Esi SS

ESI SUMMARY SHEETS
S /NO. CHAPTER NAME PAGE

NO.
1 MEASUREMENT OF GROWTH 2
2 POVERTY ALLEVIATION & 53
EMPLOYMENT GENERATION
3 SUSTAINABLE DEVELOPMENT 73
4 ECONOMIC HISTORY OF INDIA 101
5 FISCAL POLICY REFORMS OF 1991 134
6 MONETARY POLICY REFORMS OF 1991 186
7 POLITICAL ECONOMY 233
8 INDUSTRIAL & LABOUR POLICY 251
9 INDIAN AGRICULTURE 298
10 SERVICES SECTOR 330
11 REGIONAL ECONOMIC COOPERATION 338
12 INTERNATIONAL ECONOMIC 366
INSTITUTIONS
13 BALANCE OF PAYMENTS 399
14 EXPORT & IMPORT POLICY 440
15 INTERNATIONAL ECONOMIC ISSUES 453
16 MULTICULTURALISM 482
17 DEMOGRAPHIC TRENDS 500
18 URBANIZATION & MIGRATION 523
19 GENDER ISSUES 551
20 SOCIAL JUSTICE 584
21 SOCIAL MOVEMENTS 619
22 INDIAN POLITICAL SYSTEM 651
23 HUMAN DEVELOPMENT 688
24 SOCIAL SECTIONS 707
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MEASUREMENT OF
GROWTH: NATIONAL
INCOME & PER
CAPITA INCOME
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Contents
1 Part I: Basics of Economy .......................................................................................................................4
1.1 What is Economy?...........................................................................................................................4
1.2 Why do we study Economy? ...........................................................................................................5
1.3 Meaning of Macroeconomics .........................................................................................................6
1.3.1 Distinction between Macroeconomics and Microeconomics .................................................6
1.4 Factors of Production ......................................................................................................................7
1.4.1 Land..........................................................................................................................................7
1.4.2 Labour ......................................................................................................................................7
1.4.3 Capital ......................................................................................................................................7
1.4.4 Entrepreneurship .....................................................................................................................8
1.5 Factor Payments .............................................................................................................................8
1.6 Economic Agents .............................................................................................................................8
1.6.1 Households ..............................................................................................................................8
1.6.2 Firms ........................................................................................................................................9
1.6.3 Government .............................................................................................................................9
1.6.4 Foreign Sector ........................................................................................................................10
1.7 Types of Economic System ............................................................................................................10
1.7.1 Capitalism ..............................................................................................................................10
1.7.2 Socialism ................................................................................................................................11
1.7.3 Mixed Economy .....................................................................................................................12
1.8 What are the various sectors of Economy? ..................................................................................13
1.8.1 Primary activities ...................................................................................................................13
1.8.2 Secondary activities ...............................................................................................................13
1.8.3 Tertiary activities ...................................................................................................................13
1.8.4 Quaternary activities .............................................................................................................13
1.8.5 Quinary activities ...................................................................................................................13
1.9 What are the different types of Goods? .......................................................................................14
1.9.1 What are Goods? ...................................................................................................................14
1.9.2 Economic Goods and Free Goods ..........................................................................................15
1.9.3 Consumer Goods and Producer Goods .................................................................................15
1.9.4 Single Use and Durable Use Goods .......................................................................................15
1.9.5 Private Goods and Public Goods............................................................................................16
1.9.6 Intermediate Goods ...............................................................................................................17
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1.9.7 Intermediate Goods Versus Consumer & Capital Goods ......................................................18

1.9.8 Distinction Between Goods & Services .................................................................................18
2 Part II: Circular Flow of Income in a Simple Economy ..........................................................................19
2.1 Two Sector Model .........................................................................................................................19
2.2 Four Sector Model ........................................................................................................................21
3 Part III: Calculating Gross Domestic Product........................................................................................23
3.1 Product or Value Added Method ..................................................................................................23
3.2 Expenditure Method .....................................................................................................................27
3.3 Income Method.............................................................................................................................29
3.4 Comparison of the Three Methods of Estimating GDP ................................................................30
4 Part IV: Important Macroeconomic Identities .....................................................................................31
4.1 Gross Investment, Depreciation and Net Investment ..................................................................31
4.2 Net Domestic Product ...................................................................................................................32
4.3 Gross National Product .................................................................................................................33
4.4 Net National Product ....................................................................................................................34
4.5 Net National Product at Market Price (NNPMP) & Net National Product at Factor Cost (NNPFC) .34
4.6 Personal Income............................................................................................................................35
4.7 Personal Disposable Income .........................................................................................................37
4.8 Per Capita Income .........................................................................................................................37
4.9 Nominal and Real GDP ..................................................................................................................38
4.9.1 Nominal GDP..........................................................................................................................38
4.9.2 Real GDP ................................................................................................................................39
4.9.3 Base Year................................................................................................................................40
4.9.4 Why is calculating Real GDP important? ...............................................................................40
4.9.5 GDP Deflator ..........................................................................................................................41
4.10 Factor Cost, Basic Prices and Market Prices .................................................................................42
4.11 Why is GVA calculated? ................................................................................................................44
5 Part V: Growth, Welfare & Development ............................................................................................45
5.1 Sources of Economic Growth ........................................................................................................45
5.2 Types of Economic Growth ...........................................................................................................45
5.3 GDP & Welfare ..............................................................................................................................46
5.4 Limitations of GDP ........................................................................................................................46
5.5 What is development? ..................................................................................................................48
5.6 What is the difference between Growth and Development in the above context? ....................49

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6 Part VI: Summary ..................................................................................................................................50

6.1 Gross Domestic Product at Market Prices (GDPMP) ......................................................................50
6.2 GDP at Factor Cost (GDPFC) ...........................................................................................................50
6.3 Net Domestic Product at Market Prices (NDPMP) .........................................................................50
6.4 NDP at Factor Cost (NDPFC) ...........................................................................................................50
6.5 Gross National Product at Market Prices (GNPMP) .......................................................................51
6.6 GNP at Factor Cost (GNPFC) ...........................................................................................................51
6.7 Net National Product at Market Prices (NNPMP)...........................................................................51
6.8 NNP at Factor Cost (NNPFC) OR National Income (NI) ..................................................................51
Welcome to the exciting world of Economy learners! You may surely wonder what is exciting about
Economy. But as you go through this course, you will start developing a crystal-clear understanding of
Economy in general and Indian Economy in particular. You will start developing a logical understanding of
concepts that were earlier rote learnt, ignored or dreaded. You will forever be a part of an Economy and
this course will help you appreciate the various facets, ups and downs of the economy that you are a part
of. We have sub-divided this chapter into the following six parts:
1 Part I: Basics of Economy
1.1 What is Economy?

• It is the system of production, distribution, and consumption of goods and services that a society
uses to address the problem of scarcity.
• The essential task of an economy is to transform resources into useful goods and services (the act of
production), then distribute or allocate these products to useful ends (the act of consumption).

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ADAM SMITH: A Scottish professor (born 1723, died 1790) who is considered the father of modern
economics for his revolutionary book, entitled ‘An Inquiry into the Nature and Causes of the Wealth
of Nations’ published in 1776.
Concept Check
Q. ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ was published by
(a) David Ricardo
(b) Jean-Baptiste Say
(c) Thomas Malthus
(d) John Stuart Mill
(e) Adam Smith
Answer: E
1.2 Why do we study Economy?

• The basic problem of scarcity requires every society to determine: What goods to produce? How to
produce the goods? and Who receives the goods that are produced?
• The three basic questions that an economy must answer because of limited resources and unlimited
wants and needs are: What? How? and For Whom?
• Answering the 'What?' question of allocation determines the types and quantities of goods and
services produced with society's limited resources. Should we produce more food crops or cash crops?
Luxury items or essential items? Weapons or medical equipment?
• Answering the "How?" question of allocation determines how society's limited resources will be
combined in the production goods. Do we produce houses with wood or bricks? Do we make cars
with automated robots or human labor?
• The third of the three questions of allocation is: Who receives the goods and services produced with
society's resources? What if people buy goods with their incomes? Now, there is a thought. But, what
about people who have no income? With limited resources, the production of goods is also limited.
With limited goods, everyone cannot have everything. Society has to decide who gets what.
As resources are always in short supply, the British economists Lionel Robbins in 1935 described
Economics as 'the science of scarcity'.
Concept Check

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Q. Economics is often defined as a

(a) science of prosperity.
(b) science of wealth.
(c) science of money.
(d) science of scarcity.
(e) science of thrift.
Answer: D
1.3 Meaning of Macroeconomics

• Macroeconomics, as a separate branch of economics, emerged after the British economist John
Maynard Keynes published his celebrated book The General Theory of Employment, Interest and
Money in 1936.
• Macroeconomics is a branch of economics that studies how an overall economy—the market systems
that operate on a large scale—behaves. Macroeconomics studies economy-wide phenomena such as
inflation, rate of economic growth, national income, gross domestic product (GDP), and changes in
unemployment.
JOHN MAYNARD KEYNES: A British economist (born 1883, died 1946) who is most noted for his work
‘The General Theory of Employment, Interest, and Money’, published 1936. The ‘The General Theory’
revolutionized economic theory of the day, forming the foundation of Keynesian economics and
creating the modern study of macroeconomics.
Animal spirits is the term Keynes used in ‘The General Theory’ to describe the instincts, proclivities and
emotions that ostensibly influence and guide human behavior, and which can be measured in terms of,
for example, consumer confidence.
1.3.1 Distinction between Macroeconomics and Microeconomics

• Meaning
o Microeconomics: It studies issues and problems at the level of an individual firm, an individual
household etc.
o Macroeconomics: It studies issues and problems at the level of the economy as a whole.
• Concern
o Microeconomics: It is basically concerned with determination of output and price for an
individual firm or industry.

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o Macroeconomics: It is basically concerned with determination of aggregate output and

general price level in the economy as a whole.
• Focus
o Microeconomics: Its focus is on maximisation of individual’s gain.
o Macroeconomics: Its focus is on maximisation of social welfare.
• Scope
o Microeconomics: It has a narrow scope, i.e., an individual person, an individual market, etc.
o Macroeconomics: It has a very wide scope, i.e. a state, or a country.
Concept Check
Q. Macroeconomics does not study
(a) inflation rate.
(b) trend of gross domestic product.
(c) changes in unemployment levels.
(d) profitability of a firm.
(e) distribution of national income.
Answer: D
1.4 Factors of Production

• These are four basic factors used to produce goods and services in the economy-- Land, Labour,
Capital and Entrepreneurship.
1.4.1 Land
• Land is the naturally occurring materials of the planet that are used for the production of goods and
services, including the land itself; the minerals and nutrients in the ground; the water, wildlife, and
vegetation on the surface; and the air above.
1.4.2 Labour
• Labour is the mental and physical efforts of humans (excluding entrepreneurial organization) used
for the production of goods and services.
1.4.3 Capital
• Capital is the manufactured, artificial, or synthetic goods used in the production of other goods,
including machinery, equipment, tools, buildings, and vehicles. Capital is the produced factor of
production.

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1.4.4 Entrepreneurship
• Entrepreneurship is the special sort of human effort that takes on the risk of bringing labor, capital,
and land together to produce goods. Risk is a key component here.
Concept Check
Q. Capital formation in an economy is undertaken by
(a) Firms
(b) Households
(c) Government
(d) External Sector
(e) None of the above
Answer: A
1.5 Factor Payments

• Factor payments are frequently categorized according to the services of the productive resource.
o Wages are paid for the services of labour.
o Interest is the payment for the services of capital
o Rent is the payment for the services of land.
o Profit is the factor payment to entrepreneurship.
Concept Check
Q. Indicate whether the statement is true or false.
Wages are an example of a transfer payment because there is a transfer of payment from the firm to
the worker.
Answer: False
1.6 Economic Agents

• By economic units or economic agents, we mean those individuals or institutions which take economic
decisions.
• Four, broadly defined, economic agents are: households, firms, government and “the rest of the
world”.
1.6.1 Households
• All those people living under one roof are considered a household.
• Households do two fundamental things vital to the economy.
o Demand goods and services from product markets
o Supply labour, capital, land, and entrepreneurial ability to resource markets.
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• Households use their limited resources (labour, capital, land, and entrepreneurial ability) to fulfil their
wants.
• Households undertake consumption expenditure.
• Consumer spending (or consumption expenditure) is the total money spent on final goods and
services by individuals and households for personal use and enjoyment in an economy.
Contemporary measures of consumer spending include all private purchases of durable goods,
nondurable goods, and services.
1.6.2 Firms
• The business sector includes the profit-motivated firms that engage in the production of goods and
services.
• These firms combine the services of the four factors of production, which they acquire from the
household sector, to pursue their productive activities.
• The primary reason for the existence of the business sector is to produce the goods that satisfy the
wants and needs of the household sector.
• Although the business sector is largely responsible for producing and supplying goods and services to
the household sector and the rest of the economy, they do a little buying of their own. From a
macroeconomic perspective, the business sector is responsible for capital investment expenditures.
• Investment Spending (or investment expenditure): Money spent on capital goods, or goods used in
the production of capital, goods, or services. Investment spending may include purchases such as
machinery, land, production inputs, or infrastructure. Investment spending should not be confused
with investment, which refers to the purchase of financial instruments such as stocks, bonds, and
derivatives. It is also called as capital formation.
1.6.3 Government
• The government sector includes all levels of government--federal, state, and local. These three levels
intervene in the economy by collecting and spending tax revenue and by establishing and enforcing
laws, rules, and other regulations.
• The Role of the Government
o Establishing and Enforcing the Rules of the Game.
o Promoting Competition
o Regulating Natural Monopolies
o Producing public goods
o Income redistribution
o Employment, price stability, economic growth

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• To fund its activity, government raises revenue by way of collecting taxes, fees and fines.
• Government expenditure refers to the purchase of goods and services, which include public
consumption and public investment, and transfer payments consisting of income transfers (pensions,
social benefits).
1.6.4 Foreign Sector

• The foreign sector includes anything and everything that lies beyond the borders of a nation.
• The primary role it plays in the domestic economy is foreign trade. The domestic household,
business, and government sectors purchase imports produced in the foreign sector. The foreign
sector buys exports produced by the domestic business sector.
o Exports and imports are often combined into a single concept--net exports. Net exports are
simply exports minus imports. This single term provides a handy, short-cut way of noting the
trade interaction with the foreign sector. If net exports are positive, then exports exceed
imports. If net exports are negative, then imports exceed exports.
1.7 Types of Economic System
1.7.1 Capitalism
• Capitalism, also called market economy, is a type of economy based on
o private ownership of most resources, goods, and other stuff (private property);
o freedom to generally use the privately-owned resources, goods, and other stuff to get the
most wages, rent, interest, and profit possible; and
o a system of relatively competitive markets.
• While government establishes the legal "rules of the game" for capitalism and provides assorted
public goods, like national defense, education, and infrastructure, most production, consumption, and
resource allocation decisions are left up to individual businesses and consumers.
• In capitalism, only those consumer goods will be produced that are in demand, i.e., goods that can
be sold profitably either in the domestic or in the foreign markets.
• In a capitalist society the goods produced are distributed among people not on the basis of what
people need but on the basis of Purchasing Power—the ability to buy goods and services.
Adam Smith (1723-1790) laid down certain ideas that led to the birth of capitalism. He raised his voice
against the heavy-handed government regulation of commerce and industry of the time which did not
allow the economy to tap its full economic worth and reach the level of well-being. Stressing 'division
of labour', an environment of 'laissez-faire' (non-interference by the government), he proposed that
the 'invisible hand' of 'market forces' (price mechanism) will bring a state of equilibrium in the
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economy and a general wellbeing to the countrymen. For such an economy to function for public well-
being, he has acknowledged the need of competition in the market.
Concept Check
Capitalism: What does the capitalist thinker say about the following in a capitalistic market system:
1. prices,
2. competition,
3. private property,
4. exchange,
5. government,
6. income distribution,
7. and power?
Do attempt the question before taking a sneak-peak at the answer!
Answer: 1. Prices – controlled by market; 2. Competition – multiple sellers compete to sell their goods
and services; 3. Private Property – allowed; 4. Exchange – driven by market forces; 5. Government –
role of facilitator and regulator; 6. Income distribution – based on one’s earnings in the market
economy; 7. Power – what do you think?
1.7.2 Socialism
• In theory, an economy that is a transition between capitalism and communism.
• It is based on
o government, rather than individual, ownership of resources
o worker control of the government, such that workers, rather than capitalist, control capital
and other productive resources
o income allocated on need rather than on resource ownership or contribution to production
(using the needs standard rather than the contributive standard).
• In a socialist society the government decides what goods are to be produced in accordance with the
needs of society.
Rooted in the ideas of historical change proposed by the German philosopher Karl Marx (1818-1883)
more specifically, this kind of economic system came up in the erstwhile USSR after the Bolshevic
Revolution (1917) and got its ideal shape in the People's Republic of China (1949).

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* Market failure happens when the price mechanism fails to allocate scarce resources efficiently or
when the operation of market forces lead to a net social welfare loss. Complete market failure occurs
when the market simply does not supply products at all - we see "missing markets". Partial market failure
occurs when the market does actually function but it produces either the wrong quantity of a product or
at the wrong price.
Concept Check:
Socialism: What does the socialist thinker say about the following in a capitalistic market system:
1. prices,
2. competition,
3. private property,
4. exchange,
5. government,
6. income distribution,
7. and power?
Answer: 1. Prices – controlled by government; 2. Competition – limited competition between
government firms; 3. Private Property – not allowed; 4. Exchange – determined by government; 5.
Government – role of producer, facilitator and regulator; 6. Income distribution – based on one’s need;
7. Power – what do you think?
1.7.3 Mixed Economy

• An economy, or economic system, that relies on both markets and governments to allocate
resources.
• While, in theory, we could have a pure market economy or a pure command economy, in the real
world all economies are mixed, relying on both markets and governments for allocation decisions.
• Markets allocate resources through voluntary choices made by living, breathing people. Government
forces allocation through involuntary taxes, laws, restrictions, and regulations. Both institutions play
vital roles in an economy.
Concept Check
Q. According to the analysis of the British economist John Maynard Keynes...
a) ...markets coordinate supply and demand so that a policy of laissez-faire would prevent recession.
b) ...economic fluctuations were the cumulative result of mistakes made by businesses and
households in an uncertain world.

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c) ...government demand could be used to smooth fluctuations in aggregate output and income.
d) ...supply creates its own demand through the circular flow of economic activity
e) None of the above
Answer: C
1.8 What are the various sectors of Economy?

• A nation’s economy can be divided into sectors to define the proportion of a population engaged in
different activities.
1.8.1 Primary activities

• The primary sector of the economy extracts or harvests products from the earth such as raw
materials and basic foods.
• Activities associated with primary economic activity include agriculture (both subsistence and
commercial), mining, forestry, grazing, hunting and gathering, fishing, and quarrying. The packaging
and processing of raw materials are also considered to be part of this sector.
1.8.2 Secondary activities

• The secondary sector of the economy produces finished goods from the raw materials extracted by
the primary economy. All manufacturing, processing, and construction jobs lie within this sector.
• Activities associated with the secondary sector include metalworking and smelting, automobile
production, textile production, the chemical and engineering industries, aerospace manufacturing,
energy utilities, breweries and bottlers, construction, and shipbuilding.
1.8.3 Tertiary activities

• The tertiary sector of the economy is also known as the service industry.
• Activities associated with this sector include retail and wholesale sales, transportation and
distribution, restaurants, clerical services, media, tourism, insurance, banking, health care, and law.
1.8.4 Quaternary activities

• The fourth sector of the economy, the quaternary sector, consists of intellectual activities often
associated with technological innovation. It is sometimes called the knowledge economy.
• Activities associated with this sector include government, culture, libraries, scientific research,
education, and information technology.
1.8.5 Quinary activities

• Some economists further narrow the quaternary sector into the quinary sector, which includes the
highest levels of decision-making in a society or economy.

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• This sector includes top executives or officials in such fields as government, science, universities,
nonprofits, health care, culture, and the media.
• It may also include police and fire departments, which are public services as opposed to for-profit
enterprises.
• Economists sometimes also include domestic activities (duties performed in the home by a family
member or dependent) in the quinary sector. These activities, such as child care or housekeeping, are
typically not measured by monetary amounts but contribute to the economy by providing services for
free that would otherwise be paid for.
Concept Check
Q. Match the following:

Select the correct answer using the code given below:
Sector of
Economic Activity
Economy
1. Primary A. Fashion
2. Secondary B. Forestry
3. Tertiary C. Shipbuilding
4. Quaternary D. Information
(a) 1 – C, 2 – B, 3 – A, 4 – D
(b) 1 – B, 2 – C, 3 – A, 4 – D
(c) 1 – B, 2 – C, 3 – D, 4 – A
(d) 1 – B, 2 – A, 3 – C, 4 – D
Answer: B
1.9 What are the different types of Goods?
1.9.1 What are Goods?

A commodity, or a physical, tangible item that satisfies some human want or need, or something that
people find useful or desirable and make an effort to acquire it.

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1.9.2 Economic Goods and Free Goods

Economic Goods
• Economic goods are those goods (manmade or free gifts of nature) whose demand is more than
supply (i.e. they are scarce). They command a price and they can be bought in the market.
• Example: toothpaste, soap, shaving cream etc.
Free Goods
• We can define free goods as goods which possess utility but which are not scarce.
• Free goods are free gifts of nature. They are available in abundance i.e. in unlimited quantity and the
supply is much more than the demand.
• Example: Sand, clean air, water etc.
1.9.3 Consumer Goods and Producer Goods

Consumer Goods
• Consumer goods are those goods, which satisfy the want of consumers directly. They are goods,
which are used for consumption.
• Example: bread, fruits, milk, clothes etc.
Producer Goods
• Producer goods are those goods, which satisfy the want of consumers indirectly. As they help in
producing other goods, they are known as producer goods.
• Example: machinery, tools, raw materials, seeds, manure and tractor etc. are all example of producer
goods.
1.9.4 Single Use and Durable Use Goods

Single Use Goods
• Single use goods are those goods, which can be used only once. They are finished in one use itself.
• Example: bread, butter, egg, milk etc. are the single use consumer goods as they are consumed
immediately and once and for all.
• Similarly, single use producer goods are exhausted in one production process. Example: coal, raw
material, seeds, manure etc.
Durable Use Goods
• Durable use goods are those goods, which can be used again and again for a long period of time.

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• Durable use consumer goods are cloth, furniture, television, scooter etc. that can be used by
consumer again and again.
• Durable use producer goods are used in production again and again for example, machines, tools,
tractors and implements etc. This does not mean that repeated use of these goods does not make
any difference to them.
• In fact, the value of these goods gets depreciated after continuous use.
Concept Check
Which of the following is/are examples of durable consumer goods?
1. Petrol
2. Computer
3. Bread
4. Automobiles
(a) 1, 3 and 4 only
(b) 2 only
(c) 2 and 4 only
(d) 1, 2, 3, and 4
Answer: C
1.9.5 Private Goods and Public Goods

Private Goods
• All goods that are privately owned and are exclusively enjoyed by individuals are called private
goods. For example, all the goods owned by you are private goods.
• Examples: watch, pen, scooter, books, table, chair, bed, clothes etc. If you own a factory then its
building, machinery; tools etc. are your private goods.
Public Goods
• Public goods are those goods, which are owned and enjoyed by the society as a whole. They are
available to all people in a society without any discrimination, i.e. no one is denied from the
consumption of public goods.
• Both government and private entrepreneurs may produce public goods, but it is usually the former.
• Example: roads, bridges, park, town hall etc. are all collectively owned.
• Economists refer to public goods as "non-rivalrous" and "non-excludable," and most such goods are
both.

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• Their non-rivalry refers to the fact that the goods don't dwindle in supply as people consume them;
a country's defenses, for example, do not run out or diminish as its population grows.
• Non-excludability means just that; the good is available to all and cannot be withheld, even from
people who do not contribute to its public funding.
• That characteristic, in turn, leads to what is called the free-rider problem with public goods. Since you
need not contribute to the provision of a public good to benefit from it, some people will inevitably
choose to use the good and yet shirk the public responsibility to help pay for it.
Concept Check
Q. Which of the following options is correct with respect to ‘Public Goods’?
(a) They are considered non-rivalrous as they don't dwindle in supply as people consume them.
(b) They are considered non-excludable as they are available to all and cannot be withheld even from
people who do not contribute to its public funding.
(c) They are associated with free-rider problem.
(d) All of the above
Answer: D
1.9.6 Intermediate Goods

• An intermediate good is a product used to produce a final good or finished product—also referred to
as a consumer good.
• Intermediate goods are vital to the production process, which is why they are also called producer
goods. Industries sell these goods to each other for resale or to produce other goods.
• These goods are also called semi-finished products because they are used as inputs to become part
of the finished product. When they are used in the production process, they are transformed into
another state.
Concept Check
Q. Which of the following is not an example of ‘intermediate good’?
(a) Cotton fiber used by a spinning mill.
(b) Sugarcane used by a sugar mill.
(c) Coffee beans used by a café.
(d) Tea leaves used at home.
(e) Synthetic rubber used by a tire manufacturer.
Answer: D

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1.9.7 Intermediate Goods Versus Consumer & Capital Goods

• Intermediate goods can be used in production, but they can also be consumer goods. How it is
classified depends on who buys it.
• If a consumer buys a bag of sugar to use at home, it is a consumer good (final good). But if a
manufacturer purchases sugar to use during the production of another product, it becomes an
intermediate good.
• Capital goods, on the other hand, are assets that are used in the production of consumer goods. Key
thing to note about capital goods is that they don’t transform, or change shape in the production
process.
Concept Check
Q. Which of the following options is correct with respect to ‘Capital Goods’?
(a) They don’t transform, or change shape in the production process.
(b) They are bought for meeting immediate need of the consumer.
(c) They are naturally available.
Answer: A
1.9.8 Distinction Between Goods & Services

• Goods are tangible in nature i.e. they can be seen and touched. Services are non-tangible in nature
i.e. they can neither be seen nor be touched.
• There is a time gap between production and consumption of goods as they are produced first and
consumed later. There is no time gap between the production and consumption of services. That is
why they are produced and consumed simultaneously.
• Goods can be stored and utilized when required. Services cannot be stored.
• Goods can be transferred from one place to another. Transfer of service is not possible.
Concept Check
Q. Match the following pairs correctly:

Type of Good Example
1. Durable Use Good A. Coal

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2. Consumer Good B. Highway
3. Single Use Good C. Sewing Machine
4. Public Good D. Television
5. Capital Good E. Milk
(a) 1 – A, 2 – C, 3 – D, 4 – B, 5 – E
(b) 1 – C, 2 – E, 3 – A, 4 – D, 5 – B
(c) 1 – C, 2 – D, 3 – B, 4 – A, 5 – E
(d) 1 – D, 2 – E, 3 – A, 4 – B, 5 – C
(e) 1 – E, 2 – C, 3 – D, 4 – B, 5 – A
Answer: D
2 Part II: Circular Flow of Income in a Simple Economy

Part II deals with ‘Circular Flow of Income in a Simple Economy’. In this part we will explore the linkages
between various economic agents about whom we have studied in Part I.
The circular flow model is a fundamental representation of macroeconomic activity among the major
players in the economy--consumers, producers, government, and the rest of the world.
2.1 Two Sector Model
• The simplest circular flow model contains two sectors (household and business) and two markets
(product and resource). This model highlights the core circular flow of production, income, and
consumption.

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• The households receive their payments from the firms for productive activities they perform for the
latter.
• The aggregate consumption by the households of the economy is equal to the aggregate
expenditure on goods and services produced by the firms in the economy.
• We can measure the uppermost flow (at point A) by measuring the aggregate value of spending that
the firms receive or for the final goods and services which they produce. This method will be called
the expenditure method.
• If we measure the flow at point B by measuring the aggregate value of final goods and services
produced by all the firms, it will be called product method.
• At point C, measuring the sum total of all factor payments which is made by firms to households in
consideration of factor services will be called income method.
KEY DEFINITION
Gross Domestic Product (GDP): GDP is the total monetary or market value of all the final goods and
services produced within a country's borders in a specific time period. GDP provides an economic
snapshot of a country, used to estimate the size of an economy and growth rate. It can be calculated in
three ways, using expenditures, production, or incomes.
Final Goods and Services: Goods and services that are available for purchase by their ultimate or
intended user with no plans for further physical transformation or as an input in the production of other
goods that will be resold. Gross domestic product seeks to measure the market value of final goods.
Final goods are purchased through product markets by the four basic macroeconomic sectors
(household, business, government, and foreign) as consumption expenditures, investment
expenditures, government purchases, and exports.

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Concept Check
Indicate whether the statement is true or false.
For an economy as a whole, income equals expenditure because the income of the seller must be equal
to the expenditure of the buyer.
Answer: True
2.2 Four Sector Model
• The circular flow model in four sector economy provides a realistic picture of the circular flow in an
economy. Four sector model studies the circular flow in an open economy which comprises of four
economic agents viz, the household sector, business sector (firms), government sector, and foreign
sector.
• Household Sector
o Receipts:
1. The household sector receives factor income in the form of factor payments (rent,
wages, interest, and profit) from the business sector (firms). Similarly it provides factor
services to government, external sector in consideration of factor income.
2. Households also receives transfer payments from the government sector. Transfer
payments are payments which are made without any counterpart of services received
by the payer. For examples, gifts, scholarships, pensions.
3. Borrowings from the financial market.
o Payments:

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1. The income of the household sector flows into the business sector, government sector,
financial markets and foreign sector in the form of consumption expenditure, tax
payment, savings and imports respectively.
• Firms
o Receipts: The principle receipts of the business sector constitute of
1. Income from the sale of goods and services (firms receive consumption expenditure
from households).
2. Receipts from exports.
3. Subsidies from the government sector.
4. Borrowings from the financial market.
o Payments: Factor payments, tax payments, import payments, and savings constitute the
principal payments from the business sector to the household sector, government sector,
foreign sector and the financial market respectively.
• Government Sector
o Receipts: The major source of income for the government sector include the taxes paid by
household and business sector. Government can also borrow money from the financial market.
o Payments:
1. The government sectors make payments to different sectors in the form of transfer
payments, subsidies, grants, etc.
2. It pays to the business sector in return for the goods purchased, makes transfer
payments like pension funds, scholarships, etc. to the household sector.
3. If the government receipts are greater than the expenses, the surplus goes to capital
market.
4. In case of cash deficit, the government borrows from the capital market to maintain a
balance in the economy.
• Foreign Sector (External Sector)
o Receipts: The foreign sector receives income from the households and the business sector (of
the domestic country, say India) in return for the goods and services imported by the latter.
o Payments: Foreign sectors need to make payment to the business sector (of the domestic
country, say India) from where imports have been made. Foreign sector also makes payment
for factor services provided by households in the domestic sector.
Concept Check
Q. Which of the following is not a leakage from the circular flow of income and expenditure
(a) Imports

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(b) Government purchases

(c) Taxes net of government transfers
(d) Saving
Answer: B
3 Part III: Calculating Gross Domestic Product

There are multiple approaches that can be adopted for the estimation of GDP. First approach is referred
to as the Product or Value Added Method. In this approach we simply add the ‘value added’ by various
agents in an economy. Let us understand the meaning of the term ‘value added’ and how it can help us in
estimating the GDP.
3.1 Product or Value Added Method

Example of Value Added
Example 1
Example 2
In the above examples, we can visualise the process of value added as follows:
• Example 1: A farmer starts his operation using tools, seeds, water and fertiliser apart from other
inputs. All these inputs help in the production of cane sugar. So essentially, seed + water + fertiliser
+ farmer’s efforts has resulted in the formation of cane sugar. This cane sugar can be converted

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into sugar or into sugarcane juice! Now imagine if you were hungry, what would you prefer to
have? Would you prefer to have seeds or fertiliser? Or would you prefer to have cane sugar? Or
would sugarcane juice be the best? I think sugarcane juice might be the best! This is what value
addition does. It transforms intermediate goods into final goods that can satisfy a consumer’s
needs.
• Example 2: Wheat is supplied by a farmer to a baker who then coverts the wheat into breads,
cakes and an assortment of other delicious products. Again, if you were hungry, what would you
prefer to have? Wheat, wheat flour or bread?
Now that you have understood the meaning of value addition let us consider a simplified (but a
conceptually correct) model that we will be using to calculate GDP.
• In product method we calculate the aggregate annual value of goods and services produced (if a year
is the unit of time).
Farmer-Baker Model
• Let us suppose that there are only two kinds of producers in the economy. They are the wheat
producers (or the farmers) and the bread makers (the bakers). The wheat producers grow wheat and
they do not need any input other than human labour. They sell a part of the wheat to the bakers. The
bakers do not need any other raw materials besides wheat to produce bread.
• Let us suppose that in a year the total value of wheat that the farmers have produced is Rs 100. Out
of this they have sold Rs 50 worth of wheat to the bakers. The bakers have used this amount of wheat
completely during the year and have produced Rs 200 worth of bread. What is the value of total
production in the economy? If we follow the simple way of aggregating the values of production of
the sectors, we would add Rs 200 (value of production of the bakers) to Rs 100 (value of production
of farmers). The result will be Rs 300.
• A little reflection will tell us that the value of aggregate production is not Rs 300. The farmers had
produced Rs 100 worth of wheat for which it did not need assistance of any inputs. Therefore the
entire Rs 100 is rightfully the contribution of the farmers. But the same is not true for the bakers. The
bakers had to buy Rs 50 worth of wheat to produce their bread. The Rs 200 worth of bread that they
have produced is not entirely their own contribution. To calculate the net contribution of the bakers,
we need to subtract the value of the wheat that they have bought from the farmers. If we do not do
this, we shall commit the mistake of ‘double counting’. This is because Rs 50 worth of wheat will be
counted twice. First it will be counted as part of the output produced by the farmers. Second time, it
will be counted as the imputed value of wheat in the bread produced by the bakers.

