well as fund business
operations.
3) Operational efficiency : Capital market
helps to achieve operational efficiency by
lowering the transaction costs, simplifying
transaction procedures, lowering settlement
timings in purchase and sale of stocks.
4) Quick valuation : Capital market helps to
determine a fair and quick value of both
equity (shares) and debt (bonds, debentures)
instruments.
5) Integration : Capital market leads to
integration among real and financial
sectors, equity and debt instruments,
government and private sector, domestic
and external funds etc.
Problems of the Capital Market :
Following points explain the problems
faced by the Indian Capital Market :
1) Financial Scams : Increasing number of
financial frauds have resulted in irreparable
loss for the capital market. Besides this, it
has also lead to public distrust and loss of
confidence among the individual investors.
90
2) Insider trading and price manipulation :
Insider trading means buying or selling of
a security by someone who has access to
non-public information or ‘unpublished
information’ for personal benefit. Price
manipulation or price rigging on the other
hand means to simply raise the prices of
shares through buying and selling of shares
within certain individuals themselves for
personal gains. Such illegal practices have
also affected the smooth functioning of
capital market.
3) Inadequate debt instruments : Debt
instruments include bonds, debentures
etc. There is not much trading in the debt
securities due to narrow investor base, high
cost of issuance, lack of accessibility to
small and medium enterprises.
4) Decline in the volume of trade : Regional
stock exchanges have witnessed a sharp
decline in the volume of trade because
investors prefer to trade in securities listed
in premier stock exchanges like BSE,
NSE etc.
5) Lack of informational efficiency : A
market is said to be informationally efficient
if a company’s stock prices incorporate all
the available information into the current
prices. However, the stock market in India
lacks informational efficiency compared to
advanced countries.
Find out :
List of regional stock exchanges in India.
Reforms introduced in the Capital Market :
Following are some of the important
reforms introduced in the capital market :
1) Securities and Exchange Board of India
(SEBI) was established in 1988 but given
statutory powers in 1992 to protect the
interest of the investors and promote the
development of the securities market.
 159
2) National Stock Exchange (NSE), the leading 6) Investor Education and Protection Fund
stock exchange in India was established (IEPF) was established in 2001 to promote
in 1992. investors’ awareness and protecting the
3) Computerized Screen Based Trading interest of the investors.
System (SBTS) was introduced as a part of Do you know?
modernization. Economic Policy in an Economy
4) Demat account has been introduced since Monetary Policy Fiscal Policy
1996 to facilitate easy purchase and sale Implemented by Implemented by
of shares by the investors through the Central Bank Central government
electronic method. Deals with Money Deals with taxes,
5) Increased access to global funds by Supply expenditure etc.
Indian companies was permitted through Aims at financial Aims at economic and
stability social development
American Depository Receipts (ADRs) and
Global Depository Receipts (GDRs). Quantitative in nature Qualitative in nature

EXERCISE

Q. 1. Complete the following statements : b) accelerate the country's economic growth.

1) Development financial institutions were c) mobilise the savings and allocating them to
established to ............. various sectors of the economy.
a) provide short term funds. d) control the credit.
b) develop industry, agriculture and other key
Q. 2. Complete the correlation :
sectors.
1) Money market : Short term funds :: :
c) regulate the money market.
Long term funds
d) regulate the capital market.
2) : Central Bank :: SBI : Commercial
2) Money market faces shortage of funds due to Bank
...........
3) Co-operative banks : Organized sector ::
a) inadequate savings. Indigenous bankers :
b) growing demand for cash. 4) Primary market : :: Secondary market
c) presence of unorganized sector.   : Old issues
d) financial mismanagement.
Q. 3. Find the odd word :
3) Individual investors have lost confidence in the
1) Types of Bank Accounts : Saving a/c, D-mat
capital market due to ...........
a/c, Recurring a/c, Current a/c
a) lack of financial instruments.  
2) Unregulated Financial intermediates : Mutual
b) high transaction costs.
fund, Nidhi, Chit fund, Loan Companies
c) low returns.
3) Financial Assets : Bonds, Land, Govt.
d) financial scams.
Securities, Derivatives
4) Commercial banks act as intermediaries in the 4) Quantitative Tools : Bank rate, Open market
financial system to ........... operations, Foreign Exchange rate, Variable
a) make profits reserve ratios