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• Therefore, the net contribution made by the bakers is, Rs 200 – Rs 50 = Rs 150. Hence, aggregate
value of goods produced by this simple economy is Rs 100 (net contribution by the farmers) + Rs 150
(net contribution by the bakers) = Rs 250.
• The term that is used to denote the net contribution made by a firm is called its value added. We
have seen that the raw materials that a firm buys from another firm which are completely used up in
the process of production are called ‘intermediate goods’. Therefore, the value added of a firm is,
value of production of the firm – value of intermediate goods used by the firm.
KEY DEFINITION
Value added: Net contribution made by a firm in the process of production. It is defined as, Value of
production – Value of intermediate goods used.
Double Counting: The act of including the value of intermediate goods more than once in the value of
gross domestic product. Because the value, or price, of final goods includes the cost, or value, of all
intermediate goods used, including market transactions for intermediate separately in the
measurement of gross domestic product would lead to double counting.
• The value added of a firm is distributed among its four factors of production, namely, labour, capital,
entrepreneurship and land. Therefore wages, interest, profits and rents paid out by the firm must add
up to the value added of the firm.
Table summarising above explanation (all values in Rupees)
Farmer Baker
Total
100 200
Production
Intermediate
0 50
Goods Used
Value Added 100 200-50 = 150
• If we sum the gross value added of all the firms of the economy in a year, we get a measure of the
value of aggregate amount of goods and services produced in the economy in a year (just as we had
done in the wheat-bread example). Such an estimate is called Gross Domestic Product (GDP). Thus,
• GDP = Sum total of gross value added of all the firms in the economy.
• If there are N firms in the economy, each assigned with a serial number from 1 to N, then
o GDP = GVA1 + GVA2 + ..... + GVAN
• Therefore, GDP = ∑ GVAi
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KEY DEFINITION
Gross Domestic Product (GDP): GDP is the total value of all finished goods produced in the country in
one financial year. It doesn't matter if it is produced by citizens or foreigners. If they are located within
the country's boundaries, their production is included in GDP. To avoid double-counting, GDP includes
the final value of the product, but not the parts (or intermediate goods) that go into it. For example,
an Indian footwear manufacturer uses laces and other materials made in India. Only the value of the
shoe gets counted; the shoelace does not.
Concept Check
Q. Gross Domestic Product is the sum of the market value of the
(a) intermediate goods.
(b) final goods and services.
(c) manufactured goods.
(d) inferior goods and services.
(e) normal goods and services.
Answer: B
KEY DEFINITION
• Value Added method of calculating national income: Method of calculating the national income by
measuring the aggregate sum of gross value added of all the firms in an economy over a period of
time.
Concept Check
Q. Which of the following is/are not considered while calculating the Gross Domestic Product (GDP)
of a country?
(a) Purchase of vegetables by a restaurant
(b) Ice cream used by the households
(c) Plant and machinery used in a factory
(d) Garments purchased by consumers
Answer: A
Concept Check

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If a timber mart sells Rs 1,000 of timber to a carpenter and the carpenter uses the timber to build
furniture which he sells for Rs 5,000, the contribution to GDP is Rs 6,000.
Answer: False
3.2 Expenditure Method

The expenditure method is a system for calculating gross domestic product (GDP) that combines
consumption, investment, government spending, and net exports.
It is the most common way to estimate GDP. It says everything that the private sector, including
consumers and private firms, and government spend within the borders of a particular country, must add
up to the total value of all finished goods and services produced over a certain period of time.
The GDP under this method is calculated by summing up all of the expenditures made on final goods and
services.
There are four main aggregate expenditures that go into calculating GDP:
Consumption by households
• Let C be the aggregate final consumption expenditure of the entire economy.

• Notice that a part of C is spent on imports of consumption goods.
• Let Cm denote expenditure on the imports of consumption goods.
• Therefore C – Cm denotes that part of aggregate final consumption expenditure that is spent on the
domestic firms.
Investment by Businesses
• Let I be the aggregate final investment expenditure of the entire economy.

• Notice that a part of I is spent on imports of investment goods.
• Let Im denote expenditure on the imports of investment goods.
• Therefore I-Im denotes that part of aggregate final investment expenditure that is spent on the
domestic firms.
• Capital formation is a term used to describe the net capital accumulation during an accounting period
for a particular country. The term refers to additions of capital goods, such as equipment, tools,
transportation assets, and electricity. It is the result of investment activities undertaken by firms and
government.
Government Spending

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• Similarly, G – Gm stands for that part of aggregate final government expenditure that is spent on
the domestic firms, where G is the aggregate expenditure of the government of the economy and
Gm is the part of G which is spent on imports.
Spending by External Sector
• Exports (X), which is nothing but spending by the external sector on purchasing goods and services
produced by the domestic sector.
The formula for GDP is:
GDP = (C – Cm) + (I – Im) + (G – Gm) + X
It can also be written as:
GDP = C + I + G + (X – Cm – Im – Gm)
GDP = C + I + G + (X – (Cm + Im + Gm))
GDP = C + I + G + (X – M)
Where, M = Cm + Im + Gm (i.e. M = total imports)
Let us revisit the Farmer-Baker model and calculate the GDP using Expenditure Method
In the Farmer-Baker example that we have described before, the aggregate value of the output in the
economy by expenditure method will be calculated in the following way.
• In this method we add the final expenditures that each firm makes.
• The Rs 50 worth of wheat that the Farmer consumed will be counted as the final expenditure received
by him. (Assume that Farmer’s family pays Rs 50 to the Farmer for the wheat that they consume.)
• The Rs 50 worth of wheat which the Baker buys from the Farmer counts as intermediate goods,
hence it does not fall under the category of final expenditure.
• The Rs 200 worth of bread that Baker sells to his customers will be counted as the final expenditure
received by him (i.e. final expenditure incurred by households in buying the bread from Baker).
• Therefore, the aggregate value of output of the economy is Rs 200 (final expenditure received by the
baker) + Rs 50 (final expenditure received by the farmer) = Rs 250 per year.
KEY DEFINITION
Expenditure method of calculating national income: Method of calculating the national income by
measuring the aggregate value of final expenditure for the goods and services produced in an economy
over a period of time.
Concept Check

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Q. In an open economy, the Gross Domestic Product (Y) of the economy is: (C, I, G, X, M stand for
Consumption, Investment, Govt. Expenditure, total exports and total imports respectively.)
(a) Y = C + I + G + X
(b) Y = I + G –X + M
(c) Y = C + I + G + (X – M)
(d) Y = C – G + I + (X – M)
Answer: C
3.3 Income Method

The income approach to measuring gross domestic product is based on the accounting reality that all
expenditures in an economy should equal the total revenue generated by the production and sale of all
economic goods and services.
Therefore, by adding all of the sources of income together, a quick estimate can be made of the total
productive value of economic activity over a period.
The formula for GDP is:
GDP = W + P + In + R where
W = Total wages and salaries received by all factors of production
P = Total profits received by all factors of production
In = Total interest received by all factors of production
R = Total rent received by all factors of production.
Let us revisit the Farmer-Baker model and calculate the GDP using Income Method
In the Farmer-Baker example that we have described before, the aggregate value of the output in the
economy by income method will be calculated in the following way.
• In this method, we add the final income that each household receive.
• Since there are two actors in our story – the farmer and the baker, let us similarly assume that there
are only two households in the economy – farmer household and baker household.
• What is the income that the farmer household receive? You will remember that using no intermediate
products, farmer was able to produce wheat worth Rs 100. Hypothetically, if farmer were to sell this
entire output for Rs 100, what would be the farmer’s profit? It will be Rs 100. Assume that farmer

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household pays Rs 50 to the farmer for the wheat that they consume. And we know that baker paid Rs
50 to the farmer for the wheat former purchased from the latter. So essentially the income that farmer
takes back (in the form of profit) to his household is Rs 100.
• What is the income that the baker household receive? You will remember that using intermediate
goods worth Rs 50, baker produces output worth Rs 200. So, what is the profit that the baker makes?
It is Rs 150. So essentially the income that the baker takes back (in the form of profit) to his household
is Rs 150.
• Knowing that farmer and baker households are the only two households in the economy, what is the
GDP of this simple farmer-baker economy by income method? It is nothing but the sum of income
received by the two households, i.e. Rs 100 + Rs 150 = Rs 250.
KEY DEFINITION
Income method of calculating national income: Method of calculating national income by measuring
the aggregate value of final factor payments (= income) made in an economy over a period of time.
Concept Check
Q. As per the income method of calculating GDP, which of the following act as factors of production?
(a) Land
(b) Capital
(c) Entrepreneur
(d) Labour
(e) All of the above
Answer: E
3.4 Comparison of the Three Methods of Estimating GDP

Example: There are two firms, A and B. Suppose A uses no raw material and produces cotton worth Rs.
50. A sells its cotton to firm B, who uses it to produce cloth. B sells the cloth produced to consumers for
Rs. 200.
GDP in the Phase of Production or the Value Added Method
Value Added (VA) = Sales – Intermediate Goods

Thus,
VAA = 50 - 0 = 50
VAB = 200 - 50 = 150
Thus,
GDP = VAA + VAB = 200

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GDP in the Phase of Disposition or the Expenditure Method
GDP = Sum of final expenditure or expenditures on goods and services for end use
In the above case, final expenditure is expenditure by consumers on cloth. Therefore, GDP = 200.
GDP in the Phase of Distribution or Income Method
Let us look at the firms A and B again.

Now, of this 50 received by A, the firm gives Rs. 20 to the workers as wages, and keeps the remaining 30
as its profits.
Similarly, B gives 60 as wages and keeps 90 as profits (recall that 50 has been paid by B to A for cotton).
Recall that GDP by income method = sum total of factor incomes, which is equal to total wages received
(workers of A and B) and total profits earned (by A and B), which is equal to 80 + 120 = 200.
Concept Check
Q. Gross Domestic Product can be measured as the sum of
(a) final goods and services, intermediate goods, transfer payments, and rent.
(b) consumption, investment, government purchases, and net exports.
(c) consumption, transfer payments, wages, and profits.
(d) Net National Product, Gross National Product, and Disposable personal income.
(e) investment, wages, profits, and intermediate production.
Answer: B
4 Part IV: Important Macroeconomic Identities
4.1 Gross Investment, Depreciation and Net Investment

• That part of our final output that comprises of capital goods constitutes gross investment of an
economy. These may be machines, tools and implements; buildings, office spaces, storehouses or
infrastructure like roads, bridges, airports or jetties.
• But all the capital goods produced in a year do not constitute an addition to the capital stock already
existing.
• A significant part of current output of capital goods goes in maintaining or replacing part of the existing
stock of capital goods. This is because the already existing capital stock suffers wear and tear and
needs maintenance and replacement.
• A part of the capital goods produced this year goes for replacement of existing capital goods and is
not an addition to the stock of capital goods already existing and its value needs to be subtracted
from gross investment for arriving at the measure for net investment. This deletion, which is made

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from the value of gross investment in order to accommodate regular wear and tear of capital, is called
depreciation.
• So new addition to capital stock in an economy is measured by net investment or new capital
formation, which is expressed as
o Net Investment = Gross investment – Depreciation
KEY DEFINITION
Gross investment: Addition to the stock of capital which also includes replacement for the wear and
tear which the previously installed capital stock undergoes.
Depreciation: Wear and tear or depletion which capital stock undergoes over a period of time.
Net investment: Addition to capital stock; unlike gross investment, it does not include the replacement
for the depletion of capital stock.
Concept Check
Q. With reference to ‘depreciation’, which of the following option is/are correct?
(a) It refers to that portion of the capital goods which goes in maintenance and replacement of existing
goods due to wear and tear.
(b) To obtain net investment in an economy, depreciation is subtracted from the gross investment.
(c) If we include depreciation in value added then the measure of value added that we obtain is called
Gross Value Added.
Answer: D
4.2 Net Domestic Product

• This measure allows policy-makers to estimate how much the country has to spend just to maintain
their current GDP.
• If the country is not able to replace the capital stock lost through depreciation, then GDP will fall.
• NDP = GDP – Depreciation
• This way, NDP of an economy has to be always lower than its GDP for the same year, since there is no
way to cut the depreciation to zero.
• However, NDP is not used in compare the economies of the world. This is due to the different rates of
depreciation which is set by the different economies of the world.

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Concept Check
Q. The aggregate production of final goods and services taking place within the domestic economy
during a financial year, exclusive of depreciation is known as:
(a) Gross Domestic Product (GDP)
(b) Gross National Product (GNP)
(c) Net Domestic Product (NDP)
(d) Net National Product (NNP)
Answer: C
4.3 Gross National Product

• GNP and GDP are very closely related concepts, and the main differences between them comes from
the fact that there may be companies owned by foreign residents that produce goods in India, and
companies owned by Indians that produce goods for the rest of the world and revert earned income
to domestic residents in India.
• For example, there are a number of foreign companies that produce goods and services in India and
transfer any income earned to their foreign residents. Likewise, many Indian corporations produce
goods and services outside of Indian borders and earn profits for India’s residents.
• Where GDP looks at the value of goods and services produced within a country's borders, GNP is the
market value of goods and services produced by all citizens of a country—both domestically and
abroad.
• Thus, GNP is an estimate of total value of all the final products and services turned out in a given
period by the means of production owned by a country's citizens.
• GNP is commonly calculated by taking the sum of personal consumption expenditures, private
domestic investment, government expenditure, net exports and any income earned by residents
from overseas investments, minus income earned within the domestic economy by foreign
residents.
• The formula for GNP is:
o GNP = GDP + (Factor income earned by the domestic factors of production employed in the
rest of the world – Factor income earned by the factors of production of the rest of the world
employed in the domestic economy)
• Hence, GNP = GDP + Net factor income from abroad

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o (Net factor income from abroad = Factor income earned by the domestic factors of
production employed in the rest of the world – Factor income earned by the factors of
production of the rest of the world employed in the domestic economy).
KEY DEFINITION
Gross National Product (GNP): GDP + Net Factor Income from Abroad. In other words, GNP includes
the aggregate income made by all citizens of the country, whereas GDP includes incomes by foreigners
within the domestic economy and excludes incomes earned by the citizens in a foreign economy.
The different uses of the concept of GNP are as follows:
• This is the ‘national income’ according to which the IMF ranks the nations of the world in terms of the
volumes – at Purchasing Power Parity (at PPP).
• It is a more exhaustive concept of national income than GDP, as it indicates the internal as well as the
external strength of the economy.
Concept Check
If India’s GDP exceeds its GNP, then foreigners produce more in India than Indian citizens produce in
the rest of the world.
Answer: True
4.4 Net National Product

• We have already noted that a part of the capital gets consumed during the year due to wear and
tear. This wear and tear are called depreciation.
• If we deduct depreciation from GNP the measure of aggregate income that we obtain is called Net
National Product (NNP).
• The formula for NNP is:
o NNP = GNP – Depreciation
4.5 Net National Product at Market Price (NNPMP) & Net National Product at Factor Cost (NNPFC)
• It is to be noted that all the variables discussed so far are evaluated at market prices.
• But market price includes indirect taxes. When indirect taxes are imposed on goods and services,
their prices go up.
• Indirect taxes accrue to the government. We have to deduct them from NNP evaluated at market
prices in order to calculate that part of NNP which actually accrues to the factors of production.

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• Similarly, there may be subsidies granted by the government on the prices of some commodities. So,
we need to add subsidies to the NNP evaluated at market prices.
• Example: Market price of commodity X should be Rs 100 per unit; since government wants to reduce
price of commodity X for the end user, it decides to give a subsidy of Rs 20 per unit to the manufacturer
and asks the manufacturer to sell commodity X at Rs 80 per unit; so essentially, manufacturer is still
getting Rs 100 per unit for commodity X; it is this Rs 100 that gets distributed amongst various factors
of production. That is why we need to add subsidy to market price to arrive at factor cost.
• The measure that we obtain by doing so (reducing indirect taxes and adding subsidies to NNP at
market prices) is called Net National Product at factor cost or National Income.
• The formula for NNP at factor cost (which is also referred to as National Income):
o NNPFC = National Income (NI) = NNPMP – Indirect taxes + Subsidies
o NNPFC = National Income (NI) = NNPMP – (Indirect taxes – Subsidies)
o NNPFC = National Income (NI) = NNPMP – Net indirect taxes
▪ Where, Net indirect taxes = Indirect taxes – Subsidies.
Concept Check
Let us take a very hypothetical example. Suppose, the cost of making a product is Rs.1000. The
indirect tax levied on it by the government is 10%. Let us suppose the government grants a subsidy
of Rs.150 on the product. Now, what is its Factor cost and Market Price (in Rs)?
(a) 1000, 950
(b) 950, 1000
(c) 1100, 950
(d) 850, 950
Answer: (a) 1000, 950
4.6 Personal Income

• We can further subdivide the National Income into smaller categories. Let us try to find the expression
for the part of NI which is received by households. We shall call this Personal Income (PI).
• First, let us note that out of NI, which is earned by the firms and government enterprises, a part of
profit is not distributed among the factors of production. This is called Undistributed Profits (UP).
We have to deduct UP from NI to arrive at PI, since UP does not accrue to the households.
• Similarly, Corporate Tax, which is imposed on the earnings made by the firms, will also have to be
deducted from the NI, since it does not accrue to the households.

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• On the other hand, the households do receive interest payments from private firms or the
government on past loans advanced by them. And households may have to pay interests to the firms
and the government as well, in case they had borrowed money from either. So, we have to deduct
the net interests paid by the households to the firms and government.
• The households receive transfer payments from government and firms (pensions, scholarship, prizes,
for example) which have to be added to calculate the Personal Income of the households.
• The formula for Personal Income (PI):
o Personal Income (PI) = NI – Undistributed profits – Net interest payments made by
households – Corporate tax + Transfer payments to the households from the government
and firms.
KEY DEFINITION
Undistributed profits: That part of profits earned by the private and government owned firms which
are not distributed among the factors of production.
Corporate tax: Taxes imposed on the income made by the corporations (or private sector firms).
Net interest payments made by households: Interest payment made by the households to the firms –
interest payments received by the households.
Transfer payments to households from the government and firms: Transfer payments are payments
which are made without any counterpart of services received by the payer. For examples, gifts,
scholarships, pensions.
Personal Income: National Income – Undistributed profits – Net interest payments made by households
– Corporate tax + Transfer payments to the households from the government and firms.
Concept Check
Q. Which of the following is not an example of a transfer payment in the sense of the national income
accounts?
(a) Government family allowances
(b) Public unemployment insurance benefits
(c) Dividends paid by corporations to stockholders
(d) Disability pensions paid from the social insurance system
Answer: C

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4.7 Personal Disposable Income

• Even Personal Income is not the income over which the households have complete say. They have to
pay taxes from PI.
• If we deduct the Personal Tax Payments (income tax, for example) and Non-tax Payments (such as
fines) from PI, we obtain what is known as the Personal Disposable Income.
• The formula for Personal Disposable Income (PDI):
o Personal Disposable Income (PDI) = PI – Personal tax payments – Non-tax payments.
• Personal Disposable Income is the part of the aggregate income which belongs to the households.
They may decide to consume a part of it, and save the rest.
KEY DEFINITION
Personal tax payments: Taxes which are imposed on individuals, such as income tax.
Non-tax payments: Payments made by households to the firms or the government as non-tax
obligations such as fines.
Personal Disposable Income (PDI): PI – Personal tax payments – Non-tax payments.
Concept Check
Which of the following statements is correct about disposable income?
(a) It is the money available with households after deduction of income tax.
(b) It is the liquid money available with households.
(c) It is the gross money earned by a household.
(d) It is the money available to the household once savings are made.
Answer: A
4.8 Per Capita Income

• Per capita income is a measure of the amount of money earned per person in a nation or geographic
region.
• Per capita income can be used to determine the average per-person income for an area and to
evaluate the standard of living and quality of life of the population.
• Per capita income for a nation is calculated by dividing the country's national income (Net National
Income at Factor Cost) by its population.
Note:

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1. NNPMP = GNPMP – Depreciation

2. NNPMP = NDPMP + NFIA
3. National Income = NNPFC – Indirect Taxes + Subsidies
4. Per capita income = National Income / Population
5. Therefore, we can say that higher the rates of depreciation, lower the per capita income of the nation.
Concept Check
Is it possible for GDP to rise while at the same time per capita income is falling? Is it possible for GDP to
fall while per capita income is rising?
Answer: Yes, and yes. The answer to both questions depends on whether GDP is growing faster or
slower than population. If population grows faster than GDP, GDP increases while GDP per capita
decreases. If GDP falls, but population falls faster, then GDP decreases while GDP per capita increases.
Concept Check
Q. The most appropriate measure of economic growth is its:
(a) Gross Domestic Product of a country
(b) Net Domestic Product
(c) Net National Product
(d) Per Capita Real Income
Answer: D
4.9 Nominal and Real GDP
4.9.1 Nominal GDP

• Nominal GDP, or nominal gross domestic product, is a measure of the value of all final goods and
services produced within a country’s borders at current market prices. In calculating nominal GDP,
we only use current quantities at current year prices.
• If, for instance, India produced only three products—coffee, tea, and rubber, let’s say—nominal GDP
would be calculated by first multiplying the quantity of each product produced by its current market
price, and then adding the three results together. In order to calculate it, we first need to know the
quantity of each product produced and the up-to-date average price for that product.
• Therefore, (coffee quantity x coffee’s current market price) + (tea quantity x tea’s current market
price) + (rubber quantity x rubber’s current market price) = Nominal GDP

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• It can then be further reduced to the nominal GDP per capita by dividing the nominal GDP by the
country’s population.
Concept Check
With reference to ‘Nominal GDP’, which of the following statements is correct?
(a) It measures total economic output produced valued at a constant market price.
(b) It is used for comparison across years and across countries.
(c) It concentrates on volume growth only and does not include price growth.
(d) None of the above
Answer: D
4.9.2 Real GDP

• Real GDP is GDP evaluated at the market prices of some base year.
• Base year is the year whose prices are being used to calculate the real GDP.
• For example, if 2012 were chosen as the base year, then real GDP for 2019 is calculated by taking the
quantities of all goods and services purchased in 2019 and multiplying them by their 2012 prices.
KEY DEFINITION
Base year: The year whose prices are used to calculate the real GDP.
Real GDP: The total market value, measured in constant prices, of all goods and services produced
within the political boundaries of an economy during a given period of time, usually one year. The key
is that real gross domestic product is measured in constant prices, the prices for a specific base year.
Real gross domestic product, also termed constant gross domestic product, adjusts gross domestic
product for inflation.
Concept Check
If nominal GDP in 2005 exceeds nominal GDP in 2004, real output must have risen.
Answer: False
Concept Check
Q. Real GDP is a measure of a country's
(a) wealth

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(b) money
(c) economic transactions
(d) physical output
Answer: D
4.9.3 Base Year

• It is a specific year against which the economic growth is measured.
• It is allocated a value of 100 in an index.
• The estimates at the prevailing prices of the current year are termed as "at current prices", while those
prepared at base year prices are termed "at constant prices".
• The base year is changed periodically to take into account the structural changes which take place in
the economy.
• The first official estimates of national income were computed by CSO (now National Statistical Office
{NSO}* with base year 1948-49 for the estimates at constant prices.
• A base year has to be a normal year without large fluctuations in production, trade and prices of
commodities in general.
• Reliable price data should be available for it. It should be as recent as possible.
• For example, if we take a year which had a severe drought, in that year the agriculture produce would
have been very less and thus the prices would have been very high. So, taking this year as a base year
would not be appropriate as this year was a one-off case because of the occurrence of drought.
* In May 2019, Government of India had decided to merge Central Statistical Office and National Sample
Survey Office into the National Statistical Office.
4.9.4 Why is calculating Real GDP important?

Consider the following statements:
• For example, suppose a country only produces bread.

• In the year 2000 it had produced 100 units of bread, and price of bread in year 2000 was Rs 10 per
bread. GDP at current price was Rs 1,000. (This is the nominal GDP of year 2000)
• In 2001 the same country produced 110 units of bread at price Rs 15 per bread. Therefore, nominal
GDP in 2001 was Rs 1,650 (=110 × Rs 15).
• If one were to only compare nominal GDP of year 2001 with that of year 2000, without paying
attention towards the prevailing price levels, one may conclude that since there is a 65% increase in
nominal GDP (from Rs 1,000 to Rs 1,650), there may be a 65% increase in bread production.

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• But is there a 65% increase in bread production? No! There is only a 10% increase in bread
production (from 100 units to 110 units), whereas there is a 50% increase in the price level (from Rs
10 to Rs 15 per bread)!
• This is where Real GDP helps us. It helps us in cancelling out the effect of price change and correctly
measure the changes in production levels.
• Real GDP in 2001 calculated at the price of the year 2000 (2000 will be called the base year) will be
110 × Rs 10 = Rs 1,100.
• When we compare real GDP of year 2001 with nominal GDP of year 2000 (which is also the real GDP
since base year is 2000 itself), we notice an increase of 10% (from Rs 1000 to Rs 1100), which is the
same as the increase in bread production.
• If production in year 2002 increases to 120 breads, real GDP in 2002 (assuming 2000 as the base year)
will be 120 X Rs 10 = Rs 1200. This indicates a 20% increase over 2000, which is also the same as the
increase in bread production between 2000 and 2002.
Concept Check:
For cross-country comparison, which is a more suitable indicator: nominal GDP or real GDP?
Answer: Real GDP
4.9.5 GDP Deflator

• Let us understand this concept using a numerical example.
• For example, suppose a country only produces bread. In the year 2000 it had produced 100 units of
bread, price was Rs 10 per bread. GDP at current price was Rs 1,000. In 2001 the same country
produced 110 units of bread at price Rs 15 per bread. Therefore, nominal GDP in 2001 was Rs 1,650
(=110 × Rs 15). Real GDP in 2001 calculated at the price of the year 2000 (2000 will be called the base
year) will be 110 × Rs 10 = Rs 1,100.
• Notice that the ratio of nominal GDP to real GDP gives us an idea of how the prices have moved from
the base year (the year whose prices are being used to calculate the real GDP) to the current year.
• In the calculation of real and nominal GDP of the current year, the volume of production is fixed.
Therefore, if these measures differ it is only due to change in the price level between the base year
and the current year.
• The ratio of nominal to real GDP is a well-known index of prices. This is called GDP Deflator. Thus, if
GDP stands for nominal GDP and gdp stands for real GDP then, GDP deflator = GDP/gdp.
• In the previous example, the GDP deflator is 1,650/1,100 = 1.50 (in percentage terms this is 150 per
cent). This implies that the price of bread produced in 2001 was 1.5 times the price in 2000. Which is

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true because price of bread has indeed gone up from Rs 10 to Rs 15. Like GDP deflator, we can have
GNP deflator as well.
KEY DEFINITION
GDP Deflator: A price index calculated as the ratio nominal gross domestic product to real gross
domestic product. It is used as an indicator of the economy's average price level.
Concept Check
Q. Which of the following is the correct description of GDP deflator?
(a) It is the ratio between the nominal GDP and real GDP.
(b) It is the ratio between the GDP in the current year and GDP in the base year.
(c) It is the relation between the change in GDP and the corresponding change in employment rates.
(d) It is the measure used to compare GDPs of different countries
Answer: A
4.10 Factor Cost, Basic Prices and Market Prices
Factor Production Basic

Cost Taxes Price
Basic Product Market

Price Taxes Price

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• In India, the most highlighted measure of national income has been the GDP at factor cost. The Central
Statistics Office (now NSO) of the Government of India has been reporting the GDP at factor cost and
at market prices.
• In its revision in January 2015 the CSO replaced GDP at factor cost with the GVA at basic prices, and
the GDP at market prices, which is now called only GDP, is now the most highlighted measure.
• The distinction between factor cost, basic prices and market prices is based on the distinction between
net production taxes (production taxes less production subsidies) and net product taxes (product taxes
less product subsidies).
• Production taxes and subsidies are paid or received in relation to production and are independent
of the volume of production such as land revenues, stamp and registration fee.
o Production taxes/subsidies are independent of the quantity (volume) of production.
o It is often imposed even if the products are not produced (Eg: tax —land revenues, stamps
fees, registration fees tax on the profession)
o Production subsidies — subsidies to Railways, input subsidies to farmers, subsidies to the
village and small industries, administrative subsidies to corporations or cooperatives, etc).
o Note: Net Production Taxes = Production taxes - Production subsidies
• Product taxes and subsidies, on the other hand, are paid or received per unit or product, e.g., excise
tax, service tax, export and import duties etc.
• Factor cost includes only the payment to factors of production, it does not include any tax.
Example: A bread is being made in a bakery. The raw material used is wheat (it costs Rs.50), one person
is involved in making it (he charges Rs.10). Now the factor cost of the bread is going to be
Rs.50+Rs.10=Rs.60. (We are ignoring the other charges for simplicity like the rent of the place where
bakery functions, the electricity bill etc.)
• In order to arrive at the market prices, we have to add to the factor cost the total indirect taxes less
total subsidies.
• The basic prices lie in between: they include the production taxes (less production subsidies) but not
product taxes (less product subsidies). Therefore, in order to arrive at market prices, we have to add
product taxes (less product subsidies) to the basic prices.
Remember: Market Price > Basic Price > Factor Cost

• As stated above, now the CSO (now NSO) releases GVA at basic prices. Thus, it includes the net
production taxes but not net product taxes.

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• In order to arrive at the GDP (at market prices) we need to add net product taxes to GVA at basic
prices.
• The formula for GVA at basic prices:
o GVA at factor costs + Net production taxes = GVA at basic prices
• The formula for GVA at market prices:
o GVA at basic prices + Net product taxes = GVA at market prices
Concept Check
Q. Which of the following is not typically considered to be a ‘product tax’?
(a) Excise tax
(b) Sales tax
(c) Stamp Duty
(d) Customs Duty
(e) Service tax
Answer: C
4.11 Why is GVA calculated?

• GVA and GDP give a picture of economic activity from producer’s (supply side) and consumer’s
(demand side) perspective respectively, because GVA is the net receipt of the producers and GDP is
the expenditure incurred by the consumers.
• Both these measures need not match and there could be a sharp divergence due to net indirect taxes
(NIT = Indirect Taxes – Subsidies), which are counted in GDP calculation (GDP is the sum of GVA and
NIT).
• GVA provides a better measure of economic activity because GDP can record a sharp increase just on
account of increased tax collections due to better compliance /coverage and not necessarily due to
increase in output.
• GVA is a better reflection of the productivity of the producers as it excludes the indirect taxes, which
could distort the production process.
• A sector-wise breakdown provided by the GVA measure can better help policymakers to decide which
sectors need incentives/stimulus or vice-versa.
Concept Check
Q. With reference to Gross Domestic Product (GDP) and Gross Value Added (GVA), which of the
following option is/are correct?
(a) GDP gives a picture of economic activity from producer’s side.