91
 160
10 Foreign Trade of India
Introduction :
Before 1947, the pattern of India's foreign
trade was typically colonial. India was a
supplier of raw materials to the industrialized
nations, particularly England and importer of
manufactured goods. This dependence on foreign
trade did not permit industrialization at home.
As a result the indigenous handicrafts suffered
a severe blow. However, many underdeveloped
countries that won independence in the post
World War II period, viewed foreign trade as an
investment.
Meaning of Internal Trade :
Buying and selling of goods and services
within the boundaries of a nation are referred
to as ‘Internal Trade’ or ‘Domestic Trade’ or
‘Home Trade’. For example, if goods produced
in Maharashtra are sold to states like West
Bengal, Uttar Pradesh, Tamil Nadu etc, then it
is known as internal trade.
Fig. 10.1
Meaning of Foreign Trade :
Foreign Trade is trade between the different
countries of the world. It is called as International
Trade or External Trade.
Definition :
According to Wasserman and Hultman,
“International Trade consists of transaction
between residents of different countries”.
93
Types of foreign trade :
Foreign trade is divided into the following
three types.
1) Import Trade, 2) Export Trade, 3) Entrepot Trade
1) Import Trade : Import trade refers to
purchase of goods and services by one
country from another country or inflow of
goods and services from foreign country
to home country. For example, India
imports petroleum from Iraq, Kuwait, Saudi
Arabia, etc.
2) Export Trade : Export trade refers to the
sale of goods by one country to another
country or outflow of goods from one
country to foreign country. For example,
India exports tea, rice, jute to China, Hong
Kong, Singapore etc.
3) Entrepot Trade : Entrepot trade refers to
purchase of goods and services from one
country and then selling them to another
country after some processing operations.
For example, Japan imports raw material
required to make electronic goods like,
radio, washing machine, television etc.
from England, Germany, France etc. and
sells them to various countries in the world
after processing them.
Role of Foreign Trade :
Trade is an engine of growth of an economy,
because it plays an important role for economic
development. In developed countries it represents
a significant share of Gross Domestic Product.
Role of foreign trade can be justitied on the
basis of the following points :
1) To earn foreign exchange : Foreign trade
provides foreign exchange which can be
used for very productive purposes. Foreign
trade is a remarkable factor in expanding
 161
the market and encouraging the production
of goods.
2) Encourages Investment : Foreign trade
creates an opportunity for the producers
to reach beyond the domestic markets. It
encourages them to produce more goods
for export. This leads to an increase in total
investment in an economy.
3) Division of labour and specialization :
Foreign trade leads to division of labour
and specialization at world level. Some
countries have abundant natural resources,
they should export raw material and import
finished goods from countries which are
advanced in skilled manpower. Thus,
foreign trade gives benefits to all countries
thereby leading to division of labour and
specialization.
4) Optimum allocation and utilization of
resources : Due to specialization, resources
are channelized for the production of only
those goods which would give highest
returns. Thus, there is rational allocation
and specialization of resources at the
international level due to foreign trade.
5) Stability in price level : Foreign trade helps
to keep the demand and supply position
stable which in turn stabilizes the price
level in the economy.
6) Availability of multiple choices : Foreign
trade provides multiple choices of imported
commodities. As foreign trade is highly
competitive it also ensures a good quality
and standard products. This raises the
standard of living of people.
7) Brings reputation and helps earn
goodwill : Exporting country can earn
reputation and goodwill in the international
market. For example, countries like Japan,
Germany, Switzerland etc. have earned a
lot of goodwill and reputation in foreign
market for their qualitative production of
electronic goods.
94
Try this :
Name the goods exported to and imported
from India to China and Japan in recent years
by India.
Composition and Direction of India’s foreign
trade :
Over the last 70 years, India’s foreign trade
has undergone a complete change in terms of
composition and direction. Main feature of
composition of India’s foreign trade are as
follows :
1) Increasing share of Gross National
Income : In 1990-91, share of India’s foreign
trade (import-export) in gross national
income was 17.55%. It increased to 25%
during 2006-07 and to 48.8% during 2016-17
2) Increase in volume and value of trade :
Since 1990-91, the volume and value of
India’s foreign trade has gone up. India
now exports and imports goods which are
several times more in value and volume.
3) Change in the composition of exports :
Since Independence, the composition of
export trade of India has undergone a
change. Prior to Independence, India used
to export primary products like jute, cotton,
tea, oil-seeds, leather, foodgrains, cashew
nuts and mineral products. With the passage
of time, manufactured items like readymade
garments, gems and jewellery, electronic
goods, especially computer hardware and
software occupy a prime place in India’s
exports.
4) Change in the composition of imports :
Prior to independence, India used to import
consumer goods like medicines, cloth,
motor vehicles, electrical goods etc. A
part from petrol and petroleum, India is
now importing mainly capital goods like
high-tech machinery chemicals, fertilizers,
steel etc.
 162
5) Oceanic trade : Most of India’s trade
is by sea. India has trade relations with
its neighbouring countries like Nepal,
Afghanistan, Myanmar, Sri Lanka etc. The
share of India’s oceanic trade is around 68%.
6) Development of new ports : For its foreign
trade, India depended mostly on Mumbai,
Kolkata and Chennai ports. Therefore,
these ports were overburdened. Recently,
India has developed new ports at Kandla,
Cochin, Vishakhapatnam, Nhava Sheva etc.
to reduce the burden on the exsiting ports.
Find out :
Recent share of India’s foreign trade in
Gross National Income.

Do you know?
Composition of India’s Imports
Years
Commodities
2015-16 2016-17
Sr. Expenditure Percentage Expenditure Percentage
No. (in million $) (in million $)
Petroleum, oil and
1 82,944 21.8 86,896 22.6
lubricants
2 Electronic goods 40,032 10.5 41,941 10.9
Pearls and precious
3 20,070 5.3 23,809 6.2
stones
4 Edible oils 10,492 2.8 10,893 2.8
5 Fertilizers 8,072 2.1 5,024 1.3
6 Foodgrains 276 0.1 1,429 0.4

Composition of India’s Exports

Years
Commodities
2015-16 2016-17
Sr. Expenditure Expenditure Percentage
(in million $) Percentage (in million $)
No.
Readymade
1 16,964 6.9 17,368 6.3
Garments
2 Iron ore 191 0.0 1,534 0.5
3 Cotton yarn 8,874 3.4 8,550 3.1
4 Petroleum products 31,209 11.9 32,416 11.7
Leather
5 5,554 2.1 5,308 1.9
manufactures
6 Engineering goods 7,220 23.0 65,267 23.7
Source : 1) Reserve Bank of India, Handbook of Statistics on Indian Economy 2016-17,
2) Government of India, Economic Survey 2017-18.

95
 163
Direction of India’s foreign trade :
Direction of foreign trade means the
countries to which India exports its goods
and services and the countries from which it
imports the goods and services. Thus, direction
consists of destination of exports and sources
of our imports. Prior to Independence, much of
India’s trade was done with Britain. Therefore
Britain used to hold the first position in India’s
foreign trade. However, after Independence, Fig. 10.2
new trade relations with many other countries
Recent Trends in Exports :
were established. Now USA has emerged as the
leading trading partner followed by Germany, 1) Engineering goods : According to
Japan and United Kingdom. Engineering Goods Export Promotion
Council (EGEPC) Report, the share of
Do you know? engineering goods was 25% in India’s total
Direction of India's Imports exports in 2017-18. Within this category
Year some of the prominent exported items are
Countries/Organisation
2016-17 transport equipment including automobiles
Sr. no. (Percentage) and auto components, machinery and
1 OECD 28.1 instruments. During the period 2010-11 to
2 OPEC 24.1 2014-15, exports of transport equipment
3 Eastern Europe 2.4 have grown from 16 billion dollars to to
4 Developing Nations 43.2 24.8 billion dollars.
5 Others 2.2 2) Petroleum products : India’s petroleum
capacity increased significantly since
Direction of India's Exports
2001-02, due to which India turned as a
Year net exporter of petroleum refinery products.
Countries/Organisation
2016-17 Petroleum product had a share of 4.3% in
Sr. no. (Percentage) India’s total exports in 2000-01, which rose
1 OECD 37.9 steadily to 20.1% in 2013-14.
2 OPEC 16.4 3) Chemicals and chemical products : An
3 Eastern Europe 1.0 important export item that has performed
4 Developing Nations 43.5 reasonably well over the last few years
5 Others 1.2 is chemicals and chemical products. The
Source : Reserve Bank of India, Handbook of share of this item was 10.4% in 2014-15.
Statistics on Indian Economy.
4) Gems and Jewellery : Gems and jewellery
Trends in India’s foreign trade since 2001 : is one of the major contributors to export
Since liberalisation, India’s foreign trade earnings in India, having a share of 13.3%
has expanded manifold and has shown a in India’s merchandise export in 2014-15.
significant structured shift in imported and 5) Textiles and readymade garments :
exported products, and also in its geographical Textiles and garment exports together
composition. accounted for 11.3% of India’s exports
96
 164
in 2014-15. In fact, India is one of the etc. is included in balance of payments.
leading exporting countries of textiles and
readymade garments in the world.
Trends in Imports :
1) Petroleum : Petroleum has always
remained the most important item of
imports in India’s trade in the pre as well
as post reform period. It had a share of 27%
in total imports in 1990-92 which currently Fig. 10.3
stands at around 31%. Balance of Trade :
2) Gold : After petroleum, the second most Balance of trade is the difference between
imported item is gold. It has been observed the value of a country’s exports and imports for