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(b) GVA gives a picture of economic activity from consumer’s side.

(c) GVA is the sum of GDP and Net Indirect Taxes.
Answer: E
5 Part V: Growth, Welfare & Development
5.1 Sources of Economic Growth

• Economic growth is achieved by increasing the economy's ability to produce goods and services. This
goal is best indicated by measuring the growth rate of production. If the economy produces more
goods this year than last, then it is growing.
o An economy is able to achieve the goal of economic growth by increasing the quantity or
quality of the resources.
Concept Check
Q. Economic growth in country X will necessarily have to occur if
(a) there is technical progress in the world economy
(b) there is capital formation in X
(c) the volume of trade grows in the world economy
Answer: B
5.2 Types of Economic Growth

• There are two types of economic growth allocated in economic theory - intensive and extensive.
• Extensive type of growth is characterized by quantitative increase of use of one or more factors of
production. Accordingly, there are capital, labour and resource subtypes of extensive economic
growth.
• When there is a qualitative improvement in the factors of production, such as use of ultra-precise
modern equipment in goods production, cost-effective non-waste technologies and more skilled
workforce, we can talk about the intensive, or qualitative, type of economic growth.
Concept Check
Q. Which of the following programmes / schemes of Government of India can help bring about
‘intensive growth’?

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(a) Soil Health Card Scheme

(b) Skill India Mission
(c) Amended Technology Upgradation Fund Scheme
(d) Women Entrepreneurship Platform
Answer: E
5.3 GDP & Welfare

Can the GDP of a country be taken as an index of the welfare of the people of that country? If a person
has more income, he or she can buy more goods and services and his or her material well-being improves.
So it may seem reasonable to treat his or her income level as his or her level of well-being. GDP is the sum
total of value of goods and services created within the geographical boundary of a country in a particular
year. It gets distributed among the people as incomes (except for retained earnings). So we may be
tempted to treat higher level of GDP of a country as an index of greater well-being of the people of that
country. But there are many reasons why this may not be correct.
5.4 Limitations of GDP

Quality of Life
• What it means? Sometimes called “well-being”; the standard of health, happiness, security, and
material comfort of an individual, a group of people, or a nation.
• GDP gives no idea about Quality of Life.
Non-market transactions
• What it means? Economic activity that takes place in the informal sector (from babysitting, to lawn
mowing, to illegal drug sales), sometimes called the grey market or the black market economy;
• Non-market transactions are not recorded, taxed, or officially monitored by the government
therefore not included in the calculation of a nation’s GDP.

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Income Inequality
• What it means? when a disproportionate share of a nation’s income is earned by a small minority
of households; for example, according to Oxfam report in January 2020 – India’s richest 1% hold
• GDP does not account for income distribution in any way.
Sustainability
• What it means? The ability of a system to endure indefinitely into the future;
• An increase in GDP will only be sustainable as long as it does not deplete natural resources too
rapidly nor exploit the environment in a way that diminishes the quality of life of the nation’s
households over time.
Economic Bads
• What it means? Any outcome from economic activity that creates negative value for society, such
as air pollution from cars that harms human health and the environment;
• Unsustainable economic growth may diminish the quality of life of a nation’s people.
Depreciation of Capital
• What it means? The decrease in the value of a nation’s capital stock over time;
• GDP accounts for investment in new capital but does not subtract the lost value of depreciated
capital. Because of this, GDP may overstate the amount of economic activity in nations with rapidly
depreciating capital stocks.
Real GDP per capita
• What it means? The real gross domestic product of a nation, divided by the nation’s population; this
measure is an indication of the average income of a nation’s people.
Concept Check
Q. Increase in absolute and per capita real GNP do not connote a higher level of economic
development, if
(a) industrial output fails to keep pace with agricultural output.
(b) agricultural output fails to keep pace with industrial output.
(c) poverty and unemployment increase.
(d) imports grow faster than exports.
Answer: C
Concept Check
Q. Which of the following does not enter GDP?
(a) public service

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(b) public education

(c) life expectancy
(d) national defense
Answer: C
5.5 What is development?

• Economic development can be referred as the quantitative and qualitative changes in the economy.
• Economic development can be defined as the enlargement of the range of people choices.
• Economic development focuses on the spectrum of spheres ranging from health, education,
employment, safety, environmental sustainability, social exclusion, gender empowerment,
infrastructure, and other activities whereas economic growth measured in terms of rise in GDP or
market productivity.
• Economic development mainly concerned in expansion of people’s entitlements and their
corresponding capabilities, morbidity, nourishment, literacy, education, and other socio-economic
indicators.
• According to Amartya Sen, “Development consists of the removal of various types of unfreedoms
that leave people with little choice and little opportunity of exercising their reasoned agency”. Sen
defines the major factors that limit freedom as “poverty as well as tyranny, poor economic
opportunities as well as systematic social deprivation, neglect of public facilities as well as
intolerance or over activity of repressive states”.
• Economic growth set the prerequisite condition for economic development. The economic growth
accompanied by proper distribution of resources across the population, building institutional
mechanisms which ensure qualitative change in the lives of people, and environmental sustainability
guaranteed the economic development.
Concept Check:
Is it possible that a country may be experiencing rapid ‘growth’, but the ‘developmental’ indicators of
that country may actually be deteriorating?
Answer: Yes. If the country were to not invest in health, education, research and development, family
planning, development of cleaner and better technologies, it can happen that a country may experience
rapid growth even while developmental indicators may deteriorate.

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5.6 What is the difference between Growth and Development in the above context?
Concept
• Development: Economic development is a much broader concept than economic growth. Economic
development = Economic Growth + Standard of Living
• Growth: Economic Growth is a narrower concept than economic development.
Scope
• Development: Economic Development is considered as a Multidimensional phenomenon because it
focuses on the income of the people and on the improvement of the living standards of the people of
the country.
• Growth: Economic Growth is considered as a single dimensional in nature as it only focuses on the
income of the people of the country.
Time-frame
• Development: Long term process
• Growth: Short term process
Measurement
• Development: Both Qualitative & Quantitative Terms: HDI (Human Development Index), gender-
related index, Human poverty index, infant mortality, literacy rate etc.
• Growth: Quantitative Terms: Increases in real GDP.
Relevance
• Development: Economic Development is related to Underdeveloped and developing countries of the
world.
• Growth: Economic Growth is related to developed countries of the world.
Effect
• Development: Qualitative and Quantitative Impact on the economy. Improvement in life expectancy
rate, infant, literacy rate, poverty rates, and mortality rate.
• Growth: Brings a quantitative impact on the economy. Increase in the indicators like per capita income
and GDP, etc.
Concept Check
Q. With reference to growth and development, which of the options given below is not correct?
(a) Growth is quantitative and value neutral
(b) Development means a qualitative change which is always value positive
(c) A positive growth always leads to development
(d) Economic growth set the prerequisite condition for economic development.

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Answer: C
6 Part VI: Summary
6.1 Gross Domestic Product at Market Prices (GDPMP)

• GDP is the market value of all final goods and services produced within a domestic territory of a
country measured in a year.
• All production done by the national residents or the non-residents in a country gets included,
regardless of whether that production is owned by a local company or a foreign entity.
• Everything is valued at market prices.
• GDPMP = C + I + G + X – M
6.2 GDP at Factor Cost (GDPFC)

• GDP at factor cost is gross domestic product at market prices, less net product taxes.
• Market prices are the prices as paid by the consumers. Market prices also include product taxes and
subsides.
• The term factor cost refers to the prices of products as received by the producers.
• Thus, factor cost is equal to market prices, minus net indirect taxes (NIT).
o NIT = Indirect Taxes – Subsidies
• GDP at factor cost measures money value of output produced by the firms within the domestic
boundaries of a country in a year.
• GDPFC = GDPMP – Indirect Taxes + Subsidies
• GDPFC = GDPMP – NIT
6.3 Net Domestic Product at Market Prices (NDPMP)

• This measure allows policy-makers to estimate how much the country has to spend just to maintain
their current GDP.
• If the country is not able to replace the capital stock lost through depreciation, then GDP will fall.
• NDPMP = GDPMP − Depreciation
6.4 NDP at Factor Cost (NDPFC)

• NDP at factor cost is the income earned by the factors in the form of wages, profits, rent, interest,
etc., within the domestic territory of a country.
• NDPFC = NDPMP – Net Product Taxes – Net Production Taxes

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6.5 Gross National Product at Market Prices (GNPMP)

• GNPMP is the value of all the final goods and services that are produced by the normal residents of
India and is measured at the market prices, in a year.
• GNP refers to all the economic output produced by a nation’s normal residents, whether they are
located within the national boundary or abroad.
• To arrive at the value of GNP, Net Factor Income from Abroad (NFIA) is added to GDP.
• Everything is valued at the market prices.
• GNPMP = GDPMP + NFIA
6.6 GNP at Factor Cost (GNPFC)

• GNP at factor cost measures value of output received by the factors of production belonging to a
country in a year.
• GNPFC = GNPMP – Net Product Taxes – Net Production Taxes
6.7 Net National Product at Market Prices (NNPMP)

• This is a measure of how much a country can consume in a given period of time.
• NNP measures output regardless of where that production has taken place (in domestic territory or
abroad).
• NNPMP = GNPMP – Depreciation
• NNPMP = NDPMP + NFIA
6.8 NNP at Factor Cost (NNPFC) OR National Income (NI)

• NNP at factor cost is the sum of income earned by all factors in the production in the form of
wages, profits, rent and interest, etc., belonging to a country during a year.
• It is the National Product and is not bound by production in the national boundaries. It is the net
domestic factor income added with the net factor income from abroad.
• NI = NNPMP – Net Product Taxes - Net Production Taxes
• NNP = NDP + NFIA

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POVERTY ALLEVIATION
& EMPLOYMENT
GENERATION IN INDIA

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Contents
1 What is Poverty?................................................................................................................................................... 5
2 Types of poverty ................................................................................................................................................... 5
2.1 Absolute Poverty: ......................................................................................................................................... 5
2.2 Relative Poverty: ........................................................................................................................................... 5
2.3 Situational Poverty: ...................................................................................................................................... 5
2.4 Generational Poverty:................................................................................................................................... 5
2.5 Multidimensional Poverty: ........................................................................................................................... 6
3 Measuring Poverty................................................................................................................................................ 6
4 Identification of poor in India: .............................................................................................................................. 6
5 Committees for Poverty Estimation in India: ....................................................................................................... 7
5.1 National Planning Committee: ..................................................................................................................... 7
5.2 First Planning Commission working group: .................................................................................................. 7
5.3 Y K Alagh Committee (1979): ........................................................................................................................ 7
5.4 Lakdawala Committee (1993):...................................................................................................................... 7
5.5 Tendulkar Committee (2005): ...................................................................................................................... 8
5.5.1 The major changes recommended are: ................................................................................................ 8
5.6 Rangarajan Committee: ................................................................................................................................ 9
5.6.1 Differences between Rangarajan and Tendulkar Committee: ............................................................. 9
5.6.2 Important points from the report are: ...............................................................................................10
6 World Bank’s Poverty line ..................................................................................................................................11
7 Global Hunger Index (GHI):.................................................................................................................................11
7.1 Indicators of GHI: ........................................................................................................................................11
7.2 GHI Severity Scale: ......................................................................................................................................12
8 Universal Basic Income: ......................................................................................................................................13
8.1 What is it? ...................................................................................................................................................13
9 Poverty related Sustainable Development Goals (SDGs): ..................................................................................13
10 Conclusion: .....................................................................................................................................................14
11 Employment Generation in India: Why is it important? ................................................................................14
12 Types of Unemployment in India: ..................................................................................................................15
12.1 Open Unemployment: ................................................................................................................................15
12.2 Structural Unemployment: .........................................................................................................................15
12.3 Frictional Unemployment: ..........................................................................................................................15
12.4 Cyclical Unemployment: .............................................................................................................................15
12.5 Under-employment: ...................................................................................................................................15
12.6 Disguised Unemployment: .........................................................................................................................16
12.7 Seasonal Unemployment:...........................................................................................................................16

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12.8 Casual Unemployment: .............................................................................................................................16

12.9 Chronic Unemployment:...........................................................................................................................16
13 Measurement of Unemployment: ..................................................................................................................16
13.1 Usual Status Unemployment: .....................................................................................................................16
13.2 Weekly Status Unemployment: ..................................................................................................................17
13.3 Current Daily Status Unemployment:.........................................................................................................17
14 How is employment measured in India? ........................................................................................................17
14.1 Household Surveys: ....................................................................................................................................17
The Employment-Unemployment Survey of NSSO: ...........................................................................................18
The Periodic Labour Force Survey (PLFS): ..........................................................................................................18
Annual Labour Force Survey by Ministry of Labour and Employment: ..............................................................18
Population Census: .............................................................................................................................................18
14.2 Enterprise Survey:.......................................................................................................................................18
14.3 Administrative data-sets:............................................................................................................................19
14.4 Government Schemes: ...............................................................................................................................19
15 What is the status of employment in India? ..................................................................................................19
15.1 Data from the Census, 2011: ......................................................................................................................19
15.2 Unemployment grew faster for illiterates than for literates:.....................................................................19
16 Share of Employment across Organized –Unorganized Sectors in 2011-12 and 2004-05 (in per cent):
(Source: NITI Aayog) ...................................................................................................................................................21
17 Key differences between the Organized and Unorganized sector: ................................................................21

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1 What is Poverty?
Poverty is a state or condition in which a person or community lacks the financial resources and
essentials to enjoy a minimum standard of life and well-being that's considered acceptable in
society.
2 Types of poverty
Basically, poverty can be divided into two types: Absolute Poverty and Relative Poverty.
2.1 Absolute Poverty:

• Absolute poverty refers to a condition where a person does not have the minimum amount
of income needed to meet the minimum requirements for one or more basic living needs
( food and safe drinking water, shelter, clothing, sanitation facilities, quality and affordable
healthcare and education facilities, access to information) over an extended period of time.
• This minimum amount of income that is needed to fulfil the basic needs is decided upon by
each country by taking into account various factors. We shall understand this clearly when
we are discussing about the Poverty Line in India.
2.2 Relative Poverty:

• Relative poverty is closely associated with the issues of inequality.
• Relative poverty occurs when people in a country do not enjoy a certain minimum level of
living standards as compared to the rest of the population and so would vary from country to
country, sometimes within the same country.
• Gini-coefficient can be used to measure poverty in the relative sense.
Other Types of Poverty:
2.3 Situational Poverty:

People or families can be poor because of some adversities like earthquakes, floods or a serious
illness. Sometimes, people can help themselves out of this situation quickly if they are given a bit of
assistance, as the cause of their situations was just one unfortunate event.
2.4 Generational Poverty:

This is when poverty is handed over to individuals and families from generations before them. In
this type, there is usually no escape from it, as people are trapped in its causes and have no access
to tools that will help them get out of it.

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2.5 Multidimensional Poverty:

Multidimensional poverty is made up of several factors that constitute poor people’s experience of
deprivation – such as poor health, lack of education, inadequate living standard, lack of income
(as one of several factors considered), disempowerment, poor quality of work and threat from
violence.
3 Measuring Poverty
Conventionally, poverty is measured by defining a threshold level of expenditure (or income)
required to purchase goods and services necessary to satisfy basic needs at the minimal socially
acceptable level.
This threshold level of expenditure is called the poverty line and the proportion of population living
below it is called the poverty ratio.
Poverty line and the poverty ratio have three potential uses:
1. Identification of poor;
2. The allocation of expenditures on anti-poverty programs across regions; and
3. Measuring and tracking poverty over time and across regions.
4 Identification of poor in India:

• In India, identification of poor is done by the State Governments based on information from
Below Poverty Line (BPL) censuses of which the latest is the Socio-Economic Caste Census
2011 (SECC 2011).
• Allocation of expenditures on anti-poverty programs can also be done using instruments
other than the poverty ratio.
• For example, the expenditure on the provision of housing across states can be done
according to the proportion of households without house in the state.
• Universal programs such as those under the Mahatma Gandhi National Rural Employment
Guarantee Act (MGNAREGA) and Sarva Shiksha Abhiyan (SSA) are available to all making the
question of allocation moot.
• This leaves tracking poverty over time and space as the principal objective behind
measurement of poverty.
• The current official measures of poverty are based on the Tendulkar Poverty Line.
• But this line has been controversial with many observers criticizing it as being too low.
• The controversies led the previous government to appoint the Rangarajan Committee, which
recommended higher rural and urban poverty lines but recommendations have not been
considered by the Government.

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5 Committees for Poverty Estimation in India:
5.1 National Planning Committee:

In 1938, Congress president Subhash Chandra Bose set up the National Planning Committee (NPC)
with Jawaharlal Nehru as chairman and Professor K. T. Shah as secretary for the purpose of drawing
up an economic plan with the fundamental aim to ensure an adequate standard of living for the
masses.
5.2 First Planning Commission working group:

• The concept of the poverty line was first introduced by a working group of the Planning
Commission in 1962 and subsequently expanded in 1979 by a task force.
• The 1962 working group recommended that the national minimum for each household of
five persons should be not less than Rs 100 per month for rural and Rs. 125 for urban at
1960-61 prices.
• These estimates excluded the expenditure on health and education, which both were
expected to be provided by the state.
5.3 Y K Alagh Committee (1979):

• Till 1979, the approach to estimate poverty was traditional i.e. lack of income.
• It was later decided to measure poverty precisely as starvation i.e. in terms of how much
people eat.
• This approach was first of all adopted by the YK Alagh Committee’s recommendation in 1979
whereby, the people consuming less than 2100 calories in the urban areas or less than 2400
calories in the rural areas are poor.
• Now these calorie requirements need some ‘monetary value’ which can be determined by
ascertaining ‘quantity’ of consumption and ‘prices/value’ of that quantity. Data relating to
quantity and value was provided by NSSO survey.
• It was estimated that, on an average, consumer expenditure (food and non-food) of Rs.49.09
per capita per month was associated with a calorie intake of 2400 per capita per day in rural
areas and Rs.56.64 per capita per month with a calorie intake of 2100 per day in urban areas.
This ‘Monthly Per Capita Expenditure’ was termed as poverty line.
• The logic behind the discrimination between rural and urban areas was that the rural people
do more physical work.
• Moreover, an implicit assumption was that the states would take care of the health and
education of the people. Thus, YK Alagh eventually defined the first poverty line in India.
* In May 2019, Government of India had decided to merge Central Statistical Office and National Sample Survey
Office into the National Statistical Office (NSO).
5.4 Lakdawala Committee (1993):

In 1993, an expert group was constituted to review methodology for poverty estimation, chaired by
DT Lakdawala.
The following were the suggestions made:

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• Consumption expenditure should be calculated based on calorie consumption as used by the

Alagh Committee.
• State specific poverty lines should be constructed, and these should be updated using the
Consumer Price Index of Industrial Workers (CPI-IW) in urban areas and Consumer Price
Index of Agricultural Labour (CPI-AL) in rural areas.
• The method of calculating poverty included first estimating the per capita household
expenditure at which the average energy norm is met, and then, with that expenditure as
the poverty line, defining as poor as all persons who live in households with per capita
expenditures below the estimated value.
• The fallout of the Lakdawala formula was that number of people below the poverty line got
almost double. The number of people below the poverty line was 16 per cent of the
population in 1993-94. Under the Lakdawala calculation, it became 36.3 per cent.
5.5 Tendulkar Committee (2005):

In 2005, another expert group to review methodology for poverty estimation, chaired by Suresh
Tendulkar, was constituted by the Planning Commission to address the three shortcomings of the
previous methods.
5.5.1 The major changes recommended are:

• It adopted Mixed Reference Period in place of Uniform Reference Period.
• A shift away from calorie consumption-based poverty estimation.
• A uniform poverty line basket (PLB) across rural and urban India.
• A change in the price adjustment procedure to correct spatial and temporal issues with price
adjustment.
• Incorporation of private expenditure on health and education while estimating poverty.
• Poverty line was in form of ‘Rs per capita per month’.
• The Committee computed new poverty lines for rural and urban areas of each state.
National Poverty Lines (in Rs per capita per month) for the years 2004-05, 2009-10 and 2011-12:
Year Rural Urban

2004-05 446.7 578.8
2009-10 672.8 859.6
2011-12 816.0 1000.0
The following table outlines the manner in which the percentage of population below the poverty
line changed after the application of the Tendulkar Committee’s methodology. (For the year 2004-
05)
Committee Rural Urban Total

Lakdawala Committee 28.3 25.7 27.5
Tendulkar Committee 41.8 27.5 37.2

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5.6 Rangarajan Committee:

C Rangarajan Committee was Set up By Planning commission in 2012 and submitted report in 2014.
5.6.1 Differences between Rangarajan and Tendulkar Committee:

To understand the recommendations of Rangarajan Committee better, we will study the differences
between the recommendations of Tendulkar Committee and Rangarajan Committee.
Committees Tendulkar Rangarajan

Set up by Planning Commission Planning Commission
Set up in 2005 2012
Submitted report 2009 2014
Poverty estimation method Per capita Expenditure Monthly Expenditure of family
monthly of five
Urban Poverty Line Per Day Per 33 47
Person
Urban Poverty Line Per Month Per 1000 1407
Person
Urban Poverty Line Per Month, 5000 7035
Family of Five Members
Rural Poverty Line Per Day Per 27 32
Person
Rural Poverty Line (Rs) Per month 816 972
Per Person
Rural poverty line (Rs) Per month 4080 4860
Family of five members
BPL (Below Poverty Line) in crore 27 crore 37 crore
Calorie Expenditure Only calorific value in Calorie + Protein + Fat
expenditure
Calories in rural areas 2400 2155
Calories in urban areas 2100 2090
Main Focus areas Only counts expenditure on 1. Food
food, health, education, 2. Non – food items such
clothing as education
3. Healthcare
4. Clothing
5. Transport
6. Rent
7. Non-food items that
meet nutritional
requirements.

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5.6.2 Important points from the report are:

• The Rangarajan committee estimation is based on an independent large survey of
households by Center for Monitoring Indian Economy (CMIE).
• It has also used different methodology wherein a household is considered poor if it is unable
to save.
• Instead of ‘Mixed reference Period’ it recommended ‘Modified Mixed reference period’ in
which reference periods for different items were taken as : 365-days for clothing, footwear,
education, institutional medical care, and durable goods, 7-days for edible oil, egg, fish and
meat, vegetables, fruits, spices, beverages, refreshments, processed food, pan, tobacco and
intoxicants, and 30-days for the remaining food items, fuel and light, miscellaneous goods
and services including non-institutional medical; rents and taxes.
• It not only takes normative levels for adequate nourishment, clothing, house rent,
conveyance and education, but also considers behaviorally-determined levels of other non-
food expenses.
• The committee has estimated that almost 30 per cent of us were poor in 2011-12. It uses
separate data sets for rural and urban parts.
• The panel computed the average requirements of calories, proteins and fats on the norms
set by the Indian Council for Medical Research in 2010. These are differentiated by age,
gender and activity for all-India rural and urban regions.
• Accordingly, the energy requirement as calculated by Rangarajan is 2,155 kcal per person per
day in rural areas and 2,090 kcal per person per day in urban areas. This is significantly lower
than the 2,400 kcal in rural areas and slightly less than 2,100 kcal in urban areas used by the
earlier Lakdawala panel.
• The reason given is that the age profile and working conditions have changed with time.
• The protein and fat requirements have been estimated on the same lines. These are 48g and
28g per capita per day, respectively, in rural India and 50g and 26g per capita per day in
urban areas.
• According to the report of the committee, the new poverty line should be Rs 32 in rural areas
and Rs 47 in urban areas.
The table given below shows the total number of poor as per both the committees’ estimations.
Committee No. of Rural No. of urban poor Total Percent of poor

poor
Rangarajan 260.5 million 102.5 million 363 million 29.5
committee
Tendulkar 216.5 million 52.8 million 269 million 21.9%
Committee
Difference 44 million 49.7 million 93.7 million
The Rangarajan report has added 93.7 million more to the list of the poor assessed last year as per
the Suresh Tendulkar committee formula.
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Now the total number of poor has reached 363 million from 269 million in 2011-12.
6 World Bank’s Poverty line

• The approach of poverty estimation by the World Bank is similar to that employed in India
and in most of the developing countries. The World Bank estimates of poverty are based on
the poverty line of US $1.25 per person per day measured at 2005 international price and
adjusted to local currency using PPP (Purchasing Power Parity).
• The international poverty line is worked out as the average of national poverty lines in
poorest fifteen countries (in terms of consumption per capita). For this world bank runs as
‘International Comparison Program’.
• In October 2015, the World Bank updated the international poverty line to $1.90 a day. The
new figure of $1.90 is based on ICP purchasing power parity (PPP) calculations and
represents the international equivalent of what $1.90 could buy in the US in 2011. The new
IPL replaces the $1.25 per day figure, which used 2005 data.
World Bank Poverty Line for India:

Recently World Bank estimation shows that the country’s poverty rate has been reduced from 21.9
per cent to 12.4 per cent for 2011-12. The World Bank data shows that India is overestimating while
counting the number of poor.
7 Global Hunger Index (GHI):

• The Global Hunger Index (GHI) is a tool designed to comprehensively measure and track
hunger at the global, regional, and national levels.
• The International Food Policy Research Institute (IFPRI) calculates GHI scores each year
since 2006 to assess progress and setbacks in combating hunger.
• The GHI is designed to raise awareness and understanding of the struggle against
hunger, provide a means to compare the levels of hunger between countries and
regions, and call attention to the areas of the world in greatest need of additional
resources to eliminate hunger.
7.1 Indicators of GHI:

To capture the multidimensional nature of hunger, GHI scores are based on four indicators:
✓ UNDERNOURISHMENT: the share of the population that is undernourished (that is,

whose caloric intake is insufficient). It is given weightage of 1/3.
✓ CHILD WASTING: the share of children under the age of five who are wasted (that is,
who have low weight for their height, reflecting acute undernutrition. It is given
weightage of 1/6.
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✓ CHILD STUNTING: the share of children under the age of five who are stunted (that is,
who have low height for their age, reflecting chronic undernutrition). It is given
weightage of 1/6.
✓ CHILD MORTALITY: the mortality rate of children under the age of five (a reflection of
the inadequate nutrition and unhealthy environments). It is given weightage of 1/3.
7.2 GHI Severity Scale:

The scale below shows the severity of hunger—from low to extremely alarming—associated
with the range of possible GHI scores.
Note: The latest GHI scores and ranking has to be covered for the examination. Kindly refer
EduTap’s monthly current affairs compilation for the updates regarding the latest rankings.
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8 Universal Basic Income:
8.1 What is it?

• India is looking at a radical idea for reducing poverty: free money for everyone—no strings
attached!
• In the recent years, the Ministry of Finance has been exploring how the country can replace
its various welfare programs with a universal basic income, a uniform stipend paid to every
adult and child, poor or rich.
• Guaranteeing all citizens enough income to cover their basic needs would promote social
justice, the survey says, and empower the poor to make their own economic choices.
• It would also be easier to administer than India’s current antipoverty programs, which are
plagued by waste, corruption and abuse.
• Universal basic income is an old idea that is enjoying a revival as governments look to
revamp their safety nets. Finland launched a pilot project this year, and localities in Canada
and the Netherlands have also announced experiments. Voters in Switzerland considered,
and rejected, a minimum-income proposal last year.
9 Poverty related Sustainable Development Goals (SDGs):

• The Sustainable Development Goals (SDGs), otherwise known as the Global Goals, are a
universal call to action to end poverty, protect the planet and ensure that all people enjoy
peace and prosperity.
• On 1 January 2016, the 17 Sustainable Development Goals (SDGs) of the 2030 Agenda for
Sustainable Development with 169 targets — adopted by world leaders in September 2015
at an historic UN Summit — officially came into force.
• Over the next fifteen years, with these new Goals that universally apply to all countries will
mobilize efforts to end all forms of poverty, fight inequalities and tackle climate change
while ensuring that no one is left behind.
• The SDGs are built on the success of the Millennium Development Goals (MDGs) (from
2000-2015) and aim to go further to end all forms of poverty.
• There are 17 Sustainable Development Goals and each goal has specific targets (total 169
targets) to be achieved over the next 15 years i.e., by 2030.
• The new Goals are unique in that they call for action by all countries, poor, rich and middle-
income to promote prosperity while protecting the planet.
• They recognize that ending poverty must go hand-in-hand with strategies that build
economic growth and addresses a range of social needs including education, health, social
protection, and job opportunities while tackling climate change and environmental
protection.
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Note: The SDG No.1 and 2 are related to poverty and hunger respectively. Kindly make a note of
these for the examination.
The table given below lists all the 17 SDGs:
10 Conclusion:
So, we have seen in detail how an important objective of fiscal policy: ‘Reduction in inequalities of
Income and Wealth’ is achieved by coming out with effective poverty alleviation programmes. In
order to come out with such programmes, it is important to understand the concept of Poverty and
what is the condition of India when it comes to Poverty.
11 Employment Generation in India: Why is it important?

To understand the importance of employment, we need to have an idea about the working age
population of India. India’s working age population (15-64 years) is now 63.4% of the total, as
against just short of 60% in 2001.
Working Age Population:

The working age population is defined as those aged 15 to 64. The basic indicator for employment
is the proportion of the working age population aged 15-64 who are employed.
Now, when we compare this with the other countries, we see that the average age of the
population in India by 2020 is estimated to be 29 as against 40 years in USA, 46 years in Europe and
47 years in Japan. In fact, during the next 20 years the labor force in the industrialized world is
expected to decline by 4%, while in India it will increase by 32%.
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This poses a formidable challenge and a huge opportunity. To reap this demographic dividend which
is expected to last for next 25 years, India needs to equip its workforce with employable skills and
knowledge so that they can contribute substantively to the economic growth of the country.
12 Types of Unemployment in India:

Unemployment:
Unemployment may be defined as “a situation in which the person is capable of working both
physically and mentally at the existing wage rate, but does not get a job to work”.
In other words, unemployment means only involuntary unemployment wherein a person who is
willing to work at the existing wage rate does not get a job.
12.1 Open Unemployment:

• Open unemployment is a situation where in a large section of the labour force does not get a
job that may yield them regular income.
• They are able to work and are also willing to work but there is no work for them.
• This type of unemployment can be seen and counted in terms of the number of unemployed
persons. Hence it is called open unemployment.
12.2 Structural Unemployment:

• It occurs due to structural changes in the economy.
• Structural changes can be due to change in technology (from labour intensive technology to
capital intensive technology) or change in the pattern of demand.
12.3 Frictional Unemployment:

• It occurs when a worker is shifting from one job to the other.
• During the mobility period, he may be unemployed for some time.
• It is a temporary phenomenon.
12.4 Cyclical Unemployment:

• It occurs because of cyclical fluctuations in the economy.
• Phases of boom, recession, depression and recovery are typical characteristics of a capitalist
economy.
• In boom phase, high level of economic activity results in high level of employment whereas
recession and depression phases marked with low demand results in more unemployment
and during the recovery phase unemployment is slowly reduced.
12.5 Under-employment:
• It is a situation under which employed people are contributing to production less than they
are capable of.
• It can be in terms of time (visible under-employment) or type of work (invisible under-
employment).
• Part-time workers come under this category.
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12.6 Disguised Unemployment:

• A disguisedly unemployed person is the one who seems to be employed but actually he is
not.
• His contribution to the total output is zero or negligible.
• When more people are engaged in a job than actually required, a state of disguised
unemployment is created. It is mostly seen in rural areas.
12.7 Seasonal Unemployment:

• It occurs only during seasonal months of the year.
• In India, it is very common in agriculture sector. In certain type of industries also this type of
unemployment is found.
• Disguised unemployment and seasonal unemployment are two most common types of
unemployment found in rural India particularly in farm sector.
12.8 Casual Unemployment:

• In industries such as building construction, catering or agriculture, where workers are
employed on a day- to-day basis, there are chances of casual unemployment occurring due
to short-term contracts, which are terminable any time.
12.9 Chronic Unemployment:

• When unemployment tends to be a long-term feature of a country it is called “chronic
unemployment.”
• Underdeveloped countries suffer from chronic unemployment on account of the vicious
circle of poverty.
13 Measurement of Unemployment:
There are three measures or estimates of unemployment. These are developed by National Sample
Survey Organization (NSSO).
13.1 Usual Status Unemployment:

• Also known as open unemployment or chronic unemployment. This measure estimates the
number of persons who remained unemployed for a major part of the year. This measure
gives the lowest estimates of unemployment.
• This concept used to determine the usual activity status of a person as employed or
unemployed or outside the labour force. The persons covered may be classified into those
working or available for work in their principal activity sector and subsidiary sector.
Labour force:
• Labor force (also called work force) is the total number of people employed or seeking
employment in a country or region. (Thus, labour force constitutes of both employed and
unemployed).
• One is classified as ‘not in labour force’; if he or she was engaged in relatively longer period
in any one of the non-gainful activities or we can say those who are neither seeking nor
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available for work.