that there is a significant drop in gold a given period. Balance of trade is also referred
imports during 2013-14. The gold imports to as the international trade balance.
declined from 53.3 billion dollars in 2011-12 According to Bentham, “Balance of trade
to 27.5 billion dollars in 2013-14. This was of a country is the relation over a period between
primarily due to fall in international gold the values of her exports and imports of physical
prices and various policy measures taken by goods.”
the government to curb gold imports. According to Samuelson, “if export value is
3) Fertilizers : The share of fertilizers in greater than the import value it is called as trade
import expenditure declined from 4.1% in surplus and if import value is greater than export
1990-91 to only 1.3% in 2016-17. value, then it is called as trade deficit.”
It is clear from the above definitions that
4) Iron and Steel : The share of iron and steel
balance of trade includes the value of imports
in import expenditure declined from 4.9%
and exports of visible goods and invisible goods.
to 2.1% in 2016-17.
Concept of Balance of payments :
The Balance of payments of a country is a
systematic record of all international economic
transactions of that country during a given
period, usually a year.
According to Ellsworth, “Balance of
payments is a summary statement of all the
transactions between the residents of one country
and the rest of the world.
According to Walter Krause, “The balance
of payments of a country is a systematic record
of all economic transactions completed between
its residents and the rest of the world during a Fig. 10.4
given period of time usually a concept of year.
From the above definitions, it is clear that the Find out :
value of exchange of goods and services among List of countries coming under OPEC
the citizens, businessmen, firms, government and OECD.

97
 165

Balance of Payments

Balance of Payments – Meaning & Definition

According to Kindleberger, “The Balance of Payments of a country is a systematic

record of all the economic transactions between its residents and residents of foreign
countries.”

- Balance of Payments (BoP) is the recording of all the economic transactions

of a particular country with the rest of the countries in the world.

- As part of the Foreign Trade and international trade norms, each country
enters into economic contracts with the other countries in the world.

- As a result of such agreements and transactions, the particular country

receives Payments from the other countries.

- Balance of Payments is a statement of accounts of these receipts and

payments.

Generally, a country deals with the other countries in the following items:

- Visible items (imported and exported physical goods)

- Invisible items (imported and exported services)
- Capital Transfers (capital receipts and Payments like investment in India by
foreign parties)

Features

- Systematic recording of Receipts and Payments of one country with the other
countries.

- Statement of account pertaining to a specific period of time, usually one year.

- Includes all the three items, that is, visible, non-visible, and capital transfers.

- Receipts and Payments are recorded as per the double-entry system.

- Includes all government and non-government items.

 166

Structure of BoP

The components of Balance of Payments is categorized as:

● Capital Account
● Current Account
● Overall balance of Payments

Capital Account

- It involves the capital transactions, that is, those which create assets and/ or
liabilities.
- Capital account reflects the net changes in the ownership of the national
assets
- Components of capital accounts include Foreign Direct Investment, Foreign
Portfolio Investment, External Borrowings, and Reserve Account with the
Central Bank.

Current Account

- It deals with the current, short-term, and ongoing transactions such as trading
in goods and services, current unilateral transfers, and investment incomes,
etc.
- It reflects the nation’s net income.

Overall BoP

- It is the total of a country’s balance of payments on capital and current

account.

● Hence, the formula:

Balance of Payments (BoP) = Current Account + Capital Account = 0

Disequilibrium in Balance of Payments

Several reasons such as differences in the value of exports and imports cause
disequilibrium in the balance of payments. The disequilibrium may be either in
minus, deficit, unfavorable side or plus, surplus, favorable side.
 167

Unfavourable/ Favourable BoP

Balance of Payments is unfavorable when the Payments (debit) of the country is

more than its receipts (credit). Meanwhile, when the receipts (credit) are more than
the Payments (debit), the BoP is said to be favorable. Disequilibrium in Balance of
Payments can be understood as:

1. Favourable BoP
2. Unfavourable BoP

1. Favourable BoP

When the receipts are more than the Payments, then there is a favourable balance
of Payments. Such a situation increases foreign exchange reserves. The export of
goods, services, and capital receipts is more than that of the imports. It is also known
as surplus BoP

Bf = R – P > 0

Bf = Balance of Payments

R – P > 0 = Receipts are greater than Payments or their difference is positive

2. Unfavourable BoP

There is an unfavourable BoP when the Payments are more than the receipts. Such
a situation reduces foreign exchange reserves. As well, the exports of goods, capital
receipts, and services are less than that of the imports. It is also termed as a
deficient balance of Payments.

Bu = R – P < 0

Bu = Unfavourable BoP

R – P < 0 = Receipts are less than the Payments or their difference is negative
 168

Equilibrium in BoP

When the capital receipts and exports (both visible and invisible) of a country are
equal to its capital imports and Payments (visible and invisible), then it is called
equilibrium in the Balance of Payments.

B=R–P=0

B = Balanced BoP

R = Receipts

P = Payments

Causes of Disequilibrium in BoP

● The main causes of unfavourable BoP in India are discussed as below:

- Import of machinery
- Import of war equipment
- Increasing demand of consumption goods
- Price Disequilibrium
- Expenditure on Embassies
- Competition from international countries
- Increasing prices of crude oil
- Payments of interest on foreign debts
- War among the gulf countries

Measures to Correct the Disequilibrium in BoP

● The main reason for the disequilibrium in BoP is the excess of imports over exports.

Measures to correct the disequilibrium in the Bop include:

- Promotion of exports
- Scaling up production
- Favourable trade agreements
- Encouragement of foreign investment
- Boosting foreign tourism
- Decreasing the level of economic inflation
- Devaluation of the Indian currency
- Restricting imports, specifically of luxury goods
- Exercising import substitution
 169

SAARC
Introduction:

- SAARC stands for South Asian Association for Regional Cooperation.

It is a regional organization that promotes cooperation among South Asian countries.

- SAARC was established on December 8, 1985, when the eight countries signed the
charter in Dhaka.

- The headquarters of SAARC are located in Kathmandu, Nepal.

Members:

There are 8 member states of SAARC. They are:

- Afghanistan
- Bangladesh
- Bhutan
- India
- Maldives
- Nepal
- Pakistan
- Sri Lanka

Aim:
- The aim of SAARC (South Asian Association for Regional Cooperation) is to
promote regional cooperation and development among South Asian countries.

Objectives:

The South Asian Association for Regional Cooperation (SAARC) has three main
objectives:

- Promote self-reliance
- Improve mutual trust
- Promote cooperation
 170

SAARC's objectives also include:

- Promoting the welfare of South Asians

- Improving quality of life
- Accelerating economic growth
- Social progress
- Cultural development
- Providing opportunities for people to live in dignity
- Realizing people's full potential
- Improving relationships with other developing nations
- Improving relationships with international and regional groups

Logo:

- The SAARC logo depicts two hands joining together with seven doves in between.

- The hands symbolize friendship and goodwill, while the doves represent the seven
founding member nations seeking peace. Later Afghanistan joined as the 8th
member of SAARC in 2007.

Functions:

1. Policy Direction: Set the organization's strategic direction.

2. Decision-Making: Make key regional decisions.
3. Regional Issue Addressing: Collaborate on common challenges.
4. Bilateral and Multilateral Engagement: Engage with member nations and
regional forums.
5. Cooperation Promotion: Promote regional cooperation and development.

Apex and Recognized Bodies:

SAARC has six Apex Bodies, they are:

1. SAARC Chamber of Commerce & Industry (SCCI),
2. South Asian Association for Regional Cooperation in Law (SAARCLAW),
3. South Asian Federation of Accountants (SAFA),
4. South Asia Foundation (SAF),
5. South Asia Initiative to End Violence Against Children (SAIEVAC),
6. Foundation of SAARC Writers and Literature (FOSWAL)
 171

Problems:

- Political Tensions: Ongoing political disputes between member nations.