* In May 2019, Government of India had decided to merge Central Statistical Office and National Sample Survey
Office into the National Statistical Office (NSO).
13.2 Weekly Status Unemployment:

The estimate measures unemployment with respect to one week. In other words, according to this
estimate a person is said to be employed for the week even if he/she is employed only for a day
during that week.
13.3 Current Daily Status Unemployment:

• It considers the activity status of a person for each day of the preceding seven days. The
reference period here is a day. If a person did not find work on a day or some days during the
survey week, he/she is regarded as unemployed.
• Normally if a person works for four hours or more during a day, he or she is considered as
employed for the whole day. The daily status unemployment is considered to be a
comprehensive measure of unemployment.
14 How is employment measured in India?

Note: The latest updates on any of the surveys shall be covered as part of the EduTap’s ESI and
Finance monthly current affairs magazine. If there is any data mentioned, kindly use it to get an
idea regarding the situation of unemployment in India.
On the broader level, there are two institutions measuring employment in India:
1. Labour Bureau (Ministry of Labour and Employment)

2. National Sample Survey Organization (NSSO) (Ministry of Statistics and Programme
Implementation)
Sources of employment data in India:
There is a total of four potential sources:
✓ Household surveys
✓ Enterprise surveys
✓ Administrative data
✓ Data from Government schemes
14.1 Household Surveys:

Under the household surveys, the following are the datasets:
• Employment-Unemployment Survey of NSSO

• Annual Labour Force Survey by Ministry of Labour and Employment
• Population / Census Data from Office of the Registrar General & Census Commissioner
Now let us have a look at each of the above-mentioned surveys:
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The Employment-Unemployment Survey of NSSO:

• The first survey was conducted in the year 1955 and since 1972-73, it is been conducted
every five years.
• The latest such survey was conducted in 2011-12.
Note: This survey has been discontinued.
The Periodic Labour Force Survey (PLFS):

• NSSO had launched a new employment-unemployment survey, namely, Periodic Labour
Force Survey (PLFS).
• It is a continuous/regular survey for generating estimates of various labour force indicators
on quarterly basis for urban areas and annual basis for both rural and urban areas, at
State/UT and all-India level.
Annual Labour Force Survey by Ministry of Labour and Employment:

• This survey was published since 2009-10. A total of six rounds of surveys has been held till
2016.
• The results of 5 rounds have been released till date. The report of the 5 th round of Annual
EUS was released in September 2016.
Note: This survey has been discontinued.
Population Census:
It collects data on main, marginal and non-workers. The Census comes once in 10 years. The latest
Census was conducted in 2011.
14.2 Enterprise Survey:

The following are the datasets released for the enterprises:
Survey/Report Remarks
The Economic Census by MOSPI Covers all the non-agricultural economic activities,
thus both industries and service sectors are covered.
The First one was conducted in 1977.
The latest one was held in 2013-14. 7th Economic
Census is being conducted in 2020-21
Annual Survey of Industries by MOSPI It covers the industrial units registered under the
Factories Act, 1948 and only those industrial units
which employ 10 or more workers (if using power) or
20 or more workers (if not using power).
Unorganized Sector Surveys of Industries Conducted occasionally by NSSO taking Economic
and Services by NSSO Census as the time frame.
Quarterly Employment Survey (QES) by the It measures employment in 8 broad sectors of
Labour Bureau industry and services. The survey covers enterprises
with more than 10 workers in both urban and rural
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areas.
MSME (Ministry of Micro, Small and This collects data on Small Scale Industries (SSI) and
Medium Enterprises) the MSME sector through the MSME Census. Till
date, it has conducted four such censuses, in 1973-
74, 1990-91, 2001-02 and 2006-07.
14.3 Administrative data-sets:

• The key sources of administrative data include the Employees’ Provident Fund Organization
(EPFO), the Employees’ State Insurance Corporation (ESIC), the National Pension Scheme
(NPS) and other similar sources relating to large private organizations.
• These surveys have their own limitations. Like in case of EPFO, firms with more than 20
workers are only required to contribute to EPFO.
14.4 Government Schemes:

There are various government schemes giving employment to crores of people in India. So, the data
collected as part of these schemes also acts an important source of employment data generation.
Note: All the above-mentioned sources are government conducted ones. There is one privately
held survey on employment by the Centre for Monitoring Indian Economy (CMIE).
The following section gives us an idea regarding the situation of employment in India:
15 What is the status of employment in India?
15.1 Data from the Census, 2011:
15.2 Unemployment grew faster for illiterates than for literates:

Based on the data of the Census, 2011, the following observations can be made:
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• Of the 116 million Indians who were either seeking or available for work, 32 million were
illiterates and 84 literates.
• Among literates, unemployment rates were higher among the better qualified, highest of
all among the 7.2 million people with a technical diploma or certificate other than a degree.
• At all levels of education, unemployment rates were higher in rural than in urban areas.
• At every level of education, especially at the higher levels, female unemployment exceeded
male unemployment.
• The ‘unemployed’ included those who were not currently working but were seeking or
available for work, as well as those in marginal employment — meaning that they worked for
fewer than six months in the year preceding the Census — who were seeking or available for
work.
• Overall, India’s unemployment rate grew from 6.8 p.c. in 2001 to 9.6 p.c. in 2011, based on
official Census data.
• Unemployment grew faster for illiterates than for literates.
• In all, India had just 56 million graduates and post-graduates in 2011 and 12 million with a
technical certificate or diploma equivalent to a graduate or post-graduate degree.
• Half of these with the highest level of education were classified as “main workers”, meaning
that they worked for at least six months in the year preceding the Census.
Unemployment rate:
It is the percent of the labor force that is without work.
Unemployment rate = (Unemployed workers / Total Labour Force) * 100
Kindly make a note of the following terms as well:
Labour Force Participation Rate (LFPR):

Labour Force Participation Rate (LFPR) is defined as the number of persons in the labour force per
1000 persons.
Worker Population Ratio (WPR):

Worker Population Ratio (WPR) is defined as the number of persons employed per 1000 persons.
Indian economy is such that a major portion of the population comes under the unorganized
sector. The data given below emphasizes this fact:
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16 Share of Employment across Organized –Unorganized Sectors in 2011-12

and 2004-05 (in per cent): (Source: NITI Aayog)
Year Organized (in %) Unorganized (in %)
2004-05 13 87
2011-12 17.3 82.7
To understand what organized and unorganized sector is, we can study the key differences
between the two:
17 Key differences between the Organized and Unorganized sector:

Basis for comparison Organized sector Unorganized sector
Meaning The sector in which the employment The sector that comprises of
terms are fixed and employees have small scale enterprises or units
assured work is organized sector and are not registered with the
government
Governed by Various acts like factories act, Bonus Not governed by any act.
act, PF act, Minimum wages act etc.
Government rules Strictly followed Not followed
Remuneration Regular monthly salary Daily wages
Job security Yes No
Working hours Fixed Not fixed
Overtime Workers are paid remuneration for No provision for overtime
overtime
Salary of workers As prescribed by the government Less than the salary prescribed
by the government.
Contribution to provident Yes No
fund by employer
Increment in salary Once in a while Rarely
Benefits and perquisites Employees get add on benefits like Not provided.
medical facilities, pension, leave
travel compensation, etc.
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Sustainable Development
[Grab your reader’s attention with a
great quote from the document or use
&this
Environmental Issues
space to emphasize a key point. To
place this text box anywhere on the page,
just drag it.]

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Contents
Contents ....................................................................................................................................................................... 3
1 Sustainable development: What is it? .................................................................................................................. 5
1.1 Three pillars of sustainable development .................................................................................................... 5
1.2 Sustainable Development Goals ................................................................................................................... 5
2 Important Conventions and Protocols adopted during various Conferences ...................................................... 6
2.1 United Nations Conference on Environment and Development (UNCED) .................................................. 6
2.2 Agenda 21 ..................................................................................................................................................... 7
2.3 Convention on Biological Diversity (CBD) ..................................................................................................... 7
2.4 Meeting of the parties to the convention (Important Conference of Parties)............................................. 7
2.5 Cartagena Protocol ....................................................................................................................................... 7
2.6 Nagoya Protocol ........................................................................................................................................... 8
2.7 The United Nations Environment Programme (UNEP)................................................................................. 8
2.8 The International Treaty on Plant Genetic Resources for Food and Agriculture ......................................... 9
2.9 UNFCCC: United Nations Framework Convention on Climate Change ........................................................ 9
2.10 Kyoto protocol .............................................................................................................................................. 9
2.11 Important Summits .....................................................................................................................................12
2.11.1 Lima Summit, 2014 .............................................................................................................................12
2.11.2 Paris summit, 2015 .............................................................................................................................13
2.12 International Solar Alliance ........................................................................................................................14
2.13 United Nations Convention to Combat Desertification (UNCCD) ..............................................................15
2.14 Stockholm Convention................................................................................................................................15
2.15 Montreal Protocol ......................................................................................................................................16
2.16 Kigali Agreement ........................................................................................................................................16
3 Other Important Organizations: .........................................................................................................................17
3.1 Intergovernmental Panel on Climate Change ............................................................................................17
3.2 The World Wide Fund for Nature ...............................................................................................................18
3.3 The Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) ............18
3.4 TRAFFIC – The Wildlife trade monitoring network .....................................................................................18
4 India's National Action Plan on Climate Change ................................................................................................19
4.1 National Clean Air Programme (NCAP).......................................................................................................19
4.2 National Adaptation Fund on Climate Change (NAFCC) .............................................................................19
5 Constitutional Provisions ....................................................................................................................................20
6 Pollution Related Acts.........................................................................................................................................20
6.1 The Water (Prevention and Control of Pollution) Act of 1974 and Amendment, 1988 .............................20
6.2 The Water (Prevention and Control of Pollution) Cess Act of 1977 ...........................................................21
6.3 The Air (Prevention and Control of Pollution) Act of 1981 and amendment, 1987 ...................................21

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7 Environment & Biodiversity Acts/Bodies............................................................................................................21

7.1 Environment (Protection) Act of 1986 .......................................................................................................21
7.2 Genetic Engineering Appraisal Committee (GEAC) ....................................................................................22
7.3 Wild Life (Protection) Act of 1972 and Amendment, 1982 ........................................................................22
7.4 The Wild Life (Protection) Amendment Act, 2006 .....................................................................................22
7.5 Animal Welfare Board of India ...................................................................................................................23
7.6 Forest (Conservation) Act of 1980 ..............................................................................................................23
7.7 Biodiversity Act 2000 ..................................................................................................................................24
7.8 The Scheduled Tribes and Other Traditional Forest Dwellers (Recognition Of Forest Rights) Act, 2006 ..24
7.9 National Green Tribunal Act, 2010 .............................................................................................................25
8 Acts for Protecting Coastal Environment and Wetlands ....................................................................................26
8.1 Coastal Regulation Zone (CRZ)....................................................................................................................26
8.2 Wetlands (Conservation and Management) Rules 2010............................................................................27
9 Other important concepts ..................................................................................................................................27
9.1 Circular Bioeconomy...................................................................................................................................27
9.2 Environmental impact of Agricultural Subsidies ........................................................................................28
9.3 Natural Capital Accounting and Valuation of the Ecosystem Services (NCAVES) ......................................28
9.4 Coalition for Disaster Resilient Infrastructure (CDRI) .................................................................................29

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1 Sustainable development: What is it?

Sustainable development recognizes that growth must be both inclusive and environmentally
sound to reduce poverty and build shared prosperity for today’s population, and to continue to
meet the needs of future generations.
1.1 Three pillars of sustainable development

The three pillars of sustainable development – economic growth, environmental stewardship, and
social inclusion – carry across all sectors of development, from cities facing rapid urbanization to
agriculture, infrastructure, energy development and use, water availability, and transportation.
Cities are embracing low-carbon growth and public transportation.
1.2 Sustainable Development Goals

 Active participation of countries, people and business along with United Nations has intensified
the efforts to achieve Agenda 2030 for sustainable development. Seventeen Sustainable
Development Goals (SDGs) for Agenda 2030 were officially enforced on January 1, 2016 by the
leaders of the world.
 The SDGs were developed in the Post-2015 Development Agenda as the future global
development framework to succeed the Millennium Development Goals which ended in 2015.
 The SDGs were set up in 2015 by the United Nations General Assembly. They are included in
a UN Resolution called the 2030 Agenda or what is colloquially known as Agenda 2030.
 Seventeen Sustainable development Goals are:

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Concept Check
Q. Sustainable development recognizes that growth must be:
(a) Inclusive and environmentally sound
(b) Exclusive and environmentally sound
(c) Inclusive only
(d) Environmentally sound only
Answer: A
2 Important Conventions and Protocols adopted during various Conferences

Convention: Usually a treaty or international agreement between two parties, members or even
nations.
Protocol: A document that is legally binding that allows alterations and amendments to the main
treaty. It usually addresses specific issues.
2.1 United Nations Conference on Environment and Development (UNCED)
 The United Nations Conference on Environment and Development (UNCED), also known as
the Earth Summit was a major United Nations conference held in Rio de Janeiro from 3 to 14
June 1992.
 172 governments participated, with 116 sending their heads of state or government.
 As a follow-up, the World Summit on Sustainable Development (Rio+10) was held in 2002 in
Johannesburg, South Africa.
 In 2012, the United Nations Conference on Sustainable Development was also held in Rio,
and is also commonly called Rio+20 or Rio Earth Summit 2012.
The Earth Summit resulted in the following documents:

 Rio Declaration on Environment and Development
 Agenda 21
 Forest Principles
The following Conventions (Rio Convention) were opened for signature:
 Convention on Biological Diversity
 United Nations Framework Convention on Climate Change (UNFCCC)
 United Nations Convention to Combat Desertification

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2.2 Agenda 21
 Agenda 21 is an action plan of the United Nations (UN) related to sustainable development.
 The number 21 refers to an agenda for the 21st century.
2.3 Convention on Biological Diversity (CBD)

 The historic Convention on Biological Diversity (Biodiversity Convention - a multilateral treaty)
was opened for signature at the Earth Summit in Rio de Janeiro in 1992 and entered into in
1993.
The Convention has three main goals:

 Conservation of biological diversity (or biodiversity)
 Sustainable use of its components
 Fair and equitable sharing of benefits arising from genetic resources.
 It is often seen as the key document regarding sustainable development.

 The Convention is legally binding; countries that join it ('Parties') are obliged to implement its
provisions.
 195 UN states and the European Union are parties to the convention.
 All UN member states—with the exception of the United States—have ratified the treaty.
2.4 Meeting of the parties to the convention (Important Conference of Parties)

 The meeting of the parties to the Convention on Biological Diversity takes place every two
years.
 On 29 January 2000, the Conference of the Parties to the Convention on Biological Diversity
adopted a supplementary agreement to the Convention known as the Cartagena Protocol on
Biosafety.
 At the 2010 10th Conference of Parties (COP) to the Convention on Biological Diversity in
October in Nagoya, Japan, the Nagoya Protocol was adopted.
 The 2012 11th Conference of Parties (COP) was held in Hyderabad, India.
2.5 Cartagena Protocol

 The Cartagena Protocol on Biosafety (CPB), the first international regulatory framework for
safe transfer, handling and use of Living Modified Organisms (LMOs).
 The Biosafety Protocol seeks to protect biological diversity from the potential risks posed by
genetically modified organisms resulting from modern biotechnology.

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2.6 Nagoya Protocol

 The Nagoya Protocol is about “Access to Genetic Resources and the Fair and Equitable Sharing
of Benefits Arising from their Utilization”, one of the three objectives of the CBD.
 The Protocol was adopted on 29 October 2010 in Nagoya, Japan, and entered into force on 12
October 2014. It has been ratified by 60 parties.
 The Nagoya Protocol is intended to create greater legal certainty and transparency for both
providers and users of genetic resources.
Concept Check
Q. Cartagena Protocol is related to:
(a) Living Modified Organisms
(b) Access to Genetic Resources
(c) Ozone layer
(d) Land degradation
(e) Biodiversity
Answer: A
2.7 The United Nations Environment Programme (UNEP)

 It is responsible for coordinating responses to environmental issues within the United Nations
system.
 It was established after the United Nations Conference on the Human Environment in
Stockholm in June 1972.
 Its mandate is to provide leadership, deliver science and develop solutions on a wide range of
issues, including climate change, the management of marine and terrestrial ecosystems, and
green economic development.
 As a member of the United Nations Development Group, UNEP aims to help the world meet the
17 Sustainable Development Goals.
 UNEP hosts the secretariats of several multilateral environmental agreements and research
bodies, including The Convention on Biological Diversity (CBD), The Minamata Convention on
Mercury, The Convention on Migratory Species and The Convention on International Trade in
Endangered Species of Wild Fauna and Flora (CITES).
 In 1988, the World Meteorological Organization and UNEP established the Intergovernmental
Panel on Climate Change (IPCC).

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 UNEP is also one of several Implementing Agencies for the Global Environment Facility (GEF)
and the Multilateral Fund for the Implementation of the Montreal Protocol.
 UNEP sometimes uses the alternative name UN Environment.
2.8 The International Treaty on Plant Genetic Resources for Food and Agriculture
 This treaty was adopted by the Thirty-First Session of the Conference of the Food and
Agriculture Organization of the United Nations on 3 November 2001. Popularly known as
the International Seed Treaty.
The Treaty aims at
 Recognizing the enormous contribution of farmers to the diversity of crops that feed the
world;
 Establishing a global system to provide farmers, plant breeders and scientists with access to
plant genetic materials;
 Ensuring that recipients share benefits they derive from the use of these genetic materials
with the countries where they have been originated.
2.9 UNFCCC: United Nations Framework Convention on Climate Change

 The United Nations Framework Convention on Climate Change (UNFCCC) is an international
environmental treaty.
 The objective of the treaty is:
 To "stabilize greenhouse gas concentrations in the atmosphere at a level that would prevent
dangerous anthropogenic interference with the climate system“.
 Legal Effect: Treaty is considered legally non-binding: The treaty itself set no binding limits
on greenhouse gas emissions for individual countries.
 But UNFCCC provides a framework for negotiating specific international treaties (called
"protocols") that aim to set binding limits on greenhouse gases.
 As of March 2021, UNFCCC has 197 parties (almost all countries).
2.10 Kyoto protocol

 The Kyoto Protocol is an international agreement linked to the United Nations Framework
Convention on Climate Change, which commits its Parties by setting internationally binding
emission reduction targets.
 The Kyoto Protocol was adopted in Kyoto, Japan, on 11 December 1997 and entered into
force on 16 February 2005.

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 The detailed rules for the implementation of the Protocol were adopted at COP 7 in
Marrakesh, Morocco, in 2001, and are referred to as the "Marrakesh Accords."
 There are currently 192 Parties to the protocol. USA never ratified Kyoto Protocol.
Canada withdrew in 2012.
Commitment period of Kyoto Protocol
 There are two commitment periods of Kyoto Protocol:

 The first commitment period under the Kyoto Protocol was from 2008-2012.
 The second commitment period of the Kyoto Protocol or Doha Amendment for 2013-2020
period was adopted in 2012. (In Doha, Qatar, on 8 December 2012, the "Doha Amendment
to the Kyoto Protocol" was adopted.)
 The amendment includes new commitments for parties to the Protocol who agreed to take
on commitments in a second commitment period and a revised list of GHGs to be reported
on by Parties.
Classification of Parties: Kyoto Protocol
 Annex I: Developed countries (US, UK, Russia etc) + Economies in transition (EIT) (Ukraine,
Turkey, some eastern European countries etc)
 Annex II: Developed countries. Annex II is a subset of Annex I. Required to provide financial
and technical support to the EITs and developing countries to assist them in reducing their
greenhouse gas emissions.
 Annex B: Annex I Parties with first or second-round Kyoto greenhouse gas emissions targets.
The first-round targets apply over the years 2008–2012 and the second-round Kyoto targets,
which apply from 2013–2020. They have compulsory binding targets to reduce GHG
emissions.
 Non-Annex I: Parties to the UNFCCC not listed in Annex I of the Convention are mostly low-
income developing countries. No binding targets to reduce GHG emissions.
 LDCs: Least-developed countries. No binding targets to reduce GHG emissions.
 Developing countries may volunteer to become Annex I countries when they are sufficiently
developed.
The Kyoto Protocol emission target gases include:

Carbon dioxide (CO2),
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Methane (CH4),
Nitrous oxide (N2O),
Sulphur Hexafluoride (SF6),
Groups of hydro fluorocarbons (HCFs) and
Groups of Per fluorocarbons (PFCs).
Flexible Market Mechanisms – Kyoto Protocol
 Countries bound to Kyoto targets have to meet them largely through domestic action— that
is, to reduce their emissions onshore.
 But they can meet part of their targets through three “market-based mechanisms”.
The Kyoto Flexible Market Protocol mechanisms:
 Clean Development Mechanism (CDM) - It allows a country with an emission-reduction or

emission-limitation commitment under the Kyoto Protocol (Annex B Party) to implement an
emission-reduction project in developing countries.
 Emission Trading - Emissions trading, allows countries that have emission units to spare -
emissions permitted to them but not "used" - to sell this excess capacity to countries that are
over their targets. Thus, a new commodity was created in the form of emission reductions or
removals.
 Joint Implementation (JI) - The mechanism known as “joint implementation,” allows a
country with an emission reduction commitment under the Kyoto Protocol (Annex B Party)
to earn emission reduction units (ERUs) from an emission-reduction project in another Annex
B Party, each equivalent to one tonne of CO2, which can be counted towards meeting its
Kyoto target.
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2.11 Important Summits
2.11.1 Lima Summit, 2014
 COP20 or CMP10 or Lima Summit was held in Lima, Peru, in December 2014.
 2014 United Nations Climate Change Conference is the 20th yearly session of the Conference
of the Parties (COP 20) to the 1992 United Nations Framework Convention on Climate
Change (UNFCCC) and the 10th session of the Meeting of the Parties (CMP 10) to the 1997
Kyoto Protocol.
 The overarching goal of the conference was to reduce greenhouse gas emissions (GHGs) to
limit the global temperature increase by 2030 to 2 degrees Celsius above 1850 baseline or
Pre Industrial era.
 No agreement was reached due to lack of consensus between developed and developing
countries.
Last-minute deal to end the impasse at Lima Summit:
 The last minute deal urged developed countries to provide financial support to developing
countries to meet their “ambitious mitigation” goals (Slightly in favor of Common But
Differentiated Responsibility).
 The agreement urges parties to take national pledges by finalizing their Intended Nationally
Determined Contributions (INDC) by November 2015 (Before Paris Summit).
 The agreement was severely criticized for being too shallow in its commitments.
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2.11.2 Paris summit, 2015
 2015 United Nations Climate Change Conference (COP 21 or CMP 11) took place from
November 30 to December 11, 2015 in Paris.
 Previous summit was held in 2014 in Lima, Peru. No agreement was reached in Lima. All
agreements and decisions were reserved for Paris Summit 2015.
 Paris Summit is one of the most important environmental conferences because of the INDC
commitments made by major polluters.
 The conference objective is to achieve a legally binding and universal agreement on climate
to be signed in 2015 and implemented by 2020.
 Prior to the conference, 146 national climate panels publicly presented draft national climate
contributions (so-called Intended Nationally Determined Contributions, INDCs).
The aims of Paris Agreement are as below:

 Keep the global temperature rise this century well below 2 degrees Celsius above the pre-
industrial level.
 Pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius.
 Strengthen the ability of countries to deal with the impacts of climate change.
India’s Intended Nationally Determined Contributions
It was announced in October, 2015 (Lima summit urged every country to announce its INDCs by
Nov, 2015)
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1. Reduce emission intensity by 33 to 35 per cent by 2030 compared to 2005 levels.

2. Produce 40 per cent of electricity from non-fossil fuel-based energy resources by
2030, if international community helps with technology transfer and low cost finance.
3. Create an additional carbon sink of 2.5 to 3 billion tonnes of carbon dioxide
equivalent by 2030 through additional forest and tree cover.
Paris Agreement entered into force
 The agreement came into force on 4th November 2016, thirty days after the date on which at
least 55 Parties to the Convention accounting in total for at least an estimated 55 % of the
total global greenhouse gas emissions have deposited their instruments of ratification,
acceptance, approval or accession with the Depositary.
 India has ratified the Paris Agreement on climate change on the 147th birth anniversary of
Mahatma Gandhi (2nd October, 2016).
 With this, India became 62nd country to ratify the agreement. These 62 countries including
India are responsible for almost 52% of Green House Gases (GHG) emissions.
 On 5 October 2016, the threshold for entry into force of the Paris Agreement was achieved.
Concept Check
Q. Paris Agreement was the main outcome of
(a) CoP 14
(b) CoP 19
(c) Cop 17
(d) Cop 21
Answer: D
2.12 International Solar Alliance
 India and France had launched International Solar Alliance (ISA) at the Conference of Parties
(CoP21) Climate Conference in Paris, France.
 The idea of alliance was mooted by Indian PM Narendra Modi to harness solar power as a
major step to mitigate carbon gas emissions.
Salient Features
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 Aims to bring solar rich 121 tropical countries located fully or partly between the Tropic of
Cancer and Capricorn together to tap solar energy.
 These tropical countries are potential members of alliance and shall be united by the shared
vision to bring clean, renewable solar energy within the reach of all.
 The objective of the alliance is to augment solar power generation in these countries with a
view to contribute global sustainable development.
 It would play important role in achieving the objective of keeping global warming below 2
degree Celsius.
 It will function from the Gurgaon based National Institute of Solar Energy (NISE).
Concept Check
Q. International Solar Alliance was launched by India and:
(a) Germany
(b) France
(c) United Kingdom
(d) Japan
(e) United States of America
Answer: B
2.13 United Nations Convention to Combat Desertification (UNCCD)

 UNCCD is a Convention to combat desertification and mitigate the effects of drought through
national action programs (NAP).
 NAP incorporates long-term strategies supported by international cooperation and
partnership arrangements.
 The Convention stemmed from a direct recommendation of the Rio Conference's Agenda 21,
was adopted in Paris, France in 1994 and entered into force in 1996.
 It is the only internationally legally binding framework set up to address the problem of
desertification.
2.14 Stockholm Convention

 It is a global treaty to protect human health and environment from persistent organic
pollutants (POPs).
 It is legally binding.
 India ratified the Stockholm Convention in 2006.
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 Ministry of Environment had notified the 'Regulation of POP Rules' in 2018, under the
Environment (Protection) Act, 1986.
 POPs are chemical substances that persist in environment for a long period, bio-accumulate
in living organisms, adversely affect human health/ environment and have the property of
long-range environmental transport.
2.15 Montreal Protocol
 The Montreal Protocol is an international treaty designed to protect the ozone layer. It came
into force in 1989.
 It aims at reducing the production and consumption of ozone depleting substances (ODS) in
order to protect the earth’s fragile ozone layer.
 It has been ratified by 197 parties making it universally ratified protocol in United Nations
history.
 India became its signatory member on 19th June 1992.
 With International cooperation this treaty has successfully led the phase-out operation of
production & consumption of major Ozone Depleting Substance (ODS) viz. CFCs, HCFCs,
Carbon tetrachloride (CTC) and Halons globally in span of 27 years.
 Hydrofluorocarbons (HFCs) took the place of above ODS, which worked as an alternative to
CFCs & HCFCs and is now commonly used as refrigerants and coolants in refrigerators and
air-conditioners.
 Gradually, it was noticed that these HFCs though are not Ozone depleting but possess great
greenhouse gas effect and contribute to global warming about 12,000 times more than CO2,
CH4. It can also be said that HFCs solved one problem and created another.
2.16 Kigali Agreement
 A historic global climate deal was reached in Kigali, Rwanda at the Twenty-Eighth Meeting of
the Parties to the Montreal Protocol on Substances that Deplete the Ozone Layer (MOP28) in
November, 2016.
 The Kigali Amendment which amends the 1987 Montreal Protocol aims to phase out
Hydrofluorocarbons (HFCs), a family of potent greenhouse gases by the late 2040s.
 Under Kigali Amendment, in all 197 countries, including India have agreed to a timeline to
reduce the use of HFCs by roughly 85% of their baselines by 2045.
 The Kigali Agreement or amended Montreal Protocol for HFCs reduction will be binding on
countries from 2019.
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 It also has provisions for penalties for non-compliance. Under it, developed countries will
also provide enhanced funding support estimated at billions of dollars globally. The exact
amount of additional funding from developed countries will be agreed at the next Meeting of
the Parties in Montreal in 2017.
Timelines for different groups under Kigali Amendment
 All signatory countries have been divided into three groups with different timelines to go
about reductions of HFCs.
 First group: It includes richest countries like US and those in European Union (EU). They will
freeze production and consumption of HFCs by 2018. They will reduce them to about 15% of
2012 levels by 2036.
 Second group: It includes countries like China, Brazil and all of Africa etc. They will freeze
HFC use by 2024 and cut it to 20% of 2021 levels by 2045.
 Third group: It includes countries India, Pakistan, Pakistan, Iran, Saudi Arabia etc. They will
be freezing HFC use by 2028 and reducing it to about 15% of 2025 levels by 2047.
Concept Check
Q. Kigali Agreement is associated with:
(a) Montreal Protocol
(b) Kyoto Protocol
(c) Cartagena Protocol
(d) Nagoya Protocol
Answer: A
3 Other Important Organizations:
3.1 Intergovernmental Panel on Climate Change

 It is a scientific intergovernmental body under the auspices of the United Nations.
 It was set up at the request of member governments.
 It was first established in 1988 by two United Nations organizations, the World
Meteorological Organization (WMO) and the United Nations Environment Programme
(UNEP).
 Membership of the IPCC is open to all members of the WMO and UNEP.
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 The IPCC produces reports that support the United Nations Framework Convention on
Climate Change (UNFCCC).
Concept Check
Q. Intergovernmental Panel on Climate Change (IPCC) was established by the World Meteorological
Organization (WMO) and
(a) United Nations Environment Programme
(b) United Nations Development Programme
(c) World Economic Forum
(d) World Wide Fund for Nature
(e) Convention on International Trade in Endangered Species of Wild Fauna and Flora
Answer: A
3.2 The World Wide Fund for Nature

 The World Wide Fund for Nature (WWF) is an international non-governmental organization
founded on April 29, 1961, and is working on issues regarding the conservation, research and
restoration of the environment.
 The group's mission is "to stop the degradation of the planet’s natural environment and to
build a future in which humans live in harmony with nature."
3.3 The Convention on International Trade in Endangered Species of Wild Fauna and
Flora (CITES)
 CITES (the Convention on International Trade in Endangered Species of Wild Fauna and Flora)
is an international agreement between government entered into force in 1975.
 It is the only treaty to ensure that international trade in plants and animals does not threaten
their survival in the wild.
 CITES is administered through United Nations Environment Programme (UNEP).
3.4 TRAFFIC – The Wildlife trade monitoring network

 TRAFFIC, the wildlife trade monitoring network, is an international organization dedicated to
ensuring that trade in wild plants and animals is not a threat to the conservation of nature.
 TRAFFIC is a joint programme of World Wide Fund for Nature (WWF) and the World
Conservation Union (IUCN).
 TRAFFIC also works in close co-operation with the Secretariat of the Convention on
International Trade in Endangered Species of Wild Fauna and Flora (CITES).
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 Founded in 1976, TRAFFIC’s headquarters are now located in Cambridge, United Kingdom
4 India's National Action Plan on Climate Change
 India’s National Action Plan on Climate Change (NAPCC) was launched in 2008.
 Government is implementing the National Action Plan on Climate Change (NAPCC) with a
view to enhance the ecological sustainability of India’s development path and address
climate change.
 The National Action Plan hinges on the development and use of new technologies.
 The implementation of the Plan includes public private partnerships and civil society action.
 The focus will be on promoting understanding of climate change, adaptation and
mitigation, energy efficiency and natural resource conservation.
There are Eight National Missions which form the core of the National Action Plan:
1. National Solar Mission

2. National Mission For Enhanced Energy Efficiency (NMEEE)
3. National Mission On Sustainable Habitat
4. National Water Mission (NWM)
5. National Mission For Sustaining The Himalayan Ecosystem (NMSHE)
6. National Mission For A Green India
7. National Mission For Sustainable Agriculture (NMSA)
8. National Mission on Strategic Knowledge for Climate Change (NMSKCC)
4.1 National Clean Air Programme (NCAP)

 It is a pollution control initiative launched by the Ministry of Environment to cut the
concentration of coarse (PM10) and fine particles (PM2.5) by at least 20% in the next five
years, with 2017 as the base year for comparison.
 It is to be implemented in 102 non-attainment cities.
 Central Pollution Control Board (CPCB) executes the programme for the prevention, control,
and abetment of air pollution within the framework of NCAP. It directs state governments
about implementing action plans immediately under NCAP.
4.2 National Adaptation Fund on Climate Change (NAFCC)

 In the Budget 2015, “National Adaptation Fund” for climate change was introduced.
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 As an initial sum, an amount of Rs 100 crore will be transferred to the fund.

 Government has set up a budget provision of Rs.350 crores for the year 2015-16 and 2016-
17, with an estimated requirement of Rs. 181.5 crores for financial year 2017-18 for NAFCC
 Money obtained from coal cess goes into NAF.
 Objective: Assist States and Union Territories that are particularly vulnerable to the adverse
effects of climate change in meeting the cost of adaptation.
The National Bank for Agriculture and Rural Development (NABARD) has been appointed as National
Implementing Entity (NIE) responsible for implementation of adaptation projects under the
(NAFCC).
5 Constitutional Provisions
The forty second amendment of our constitution has added Clause (g) to Article 51A of the Indian
constitution and has thus made it a fundamental duty to protect and improve the natural
environment.
Fundamental Duty:
Clause (g) to Article 51A of the Indian constitution states “It shall be the duty of every citizen of India
to protect and improve the natural environment including forests, lakes, rivers and wild life and have
compassion for living creatures.”
There is a directive, given to the State as one of the Directive Principles of State Policy regarding the
protection and improvement of the environment.
Directive Principles of State Policy:
Article 48A states “The State shall endeavor to protect and improve the environment and to
safeguard the forests and wildlife of the country”.
6 Pollution Related Acts
6.1 The Water (Prevention and Control of Pollution) Act of 1974 and Amendment,
1988
 The Act vests regulatory authority in State Pollution Control Boards to establish and enforce
effluent standards for factories.
 A Central Pollution Control Board performs the same functions for Union Territories and
formulates policies and coordinates activities of different State Boards.
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 The Act grants power to SPCB and CPCB to test equipment and to take the sample for the
purpose of analysis.
6.2 The Water (Prevention and Control of Pollution) Cess Act of 1977
 The Water Cess Act was passed to generate financial resources to meet expenses of the
Central and State Pollution Boards.
 The Act creates economic incentives for pollution control and requires local authorities and
certain designated industries to pay a cess (tax) for water effluent discharge.
 The Central Government, after deducting the expenses of collection, pays the central board
and the states such sums, as it seems necessary.
6.3 The Air (Prevention and Control of Pollution) Act of 1981 and amendment, 1987
 To implement the decisions taken at the United Nations Conference on the Human
Environment held at Stockholm in June 1972, Parliament enacted the nationwide Air Act.
 The main objectives of this Act are to improve the quality of air and to prevent, control and
abate air pollution in the country.
7 Environment & Biodiversity Acts/Bodies

 The most important legislation in this category is The Environment (Protection) Act of 1986.
 Through this Act Central Government gets full power for the purpose of protecting and
improving the quality of the environment.
7.1 Environment (Protection) Act of 1986
 In the wake of the Bhopal tragedy, the government of India enacted the Environment
(Protection) Act of 1986.
 The purpose of the Act is to implement the decisions of the United Nations Conference on
the Human Environment of 1972, in so far as they relate to the protection and improvement
of the human environment and the prevention of hazards to human beings, other living
creatures, plants and property.
 The Act is an “umbrella” for legislations designed to provide a framework for Central
Government, coordination of the activities of various central and state authorities
established under previous Acts, such as the Water Act and the Air Act.
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 In this Act, main emphasis is given to “Environment”, defined to include water, air and land
and the inter-relationships which exist among water, air and land and human beings and
other living creatures, plants, micro-organisms and property.
7.2 Genetic Engineering Appraisal Committee (GEAC)
 The Genetic Engineering Appraisal Committee (GEAC) is the apex body constituted in
the Ministry of Environment and Forests under 'Rules for Manufacture, Use, Import, Export
and Storage of Hazardous Microorganisms/Genetically Engineered Organisms or Cells 1989',
under the Environment Protection Act, 1986.
 Aim of ‘Rules 1989’ is to protect environment, nature and health in connection with
application of gene technology and micro-organisms.
7.3 Wild Life (Protection) Act of 1972 and Amendment, 1982
 In 1972, Parliament enacted the Wild Life Act (Protection) Act.
The Wild Life Act provides for:
1. state wildlife advisory boards,
2. regulations for hunting wild animals and birds,
3. establishment of sanctuaries and national parks,
4. regulations for trade in wild animals, animal products and trophies, and
5. judicially imposed penalties for violating the Act.
 Harming endangered species listed in Schedule 1 of the Act is prohibited throughout India.
 Hunting species, like those requiring special protection (Schedule II), big game (Schedule III),
and small game (Schedule IV), is regulated through licensing.
 A few species classified as vermin (Schedule V), may be hunted without restrictions.
7.4 The Wild Life (Protection) Amendment Act, 2006

The Act provides for creating
1. National Tiger Conservation Authority and
2. Tiger and Other Endangered Species Crime Control Bureau (Wildlife Crime Control Bureau).
 NTCA was set up under the Chairmanship of the Minister for Environment and Forests.
 The Authority will have eight experts having qualifications in wildlife conservation and
welfare tribals, 3 MPs, the Inspector General of Forests, in charge of project Tiger, will be ex-
officio Member Secretary and others.
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 The Authority lays down standards, guidelines for tiger conservation in the Tiger Reserves,
National Parks and Sanctuaries.
7.5 Animal Welfare Board of India
 Statutory advisory body advising the Government of India on animal welfare laws, and
promotes animal welfare in the country of India.
 It works to ensure that animal welfare laws in the country are followed; provides grants to
Animal Welfare Organizations; and considers itself "the face of the animal welfare
movement in the country."
 It was established in 1960 under Section 4 of The Prevention of Cruelty to Animals Act,
1960.
 The subject of Prevention of Cruelty to Animals is under Ministry of Environment and
Forests.
Indian government has also started some conservation projects for individual endangered species like
Hungal (1970), Lion (1972), Tiger (1973), Crocodiles (1974), Brown-antlered Deer (1981) and Elephant
(1991-92).
India Rhino Vision 2020: It is a partnership the Assam Forest Department, World Wide Fund for
Nature (WWF), Bodoland Territorial Council, International Rhino Foundation (IRF) and US Fish and
Wildlife Service. Its goal is to attain a wild rhino population of at least 3,000 in the Indian state of
Assam by the year 2020.
7.6 Forest (Conservation) Act of 1980
 First Forest Act was enacted in 1927.
 Alarmed at India’s rapid deforestation and resulting environmental degradation, Centre
Government enacted the Forest (Conservation) Act in 1980.
 It was enacted to consolidate the law related to forest, the transit of forest produce and the
duty livable on timber and other forest produce.
 Forest officers and their staff administer the Forest Act.
 Under the provisions of this Act, prior approval of the Central Government is required for
diversion of forestlands for non-forest purposes.
 An Advisory Committee constituted under the Act advises the Centre on these approvals.
 The Act deals with the four categories of the forests, namely reserved forests, village forests,
protected forests and private forests.
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Reserved forest: A state may declare forestlands or waste lands as reserved forest and may sell the
produce from these forests. Any unauthorized felling of trees quarrying, grazing and hunting in
reserved forests is punishable with a fine or imprisonment, or both
Village forests: Reserved forests assigned to a village community are called village forests.
Protected forests: The state governments are empowered to designate protected forests and may
prohibit the felling of trees, quarrying and the removal of forest produce from these forests. The
preservation of protected forests is enforces through rules, licenses and criminal prosecutions.
7.7 Biodiversity Act 2000

 The legislation aims at regulating access to biological resources so as to ensure equitable
sharing of benefits arising from their use.
 The Biological Diversity Bill was introduced in the Parliament in 2000 and was passed in 2002.
Salient features of the biodiversity legislation are
 The main intent of this legislation is to protect India’s rich biodiversity and associated
knowledge against their use by foreign individuals and organizations without sharing the
benefits arising out of such use, and to check biopiracy.
 This bill seeks to check biopiracy, protect biological diversity and local growers through a
three-tier structure of central and state boards and local committees.
 The Act provides for setting up of a National Biodiversity Authority (NBA), State Biodiversity
Boards (SBBs) and Biodiversity Management Committees (BMCs) in local bodies. The NBA
will enjoy the power of a civil court.
 BMCs promote conservation, sustainable use and documentation of biodiversity.
 NBA and SBB are required to consult BMCs in decisions relating to use of biological
resources.
7.8 The Scheduled Tribes and Other Traditional Forest Dwellers (Recognition Of Forest
Rights) Act, 2006
 Forest Rights Act, 2006 provides for the restitution of deprived forest rights across India.
 The Act is provides scope of integrating conservation and livelihood rights of the people.
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FRA is tool
 To empower and strengthen the local self-governance
 To address the livelihood security of the people
 To address the issues of Conservation and management of the Natural Resources and
conservation governance of India.
Salient Features
 Nodal Agency for the implementation is Ministry of Tribal Affairs (MoTA).

 This Act is applicable for Tribal and Other Traditional Forest Dwelling Communities.
 The Act provides for recognition of forest rights of other traditional forest dwellers provided
they have for at least three generations prior to 13.12.2005 primarily resided in and have
depended on the forests for bonafide livelihood needs.
 The maximum limit of the recognizing rights on forest land is 4 ha.
 National Parks and Sanctuaries have been included along with Reserve Forest, Protected
Forests for the recognition of Rights.
 The Act recognizes the right of ownership access to collect, use, and dispose of minor forest
produce by tribals.
 Minor forest produce includes all non-timber forest produce of plant origin, including
bamboo, brush wood, stumps, cane, tussar, cocoons, honey, wax, lac, leaves, medicinal
plants and herbs, roots, tubers and the like.
 The rights conferred under the Act shall be heritable but not alienable or transferable.
 As per the Act, the Gram Sabha has been designated as the competent authority for
initiating the process of determining the nature and extent of individual or community forest
rights.
7.9 National Green Tribunal Act, 2010

 Act of the Parliament of India which enables creation of NGT to handle the expeditious
disposal of the cases pertaining to environmental issues.
 It was enacted under India's constitutional provision of Article 21, which assures the citizens
of India the right to a healthy environment.
 The specialized architecture of the NGT will facilitate fast track resolution of environmental
cases and provide a boost to the implementation of many sustainable development
measures.
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 NGT is mandated to dispose the cases within six months of their respective appeals.
Members
 The sanctioned strength of the tribunal is currently 10 expert members and 10 judicial
members although the act allows for up to 20 of each.
 The Chairman of the tribunal who is the administrative head of the tribunal also serves as a
judicial member.
 Every bench of tribunal must consist of at least one expert member and one judicial
member.
 The Chairman of the tribunal is required to be a serving or retired Chief Justice of a High
Court or a judge of the Supreme Court of India.
Jurisdiction
 The Tribunal has Original Jurisdiction on matters of “substantial question relating to

environment” (i.e. a community at large is affected, damage to public health at broader
level) & “damage to environment due to specific activity” (such as pollution).
 The term “substantial” is not clearly defined in the act.
 Notable orders: Ban on decade old Diesel vehicles at Delhi NCR. NGT cleared three-day
World Culture Festival (Art of Living) on the floodplains of the Yamuna in March but imposed
a fine of Rs 5 crores as an interim compensation.
8 Acts for Protecting Coastal Environment and Wetlands
8.1 Coastal Regulation Zone (CRZ)
 The coastal stretches of seas, bays, estuaries, creeks, rivers and back waters which are
influenced by tidal action are declared "Coastal Regulation Zone" (CRZ) in 1991.
 India has created institutional mechanisms such as National Coastal Zone Management
Authority (NCZMA) and State Coastal Zone Management Authority (SCZMA) for enforcement
and monitoring of the CRZ Notification.
 These authorities have been delegated powers under Section 5 of the Environmental
(Protection) Act, 1986 to take various measures for protecting and improving the quality of
the coastal environment and preventing, abating and controlling environmental pollution in
coastal areas.
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8.2 Wetlands (Conservation and Management) Rules 2010

 MoEF has notified the rules in order to ensure that there is no further degradation of
wetlands.
 The rules specify activities which are harmful to wetlands such as industrialization,
construction, dumping of untreated waste and reclamation and prohibit these activities in
the wetlands.
 Other activities such as harvesting and dredging may be carried out in the wetlands but only
with prior permission from the concerned authorities.
 Under the Rules, wetlands have been classified for better management and easier
identification.
 Central Wetland Regulatory Authority has been set up to ensure proper implementation of
the Rules.
Concept Check
Q. Environment Protection Act was passed in –
(a) 1974
(b) 1981
(c) 1986
(d) 2002
Answer: C
9 Other important concepts
9.1 Circular Bioeconomy

 The “Circular Bioeconomy” is defined as the intersection of bioeconomy and circular
economy.
 The bioeconomy substitutes fossil carbon by renewable carbon from biomass from
agriculture, forestry and marine environment (including by-products and wastes).
 The 10-point Action Plan needed to create a circular bioeconomy based on a synergistic
relationship between economy and ecology, includes following:
 Focus on sustainable wellbeing
 Invest in nature and biodiversity
 Generate an equitable distribution of prosperity
 Rethink land, food and health systems holistically
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 Transform industrial sectors

 Reimagine cities through ecological lenses
 Create an enabling regulatory framework
 Deliver mission-oriented innovation to the investment and political agenda
 Enable access to finance and enhance risk-taking capacity
 Intensify and broaden research and education
9.2 Environmental impact of Agricultural Subsidies

 Boom in fertilizer industry
 Overuse of fertilizer
 Depletion of groundwater
 Intensification and Extensification of Agricultural Production
 Wastage of resources
 Extensive paddy cultivation
9.3 Natural Capital Accounting and Valuation of the Ecosystem Services (NCAVES)
 NCAVES India Forum 2021 was organised by the Ministry of Statistics and Programme
Implementation.
 Natural Capital Accounting (NCA) is a tool that can help measure the full extent of a country’s
natural capital. It also provides a perspective on the link between the economy, ecology and
environment.
 Natural capital includes individual environmental assets or resources, both biotic and
abiotic (such as water, minerals, energy, timber and fish), as well as ecosystem assets
(e.g. forests and wetlands), biodiversity and ecosystem services (e.g. air and water
filtration and purification, flood protection, carbon storage, pollination of crops and
habitats for wildlife).
 NCA establishes the links between an ecosystem and the economy, which can be presented
in both physical and monetary terms.
Concept Check
Q. Which of the following are Environmental impacts of agricultural subsidies:
(a) Overuse of fertilizer
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(b) Depletion of groundwater

(c) Wastage of resources
(d) Extensive paddy cultivation
Answer: E
Concept Check
Q. Which of the following are parts of natural capital:
(a) Money
(b) House
(c) Forests
(d) Jewellery
Answer: C
9.4 Coalition for Disaster Resilient Infrastructure (CDRI)

 CDRI is a multi-stakeholder global partnership of national governments, UN agencies and
programmes, multilateral development banks and financing mechanisms, private sector, and
academic and knowledge institutions.
 It was announced by India’s PM at UN Climate Action Summit 2019.
 It aims to promote the resilience of new and existing infrastructure systems to climate and
disaster risks, thereby ensuring sustainable development.
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Economic History of India

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Contents
1 Indian Economy: A Brief Overview .........................................................................................................5
1.1 Economy till 2008............................................................................................................................5
1.2 Economy after 2008 ........................................................................................................................6
2 Various Sectors of the Economy ............................................................................................................7
2.1 Agriculture.......................................................................................................................................7
2.2 Industry ...........................................................................................................................................8
2.2.1 Micro, Small and Medium Enterprises (MSMEs) .....................................................................9
2.3 Services ...........................................................................................................................................9
3 Structural Changes in Indian Economy...................................................................................................9
4 Features of the Indian Economy ..........................................................................................................10
4.1 Low per capita income ..................................................................................................................10
4.2 Heavy population pressure ...........................................................................................................10
4.3 Dependence on Agriculture ..........................................................................................................11
4.4 Poverty and inequality ..................................................................................................................11
4.5 Higher rate of capital formation or investment............................................................................12
4.6 Planned economy..........................................................................................................................12
5 Concerns facing the Indian Economy ...................................................................................................12
5.1 Achieving and Sustaining Higher Growth .....................................................................................12
5.2 Expanding the Process of Economic Reforms ...............................................................................13
5.3 Improving the Infrastructure ........................................................................................................13
5.4 Issues like Human Development, Financial Literacy etc. ..............................................................13
6 Underdevelopment ..............................................................................................................................14
6.1 Characteristics of Underdevelopment ..........................................................................................14
6.1.1 Low Per Capita Income ..........................................................................................................14
6.1.2 Inadequacy of Natural Resources ..........................................................................................14
6.1.3 Predominance of Primary Sector...........................................................................................14
6.1.4 Population Pressure ...............................................................................................................14
6.1.5 Chronic Unemployment.........................................................................................................14
6.1.6 Malnutrition and Illiteracy .....................................................................................................15
6.1.7 Low Urbanization ...................................................................................................................15
6.1.8 Low Savings and Capital Formation .......................................................................................15
6.1.9 Poverty, Inequality, Lack of Food Security ............................................................................15
6.1.10 Low Development of Market and Monetization ...................................................................15

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6.1.11 Inadequate and Inefficient Institutions and Agencies...........................................................15

6.1.12 Political Instability, Social Rigidity, Lack of Dynamism, Self-Esteem and Freedom ..............16
6.1.13 The Vicious Circle of Poverty .................................................................................................16
7 Meaning of Economic Planning ............................................................................................................16
8 Types of Economic Planning .................................................................................................................17
8.1 Democratic Planning .....................................................................................................................17
8.2 Totalitarian (Authoritarian) Planning ............................................................................................17
8.2.1 Democratic planning Vs Totalitarian Planning ......................................................................17
8.3 Centralized Planning .....................................................................................................................17
8.4 Decentralized Planning .................................................................................................................17
8.4.1 Centralised Vs Decentralised Planning ..................................................................................18
8.5 Functional Planning.......................................................................................................................18
8.6 Structural Planning ........................................................................................................................18
8.6.1 Structural Vs Functional Planning..........................................................................................19
8.7 Perspective Planning .....................................................................................................................19
8.8 Annual Planning or Prospective Planning .....................................................................................19
8.9 Indicative Planning ........................................................................................................................19
8.10 Imperative Planning ......................................................................................................................20
8.11 Rolling Planning .............................................................................................................................20
8.12 Fixed Planning ...............................................................................................................................21
9 Economic Planning in India before Independence...............................................................................21
9.1 Economic Study by Dadabhai Naoroji ...........................................................................................21
9.2 Royal Commission on Indian Expenditure (1896) .........................................................................22
9.3 Emergence of the Idea of Planned Economy in India ...................................................................22
9.4 Bombay Plan .................................................................................................................................22
9.5 People’s Plan .................................................................................................................................22
9.6 Gandhian Plan ...............................................................................................................................22
9.7 Sarvodaya Plan ..............................................................................................................................22
10 Economic Planning in India after Independence ..............................................................................23
10.1 Planning Commission – Its Origin: ................................................................................................23
10.2 Planning Commission – Structure .................................................................................................23
10.3 Objectives of Planning in India......................................................................................................24
10.3.1 Economic Growth ..................................................................................................................24
10.3.2 Increase in Employment ........................................................................................................24

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10.3.3 Reduction in Inequality of Income.........................................................................................24

10.3.4 Reduction in Poverty .............................................................................................................24
10.3.5 Modernization of the Economy .............................................................................................24
10.3.6 Ensuring Social Justice and Equality ......................................................................................24
10.4 Five Year Plans in India: An Overview ...........................................................................................25
10.5 Planning Commission – An Appraisal............................................................................................28
10.5.1 Achievements of Planning Commission ................................................................................28
10.5.2 Failures of Planning Commission ...........................................................................................29
11 Economic Reforms in India ...............................................................................................................29
11.1 Background ...................................................................................................................................29
11.2 Stabilisation Measures ..................................................................................................................30
11.3 Structural Reform Measures .........................................................................................................30
11.4 Liberalisation .................................................................................................................................31
11.5 Privatization ..................................................................................................................................31
11.6 Globalization .................................................................................................................................32
12 NITI Aayog .........................................................................................................................................32
12.1 Origin .............................................................................................................................................32
12.2 Composition ..................................................................................................................................32
12.3 Difference between NITI Aayog & Planning Commission .............................................................33
12.4 Objectives......................................................................................................................................34
12.5 Functions .......................................................................................................................................34
1 Indian Economy: A Brief Overview

1.1 Economy till 2008
In the first five decades of the twentieth century, till we got our independence in 1947, the per capita
GDP in India was stagnant. The trend growth in GDP during this period was 0.9 per cent with population
growing by about 0.8 per cent.
As compared with the near stagnant growth in the first half of the twentieth century, the annual growth,
averaging at around 3.5 per cent during the period 1950 to 1980, was comparatively better.
The average growth rate of the Indian economy over a period of 25 years since 1980-81 was about 6.0
per cent – a significant improvement over the annual growth rate of the earlier three decades.
In the new millennium, the GDP growth rate has further accelerated averaging 7.2 per cent during the
seven-year period 2000-01 to 2007-08, with the growth rate in the five years period between 2003-04 to
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Over the years, while the GDP growth has been accelerating, the population growth rate has moderated,
giving a sharp impetus to the growth in per capital income.
The strengthening of economic activity in the years 2001-08 has been supported by a sustained increase
in the gross domestic investment rates from 22.8 per cent of GDP in 2001-02 to 35.9 per cent in 2006-
07. It may also be noted that over 95 per cent of the investment during this period was financed by
domestic savings.
Since independence, the inflation rate, in terms of the wholesale price index (WPI), on average basis, was
above 15 per cent in only five out of fifty years and was in single-digit for thirty-six of these years. On
most occasions, high inflation was due to food or oil shortages. The inflation rate accelerated steadily
from an annual average of 1.7 per cent during the 1950s to 6.4 per cent during the 1960s and further to
9.0 per cent in the 1970s before marginally easing to 8.0 per cent in 1980s. the inflation rate declined
from an average of 11.0 per cent during 1990-95 to 5.3 per cent during the second-half of 1990s. In years
from 2001-2008, inflation rate has averaged around 5 per cent.
An important characteristic of the growth phase of over a quarter century (1981-2008) was the country’s
resilience to shocks. During this period, we witnessed only one serious balance of payments crisis. The
Indian economy, in the later years, could successfully avoid any adverse contagion impact of shocks from
East Asian Crisis, the Russian Crisis during 1997-98, sanction-like-situation in post-Pokhran scenario, the
border conflict during May-June 1999 and Sub-Prime Crisis. Viewed in this context, this robust
macroeconomic performance, in the face of shocks demonstrated the vibrancy and resilience of the Indian
economy.
1.2 Economy after 2008

The global financial crisis of 2008 affected the Indian economy also. Despite various measures taken by
the RBI and the government, the growth rate started declining. The GDP growth, which was 9.2 per cent
in 2005-06 and 9.0 per cent in 2006-07, came down to 7.4 per cent in 2007-08 and 2008-09. It continued
to decline further and was 7.1 per cent in 2009-10, 6.8 per cent in 2010-11, and 6.5 per cent in 2011-12.
It dipped to a low of 5.1 per cent in the year 2012-13.
During the same period, the inflation escalated to very high levels due to the side effects of the monetary
and fiscal measures taken to precent steep fall in economic growth. The inflation reached a level of around
11 per cent for some time. As the global economic crisis eased, the priority of policy makers shifted to
containing inflation by control of fiscal deficit and other policy measures. As a result, the inflation came
down sharply during 2013-14 to a level of around 6 to 7 per cent. It has continued to decline further in
2014-15 and was 2.38 per cent, based on the official Wholesale Price Index, in September 2014. It was
in the negative territory since November 2014. The official figure for December 2015 also shows WPI at
– 0.7 per cent. However, there has been a continuous rise in inflation and the WPI for January 2017
became 5.2%. It rose further to 6.5% in February 2017. Inflation control in India has been aided by sharp
decline in global community prices, especially, the crude oil. With downturn in global commodity prices
reversing, inflation may again pose a major challenge for the Indian economy.
Easing of global economic crisis also resulted in revival of growth in India after 2012-13. The GDP figure
recorded a growth of 6.6 per cent for 2013-14, 7.2 per cent for 2014-15 and 7.9 per cent for 2015-16.

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2 Various Sectors of the Economy

Indian economy is classified in three main sectors – Agriculture and allied activities, Industry and
Services.
Agriculture includes Agriculture (Agriculture proper & Livestock), Forestry & Logging, Fishing and related
activities.
Industry sector includes Manufacturing (Registered & Unregistered), Electricity, Gas, Water supply, and
Construction.
Services sector includes trade, repairs, hotels and restaurants, transport, storage, communication and
services related to broadcasting, financial, real estate & professional services, community, social and
personal services.
Other Sectors of the Economy

Quaternary Sector: The fourth sector of the economy, the quaternary sector, consists of intellectual
activities often associated with technological innovation. It is sometimes called the knowledge
economy.
Quinary Sector: Some economists further narrow the quaternary sector into the quinary sector, which
includes the highest levels of decision-making in a society or economy. This sector includes top
executives or officials in such fields as government, science, universities, nonprofits, health care,
culture, and the media.
2.1 Agriculture
Agriculture is one of the most important sectors of Indian economy.
Agriculture (including allied activities) accounted for 17 per cent of the Gross Domestic Product (GDP at
constant prices) in 2008-09 as compared to 21.7 per cent in 2003-04. This is estimated to have declined
further in 2016-17.
Notwithstanding the fact that the share of this sector in GDP has been declining over the years, its role
remains critical as it accounts for more than 50% of the employment in the country. Apart from being the
provider of food and fodder, its importance also stems from the raw materials that it provides to
industry. About 10% of India’s exports consist of agricultural commodities. The prosperity of the rural
economy is also closely linked to agriculture and allied activities.
One of the biggest success stories of independent India is the rapid strides made in the field of
agriculture. From a nation dependent on food imports (PL-480) to feed its population, today India is not
only self-sufficient in grain production but also has substantial food reserves. Dependence of India on
agricultural imports and the crises of food shortage encountered in 1960s convinced planners that India’s
growing population, as well as concerns about national independence, security, and political stability,
required self-sufficient in food production. This perception led to a programme of agricultural
improvement called the Green Revolution. It involved bringing additional area under cultivation,
extension of irrigation facilities, the use of improved high-yielding variety of seeds, better techniques
evolved through agricultural research, water management and plant protection through judicious use of
fertilisers, pesticides and cropping practices. All these measures had a salutary effect and the production
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However, there are still a host of issues that need to be addressed regarding Indian agriculture. Indian
agriculture is heavily dependent on monsoons. The monsoons play a critical role in determining whether
the harvest will be rich, average, or poor. The structural weaknesses of the agriculture sector are reflected
in the low level of public investment, exhaustion of the yield potential of new high yielding varieties of
wheat and rice, unbalanced fertilizer use, low seeds replacement rate, an inadequate incentive system
and post-harvest value addition. High number of farmers’ suicide is also an indication of the stress in the
rural sector.
Concept Check
Q. Why India was in need of Green Revolution after independence?
(a) Majority of India's population was dependent on agriculture.
(b) Productivity of the agricultural land in India was very low.
(c) Stagnation of Indian agriculture during colonial rule.
Answer: D
2.2 Industry
Industry or the secondary sector of the economy is another important area of economic activity. After
independence, the government of India emphasized the role of industrialization in the country's economic
development in the long run. Accordingly, the blue print for industrial development was made through
the Industrial Policy Resolution (IPR) in 1956. The 1956 policy emphasized on establishment of heavy
industries with public sector taking the lead in this area. Adoption of heavy or basic industries strategy
was justified on the ground that it will reduce the burden on agriculture, enable growth in the production
of consumer goods industries as well as small industries that are helpful for employment generation and
achieving self-reliance. After the adoption of the IPR, 1956 there was tremendous growth in
industrialization during the second and third plan periods i.e., 1956-61 and 1961-66. Public sector
contributed maximum to this growth. But towards the end of 1960s, investment in industries was
reduced which adversely affected its growth rate. In the 1980s, this trend was reversed and investment
in industries was increased by making the infrastructure base such as power, coal, rail much stronger.
In early 1990s it was found that the public sector undertakings were not performing up to expectation.
There has been reports of mismanagement in these under takings resulting in loss. So, in 1991 the
government of Indian decided to encourage the role of private sector in industrial development, remove
the rigid license system which is known as liberalization and allow international players to compete in
the domestic country as well as domestic players to explore foreign territories. The aim of taking all these
steps was to strengthen the process of industrialization in the country. Such a model of industrial
development is called Liberalization, Privatization and Globalization (LPG) model.
After the adoption of this new policy in 1991, there has been phases of growth followed by slowdown in
the industrial development process. In the early years of 1990s there was significant growth in
industrialization due to increase in investment in infrastructure, reduction in excise duty, availability of
finance etc. But towards the end of 1990s the growth rate slowed down due to stiff competition from
international companies, inadequate infrastructure support etc. However, in the beginning of the new
millennium, between 2002-08 there was again some recovery due to increase in saving rate from 23.5
percent in 2001-2 to 37.4 percent in 2007-08. Even the competition from the foreign companies helped

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during this phase as the domestic companies could create enough internal strength in term of quality
control, finance and customer care etc. to withstand the competition. However, after 2008-09 there was
some slowdown in industrial growth due to rise in petroleum price, interest rate and borrowings from
abroad which has created lot of liabilities for the domestic companies.
The contribution of industrial sector has been increasing slowly over time after independence. In 2009-
10 the share of this sector was 28 percent in India’s domestic product. At the time of independence, it
was only 14 percent. The increase is due to increase in number of manufacturing units and increase in
industrial production. (Note: Share of Services Sector in India’s GDP off late has been increasing at the
cost of both Agricultural and Industrial Sectors)
2.2.1 Micro, Small and Medium Enterprises (MSMEs)

As per the Annual report 2014-15 of the Ministry of Micro, Small and Medium Enterprises, the MSME
sector provided employment to 1114.29 lakh people in 2013-14 compared to 805.23 lakh people in 2006-
07. The share of MSMEs in the GDP of the country increased to 37.5 per cent in 2013-14 from 35.13 per
cent in 2006-07. The share of MSME manufacturing output in total manufacturing output of the country
came down to 37.33 per cent against 42.02 per cent in 2006-07.
Concept Check
Q. Why are small scale industries considered important in an economy?
(a) They provide immediate large-scale employment.
(b) They offer a method of ensuring a more equitable distribution of the national income.
(c) They facilitate an effective mobilisation of resources of capital and skill.
(d) They bring about the regional balances in the country.
Answer: E
2.3 Services
The services sector now accounts for about 54% of India’s GVA. This sector has gained importance at the
expense of both the agricultural and industrial sectors through the 1990s. The rise in the service sector’s
share in GDP marks a structural shift in the Indian economy and takes it closer to the fundamentals of a
developed economy (in the developed economies, the industrial and service sectors contribute a major
share in GDP while agriculture accounts for a relatively lower share).
Some economists caution that if the service sector bypasses the industrial sector, economic growth can
be distorted. According to them service sector growth must be supported by proportionate growth of the
industrial sector; otherwise, the service sector growth will not be sustainable. It is true that, in India, the
service sector’s contribution in GDP has sharply risen and that of industry has fallen.
Phenomenal growth has been noticed in selected service sector segments like IT/ITES, telecom, banking,
insurance and real estate, and civil aviation.
3 Structural Changes in Indian Economy

The Indian economy has registered an impressive growth in recent times with GDP recording an average
of above 7% growth rate in the years since 2001, from an average growth of 5.7 per cent in the 1990s.
Real GDP or GDP at constant (2011-12) prices for the years 2015-16, 2014-15 and 2013-14 stood at Rs.