- Limited Economic Integration: Hindered trade and economic integration.
- Security Concerns: Regional security challenges and terrorism.
- Infrastructure Gaps: Inadequate regional connectivity and infrastructure.
- Socio-Economic Disparities: Economic and social inequalities among
member states.
 172

BRICS

Meaning
BRICS is an acronym for Brazil, Russia, India, China, and South Africa. In 2001, Jim
O’Neill, an economist at Goldman Sachs, came up with the term “BRIC” (without
South Africa). He said that by 2050, the four BRIC economies would rule the world
economy. In 2010, South Africa joined the list.

Objectives of BRICS

BRICS aims to increase economic and political stability. It is believed that by the end
of 2050, these countries will be the main places where products, services, and raw
materials come from. Cooperation, development, and influence in world affairs are at
the heart of the BRICS goals. The main objectives of BRICS are as under-

- Economic cooperation: encouraging trade, cooperation and growth among

members, as well as improving BRICS economies’ access to markets.

- Development financing: Creating institutions such as the CRA (Contingent

Reserve Arrangement) and the NDB (The New Development Bank) to finance
infrastructure and development projects in member nations.

- Political coordination: Strengthening political discourse and coordination on

international issues, such as modifying institutions of global governance to
take into account the shifting global economic landscape and to provide rising
economies with a stronger voice and representation.

- Social and cultural exchanges: Promoting interpersonal relationships and

mutual respect for one another’s cultures while also boosting social and
cultural exchanges between member nations.

- Technology and innovation: Strengthening international collaboration in the

fields of science, technology and innovation to promote knowledge exchange,
capacity building and technological advancements among member nations.

- Sustainable development: Promoting environmentally friendly and

sustainable development methods while working together to achieve
sustainable development goals.
 173

- Peace and security: Promoting peace, stability and security locally and
internationally while addressing shared security issues and risks, such as
terrorism.

- South–South cooperation: Strengthening cooperation and collaboration

among developing countries, sharing best practices, and supporting initiatives
that contribute to the overall development of the Global South.

- Promote growth: to increase, deepen, and broaden cooperation among its

member countries in order to promote growth that is sustainable, fair, and
good for everyone. All of the members’ growth and progress are taken into
account.

- Build relations: to ensure that the economic strengths of each country are
used to build relations and eliminate competition where possible.

BRICS is becoming a new and promising diplomatic and political group with goals
that go far beyond the original goal. Initially, it was only expected to solve global
financial problems and change the way institutions worked.

Key aspects of BRICS

The key aspects of BRICS encompass various dimensions that characterize the
cooperation and influence of the group.

1. Economic powerhouses
The BRICS countries account for a considerable share of the global population,
landmass and gross domestic product. They are significant rising economies with
enormous potential for economic expansion.

2. Cooperation and dialogue

The BRICS group provides a forum for ongoing communication and collaboration
among its members. It offers a platform for decision-makers to have conversations,
share ideas and collaborate on projects.

3. Economic cooperation
The BRICS initiative seeks to increase trade and economic cooperation among its
member nations. Initiatives, such as the BRICS Business Council, are used to attract
investment, lower trade barriers and develop economic ties.
 174

4. Development finance
The BRICS have formed financial institutions, including the CRA (Contingent
Reserve Arrangement) and the NDB (The New Development Bank). These
organizations fund infrastructure projects, finance international development and
maintain the financial systems of their member nations.

5. Political influence
The BRICS countries aim to have a political impact on the world arena. Member
nations work together on global concerns, push for reform in institutions of global
governance, and work to ensure that rising economies are more represented.

6. Global governance reform

The BRICS countries support a system of global governance that is more inclusive
and egalitarian. It aims to improve global financial institutions and advance a
multipolar world order that more accurately represents the objectives and ambitions
of developing nations.

7. Closure of Goldman Sachs’ BRICS investment fund

The Goldman Sachs BRICS Fund was an investment fund launched by Goldman
Sachs in 2006. It was designed to provide investors with exposure to the economies
of the BRICS countries by investing in companies listed in these markets.

The fund aimed to capitalize on the rapid economic growth and development
potential of the BRICS nations, which were identified as emerging economic
powerhouses. It allowed investors to diversify their portfolios and participate in the
growth of these economies.