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113.50 lakh crore, Rs. 105.52 lakh crore and Rs 98.39 lakh crore, respectively, showing growth of 7.6 per
cent during 2015-16, 7.2 per cent during 2014-15, and 6.6 per cent during 2013-14.
A comparison with the earlier period since the beginning of the last century brings out the extent of
economic transformation far more clearly. During the first 50 years of the nineteenth century, the
average GDP growth rate has been just 0.7 per cent, which picked up to 3.5 per cent (popularly called as
‘Hindu rate of growth’) in the three decades after independence, before progressing to higher growth
path in the recent decades.
KEY DEFINITION
Hindu Rate of Growth: The Hindu rate of growth is a term referring to the low annual growth rate of
the economy of India before the liberalisations of 1991, which stagnated around 3.5% from 1950s to
1980s, while per capita income growth averaged 1.3%.
Transformation of the economy is quite apparent from the noticeable changes that have occurred in the
sectoral composition of the output. The share of services in the national income has steadily increased
with corresponding fall in the contributions of agriculture over the years. At constant prices (base 2011-
12), composition of Agriculture & allied activities, Industry, and Services sector is 15.43%, 32.61% and
51.96% respectively in terms of GVA for the year 2015-16.
Concept Check
Q. Since 1980, the share of the tertiary sector in the total GDP of India has:
(a) shown an increasing trend
(b) shown a decreasing trend
(c) remained constant
(d) been fluctuating
Answer: A
4 Features of the Indian Economy

4.1 Low per capita income
India is known in the world as a country with low per capita income. India's per capita income for the year
2012-2013 is estimated at Rs 39,168. This comes to about Rs 3,264 per month. If we compare India's per
capita income with other countries of the world then it can be seen that India is well behind many of
them. For example, the per capita income of USA is 15 times more that of India while China's per capita
income is more than three times of India.
4.2 Heavy population pressure

India is world's second largest populated country after China. As per 2011 census India's population
stands at more than 121 crores. It increased at a rate of 1.03 percent during 1990-2001. The main cause
of fast rise in India's population is the sharp decline in death rate while the birth rate has not decreased
as fast. In 2010, the birth rate was 22.1 persons per one thousand population while the death rate was
only 7.2 persons per one thousand population. Low death rate is not a problem. In fact, it is a sign of
development. Low death rate reflects better public health system. But high birth rate is a problem
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because it directly pushes the growth of population. After 1921, India's population increased very fast
because birth rate declined very slowly while death rate declined very fast. From 49 in 1921 the birth
rate declined to 22.1 in 2010 while during the same time period, death rate declined from 49 to 7.2. Hence
the population growth was very rapid in India.
4.3 Dependence on Agriculture

Majority of India's working population depend on agricultural activities to pursue their livelihood. In
2011 about 58 percent of India's working population was engaged in agriculture. In spite of this, the
contribution of agriculture to India’s gross domestic product is a little over 17 percent. A major concern
of agriculture in India is that productivity in this sector is very less. There are many reasons for this. There
is heavy population pressure on land to sustain huge number. Due to population pressure on land the
per capita availability of land area is very low and not viable for extracting higher output. Two, since per
capita land availability is less, a majority of people are forced to become agricultural labour working at
low wages. Three, Indian agriculture suffers from lack of better technology and irrigation facilities. Four,
mostly people, who are not educated or not trained properly, are engaged in agriculture. So, it adds to
low productivity in agriculture.
Concept Check
Q. With reference to Indian economy, the term jobless growth refers to
(a) increasing GDP coupled with high unemployment.
(b) high inflation rate pushing up the rate of unemployment.
(c) declining GDP coupled with high unemployment.
(d) high inflation pushing down the rate of unemployment.
(e) none of the above
Answer: A
4.4 Poverty and inequality

Another very disheartening thing about India is that it has world’s largest number of poor people. As per
reports of government of India, in 2011-12 about 269.3 million people in India were poor. This was about
22 percent of India's population. The government has also estimated that the required amount of money
is Rs 816 in rural area and Rs 1000 in urban area per head per month. This is called poverty line.
Poverty goes with inequality in income and wealth distribution. Another issue linked to poverty is the
problem of unemployment.
Concept Check
Q. Persons below the poverty line in India are classified as such based whether:
(a) they are entitled to a minimum prescribed food basket
(b) they get work for a prescribed minimum number of days in a year
(c) they belong to agricultural labourer household and the scheduled caste/tribe social group
(d) their daily wages fall below the prescribed minimum wages
Answer: A
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4.5 Higher rate of capital formation or investment

At the time of independence, one of the major problems of Indian economy was deficiency in capital
stock in the form of land and building, machinery and equipment, saving etc. In order to continue the
cycle of economic activities such as production and consumption, a certain ratio of production must go
towards saving and investment. However, the required ratio was never generated in the first four to
five decades after independence. The simple reason being higher consumption of necessary items by the
population of whom most happened to be poor and lower middle-income class. Collective household
saving was very less due to this. Consumption of durable items was also very less. But in recent years
things have charged. Economists have calculated that in order to support the growing population, India
requires 14 percent of its GDP to be invested. It is encouraging to note that the saving rate of India for
the year 2011 stands at 31.7 percent. The ratio of gross capital formation was 36.6 percent. This is
possible because people are now able to save in banks, consume durable goods and there has been large
scale investment taking place on public utilities and infrastructure.
4.6 Planned economy

India is a planned economy. Its development process has been continuing through five-year plan since
the first plan period during 1951-56. The advantage of planning is very well known. Through planning the
country sets its priorities first and provides the financial estimates to achieve the same. Accordingly,
efforts are made to mobilise resources from various sources at least cost. After every plan a review is
made analysing the achievements and short falls. Accordingly, things are rectified in the next plan. Today
India is a growing economy and recognised everywhere as a future economic power. The per capita
income of India is growing at a higher rate than before. India is seen as a big market for various products.
All these are possible due to planning in India.
5 Concerns facing the Indian Economy

5.1 Achieving and Sustaining Higher Growth
Though India can boast of having one of the highest growth rates in the world, we should not forget that
our population is also growing and we are set to become the most populous country in coming years.
This curtails the per capita GDP growth rate to miserable levels. India needs a much higher growth to
take care of its growing population.
The challenge facing the Indian economy is to revive and sustain the investment cycle. In recent years,
India is facing a balance-sheet slowdown and it seems imperative to consider the case for reviving public
investment as one of the key engines of growth going forward, not to replace private investment but to
revive and complement it.
The sustainability of growth is likely to be affected not only by global economic scenario but also by the
concerns relating to ecology.
Strengthening the manufacturing capability of the country is another challenge faced by the economy.
The share of manufacturing in GDP is only about 15 per cent in India, compared to 32 per cent in China.
The growth in India is skewed in favour of the services sector and the share of manufacturing is stagnant.
Concept Check
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Q. Which one of the following is the correct sequence in the decreasing order of contribution of
different sectors to the Gross Domestic Product of India?
(a) Services - Industry - Agriculture
(b) Services - Agriculture - Industry
(c) Industry - Services - Agriculture
(d) Industry - Agriculture – Services
Answer: A
5.2 Expanding the Process of Economic Reforms

Economic reforms are crucial for sustainable growth and development. Though passing of GST by the
parliament and its implementation from July 1, 2017 is considered to be a great achievement, crucial
reforms in the areas of land procurement, taxes, labour, foreign investment and energy are pending.
Another area which needs rapid reforms related to strengthening of public sector institutions.
Privatisation of inefficient and loss-making public enterprises is also an area in which progress has been
very slow in the past. Much needs to be done in the areas of civil aviation, telecom, banking and insurance
sectors on the reform front. India is one of the fastest growing e-commerce markets in the world and
there is need for its comprehensive reform and regulation.
5.3 Improving the Infrastructure

Infrastructure sector is a key driver for the Indian economy. Lack of infrastructure and its poor quality,
be it power generation or distribution facilities, roads, ports, railways, airports, irrigation facilities, access
to telecom infrastructure or even basic housing and sanitation infrastructure has long affected the Indian
economy.
It is estimated that inadequate infrastructure acts as a major barrier to FDI, hinders the objective of
inclusive development, and retards GDP growth by about 2 per cent.
5.4 Issues like Human Development, Financial Literacy etc.

The demographic factors in India provide both opportunities and challenges for the economy. It is
estimated that the working age population in India will become about 64% coming years with the average
of about 29 years.
Improving the quality of education is necessary to provide education, skill and employment to all for
which higher investment is required. A major gap exists in quality and availability of teachers, both in
rural and urban areas, for which a massive effort and investment is needed. Providing entrepreneurial
opportunities to the youth of the country is also crucial to achieve the aim of maximum employment. The
government has taken several steps to encourage and facilitate ‘start-ups’ in the country to provide
opportunities for fulfilling the aspirations of the youth.
Another issue facing the Indian economy is that of financial inclusion. A large section of the population
remains secluded from the financial mainstream of the economy despite relentless efforts of RBI and the
government over the last fifteen years. This has proved to be an avoidable hurdle in expediting the
economic development, and eliminating poverty and inequality.
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Concept Check
Q. Human capital formation as a concept is better explained in terms of a process which enables
(a) individuals of a country to accumulate more capital.
(b) increasing the knowledge, skill levels and capacities of the people of the country.
(c) accumulation of tangible wealth.
(d) accumulation of intangible wealth.
Answer: B
6 Underdevelopment
6.1 Characteristics of Underdevelopment
6.1.1 Low Per Capita Income

Low per capita (that is, per head) income is a major feature of under-development. The difference or gap
in this respect is often shocking. In 2005, the per capita Gross National Income of USA (at Purchasing
Power Parity Rate) was Rs 41, 950, while for India it was Rs 3,460. It is per capita income that is relevant,
not so much the National Income.
6.1.2 Inadequacy of Natural Resources

One major characteristic of underdevelopment may be paucity of natural resources. Several developed
countries, like the USA or Canada have been blessed with an abundance of natural resources that has
certainly aided their development process. But this is not a binding constraint to economic development
like Britain and Japan are developed even without adequate natural resources, over-abundance of Human
Resources Deficient in Nutrition, Education and Skill.
6.1.3 Predominance of Primary Sector

Primary Activities like agriculture, animal husbandry, fishing and foraging in the forests predominate in
underdeveloped countries. Secondary Activities like industrial manufacturing, mining, and metallurgy are
relatively less important. The Occupational Structure of the work force is thus biased towards the Primary
Sector. In India about 58% of the labour force is engaged in agriculture while in the U.S.A., only 1%.
6.1.4 Population Pressure

Underdevelopment is usually accompanied by the pressure of a vast and growing population. The birth
rate in less developed countries is high and the control of the death rate through better medical facilities
only increases the rate of growth of population. The rate of growth of population in India during 1991-
2001 was 1.93 %.
6.1.5 Chronic Unemployment

Unemployment is a chronic malady of underdeveloped countries. Because the secondary activities do
not grow fast enough, the fast-growing population becomes an increasing burden upon both rural and
urban areas. In urban areas the unemployment in Open and even White collared. In rural areas, it takes
the form of disguised unemployment as well as.
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6.1.6 Malnutrition and Illiteracy

The population of under–and-less developed countries are usually under-nourished, rickety and even
marked by deformities. Literacy is low and skill-formation inadequate. In 1990-91, Adult Literacy rate was
to 64 for males and 39 for females, as per census reports. Human Capital, as labour is called, is deficient.
6.1.7 Low Urbanization

Urbanization usually goes hand in hand with economic development, though it need not always be so. In
most of the under-and-less developed countries, urban development is low. Rural, that is, village areas
pre-dominate. Industrial activities, infrastructure (roads, railways, energy), educational and medical
facilities are inadequate.
6.1.8 Low Savings and Capital Formation

Because of low per capita income and traditional ways of spending (such as on weddings, funerals, and
ritualistic worship), the saving habit is lacking, and capital gets formed only very slowly. Capital being
the mainspring of economic growth, this slows down the overall rate of economic growth. In 1950-51,
India’s Gross Domestic Saving as percentage of GDP at Market Prices was 8.9 and Gross Domestic Capital
Formation was 8.7. It is cheering to learn that the figures for 2005-6 are 32.4 and 33.8 respectively.
6.1.9 Poverty, Inequality, Lack of Food Security

Lack of economic development keeps the masses in poverty, inequality and insecurity about the
availability of food. The Planning Commission’s estimate, even at the turn of the century, about 26% of
the total population are poor.
Inequality of income as well as income-yielding assets (land, capital) are also blatantly unequal in under
and-less developed countries.
Insecurity regarding something as essential as food is another characteristic of under and less developed
countries. In spite of Land Reforms and the New Agricultural Strategy (the Green Revolution) supposedly
bringing Self-sufficiency in Food grains, by the turn of the 20th century, people in various parts of India
still go hungry and there are reports of starvation deaths as well as reports of rats gnawing at food grains
stocked in the Food Corporation of India.
6.1.10 Low Development of Market and Monetization

Underdeveloped and less developed countries lag behind the developed ones in the use of money and
the functioning of markets. Economic development is bound up with the use of Money as a medium of
exchange as well as a measure, standard and store of value. As markets develop, and feudalistic life
changes to capitalistic, the country becomes increasingly monetized. Buying and selling of shares and
bonds as well as of commodities and services develop. The Share Market and the Stock Exchange become
developed. In underdeveloped or less developed countries the above processes are at a rudimentary level.
6.1.11 Inadequate and Inefficient Institutions and Agencies

The economic development of a country depends crucially on its institutions and agencies. Indian
economic development too has taken place under the guidance of the Planning Commission which, from
1952, has been making Five Year Plans that are comprehensive yet only indicative. The central bank, the
commercial banks and other credit and agencies also play an important role in the economic life of a
country. In underdeveloped or less developed countries these institutions and agencies are also
underdeveloped.
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6.1.12 Political Instability, Social Rigidity, Lack of Dynamism, Self-Esteem and Freedom
Underdeveloped and less developed countries are usually torn by political uncertainty, social
divisiveness, old-fashioned attitudes and diffident outlook. The India of 1757- 1947, for example, was
characterized by colonial domination, the caste system and the joint family system, and belief in the
philosophy of Karma. Slowly but surely these systems and attitudes are changing in course of the
developmental process. A developed country ultimately has to be a country “Where the mind is without
fear and the head is held up high” (Rabindranath Tagore).
6.1.13 The Vicious Circle of Poverty

Another important characteristic of underdevelopment is the Vicious Circle of Poverty that
underdeveloped or less developed countries get caught in. Having low national income, it has little ability
or incentive to save. Low saving leads to low investment and low capital formation. These lead to low
level of productivity per worker. Low productivity leads to low-income generation. Low national income
thus perpetuates itself.
Breaking out of an underdeveloped state is most difficult. Governmental participation, public awareness
and an overall, concerted effort are essential to combat its viciousness. These factors made realize the
need of proper planning and effective and efficient utilization of resources through that planning which
was considered and adopted by the government since 1950.
7 Meaning of Economic Planning

India is a vast country with multiple problems faced by its population. The British ruled the country for
nearly two centuries and exploited its resources for their benefit leaving the country reeling under
absolute poverty. When the British left India in 1947 there was nothing to be proud of or be happy except
for the ‘freedom’. The problems were many before the Indian government. Besides mass poverty there
was the problem of food shortage and inflation. Illiteracy, lack of health care, lack of infrastructure etc.
were other serious problems facing the country. As a long-term strategy, ‘Planning’ for economic
development was the answer to solve these problems.
Economic planning is a process which involves the following steps:
1. Preparing a list of the problems facing the economy.

2. Rearranging the list on the basis of priority.
3. Identify the problems which are to be solved in the immediate short run and the other problems which
are to be addressed over the long period.
4. Fixing a target to achieve the desired goal.
5. Estimating the amount of resources needed for achieving the target.
6. Mobilizing the resources is another important task.
7. Once the resources are arranged, implementation and execution process start, periodic review must
be done till the final achievement is realized.
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8 Types of Economic Planning

8.1 Democratic Planning
 Democratic Planning implies a system of economic order in which the authority that vests in the state
is based on the support of common masses.
 In democratic planning, the state does not control all the means of production and does not regulate
economic operations of the private economy directly.
 In democratic planning, the plan is fully debated in the Parliament, state legislature and in the
private forums.
8.2 Totalitarian (Authoritarian) Planning

 When planning is adopted under a dictatorship, it is called totalitarian planning.
 Under this planning, state fully controls the economic affairs, productive resources and economic
decisions.
 The state is the final authority in allocating the productive resources and it determines in accordance
with the directions of the central authority.
 The profits or production instead of being pocketed by the private capitalists go to the state for
ameliorating the problems of the poor lots in the country.
 Totalitarian planning shows the complete socialization of entire national economy. Under such
planning, plans are formulated, controlled, financed and executed by the state and people have to do
nothing in it.
8.2.1 Democratic planning Vs Totalitarian Planning

 Regarding choice between democratic and totalitarian planning, some regard democratic planning as
better because it gives complete freedom to consumers and producers.
 But democratic planning accelerates the pace of economic development slowly.
 Others regard democratic planning as imaginary since the interference by the government is
indispensable.
 On the other hand, under totalitarian planning, there are big sacrifices by the public. But the pace of
economic development is very fast.
8.3 Centralized Planning

 The framing, adopting, executing, supervising and controlling the plan is done by central planning
authority.
 Planning authority determines targets and priorities. It is the duty of the planning authority to bring
harmony in the planning process.
 This type of planning comes from the top to the bottom. This plan determines the equality and
cohesion. The central planning authority determines the basic policies in view of the regional and
local needs.
8.4 Decentralized Planning

 Under this planning, responsibility lies with local and regional officials who take economic decisions
about the plan. In other words, this planning starts from the grass roots.
 In other words, this type of planning is from bottom to top. Under this, plan is framed by the central
planning authority by consulting different administrative units of the country.
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 The plan incorporates plans under central, state and local schemes. Also plans are prepared for
different industries too. But individual firms are free to take their own decisions about investment
and output. Prices are determined by market mechanism even though there are government
controls.
 There is complete economic freedom in consumption, production and exchange.
 The main defect of decentralized planning is that there is no uniformity and coordination among
different sectors of the economy. This plan has been adopted in England and France.
8.4.1 Centralised Vs Decentralised Planning

 Decentralized planning is superior to centralized planning.
 It provides economic freedom and flexibility in the economy.
 But dependence on market mechanism in decentralized planning results into shortages or
surpluses in the production of goods and services. The adjustment can be made only through
government. If there are shortages of goods, it will lead to inflationary pressures.
 Again, decentralized planning provides economic freedom and incentives to the market economy
while centralized planning provides cohesiveness to the economy.
Concept Check
Q. Engagement of local people in development project refers to
(a) Economic Development
(b) Social Development
(c) Participatory Development
(d) Sustainable Development
Answer: C
8.5 Functional Planning

 Under functional planning, there is no need to build up new structure, rather the existing structure
is corrected and modified.
 According to Zweig in his “The Planning of Free Societies’ has stated “Functional planning will only
repair, not build a new, it will improve the wave of the existing order, but not supersede it.
 It is a conservative, or rather evolutionary type of planning which will not over turn the existing
structure and moves only within its narrow border”.
 Thus, functional planning brings no change in the economic and social set up.
8.6 Structural Planning

 In this type of planning the present social and economic structure is changed and a new structure
emerges.
 In the developing countries, there is a structure planning. Big economic and social changes are
brought about to usher into a new system.
 For instance, shift from capitalist to socialist economy can be called a structural change. Structural
planning can help in accelerating the pace of economic development. The Communist countries like
Russia and China followed structural planning.
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8.6.1 Structural Vs Functional Planning

Indian planning is both structural and functional because under public sector, a new economic structure
is built up whereas under private sector, the existing structure is modified. There is not much difference
in structural and functional planning. After sometimes structural planning turns into functional planning.
8.7 Perspective Planning

 Perspective planning is a long run planning where targets are fixed for long periods, for example 20
to 25 years.
 But a perspective plan cannot mean one plan for the complete period. In a true sense, broader
objectives are to be achieved in a fixed period by dividing the perspective plan into short-run plans
of 4 to 6 years.
 The long-run objectives are so divided into short- run that one by one all the objectives are achieved
in the long-run. In other words, short run plans pave way for the achievement of long run motives.
 The perspective plan has so many administrative difficulties due to which the fulfillment of the
objectives becomes difficult.
Concept Check
Q. Plan period considered for perspective plan is
(a) 1-5 Years
(b) 5-10 Years
(c) 10-15 Years
(d) 20-25 Years
(e) 45-50 Years
Answer: D
8.8 Annual Planning or Prospective Planning

 Annual Planning or short-term planning refers to 4 to 6 years plans which are further divided into
annual plans so that each annual plan may fit in short-run plan and each short-run plan may
ultimately fit in the long-run plan.
 Plans are further divided into regional and sectional plans. Regional plans are linked with regions,
district and localities which are further divided into sectional plans for agriculture, industry, transport,
foreign trade etc.
 The sectional plans are again divided for different branches like iron and steel, food-grains, exports
etc.
8.9 Indicative Planning

 Indicative plan is not imperative but flexible.
 Indicative planning is peculiar to the mixed economy of France. But this is quite different from the
type of planning which exists in other mixed economies.
 By mixed economy, we mean simultaneous working of public and private sector. It is the state which
controlled the private sector in different ways, i.e., by quotas, price, licenses, etc.
 But under indicative planning, the private sector is not rigidly controlled to achieve the targets and
priorities of the plan.
 The state gives full assistance to private sector but does not control it. It, rather, directs the private
sector in certain areas to implement the plan.
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 This plan was used in France from 1947-50 as Monnet Plan. France’s experience shows that the firms
do not play the game when development programme does not coincide with profit expectations.
Concept Check
Q. Most mixed or capitalist developing countries are limited to an indicative plan, which indicates
expectations, aspirations, and intentions
(a) but falls short of authorization.
(b) with immediate implementation.
(c) of the central bank.
(d) of implementation through foreign aid.
Answer: A
8.10 Imperative Planning

 It refers to that where all economic activities and resources of the country operate under the
direction of the state. The resources are optimally used by the state in order to achieve the targets of
the plan. Consumer’s sovereignty is sacrificed under this type of planning.
 The consumers get fixed quantities at fixed prices. The government policies are rigid which cannot
be changed easily. Any change can adversely affect the economy.
 In reality, such type of planning does not exist.
Concept Check
Q. Imperative planning is:
(a) The planning process followed by the state economies (i.e., the socialist or communist)
(b) The type of planning which gives less emphasis upon the social and institutional dimensions
(c) In such planning, the planners just search for the best possible results in relation to the established
goals giving less importance to issues like caste, creed, religion, region, language, marriage, family, etc.
(d) The systems planning gives due importance to the socio-institutional factors.
Answer: A
8.11 Rolling Planning

 Rolling plan was advocated by Prof. Myrdal for the development of developing countries. India
experienced it for the first time in April 1978 under Janata Party rule and continued up to April 1980.
 In the rolling plan, every year, three new plans are made:
 There is a plan for the current year which includes annual budget and the foreign exchange
budget.
 There is a plan for number of years for example 3 to 5. It is changed every year keeping in view
the needs of the economy.
 A perspective plan for 10 to 20 years or more is presented where broader goals are stated. The
annual plan is fitted into same year’s new 3 to 5 years plan and both are framed in the light of
perspective plan.
 In this way, the rolling plan gives the benefits of both perspective and flexible planning.
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 But under rolling plan, long-term objectives cannot be achieved since the targets are revised every
year. Such changes cannot maintain proper balances in the economy so as to achieve balanced
development.
Concept Check
Q. A rolling plan refers to a plan which
(a) Does not change its target every year
(b) Changes its allocation every year
(c) Changes its allocation and target every year
(d) Changes only its target every year
Answer: C
8.12 Fixed Planning

 Fixed planning is for some fixed period, say four or five or six or seven years. A fixed plan fixes definite
objective which has to be achieved during the plan period.
 Physical targets and financial outlays do not change except under emergencies. Under this plan,
targets are achieved which are laid down in the plan.
 This plan helps in maintaining proper balance in the economy.
 Further, there is no uncertainty in this type of planning.
 Fixed plan, with given objectives, ensures public cooperation. This type of planning needs political
will for its successful implementation.
9 Economic Planning in India before Independence

9.1 Economic Study by Dadabhai Naoroji
 The first authentic economic study of British India was published by Dadabhai Naraoji in his book
‘Poverty and the Unbritish Rule in India’.
 Dadabhai Naoroji's work focused on the drain of wealth from India into England through colonial
rule.
 One of the reasons that the Drain theory is attributed to Naoroji is his decision to estimate the net
national profit of India, and by extension, the effect that colonization has on the country.
 In Naoroji's book 'Poverty of India' he estimated a 200–300 million pounds loss of revenue to Britain
that is not returned.
 Through his work with economics, Naoroji sought to prove that Britain was draining money out of
India.
Naoroji described 6 factors which resulted in the external drain:

 Firstly, India is governed by a foreign government.
 Secondly, India does not attract immigrants which bring labour and capital for economic growth.
 Thirdly, India pays for Britain's civil administrations and occupational army.
 Fourthly, India bears the burden of empire building in and out of its borders.
 Fifthly, opening the country to free trade was actually a way to exploit India by offering highly paid
jobs to foreign personnel.
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 Lastly, the principal income-earners would buy outside of India or leave with the money as they
were mostly foreign personnel.
9.2 Royal Commission on Indian Expenditure (1896)

Naoroji's work on the drain theory was the main reason behind the creation of the Royal commission
on Indian Expenditure in 1896 in which he was also a member. This commission reviewed financial
burdens on India and in some cases came to the conclusion that those burdens were misplaced.
9.3 Emergence of the Idea of Planned Economy in India

 First of all, the idea of planned economy was crystallized in 1930s when our national leaders came
under the influence of socialist philosophy. India’s Five-year plans were very much impressed by the
rapid strides achieved by the USSR through five years plans.
 In 1934, Sir M. Visvesvaraya had published a book titled “Planned Economy in India”, in which he
presented a constructive draft of the development of India in next ten years. His core idea was to lay
out a plan to shift labour from agriculture to industries and double up National income in ten years.
This was the first concrete scholarly work towards planning.
 The economic perspective of India’s freedom movement was formulated during the thirties between
the 1931 Karachi session of Indian National Congress, 1936 Faizpur session of India National
Congress.
 National Planning Committee: The first attempt to develop a national plan for India came up in 1938.
In that year, Congress President Subhash Chandra Bose had set up a National Planning Committee
with Jawaharlal Nehru as its president. However, the reports of the committee could not be prepared
and only for the first time in 1948 -49 some papers came out.
There were various plans that were put forth for economic development of India.
9.4 Bombay Plan

In 1944 Eight Industrialists of Bombay viz. Mr. JRD Tata, GD Birla, Purshottamdas Thakurdas, Lala
Shriram, Kasturbhai Lalbhai, AD Shroff , Ardeshir Dalal, & John Mathai working together prepared “A
Brief Memorandum Outlining a Plan of Economic Development for India”. This is known as “Bombay
Plan”. This plan envisaged doubling the per capita income in 15 years and tripling the national income
during this period. Nehru did not officially accept the plan, yet many of the ideas of the plan were
inculcated in other plans which came later.
9.5 People’s Plan

People’s plan was drafted by MN Roy. This plan was for ten years period and gave greatest priority to
Agriculture. Nationalization of all agriculture and production was the main feature of this plan. This plan
was based on Marxist socialism and drafted by M N Roy on behalf of the Indian Federation of Lahore.
9.6 Gandhian Plan

This plan was drafted by Sriman Nayaran, principal of Wardha Commerce College. It emphasized the
economic decentralization with primacy to rural development by developing the cottage industries.
9.7 Sarvodaya Plan

Sarvodaya Plan (1950) was drafted by Jaiprakash Narayan. This plan itself was inspired by Gandhian Plan
and Sarvodaya Idea of Vinoba Bhave. This plan emphasized on agriculture and small & cottage
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industries. It also suggested the freedom from foreign technology and stressed upon land reforms and
decentralized participatory planning.
10 Economic Planning in India after Independence

10.1 Planning Commission – Its Origin:
 Immediately after independence in 1947, the Economic Programme Committee (EPC) was formed by
All India Congress Committee with Nehru as its chairman.
 This committee was to make a plan to balance private and public partnership and urban and rural
economies. In 1948, this committee recommended forming of a planning commission.
 In March 1950, the Planning Commission was set up by a Resolution of the Government of India as
an advisory and specialized institution.
(Planning Commission in India has been replaced by the NITI Aayog from 1 st January, 2015. It has been
explained in detail in the last section of this document)
Concept Check
Q. The Planning Commission was established in the year
(a) 1947
(b) 1948
(c) 1949
(d) 1950
(e) 1965
Answer: D
Concept Check
Q. NITI AAYOG was established on
(a) 15th August 2015
(b) 26th January 2015
(c) 2nd October 2015
(d) 1st January 2015
Answer: D
10.2 Planning Commission – Structure

 Planning Commission was an extra-constitutional body, charged with the responsibility of making
assessment of all resources of the country, augmenting deficient resources, formulating plans for
the most effective and balanced utilization of resources and determining priorities.
 Jawaharlal Nehru was the first Chairman of the Planning Commission.
 Originally most of the members of the commission were themselves central ministers.
Indian government adopted five-year plan starting from first year plan in 1951 development. Some of
the great architects of Indian planning include Jawaharlal Nehru, P.C Mahalonobis, V.R Gadgil, V.K.R.V
Rao.
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Concept Check
Q. The Planning Commission of India:
(a) was set up in 1951
(b) is a constitutional body
(c) is an advisory body
(d) is a government department
Answer: C
10.3 Objectives of Planning in India
10.3.1 Economic Growth

It refers to increase in the country’s capacity to produce the output of goods and services within the
country. The objective of achieving economic growth implies that the real national income and per capita
income must grow every year at a targeted rate.
Real national income is the measure of national income at a given years price or at a constant price. Real
per capita income is the average income of individuals in the economy.
It is argued that in order to achieve higher standard of living for each individual /household and the
society as a whole, both per capita income and national income must grow in real terms.
10.3.2 Increase in Employment

Employment refers to engagement of the labour force in gainful economic activity such as production of
goods and services. Income is generated through the production process where the production process
involves employment of factors of production provided by the households.
10.3.3 Reduction in Inequality of Income

India is a country with diverse economic standard of its population. This means that in terms of income
level, India lacks uniformity. A large section of India’s population belongs to lower income group and
termed as poor whereas a few are very rich with very high level of income.
One of the major reasons of inequality in income is the unequal distribution of asset holding such as per
capita land holding, possession movable and immovable property from inheritance etc.
10.3.4 Reduction in Poverty

Another major objective of planning in India is “reduction in poverty”. At the time of independence more
than fifty percent of India’s population was poor. By the year 2014, nearly 27 to 28 percent of India’s
population is under poverty as per governments estimates.
10.3.5 Modernization of the Economy

British left the country in dire poverty and underdevelopment when they handed over power to Indian
government in 1947. Because of the historical reasons Indian economy could not rise from its traditional
level of functioning. It remained an agrarian economy and industrially backward.
10.3.6 Ensuring Social Justice and Equality