However, in 2015, Goldman Sachs decided to discontinue its BRIC fund due to an
assessment that it would not experience significant asset growth in the foreseeable
future. The economic challenges faced by the BRICS countries after the global
financial crisis, such as Brazil’s economic slump, Russia’s struggles with low oil
prices and sanctions, and China’s slowing growth, have led to a reassessment of the
investment prospects in these markets. Despite the fading allure of the BRICS era,
Goldman Sachs emphasizes that it remains committed to exploring opportunities in
these emerging markets.
 175

WTO

INTRODUCTION:

- The General Agreement on Tariffs and Trade (GATT) was regulating world trade
since 1947.
- It then was transformed into World Trade Organisation (WTO), on 1st January 1995,
in its Uruguay Round (GATT 8th Round), talks which lasted for eight years.
- GATT was mainly concentrating on trade in manufactures whereas WTO deals with
all major aspects of international trade.

OBJECTIVES:

- The overall objective of the WTO is to help its members use trade as a means to
raise living standards, create jobs and improve people’s lives.
- The WTO operates the global system of trade rules and helps developing countries
build their trade capacity.
- It also provides a forum for its members to negotiate trade agreements and to
resolve the trade problems they face with each other.

The important objectives of the WTO include:

1. Improving people’s lives

- The fundamental goal of the WTO is to improve the welfare of people around
the world.
- The WTO’s founding Marrakesh agreement recognizes that trade should be
conducted with a view to raising standards of living, ensuring full employment,
increasing real income and expanding global trade in goods and services
while allowing for the optimal use of the world’s resources.

2. Negotiating trade rules

- The WTO was born out of five decades of negotiations aimed at progressively
reducing obstacles to trade.
- Where countries have faced trade barriers and wanted them lowered, the
negotiations have helped to open markets for trade.
- Conversely, in some circumstances, WTO rules support maintaining trade
barriers – for example, to protect consumers or the environment.
 176

3. Overseeing WTO agreements

- At its heart are the WTO agreements, negotiated and signed by the bulk of
the world’s trading nations.
- Essentially contracts, these documents provide the rules for international
commerce and bind governments to keep their trade policies within agreed
limits.
- Their goal is to help producers of goods and services, exporters and importers
conduct their business, with a view to raising standards of living, while
allowing governments to meet social and environmental objectives.

4. Maintaining open trade

- The system’s overriding purpose is to help trade flow as freely as possible,

provided there are no undesirable side effects, because this stimulates
economic growth and employment and supports the integration of developing
countries into the international trading system.
- Its rules have to be transparent and predictable, to ensure that individuals,
companies and governments know what the trade rules are around the world,
and to assure them that there will be no sudden changes of policy.

5. Settling disputes

- Trade relations often involve conflicting interests.

- Agreements, including those painstakingly negotiated in the WTO, often need
interpreting.
- The most harmonious way to settle these differences is through a neutral
procedure based on an agreed legal foundation.
- That is the purpose behind the dispute settlement process written into the
WTO agreements.

AIMS OF WTO:

1. Non-discrimination
A country should not discriminate between its trading partners, and it should not
discriminate between its own and foreign products, services or nationals.

2. Opening trade
Lowering trade barriers is an obvious way to encourage trade; these barriers include
customs duties (or tariffs) and measures such as import bans or quotas, that restrict
quantities selectively.
 177

3. Predictability and transparency

Foreign companies, investors and governments should be confident that trade
barriers will not be raised arbitrarily. With stability and predictability, investment is
encouraged, jobs are created and consumers can fully enjoy the benefits of
competition – such as increased choice and lower prices.

4. Fair competition
Discouraging “unfair” practices, such as export subsidies and dumping products at
below normal value to gain market share; the issues are complex, and the rules try
to establish what is fair or unfair, and how governments can respond, in particular by
charging additional import duties calculated to compensate for damage caused by
unfair trade.

5. Support for less developed countries

Over three-quarters of WTO members are developing economies or in transition to
market economies. The WTO agreements give them transition periods to adjust to
WTO provisions and, in the case of the Trade Facilitation Agreement, provide for
practical support for implementation of the Agreement.

6. Protection of the environment

The WTO agreements permit members to take measures to protect not only public,
animal and plant health but also the environment. However, these measures must be
applied in the same way to both national and foreign businesses: members must not
use environmental protection measures as a means of introducing discriminatory
trade barriers.

7. Inclusion
The WTO seeks to build a more inclusive trading system that will allow more women
and small businesses to participate in trade and to reap the economic benefits of
global trading.
 178

Commercial Trade Policy

A commercial policy or trade policy is a governmental policy governing trade with
other countries. This covers tariffs, trade subsidies, import quotas, voluntary export
restraints, and restrictions on the establishment of foreign-owned businesses,
regulation of trade in service, and other barriers to international trade.

Countries that are part of an economic union often have a single commercial policy
that determines how member countries can interact with non-member countries.
For example, member countries of the European Union have a common commercial
policy.

In modern times, the commercial policy of every country is generally based on the
encouragement of exports and the discouragement of imports. The exports are
encouraged by giving preferential freight rates on exports, subsidies, etc. Imports are
hindered by erecting the tariffs walls, exchange controls, quota system, buy at the
home campaign, etc.

Features/ Objectives of Commercial Policies

1. To improve & extend international aid/co-operation through the exchange of

goods & making a contract with different countries.

2. To create an international market for our local products to increase export.

3. To participate in the international trade fair to introduce our local products

through govt or private initiatives.

4. To take proper steps for promoting the export of non-traditional items.

5. To launch publicity campaigns for creating a new market for traditional

products.

6. To create a favorable environment for foreign trade/exchange.

7. To provide export facilities to exporters.

8. To reduce the import of luxurious goods.

9. To import raw materials, machinery, parts & accessories

10. To promote the establishment of export-oriented industries.

 179

11. To meet the need for essential goods.

12. To encourage govt. & private sector industry for foreign trade.

13. To stabilize the foreign exchange rate.

14. To promote the export of man-power, to increase the earning of foreign

currencies.

15. Encourage domestic and foreign investment in overall industrial development.

16. Encourage especially the development of small & cottage industries.

17. Encourage the development of agro-based and agro-supportive industries.

18. Stimulate the development of industries based on indigenous raw materials

and indigenous technology

19. Motivate investment in the intermediate and basic industries

20. Create possible opportunities for revitalizing and rehabilitating controlling the
quality of products;

21. Take appropriate measures for preventing environmental pollution and

maintaining the ecological balance.

22. Control the internal/external trade and other commercial activities of the
economy

Instruments of Commercial Policy

1. Tariff
- A tariff is a tax or duty levied on the traded commodity as it crosses a national
boundary.
- An import tariff is a duty on the imported commodity, while an export tariff is a
duty on the exported commodity.
- Tariffs can be ad valorem, specific, or compound.
- The ad valorem tariff is expressed as a fixed percentage of the value of the
traded commodity.
- The specific tariff is expressed as a fixed sum per physical unit of the traded
commodity.
- Finally, a compound tariff is a combination of an ad valorem and a specific
tariff.
 180

2. Quotas
- An import quota is a direct restriction on the quantity of some good that may
be imported.
- The restriction is usually enforced by issuing licenses to some groups of
individuals or firms.
- For example, the United States has a quota on imports of foreign cheese.
- The only firms allowed to import cheese are certain trading companies, each
of which is allocated the right to import a maximum number of pounds of
cheese each year.

3. Voluntary Export Restraint

- Voluntary export restraint refers to the case where an importing country
induces another nation to reduce its exports of a commodity “voluntarily,”
under the threat of higher-all round trade restriction when these exports
threaten an entire domestic industry.
- The United States negotiated voluntary export restraint on Japanese
automobile exports in 1981.

4. Export Subsidies
- An export subsidy is a payment to a firm or individual that ships a good
abroad.

5. Local Content Requirements

- A local content requirement is a regulation that requires that some specified
fraction of a final good be produced domestically.

6. Export Credit Subsidies

- This is like an export subsidy except that it takes the form of a subsidized loan
to the buyer.
- The United States has a government institution, the Export-Import Bank, that
is devoted to providing at least slightly subsidized loans to aid exports.

7. Red-tape Barriers
- Sometimes a government wants to restrict imports without doing so formally.
- It is easy to twist normal health, safety, and customs procedures to place
substantial obstacles in the way of trade.
- The classic example is the French decree in 1982 that all Japanese
videocassette recorders must pass through the tiny customs house at
Poitiers- effectively limiting the actual imports to a handful.
 181

8. Exchange Control
- Exchange control refers to the restrictions on the purchase and sale of foreign
exchange. It is operated in various forms by many countries, in particular
those who experience shortages of hard currencies.
- A government can use exchange controls to limit the number of products that
importers can purchase with a particular currency.
- For example, in 1985, China placed strict restrictions on foreign exchange
spending.