Indian planning also aimed at achieving a socialistic pattern of society. It can be achieved by ensuring its
population social justice and equity. In fact, all the objectives said above are necessary to achieve social
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justice. But the sufficient condition for sustaining social justice and equitable distribution of income is to
introduce reforms in various sectors by changing the age-old systems which have perpetuated poverty
and inequality and obstructed development of industrial and service sector or caused low productivity
in agriculture.
10.4 Five Year Plans in India: An Overview
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Concept Check
Q. Which of the following Five year Plans laid emphasis on the development of basic and heavy
industries for the first time in India?
(a) First Five Year Plan
(b) Second Five Year Plan
(c) Third Five Year Plan
(d) Fourth Five Year Plan
(e) Fifth Five Year Plan
Answer: B
Concept Check
Q. The Seventh Five Year Plan covered the period:
(a) 1987 - 1992
(b) 1986 - 1991
(c) 1985 - 1990
(d) 1988 - 1994
Answer: C
Concept Check
Q. The main objective of the 12th Five-Year Plan is
(a) inclusive growth and poverty reduction
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(b) inclusive and sustainable growth

(c) sustainable and inclusive growth to reduce unemployment
(d) faster, sustainable and more inclusive growth
Answer: D
10.5 Planning Commission – An Appraisal
10.5.1 Achievements of Planning Commission

Modernization
 This is evident from a variety of changes in the structural and the institutional set-up of the economy.
 In respect of the structural changes, the noteworthy developments are: steady change in the
composition of national income with a higher share of national income originating in the
manufacturing sector; and a considerable diversification of products with many new industries
coming into the picture.
 Technologically too, some advances have been made. Modernization through institutional changes is
no less significant.
Self-Reliance
 Self-reliance implies that nation must have economic security, food security, energy security,
environmental security and political and social security.
 During the last seven decades considerable progress has been made towards the achievement of this
goal.
Social Justice
 The number of the poor below the poverty line has no doubt declined but the magnitude of poverty
continues to be large.
 According to Planning Commission estimates, poverty ratio declined from 36 per cent in 1993-94 to
27.5 per cent in 2004-05.
 In regard to the employment, there has again been some improvement.
Concept Check
Q. One of the reasons for India’s occupational structure remaining more or less the same over the
years has been that:
(a) investment pattern has been directed towards capital intensive industries.
(b) productivity in agriculture has been high enough to induce people to stay with agricultural.
(c) ceiling on land holdings have enabled more people to own land and hence their preference to stay
with agriculture.
(d) people are largely unaware of the significance of transition from agriculture to industry for economic
development.
Answer: A
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10.5.2 Failures of Planning Commission

 The primary aim of Planning Commission (PC) was to allocate scarce resources of the country to
various sectors of the economy. This was done to bring about orderly development. It was a need in
the times of Nehru's Soviet styled planned socialism. Free market itself is considered as an efficient
resource allocator and we are moving towards it. PC's importance is thus reduced.
 The distinction between the plan and non-plan has been done away with from the budget 2017-18.
 Plan targets set by PC were often not met on time.
 The growth of coalition governments and regional parties in the last 20 years has decentralized the
political structure and therefore there is now need for more devolution of planning to state and local
levels. States need greater flexibility to address their varied developmental challenges.
 Times have changed since inception of PC in 1951. Private sector now plays an important role in
development of the country.
Concept Check
Q. Which of the following are not correct assessments of the decades of India's Five-Year Plans?
(a) There has been very low capital formation
(b) Growth has favoured only the better off
(c) Production has increased substantially though often falling short of targets
(d) The public sector has contributed nothing to economic growth
Answer: C
11 Economic Reforms in India

11.1 Background
The origin of the financial crisis can be traced from the inefficient management of the Indian economy
in the 1980s. We know that for implementing various policies and its general administration, the
government generates funds from various sources such as taxation, running of public sector enterprises
etc.
Development policies required that even though the revenues were very low, the government had to
overshoot its revenue to meet challenges like unemployment, poverty and population explosion. The
continued spending on development programmes of the government did not generate additional
revenue. Moreover, the government was not able to generate sufficiently from internal sources such as
taxation. When the government was spending a large share of its income on areas which do not provide
immediate returns such as the social sector and defence, there was a need to utilise the rest of its revenue
in a highly efficient manner. The income from public sector undertakings was also not very high to meet
the growing expenditure. At times, our foreign exchange, borrowed from other countries and
international financial institutions, was spent on meeting consumption needs. Neither was an attempt
made to reduce such profligate spending nor sufficient attention was given to boost exports to pay for
the growing imports.
In the late 1980s, government expenditure began to exceed its revenue by such large margins that
meeting the expenditure through borrowings became unsustainable. Prices of many essential goods rose
sharply. Imports grew at a very high rate without matching growth of exports. As pointed out earlier,
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foreign exchange reserves declined to a level that was not adequate to finance imports for more than
two weeks. There was also not sufficient foreign exchange to pay the interest that needs to be paid to
international lenders. Also, no country or international funder was willing to lend to India.
India approached the International Bank for Reconstruction and Development (IBRD), popularly known
as World Bank and the International Monetary Fund (IMF), and received $7 billion as loan to manage the
crisis. For availing the loan, these international agencies expected India to liberalise and open up the
economy by removing restrictions on the private sector, reduce the role of the government in many
areas and remove trade restrictions between India and other countries.
India agreed to the conditionalities of World Bank and IMF and announced the New Economic Policy
(NEP). The NEP consisted of wide-ranging economic reforms. The thrust of the policies was towards
creating a more competitive environment in the economy and removing the barriers to entry and
growth of firms. This set of policies can broadly be classified into two groups: the stabilisation measures
and the structural reform measures.
Key Definition
Deficit Financing: Means generating funds to finance the deficit which results from excess of
expenditure over revenue.
New Economic Policy: A term used to describe the policies adopted in India since 1991.
Import Cover: It measures the number of months of imports that can be covered with foreign exchange
reserves available with the central bank of the country. Eight to ten months of import cover is essential
for the stability of a currency.
Concept Check
Q. Which of the following best describes the term ‘import cover’, sometimes seen in the news?
(a) It is the ratio of value of imports to the Gross Domestic Product of a country.
(b) It is the total value of imports of a country in a year.
(c) It is the ratio between the value.
(d) It is the number of months of imports that could be paid for by a country’s international reserves.
Answer: D
11.2 Stabilisation Measures

Stabilisation measures are short-term measures, intended to correct some of the weaknesses that have
developed in the balance of payments and to bring inflation under control. In simple words, this means
that there was a need to maintain sufficient foreign exchange reserves and keep the rising prices under
control.
11.3 Structural Reform Measures

On the other hand, structural reform policies are long-term measures, aimed at improving the efficiency
of the economy and increasing its international competitiveness by removing the rigidities in various
segments of the Indian economy. The government initiated a variety of policies which fall under three
heads viz., liberalisation, privatisation and globalisation.
Concept Check
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Q. Which one of the following is correct regarding stabilization and structural adjustment as two
components of the new economic policy adopted in India?
(a) Stabilization is a gradual, multi-step process while structural adjustment is a quick adaptation
process
(b) Structural adjustment is a gradual multi-step process, while stabilization is a quick adaptation
process
(c) Stabilization and structural adjustment are very similar and complimentary policies. It is difficult to
separate one from the other
(d) Stabilization mainly deals with a set of policies which are to be implemented by the Central
government while structural adjacent is to be set it motion by the State governments
Answer: B
11.4 Liberalisation
Liberalisation means to unshackle the economy from bureaucratic cobweb to make it more competitive.
Following are its chief features:
 To do away with the necessity of having a license for most of the industries
o Industrial licensing was abolished for almost all but product categories — alcohol, cigarettes,
hazardous chemicals, industrial explosives, electronics, aerospace and drugs and
pharmaceuticals.
 Freedom in determining the scale of business activities
 Removing restrictions for the movement of goods and services from one place to another
 Freedom to fix the prices of goods and services
 Reduction in the rate of taxes
 Freedom from unnecessary control over economy
 Simplifying import-export procedure
 Simplifying the process of attracting foreign capital and technology.
11.5 Privatization
 In brief, privatisation means such an economic process through which some public sector undertaking
is brought either partially or completely under private ownership.
 Privatisation of the public sector enterprises by selling off part of the equity of PSEs to the public is
known as disinvestment. The purpose of the sale, according to the government, was mainly to
improve financial discipline and facilitate modernisation.
 Its chief features are given below:
 Reducing the role of public sector and increasing the role of private sector
 Reducing fiscal burden of the government
 Reducing the size of the government machinery
 Speeding up economic development
 Improving management of enterprises
 Increase in government treasury
 Increasing competition by opening industries reserved for the public sector to the private
sector.
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11.6 Globalization
Globalization means integrating the economy with the rest of the world.
Following are its chief features:
 Free flow of goods and services in all the countries

 Free flow of capital in all the countries
 Free flow of information and technology in all the countries
 Free movement of people in all the countries
 The same conflict-solving technique in all the countries.
Concept Check
Q. 'Globalisation of Indian Economy' means:
(a) stepping up external borrowings
(b) establishing Indian business units abroad
(c) having minimum possible restrictions on economic relations with other countries
(d) giving up programmes of import substitution
Answer: C
12 NITI Aayog
12.1 Origin
 The National Institution for Transforming India, also called NITI Aayog, was formed via a resolution
of the Union Cabinet on January 1, 2015.
 NITI Aayog is the premier policy ‘Think Tank’ of the Government of India, providing both directional
and policy inputs.
 The Government of India, in keeping with its reform agenda, constituted the NITI Aayog to replace
the Planning Commission instituted in 1950.
 This was done in order to better serve the needs and aspirations of the people of India. An important
evolutionary change from the past, NITI Aayog acts as the quintessential platform of the Government
of India to bring States to act together in national interest, and thereby fosters Cooperative
Federalism.
Concept Check
Q. Full form of NITI Aayog is
(a) National Institute for Transforming India
(b) National Institution for Transforming India
(c) National Institute for Transmitting India
(d) New Institution for Transforming India
Answer: B
12.2 Composition
 Prime Minister of India as the Chairperson.
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 Governing Council comprising the Chief Ministers of all the States and Lt. Governors of Union
Territories.
 Regional Councils are formed for a specific tenure to address specific issues and contingencies
impacting more than one state or a region. The Regional Councils will be convened by the Prime
Minister and will comprise of the Chief Ministers of States and Lt. Governors of Union Territories in
the region. These will be chaired by the Chairperson of the NITI Aayog or his nominee.
 Experts, specialists and practitioners with relevant domain knowledge as special invitees nominated
by the Prime Minister.
 The full-time organizational framework will comprise of, in addition to the Prime Minister as the
Chairperson:
o Vice-Chairperson: To be appointed by the Prime Minister
o Members: Full-time
o Part-time members: Maximum of 2 from leading universities research organizations and other
relevant institutions in an ex-officio capacity. Part time members will be on a rotational basis.
o Ex Officio members: Maximum of 4 members of the Union Council of Ministers to be
nominated by the Prime Minister.
o Chief Executive Officer: To be appointed by the Prime Minister for a fixed tenure, in the rank
of Secretary to the Government of India.
o Secretariat as deemed necessary.
Concept Check
Q. Who appoints the Vice-Chairperson of NITI Aayog?
(a) The Prime Minster
(b) The President
(c) The Chief Executive Officer
(d) The Union Finance Minister
Answer: A
Concept Check
Q. Who amongst the following is the chairperson of NITI Aayog?
(a) The President
(b) The Prime Minister
(c) The Union Finance Minister
(d) The Finance Minister
Answer: B
12.3 Difference between NITI Aayog & Planning Commission

Planning Commission was an advisory body, and so is NITI Aayog. But the key difference between them
is that while the former had powers to allocate funds to ministries and states; this function will be now
of finance ministry. NITI Aayog is essentially a think tank and a truly advisory body. Other differences are
as follows:
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 The role of states in the planning commission era was limited. The states annually needed to interact
with the planning commission to get their annual plan approved. They had some limited function in
the National Development Council. Since NITI Aayog has all chief ministers of states and
administrators of UT in its Governing Council, it is obvious that states are expected to have greater
role and say in planning/ implementation of policies.
 The top-down approach is reversed in NITI Aayog. It will develop mechanisms to formulate credible
plans to the village level and aggregate these progressively at higher levels of government.
 The provision of regional council is there in NITI Aayog to address local / regional development issues.
One of the new functions of NITI Aayog is to address the need of the National Security in the economic
strategy.
 While the planning commission formed Central Plans, NITI Aayog will not formulate them anymore.
It has been vested with the responsibility of evaluating the implementation of programmes. In this
way, while NITI Aayog retains the advisory and monitoring functions of the Planning commission, the
function of framing Plans and allocating funds for Plan assisted schemes has been taken away.
12.4 Objectives
 To evolve a shared vision of national development priorities, sectors and strategies with the active
involvement of States.
 To foster cooperative federalism through structured support initiatives and mechanisms with the
States on a continuous basis, recognizing that strong States make a strong nation.
 To develop mechanisms to formulate credible plans at the village level and aggregate these
progressively at higher levels of government.
 To design strategic and long-term policy and programme frameworks and initiatives, and monitor their
progress and their efficacy.
 To provide advice and encourage partnerships between key stakeholders and national and
international like-minded Think tanks, as well as educational and policy research institutions.
 To create a knowledge, innovation and entrepreneurial support system through a collaborative
community of national and international experts, practitioners and other partners.
 To maintain 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 dissemination to stake-
holders.
 To actively monitor and evaluate the implementation of programmes and initiatives, including the
identification of the needed resources so as to strengthen the probability of success and scope of
delivery.
 To focus on technology upgradation and capacity building for implementation of programmes and
initiatives.
12.5 Functions
NITI Aayog’s entire gamut of activities can be divided into four main heads:
 Design Policy & Programme Framework

 Foster Cooperative Federalism
 Monitoring & Evaluation
 Think Tank and Knowledge & Innovation Hub
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Fiscal Policy Since

Reforms of 1991
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Contents
1 Part 1: Basics of Budget ........................................................................................................................................ 4
1.1 Introduction to Budget ................................................................................................................................. 4
1.2 Objectives of Government Budget ............................................................................................................... 4
1.2.1 Allocation Function of Government Budget ......................................................................................... 6
1.2.2 Redistribution Function of Government Budget .................................................................................. 7
1.2.3 Stabilisation Function of Government Budget ..................................................................................... 8
2 Part 2: Basics of Fiscal Policy ................................................................................................................................ 9
2.1 Meaning of Fiscal Policy................................................................................................................................ 9
2.2 Types of Fiscal Policy ..................................................................................................................................10
2.3 Tools of Fiscal Policy ...................................................................................................................................11
2.4 Main objectives of Fiscal Policy in India .....................................................................................................12
2.5 Importance of Fiscal Policy in India ............................................................................................................12
2.6 Similarities & Difference between Monetary Policy and Fiscal Policy .......................................................13
2.6.1 Similarities ..........................................................................................................................................13
2.6.2 Differences ..........................................................................................................................................13
3 Part 3: Components of Budget ...........................................................................................................................14
3.1 Receipts ......................................................................................................................................................14
3.1.1 Revenue Receipts ...............................................................................................................................15
3.1.2 Capital Receipts ..................................................................................................................................17
3.1.3 Distinction between Debt Creating Capital Receipts and Non-Debt Creating Capital Receipts.........19
3.1.4 Distinction between Revenue Receipt and Capital Receipt ...............................................................20
3.2 Expenditure ................................................................................................................................................20
3.2.1 Revenue Expenditure..........................................................................................................................21
3.2.2 Capital Expenditure ............................................................................................................................23
3.2.3 Importance of Capital Expenditure.....................................................................................................24
3.2.4 Difference between Revenue Expenditure and Capital Expenditure .................................................24
4 Part 4: Balanced, Surplus & Deficit Budget ........................................................................................................26
4.1 Balanced Budget .........................................................................................................................................26
4.1.1 Merits of a Balanced Budget ..............................................................................................................26
4.1.2 Demerits of a Balanced Budget ..........................................................................................................26
4.2 Surplus Budget ............................................................................................................................................27
4.2.1 Merits of a Surplus Budget .................................................................................................................27
4.2.2 Demerits of a Surplus Budget .............................................................................................................27
4.3 Deficit Budget .............................................................................................................................................28
4.3.1 Merits of a Deficit Budget ...................................................................................................................28

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4.3.2 Demerits of a Deficit Budget ..............................................................................................................28

5 Part 5: Types of Budgets in India ........................................................................................................................29
5.1 Zero-Base Budgeting...................................................................................................................................29
5.2 Gender Budgeting .......................................................................................................................................30
5.2.1 What is Gender Budgeting? ................................................................................................................30
5.2.2 Five Step Framework for Gender Budgeting ......................................... Error! Bookmark not defined.
5.3 Outcome and Performance Budgets ..........................................................................................................30
5.3.1 Output-Outcome Framework .............................................................................................................31
6 Part 6: Measures of Government Deficit............................................................................................................32
6.1 Revenue Deficit...........................................................................................................................................32
6.2 Effective Revenue Deficit............................................................................................................................33
6.3 Gross Fiscal Deficit ......................................................................................................................................34
6.4 Net Fiscal Deficit .........................................................................................................................................35
6.5 Gross Primary Deficit ..................................................................................................................................35
6.6 Net Primary Deficit .....................................................................................................................................35
6.7 Traditional Budget Deficit ...........................................................................................................................36
6.8 Monetized Deficit .......................................................................................................................................36
6.9 Composition of Fiscal Deficit ......................................................................................................................36
6.10 Significance of Different Measures of Deficit .............................................................................................37
6.10.1 Fiscal Deficit ........................................................................................................................................37
6.10.2 Budget Deficit .....................................................................................................................................37
6.10.3 Monetized Deficits ..............................................................................................................................38
6.10.4 Primary Deficits...................................................................................................................................38
6.10.5 Revenue Deficit...................................................................................................................................38
6.11 Deficit Financing .........................................................................................................................................38
7 Part 7: Public Debt in India .................................................................................................................................39
7.1 Borrowings by the Centre and the States – Constitutional Provisions.......................................................39
7.2 Internal Debt...............................................................................................................................................40
7.3 External Debt ..............................................................................................................................................41
7.4 Deficit Reduction ........................................................................................................................................42
7.5 Fiscal Responsibility & Budget Management Act 2003 ..............................................................................43
7.6 Independent Debt Management ................................................................................................................44
8 Part 8: GST: One Nation, One Tax, One Market (Linked to Tax Revenue)..........................................................45
9 Summary .............................................................................................................................................................49

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1 Part 1: Basics of Budget
1.1 Introduction to Budget

A budget is an estimation of receipts and expenses over a specified future period of time and is utilized
by governments, businesses, and individuals. Budgets can be made for a person, a group of people, a
business, a government, or just about anything else that makes and spends money.
Government budget or Fiscal budget is a forecast by a government of its expenditures and revenues for
a specific period of time. In national finance, the period covered by a budget is usually a year, known as
a financial or fiscal year, which may or may not correspond with the calendar year. The word budget is
derived from the Old French bougette (“little bag”).
Concept Check
Q. Which among the following is not accounted as expenditure in a government budget?
(a) Transfer payment
(b) Subsidy
(c) Disinvestment proceeds
(d) Capital infusion into PSUs
(e) Debt service
Answer: C
1.2 Objectives of Government Budget

As mentioned earlier, the Union Budget’s general objective is to present the yearly financial record and
plannings of the government and it helps the government in bringing out fast and all-inclusive economic
growth of our country. It also empowers the government to carry out its constitutional duties such as
providing social justice and equality for all. It has the following key objectives which highlight its
importance of Union Budget in India:
1. Resource allocation in the best interest of the society and the country and allocating resources
optimally for public welfare. For example, during a war like situation, it is in the best interest of the
society and the country for the government to divert resources towards military preparedness.
Similarly, if faced with an outbreak of a pandemic, it is in the best interest of the country for the
government to channel resources towards maintaining and strengthening the healthcare
infrastructure.
2. Uplift downtrodden sections of the society by reducing poverty levels and creating employment. This
objective has guided the Government of India in implementing numerous poverty alleviation and

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wage employment generation programs – most recent and important being Mahatma Gandhi
Employment Guarantee Act 2005.
3. Creating programmes for citizens so that they get basic needs such as food, shelter, education and
health care. Keeping this objective in mind, the Government of India has enacted the National Food
Security Act, 2013, implemented the Pradhan Mantri Awas Yojana, enacted the Right of Children to
Free and Compulsory Education Act, 2009 and formulated the Ayushman Bharat Yojana.
4. Union Budget makes sure that there is fair distribution of income through taxes and subsidies.
Government of India follows a system of taxation whereby the burden of taxes increases
progressively with the increase in income. The underlying idea is to collect greater taxes from those
who can afford to pay taxes. Similarly, the Government of India provides a number of subsidies – for
fertilisers to farmers, capital subsidy to micro and small enterprises (this type of subsidy helps small
entrepreneur in purchasing capital goods) and food subsidy to a large section of the Indian society.
KEY DEFINITION
Subsidy: A subsidy is a benefit given to an individual, business, or institution, usually by the government.
It is usually in the form of a cash payment or a tax reduction. The subsidy is typically given to remove
some type of burden, and it is often considered to be in the overall interest of the public, given to
promote a social good or an economic policy.
Progressive Tax System: A progressive tax is one in which the proportion of income paid in taxes is
greater for higher income levels. A progressive income tax exists, for example, if taxpayers with more
income pay a 25% of their income in taxes, while those with less income pay 20%.
5. Union Budget takes steps to control inflation, disinflation, deflation and economic fluctuations thus
ensuring economic stability in the country. Government of India, through its fiscal policy, takes steps
to stablise the business cycle – which simply means taking steps to boost the economy during a
slowdown and ensuring price stability during a phase of rapid economic growth. We will be reading a
lot more about fiscal policy going ahead in a dedicated section.
KEY DEFINITION
Inflation: A persistent increase in the average price level in the economy.
Disinflation: A decline in the inflation rate. With disinflation, prices are still rising, they're just not rising
as fast. Numerically speaking, if the inflation rate was 10% last year, 6% this year, and looks to be 4%
next year, then we have disinflation.

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Deflation: Deflation occurs when the average price level decreases over time. This is the exact opposite
of inflation--in which prices are rising over an extended period, and it should be contrasted with
disinflation--which is a decline in the inflation rate.
6. The Union Budget of any country is crucial as it has widespread implications on that country’s
economic stability and general life as such.
Thus, government plays a very important role in increasing the welfare of the people. In order to do that
the government intervenes in the economy in the following ways.
Union Budget of India – Key Facts

 According to Article 112 of the Indian Constitution, the Union Budget of a year, referred to as the
annual financial statement (AFS), is a statement of the estimated receipts and expenditure of the
government for that particular year.
 The Union Budget keeps the account of the government's finances for the financial year that runs
from April 1 to March 31.
 The Annual Financial Statement distinguishes the expenditure on revenue account from the
expenditure on other accounts, as mandated by the Constitution of India.
 In the Budget, the receipts and disbursements are shown in three parts in which Government
Accounts comprise (i) the Consolidated Fund, (ii) the Contingency Fund and (iii) the Public Account.
 The Budget Division of the Department of Economic Affairs in the finance ministry is the nodal
body responsible for producing the Budget.
Concept Check
Q. With reference to ‘subsidy’, which of the following options is correct?
(a) It is a benefit given to an individual, business, or institution, usually by the government.
(b) It is usually in the form of a cash payment or a tax reduction.
(c) It is typically given to promote a social good or an economic policy.
Answer: D
1.2.1 Allocation Function of Government Budget

Government provides certain goods and services which cannot be provided by the market mechanism
i.e. by exchange between individual consumers and producers. Examples of such goods are national
defence, roads, government administration etc. which are referred to as public goods. The act of
providing such public goods is referred to as the allocation function of government budget.
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Concept Check
Q. Which of the following good/service will typically not be provided by a government under its
‘allocation function’?
(a) Universal vaccination
(b) National defence
(c) Legal aid to poorer sections of society
(d) Consumer durable goods
(e) Public parks
Answer: D
1.2.2 Redistribution Function of Government Budget

Total national income of the country goes to either the private sector, that is, firms and households
(known as private income) or the government (known as public income). Out of private income, what
finally reaches the households is known as personal income and the amount that can be spent is the
personal disposable income. (You may recall, we have discussed these concepts in detail in Chapter 1 of
this course.)
The government sector affects the personal disposable income of households by making transfers and
collecting taxes. It is through this that the government can change the distribution of income and bring
about a distribution that is considered ‘fair’ by society. This is the redistribution function.
The transfer of income from one section of the society to another is achieved primarily by the use of a
progressive taxation system and a variety of welfare provisions (subsidized housing, old age pensions,
etc.).

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Concept Check
Q. With reference to taxation system, which of the following statements is correct?
(a) In progressive taxation system, rate of taxation decreases with increase in income.
(b) In proportionate taxation system, rate of taxation remains constant at all income levels.
(c) In regressive taxation system rate of taxation increases with increase in income.
(d) Regressive taxation system is the most suited for tackling high inequality in a society.
Answer: B
1.2.3 Stabilisation Function of Government Budget

Pioneering economist John Maynard Keynes noted that an economy grows and contracts in a cyclical
pattern.
When people lack the means to buy the goods or services being produced, prices are reduced to entice
customers. As prices fall, some businesses experience significant losses. Corporate bankruptcies
increase, and job losses mount. That further reduces the buying power in the consumer market. Prices
can only go lower again.
To stop the cycle, Keynes argued, requires changes in fiscal policy such as the manipulation of aggregate
demand. In Keynesian theory, demand is stimulated to counter high levels of unemployment and it is
suppressed to counter rising inflation. One way to stimulate demand is to increase government
expenditure. You may recall, we had discussed ‘government expenditure’ in detail in Chapter 1, while
discussing the expenditure method of calculating gross domestic product.
On the other hand, if the economy is witnessing a period of high inflation, government must try to control
the level of aggregate demand. In such scenarios, it is important that government cuts down upon
wasteful expenditure and channelises resources to bring about a supply augmentation.
A stabilization policy seeks to limit erratic swings in the economy's total output, as measured by the
nation's gross domestic product (GDP), as well as controlling surges in inflation or deflation. Stabilization
of these factors generally leads to healthy levels of employment.
To sum up,
Scenario 1: Low purchasing power ► Low demand ► Lower production and prices ► Less number of
jobs available ► Lower income of households ► Lower expenditure by household ► Still Lower demand
► To break this vicious cycle, government increases expenditure ► Demand increases ► Production

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increase ► More jobs available ► Household income increases ► Household expenditure increases ►
Demand increases ► Production increases ► Economy can be pulled out of the low growth scenario.
Scenario 2: High demand ► High Prices – a period of high inflation ► High inflation will erode the
purchasing power of households ► Household will demand less ► Production will decrease ► To avoid
this trap, it is important to curb inflation ► How can government help in controlling inflation? ►
Government can control its own wasteful expenditure, thus lowering the demand ► Government can
spend on supply augmentation, which will help increase supply ► Both these measures can help in
restoring demand and supply equilibrium.
Concept Check
Q. Which of the following measures should be adopted by a government in order to control
inflation?
(a) Decrease income tax
(b) Increase subsidy
(c) Increase salaries of government employees
(d) Increase wages under MNREGA
Answer: E
2 Part 2: Basics of Fiscal Policy
2.1 Meaning of Fiscal Policy

Fiscal means something that is related to public money or taxes. Fiscal policy is an estimate of taxation
and government spending that impacts the economy. It was John Maynard Keynes, the first economist
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Fiscal policy in India is the guiding force that helps the government decide how much money it should
spend to support the economic activity, and how much revenue it must earn from the system, to keep
the wheels of the economy running smoothly.
Concept Check
Q. Which of the following is considered to be a tool of a government’s fiscal policy?
(a) Cash Reserve Ratio
(b) Statutory Liquidity Ratio
(c) Repo Rate
(d) Reverse Repo Rate
(e) Taxation
Answer: E
2.2 Types of Fiscal Policy

There are two types of fiscal policy:
 Expansionary fiscal policy: This policy is designed to boost the economy. It is mostly used in times of
high unemployment and recession (a slowdown or a massive contraction in economic activities). It
leads to the government lowering taxes and spending more, or one of the two. The aim is to stimulate
the economy and ensure consumers' purchasing power does not weaken.
 Contractionary fiscal policy: As the term suggests, this policy is designed to slow economic growth in
case of high inflation. The contractionary fiscal policy raises taxes and cuts spending.
Concept Check
Q. In the context of economic recession, which of the above actions can be considered a part of the
“fiscal stimulus” package?
(a) Cutting the tax rates
(b) Increasing the government spending
(c) Increasing the subsidies
Answer: D
Concept Check
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Q. In the context of economic recession, which of the following actions can be considered a part of
the “fiscal stimulus” package?
(a) Cutting the tax rates
(b) Increasing the government spending
(c) Abolishing the subsidies
(d) Only (a) and (b)
Answer: D
2.3 Tools of Fiscal Policy

There are two key tools of the fiscal policy:
 Taxation: Funds in the form of direct and indirect taxes help the government function. Taxes affect
the consumer's income and changes in consumption lead to changes in real gross domestic product
(GDP). Before we proceed ahead, let us understand the distinction between direct and indirect taxes:
 Direct Taxes: A direct tax is paid by an individual or organization to the entity that levied the tax.
Direct taxes include income tax, property tax, corporate tax, estate tax, gift tax, and taxes on
assets.
 Indirect Taxes: An indirect tax is collected by one entity in the supply chain (usually a producer or
retailer) and paid to the government, but it is passed on to the consumer as part of the purchase
price of a good or service. The consumer is ultimately paying the tax by paying more for the
product. Best example of indirect tax in the present times is the Goods and Services Tax. We will
be discussing this in detail towards the end of this chapter.
 Government spending: It includes welfare programmes, government salaries, subsidies,
infrastructure, etc. Government spending has the power to raise or lower real GDP, hence it is included
as a fiscal policy tool.
Concept Check
Q. Which among the following is not an example of direct tax?
(a) Income tax
(b) Property tax
(c) Corporate tax
(d) Gift tax
Answer: E
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2.4 Main objectives of Fiscal Policy in India

 Economic growth: Fiscal policy helps maintain the economy’s growth rate so that certain economic
goals can be achieved. As we read above, government can adopt an expansionary fiscal policy to
stimulate a slowing economy.
 Price stability: It controls the price level of the country so that when the inflation is too high, prices
can be regulated. As we read above, government may adopt a contractionary fiscal policy to rein in
demand and therefore the prices.
 Full employment: It aims to achieve full employment, or near full employment, as a tool to recover
from low economic activity.
2.5 Importance of Fiscal Policy in India

 In a country like India, fiscal policy plays a key role in elevating the rate of capital formation both in
the public and private sectors. (Capital formation refers to additions of capital goods, such as
equipment, tools, transportation assets, and electricity. Generally, firms undertake investment
expenditure to bring about capital formation.) Government can provide capital subsidy to firms, thus
helping them undertake investment expenditure.
 Through taxation, the fiscal policy helps mobilise considerable amount of resources for financing the
government’s numerous projects. Consider the following example to understand this point better: To
give wings to the Swachh Bharat Mission, the Government of India initiated a tax known as ‘Swachh
Bharat Cess’ at 0.5% on all taxable services to fund Swachh Bharat initiatives. Consequently, the
service tax rate including the Swachh Bharat Cess stands at 14.50%. The Cess became effective from
November 15th, 2015 and is collected as per provisions of Chapter VI (Section 119) of the Finance Act,
2015. With the implementation of GST from 1st July 2017, Swachh Bharat Cess in not applicable any
more.
 Fiscal policy also helps in providing stimulus to elevate the savings rate. There are two ways of raising
the rate of saving. The government can directly increase the rate of saving by increasing its own
saving, called public saving. Public saving is the excess of government tax revenue over government
expenditure. The government can also affect national saving by influencing private saving — saving
of the household sector and the corporate sector (i.e., retained earnings of corporations). The
Government of India has launched various saving schemes such as - Equity-Linked Savings Scheme,
Public Provident Funds, National Savings Certificate, Senior Citizens Savings Scheme, Kisan Vikas
Patra and Sukanya Samruddhi Yojana to promote savings within the household sector.
 The fiscal policy gives adequate incentives to the private sector to expand its activities. Consider the
following example to understand this point better: In March 2020, with a view to boost the
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pharmaceutical sector in India, Government of India has approved the scheme on Promotion of Bulk
Drug Parks for financing Common Infrastructure Facilities in 3 Bulk Drug Parks with financial
implication of Rs. 3,000 crores for next five years. Production Linked Incentive (PLI) Scheme has also
been approved for promotion of domestic manufacturing of critical Drug Intermediates and APIs in
the country with financial implications of Rs 6,940 crore for next eight years.
 Fiscal policy aims to minimise the imbalance in the dispersal of income and wealth. Consider the
following example to understand this point better: The Pradhan Mantri Kisan Samman Nidhi Yojana
(PM-KISAN) was announced in the interim Budget 2019-20 on February 1, 2019. The Scheme was
introduced to augment the income of the farmers in India. The PM-KISAN scheme aims to supplement
the financial means of farmers and thus help in procuring various inputs to ensure proper crop health
and appropriate yields.
Concept Check
Q. Fiscal policy can aid in
(a) capital formation.
(b) resource mobilization.
(c) promoting economic activity.
(d) ensuring equitable distribution of income.
Answer: E
2.6 Similarities & Difference between Monetary Policy and Fiscal Policy
2.6.1 Similarities
Both monetary and fiscal policy are macroeconomic tools used to manage or stimulate the economy.
The government uses both monetary and fiscal policy to meet the county’s economic objectives. Both
aim at creating a more stable economy characterised by low inflation and positive economic growth.
Both fiscal and monetary policy are an attempt to reduce economic fluctuations and smooth out the
economic cycle.
2.6.2 Differences
Monetary policy is concerned with the management of interest rates and the total supply of money in
circulation. It is generally carried out by the RBI.
Fiscal policy, on the other hand, estimates taxation and government spending. It should ideally be in line
with the monetary policy, but since it is created by lawmakers, people's interest often takes precedence
over growth.
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Concept Check
Q. With reference to fiscal policy and monetary policy, which of the following options is correct?
(a) Monetary policy decisions are within the domain of the Reserve Bank of India.
(b) Taxation and expenditure are the main tools of monetary policy.
(c) Policy rate is the chief tool of fiscal policy.
Answer: A
3 Part 3: Components of Budget

Government Budget in India is divided into two parts – Revenue Budget and Capital Budget.
The Revenue Budget comprises revenue receipts and expenditure met from these revenues. The
revenue receipts include both tax revenue (like income tax, excise duty) and non-tax revenue (like
interest receipts, profits).
Capital Budget consists of capital receipts (like borrowing, disinvestment) and long period capital
expenditure (creation of assets, investment).
3.1 Receipts
Government receipts are divided into two groups—Revenue Receipts and Capital Receipts. All
Government receipts which either create liability or reduce assets are treated as capital receipts whereas
receipts which neither create liability nor reduce assets of Government are called revenue receipts.
Before we move ahead, let us understand the distinction between assets and liabilities:
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Concept Check
Q. With reference to revenue receipt and capital receipt, which of the following options is not
correct?
(a) Revenue receipt does not increase liability.
(b) Capital receipt can increase liability.
(c) Revenue receipt does not decrease asset.
(d) Capital receipt can increase assets.
Answer: D
3.1.1 Revenue Receipts
Revenue Receipt: Receipts which are recurring (received again and again) by nature and which are
available for meeting all day to day expenses (revenue expenditure) of a business concern are known as
"Revenue receipts", e.g. sale proceeds of goods, interest received, commission received, rent received,
dividend received etc. In case of government, tax revenue is a major component of revenue receipts.
Revenue receipts are those receipts that do not lead to a claim on the government (i.e. government is
not obligated to repay the money received as revenue receipt). They are therefore termed non-
redeemable.
They are divided into tax and non-tax revenues.
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3.1.1.1 Tax Revenues

Tax revenues, an important component of revenue receipts, have for long been divided into direct taxes
(personal income tax) and firms (corporation tax), and indirect taxes like excise taxes (duties levied on
goods produced within the country), customs duties (taxes imposed on goods imported into and exported
out of India) and service tax.
Other direct taxes like wealth tax, gift tax and estate duty (now abolished) have never brought in large
amount of revenue and thus have been referred to as ‘paper taxes.
KEY DEFINITION
Proportional Tax: A tax in which people pay the same percentage of income in taxes regardless of their
incomes. Here's an example of a proportional tax -- You earn Rs 10,000 a year and your boss get Rs
20,000. You pay Rs 1,000 in taxes (10 percent) and your boss pays Rs 2,000 in taxes (10 percent).
Concept Check
Q. Which of the following taxes is a direct tax?
(a) Goods and Services Tax
(b) Excise Tax
(c) Sales Tax
(d) Wealth Tax
(e) Customs duty
Answer: D
3.1.1.2 Non Tax Revenue

Following are the examples of Non-Tax Revenue Receipts:
1. Profits and dividends (a sum of money paid regularly by a company to its shareholders out of its
profits) which the government gets from its public sector undertakings (PSUs).
2. Interests received by the government out of all loans forwarded by it, be it inside the country (i.e.
internal lending) or outside the country (i.e. external lending). It means this income might be in both
domestic and foreign currencies.
3. Fiscal services also generate incomes for the government, i.e., printing currency, stamp printing,
coinage and medals minting, etc.
4. General Services also earn money for the government as the power distribution, irrigation, banking,
insurance, community services, etc.
5. Fees, penalty and fines received by the government.
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6. Cash grants-in-aid (payments in the nature of assistance, donations or contributions made to one
government by another government, body, institution or individual) from foreign countries and
international organisations are also included. Grants is always external in the case of the Central
Government and internal in the case of state governments.
Concept Check
Q. Which of the following forms a part of the non-tax revenue receipts of the Government of India?
(a) Profits earned from Public Sector Undertakings (PSUs)
(b) Fines received by the government
(c) Grants
Answer: D
3.1.2 Capital Receipts
Receipts which are non-recurring (not received again and again) by nature and whose benefit is enjoyed
over a long period are called "Capital Receipts", e.g. money brought into the business by the owner
(capital invested), loan from bank, sale proceeds of fixed assets etc. Capital receipt is shown on the
liabilities side of the Balance Sheet.
The capital receipts in India include the following capital kind of accruals to the government:
1. Loan Recovery: This is one source of the capital receipts. The money the government has lent out in
the past in India (to states, UTs, PSUs, etc.) and abroad their capital comes back to the government
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when the borrowers repay them as capital receipts. The interests which come to the government on
such loans are part of the revenue receipts.
2. Borrowings by the Government: This includes all long-term loans raised by the government inside
the country (i.e., internal borrowings) and outside the country (i.e., external borrowings). Internal
borrowings might include the borrowings from the RBI, Indian banks, financial institutions, etc.
Similarly, external borrowings might include the loans from the World Bank, the IMF, foreign banks,
foreign governments, foreign financial institutions, etc. Loans will have to be returned to the agencies
from which they have been borrowed. Thus, they create liability (liabilities are something that we
owe to others. These have to be re-paid, usually with an interest).
3. Other Receipts by the Government: This includes many long-term capital accruals to the government
through the Provident Fund (PF), Postal Deposits, various small saving schemes and the government
bonds sold to the public (as Indira Vikas Patra, Kisan Vikas Patra etc.). Such receipts are nothing but
a kind of loan on which the government needs to pay interests on their maturities. But they play a
role in capital raising process by the government.
4. The government also receives money sale of its assets. Sale of government assets, like sale of shares
in Public Sector Undertakings (PSUs) (Air India, BPCL, HPCL, IOCL and ONGC are some examples of
PSUs in India – Government of India is the majority stakeholder in these companies) which is referred
to as PSU disinvestment, reduce the total amount of financial assets of the government.
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3.1.3 Distinction between Debt Creating Capital Receipts and Non-Debt Creating Capital
Receipts
When government takes fresh loans, it will mean that in future these loans will have to be returned and
interest will have to be paid on these loans. Similarly, when government sells an asset, then it means that
in future its earnings from that asset, will disappear. Thus, these receipts can be debt creating or non-
debt creating.
Loan is a debt creating capital receipts. Loan has to be repaid with interest. It is a debt obligation. On
the other hand, money received by the government through sale of stake (disinvestment) in a public
sector enterprise is a non-debt creating capital receipt. Government does not have to repay this money
back to anyone. It is not a debt obligation.
Note that non debt capital receipts of the union government include:
 Recoveries of loans and advances given to state governments, Union territories and foreign
governments. (in simpler terms, this means that Government is taking back the money it had given
out as a loan to a borrower)
 Money accrued to the Union government from listing (listing refers to a company's shares being
included on the list of stock that are officially traded on a stock exchange) of central government
companies. Consider the following example to understand this point better: Indian Railway Catering
and Tourism Corporation (IRCTC) was listed on the National Stock Exchange and the Bombay Stock
Exchange by the Government of India on October 14, 2019. Through selling its shares, the government
offloaded 12.6% stake in IRCTC and garnered around Rs 645 crore.
The government further classifies disinvestment proceeds into:
 Disinvestment receipts
 Strategic disinvestment
 Listing of PSUs in stock markets and
 Issue of bonus shares
Over a period, disinvestment has become the main source of the Union government’s non debt capital
receipts.
Concept Check
Q. Which of the following items form a part of capital receipt?
(a) Borrowing by the government from commercial banks
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(b) Loans received from foreign governments

(c) Sale of shares in Public Sector Undertakings
(d) Grants-in-aid from foreign countries
(e) All of the above except (d)
Answer: E
3.1.4 Distinction between Revenue Receipt and Capital Receipt

Effect
 Revenue Receipt: It has short-term effect. The benefit is enjoyed within one accounting period.
 Capital Receipt: It has long-term effect. The benefit is enjoyed for many years in future.
Occurrence
 Revenue Receipt: It occurs repeatedly. It is recurring and regular.

 Capital Receipt: It does not occur again and again. It is non-recurring and irregular.
Assets/Liabilities
 Revenue Receipt: This does not increase or decrease the value of asset or liability.
 Capital Receipt: The capital receipt decreases the value of asset or increases the value of liability e.g.,
sale of a fixed asset, loan from bank etc.
Concept Check
Q. Which of the following option consists of items that can all be classified as revenue receipt?
(a) Income Tax, Corporation Tax, Wealth Tax and Disinvestment receipts
(b) Borrowing at home, Loans from RBI, Sales Tax and Fines
(c) Profit, Corporation Tax, Goods and Services Tax and Borrowing at home
(d) Interest, Dividend, Income Tax and Fees
Answer: D
3.2 Expenditure
Expenditure can be classified under two heads – revenue expenditure and capital expenditure. The
differences between capital expenditures and revenue expenditures include whether the purchases will
be used over the long-term or short-term.
Revenue expenditures are typically referred to as ongoing operating expenses (it is an ongoing cost for
running a product, business, or system).
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Capital expenditures are typically one-time large purchases of fixed assets that will be used for revenue
generation over a longer period.
Concept Check
Q. Which of the following is not an example of developmental expenditure?
(a) Grants to states
(b) Developing infrastructure projects
(c) Defence expenditure
(d) Developing railways
Answer: C
3.2.1 Revenue Expenditure
Revenue Expenditure is expenditure incurred for purposes other than the creation of physical or financial
assets of the central government.
It relates to those expenses incurred for the normal functioning of the government departments and
various services, interest payments on debt incurred by the government, and grants given to state
governments and other parties (even though some of the grants may be meant for creation of assets).
The main items of revenue expenditure are interest payments, defence services, subsidies, salaries and
pensions. Some of this expenditure is also referred to as ‘charged expenditure’.
Charged Expenditure is the public expenditure which is beyond the voting power of the Parliament and is
directly withdrawn from the Consolidated Fund of India. For example, the emoluments of the President,
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Speaker and the Deputy Speaker of the Lok Sabha, Chairman and the Deputy Chairman of the Rajya Sabha,
Judges of the Supreme Court and the High Courts in India, etc.
Interest payments on market loans, external loans and from various reserve funds constitute one of the
largest components of revenue expenditure.
Defence expenditure, is committed expenditure in the sense that given the national security concerns,
there exists little scope for drastic reduction. (Committed expenditure is the expenditure of the
governments from which they cannot deny, i.e. a government has to undertake this expenditure and there
is very less scope for reducing it.)
Subsidies are an important policy instrument which aim at increasing welfare. Apart from providing
implicit subsidies through under-pricing of public goods and services like education and health, the
government also extends subsidies explicitly on items such as exports, interest on loans, food and
fertilisers.
To sum up, examples of revenue expenditure are as follows:
1. Interest payments by the government on the internal and external loans;

2. Salaries, Pension and Provident Fund paid by the government-to-government employees;
3. Subsidies forwarded to all sectors by the government;
4. Defence expenditures by the government;
5. Postal deficits of the government;
6. Law and order expenditures (i.e. police & paramilitary)
7. Expenditures on social services (includes all social sector expenditures as education, health care, social
security, poverty alleviation, etc.) and general services (tax collection, etc.)
8. Grants given by the government to Indian states and foreign countries.
Concept Check
Q. Which of the items given below forms a part of ‘Revenue Expenditure’?
(a) Salaries, Pension and Provident Fund paid by the government
(b) Grants given by the government to Indian States and foreign countries
(c) Subsidies forwarded to all sectors
(d) Law and order expenditure
Answer: E
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3.2.2 Capital Expenditure
There are expenditures of the government which result in creation of physical or financial assets or
reduction in financial liabilities.
This includes expenditure on the acquisition of land, building, machinery, equipment, investment in
shares, and loans and advances by the central government to state and union territory governments,
PSUs and other parties.
Capital expenditure is the part of the government spending that goes into the creation of assets like
schools, colleges, hospitals, roads, bridges, dams, railway lines, airports and seaports. Capital
expenditure also covers the acquisition of equipment and machinery by the government, including those
for defence purposes. Capital expenditure also includes investment by the government that yields profits
or dividend in future.
Examples of Capital Expenditure are as follows:
1. Loan Disbursals by the Government: The loans forwarded by the government might be internal (i.e.,
to the states, UTs, PSUs) or external (i.e., to foreign countries, foreign banks, purchase of foreign
bonds, loans to IMF and WB, etc.)
2. Loan Repayments by the Government: Again, loan payments might be internal as well as external.
This consists of only the capital part of the loan repayment as the element of interest on loans are
shown as a part of the revenue expenditure.
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3. Plan Expenditure of the Government: This consists of all the expenditures incurred by the
government to finance the planned development of India as well as the central government financial
supports to the states for their plan requirements.
4. Capital Expenditures on Defence by the Government: This consists of all kinds of capital expenses to
maintain the defence forces, the equipment purchased for them as well as the modernisation
expenditures.
5. General Services: These also need huge capital expenditure by the government - the railways, postal
department, water supply, education, rural extension, etc.
6. Other Liabilities of the Government: Basically, this includes all the repayment liabilities of the
government on the items of the 'other receipts'. The level of liabilities depends on the fact as to how
much such receipts were made by the governments in the past. The amount of payment liabilities in
the year also depends on the fact as to which years in the past the governments had other receipts
and for what duration of maturity periods. As for example, the PF liabilities were not an item of such
liabilities for almost first three decades after Independence. But once the government employees
started retiring, it went on increasing.
3.2.3 Importance of Capital Expenditure

 High capital expenditure usually means more investment by the government towards the creation of
infrastructure and other assets that are crucial for rapid economic growth.
 Capital expenditure means construction of roads, highways, dams, bridges, ports, airports and
railway lines.
 India experienced low growth rates for decades as it failed to develop physical and social
infrastructure, the key to achieving high economic growth.
Concept Check
Q. Which among the following is not one of the features of capital expenditure?
(a) It is non-recurring in nature.
(b) It leads to creation of either physical asset or financial asset.
(c) It can also referred to as developmental expenditure.
(d) It can result in an increase in the productive capacities of an economy.
Answer: E
3.2.4 Difference between Revenue Expenditure and Capital Expenditure
Revenue Expenditure Capital Expenditure
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1. Its effect is temporary, i.e., the benefit is 1. Its effect is long-term, i.e., it is not exhausted
received within the accounting year. within the current accounting year-its benefit
is received for a number of years in future.
2. Neither an asset is acquired nor the value of 2. An asset is acquired or the value of an existing
an asset is increased. asset is increased.
3. It has no physical existence because it is 3. Generally, it has physical existence except

incurred on items which are used by the intangible assets.
business.
4. It is recurring and regular and it occurs 4. It does not occur again and again. It is
repeatedly. nonrecurring and irregular.
5. This expenditure helps to maintain the 5. This expenditure improves the position of the
business. business.
6. It does not appear in the balance sheet. 6. It appears in the balance sheet until its
benefit is fully exhausted.
7. It reduces profit of the business. 7. It does not reduce the profit of the concern.
Purchase of fixed asset does not affect profit.
RELATED CONCEPTS
Developmental and Non-Developmental Expenditure
Total expenditure incurred by the government is classified into two segments - developmental and non-
developmental.
All expenditures of productive nature are developmental such as on the heads of new factories, dams,
bridges, roads, investments.
The expenditure which are of consumptive kind and do not involve any production are non-
developmental, i.e., paying salaries, pensions, interest payments, subsidies, defence expenses, etc.
This classification is not used in the Indian public finance management now.
Concept Check
Q. Which among the following is not one of the features of revenue expenditure?
(a) It is also referred to as consumptive expenditure.
(b) It helps in the day to day functioning of an organisation.
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(c) It can often be in the form of committed expenditure.

(d) It was earlier referred to as non-plan expenditure.
Answer: E
4 Part 4: Balanced, Surplus & Deficit Budget
4.1 Balanced Budget

A government budget is said to be a balanced budget if the estimated government expenditure is equal
to expected government receipts in a particular financial year.
This type of budget is based on the principle of “living within means.” It is believed the government’s
expenditure should not exceed their revenue.
Though an ideal approach to achieve a balanced economy and maintain fiscal discipline, a balanced
budget does not ensure financial stability at times of economic depression or deflation. Theoretically,
it’s easy to balance the estimated expenditure and anticipated revenues but when it comes to practical
implementation, such balance is hard to achieve.
4.1.1 Merits of a Balanced Budget

 Ensures economic stability, if implemented successfully.
 Ensures that the government refrains from imprudent expenditures.
4.1.2 Demerits of a Balanced Budget

 Unviable at times of recession and does not offer any solution to problems such as unemployment.
 Inapplicable in less developed countries as it limits the scope of economic growth.
 Restricts the government from spending on public welfare.
KEY DEFINITION
Depression: A depression is a severe and prolonged downturn in economic activity. In economics, a
depression is commonly defined as an extreme recession that lasts three or more years or which leads
to a decline in real gross domestic product (GDP) of at least 10%. in a given year. Depressions are
relatively less frequent than milder recessions, and tend to be accompanied by high unemployment and
low inflation.
Concept Check
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Q. With reference to Balanced Budget, which of the following options is correct?

(a) It can help in tackling recessionary headwinds.
(b) It is the most suited for controlling price rise.
(c) It is an outcome of extreme fiscal austerity.
(d) It helps curb imprudent expenditure.
Answer: D
4.2 Surplus Budget

A government budget is said to be a surplus budget if the expected government revenues exceed the
estimated government expenditure in a particular financial year. A surplus budget denotes the financial
affluence of a country. Such a budget can be implemented at times of inflation to reduce aggregate
demand.
Putting it in simpler terms, during times of inflation, it is important to keep aggregate demand under
control. Government can help in keeping the aggregate demand under control by reducing its own
expenditure. This is precisely what is achieved by running a surplus budget wherein the expenditure is
kept below the revenue.
4.2.1 Merits of a Surplus Budget

 A surplus allows a government to repay some of their existing national debt.
 This might lead to a fall in bond yields which makes future government borrowing less expensive.
 A budget surplus gives a government scope for meeting a future crisis e.g. a fiscal stimulus during a
downturn or in response to an external shock.
 Government might use a budget surplus to cut taxes to stimulate the supply-side of the economy.
 Surplus revenues might be used to fund an increase in public sector infrastructure spending.
4.2.2 Demerits of a Surplus Budget

 If taxes > government spending, this is a net leakage from the circular flow of income which can have
a deflationary effect on real GDP.
 Fiscal austerity to achieve a budget surplus can have damaging effects on the quality of public services
and might increase inequality.
 There is nothing inherently wrong in running a budget deficit – especially during a downturn or to
increase infrastructure investment.
Concept Check
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Q. With reference to Surplus Budget, which of the following options is/are not correct?
(a) It can be an indication of good governance.
(b) It can exacerbate inflation.
(c) It can create deflationary pressures in the economy.
Answer: B
4.3 Deficit Budget

A government budget is said to be a deficit budget if the estimated government expenditure exceeds the
expected government revenue in a particular financial year. This type of budget is best suited for
developing economies, such as India. Especially helpful at times of recession, a deficit budget helps
generate additional demand and boost the rate of economic growth. Here, the government incurs the
excessive expenditure to improve the employment rate. This results in an increase in demand for goods
and services which helps in reviving the economy. The government covers this amount through public
borrowings (by issuing government bonds) or by withdrawing from its accumulated reserve surplus.
4.3.1 Merits of a Deficit Budget

 Helps in addressing public concerns such as unemployment at times of economic recession.
 Enables the government to spend on public welfare.
4.3.2 Demerits of a Deficit Budget

 Can encourage imprudent expenditures by the government.
 Increases burden on the government by accumulating debts.
Concept Check
Q. With reference to Deficit Budget, which of the following options is/are correct?
(a) It is suitable for developing economies.
(b) Persistent budget deficit can lead to a debt pile up.
(c) It is most suitable for tackling recessionary headwinds.
Answer: D
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5 Part 5: Types of Budgets in India
5.1 Zero-Base Budgeting

The idea of zero-base budgeting (ZBB) first came to the privately owned organisation of the USA by the
1960s. It was the US financial expert Peter Phyrr who first proposed this idea for government budgeting
and Jimmy Carter, Governor of Georgia, USA was the first elected executive to introduce ZBB to the public
sector. When he presented the US Budget in 1979 as the US President it was the first use of the ZBB for
any nation state. Since then, many governments of the world have gone for such budgeting.
ZBB is the allocation of resources to agencies based on periodic re-evaluation by those agencies of the
need for all the programmes for which they are responsible, justifying the continuance or termination
of each programme in the agency budget proposal - in other words, an agency reassess what it is doing
from top to bottom from a hypothetical zero base.
There are three essential questions which must be answered objectively before going for any
expenditure as per the techniques of ZBB:
1. Should we spend?
2. How much should we spend?
3. Where should we spend?
In India, it is believed to be in practice since 1997-99. We cannot say that India is a success in ZBB, but
many of the profit-fetching PSUs have been able to use it successfully and optimise their profits.
Concept Check
Q. Zero Base Budgeting mandates
(a) zero fiscal deficit.
(b) zero revenue deficit.
(c) zero imprudent expenditure.
(d) zero financial allocation for an ongoing programme in the upcoming year’s budget unless the line
ministry is able to justify the continuation of the programme.
(e) zero financial allocation for programmes to be implemented through the route of public-private
partnership.
Answer: D
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5.2 Gender Budgeting

A gender budget by the government which allocates funds and responsibilities on the basis of gender is
gender budgeting. It is done in an economy where socio-economic disparities are chronic and clearly
visible on a sex basis.
Gender budgeting started in India with the Union Budget of 2006-07 which proposed an outlay of Rs
28,737 crore dedicated to the cause of women and created gender budgeting cells in 32 ministries and
departments.
5.2.1 What is Gender Budgeting?

 GB is concerned with gender sensitive formulation of legislation, programmes and schemes;
allocation of resources; implementation and execution; audit and impact assessment of
programmes and schemes; and follow-up corrective action to address gender disparities.
 A powerful tool for achieving gender mainstreaming so as to ensure that benefits of development
reach women as much as men.
 Does not seek to create a separate budget but seeks affirmative action to address specific needs of
women.
 Monitors expenditure and public service delivery from a gender perspective.
 Entails dissection of the Government budgets to establish its gender differential impacts and to ensure
that gender commitments are translated in to budgetary commitments.
Concept Check
Q. With reference to Gender Budgeting, which of the following options is/are correct?
(a) In India, Union Budget 2006-07 is considered as the budget that launched ‘Gender Budgeting’
(b) ‘Gender mainstreaming’ is the prime goal of Gender Budgeting.
(c) It is a tool for women empowerment in societies that have rampant and deep-entrenched gender
discrimination.
(d) It does not advocate creation of a separate budget exclusively for addressing the concerns of girls
and women.
Answer: E
5.3 Outcome and Performance Budgets

The concepts are part of result-oriented budgeting. Both go for 'quantitative' as well as 'qualitative'
progress reports of the performance of the government.
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While outcome budget is presented by different departments and divisions of a ministry or the
government, the performance budget is presented by the ministry of finance on behalf of the
government.
The outcome budget is a micro level process while performance budget is a macro level process in
budgeting. There are many outcome budgets in any one performance budget.
The basic objective of such budgeting is to bring in transparency and thereby making the government
more and more responsible to the house and the public. Naturally, they bring in prudence and
optimisation elements in public spending.
5.3.1 Output-Outcome Framework

Economising expenditures and enhancing performance of expenditures have fascinated governments of
world, especially since early 1960s which resulted in the idea of zero-based budgeting. India also has its
share of experiments in this direction. By 2019–20, the Government of India developed the idea of the
Output-Outcome Framework (OOF). The OOF is an important reform towards outcome-based
monitoring of developmental actions of the ministries and departments. This is a creative modification
of a similar effort of past (i.e., the ‘Outcome & Performance Budgeting’ initiated in 2005–06). The DMEO
(Development Monitoring and Evaluation Office) at NITI Aayog has been working on it since 2017, which
actively supports the Government agencies in the process.
Under it, a framework of ‘measurable indicators’ have been put in place monitoring the objectives (i.e.,
‘Outcomes’) of the Central Sector (CS) and Centrally Sponsored Schemes (CSSs) which account for around
40 per cent of the Government’s budget expenditures. This is a paradigm shift from measuring simply
‘physical and financial’ progress, to a ‘governance model based’ on outcomes. Actively tracking progress
against defined targets, the framework provides two key benefits to improve governance—
1. Enhancing the development impact

2. Improving accountability and transparency
Thus, the Output-Outcome Framework 2019–20 lays the foundation of the journey towards a stronger
portfolio of Government’s development programmes. It enables performance-based ‘budgetary
allocations’ and can also be used to drive budgetary and administrative convergence among existing
schemes and programmes. With the cooperation of line ministries and implementing actors, a robust
monitoring mechanism based on this framework can revolutionize the governance and implementation
process.
Concept Check
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Q. ‘Output Outcome Framework’ has been developed by…

(a) Ministry of Statistics and Programme Implementation
(b) Department for Promotion of Industry and Internal Trade
(c) National Informatics Centre
(d) Development Monitoring and Evaluation Office (NITI Aayog)
(e) Reserve Bank of India
Answer: D
6 Part 6: Measures of Government Deficit

The broad measures of deficit (which have been and/or are being) reported by the government in India,
may be classified, either in terms of the ‘nature of transactions’ or on the basis of the ‘means of financing’
them.
6.1 Revenue Deficit

Revenue deficit is a fiscal terminology used since the fiscal 1997-98 in India. The revenue deficit refers to
the excess of government’s revenue expenditure over revenue receipts.
The formula for Revenue deficit is:
Revenue deficit = Revenue expenditure – Revenue receipts
The revenue deficit includes only such transactions that affect the current income and expenditure of the
government.
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When the government incurs a revenue deficit, it implies that the government is dissaving and is using
up the savings of the other sectors of the economy to finance a part of its consumption expenditure. This
situation means that the government will have to borrow not only to finance its investment but also its
consumption requirements. This will lead to a build-up of stock of debt and interest liabilities and force
the government, eventually, to cut expenditure.
Concept Check
Q. Which of the following option best describes the term ‘revenue deficit’?
(a) Excess of Total Expenditure over Total Receipts
(b) Excess of Revenue Expenditure over Revenue Receipts
(c) Excess of Total Expenditure over Total Receipts less borrowings
(d) Excess of Total Expenditure over Total Receipts less borrowings and Interest Payments
Answer: B
6.2 Effective Revenue Deficit

Effective Revenue deficit is a new term introduced in the Union Budget 2011-12.
While revenue deficit is the difference between revenue receipts and revenue expenditure, the present
accounting system includes all grants from the Union Government to the state governments/Union
territories/other bodies as revenue expenditure, even if they are used to create assets.
Such assets created by the sub-national governments/bodies are owned by them and not by the Union
Government. Nevertheless, they do result in the creation of durable assets.
According to the Finance Ministry, such revenue expenditures contribute to the growth in the economy
and therefore, should not be treated as unproductive in nature.
In the Union Budget (2011-12) a new methodology has been introduced to capture the ‘effective revenue
deficit’, which excludes those revenue expenditures (or transfers) in the form of Grants for Creation of
Capital Assets (GoCA).
The GoCA includes the Government of India grants forwarded to the states & UTs for the implementation
of the centrally sponsored programmes such as Pradhan Mantri Gram Sadak Yojana, Accelerated
Irrigation Benefit Programme, Jawaharlal Nehru National Urban Renewal Mission, etc., these expenses
though they are shown by the Government of India in its Revenue Expenditures they are involved with
asset creation and cannot be considered completely 'unproductive' like other items put in the basket of
the Revenue Expenditures - the reason why a new 'terminology' was created.
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In short, Effective Revenue Deficit is the difference between revenue deficit and grants for creation of
capital assets.
6.3 Gross Fiscal Deficit

Gross Fiscal deficit is the difference between the government’s total expenditure and its total receipts
excluding borrowing.
Total Receipts = Revenue Receipts + Capital Receipts
The above formula can also be written as:
Total Receipts = Revenue Receipts + Non-debt creating capital receipts + Debt-creating capital receipts
Borrowing is nothing but Debt-creating capital receipt
The formula for Gross fiscal deficit is:
Gross Fiscal Deficit = Total Expenditure – (Total Receipts excluding borrowing)
Gross fiscal deficit = Total expenditure – (Revenue receipts + Non-debt creating capital receipts)
Non-debt creating capital receipts are those receipts which are not borrowings and, therefore, do not
give rise to debt. Examples are recovery of loans and the proceeds from the sale of PSUs.
From the financing side, the formula for Gross fiscal deficit is:
Gross fiscal deficit = Net borrowing at home + Borrowing from RBI + Borrowing from abroad
A large share of revenue deficit in fiscal deficit indicated that a large part of borrowing is being used to
meet its consumption expenditure needs rather than investment.
Concept Check:
Q. Term ‘fiscal deficit’ is best defined by which of the following options?
Answer: C
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6.4 Net Fiscal Deficit

Fiscal deficit can be either ‘gross’ or ‘net’.
The Central government makes capital disbursements as loans to the different segments of the economy.
In the developing countries, a large part goes as loans to other sectors – States and local Governments,
public sector enterprises and the like.
Net fiscal deficit can be arrived at by deducting net domestic lending from gross fiscal deficit.
6.5 Gross Primary Deficit

We must note that the borrowing requirement of the government includes interest obligations on
accumulated debt.
The goal of measuring gross primary deficit is to focus on present fiscal imbalances.
To obtain an estimate of borrowing on account of current expenditures exceeding revenues, we need to

calculate what has been called the primary deficit. It is simply the fiscal deficit minus the interest
payments.
The formula for Gross primary deficit is:
Gross primary deficit = Gross fiscal deficit – Net interest liabilities
Net interest liabilities consist of interest payments minus interest receipts by the government on net
domestic lending.
Concept Check
Q. Which of the following option best describes the term ‘primary deficit’?
Answer: D
6.6 Net Primary Deficit

Net primary deficit is gross primary deficit minus net domestic lending.
KEY DEFINITION
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Primary Surplus: This is a situation in budgeting process when the tax receipts of government are higher
than its total expenditures excluding interest payments. This concept is being used in India since 1997-
98.
6.7 Traditional Budget Deficit

It is that part of the government’s deficit which is financed through short-term borrowings. These short-
term borrowings may be from the RBI or from other sources.
Normally, short-term borrowings from the RBI are through the net issuance of short-term treasury bills
(that is, ad-hoc and ordinary treasury bills) and by running-down the central government’s cash balances
held by the RBI.
6.8 Monetized Deficit

Monetized deficit, also known as the ‘net reserve bank credit to the government’, is that part of the
government deficit which is financed solely by borrowing from the RBI.
Since borrowings from the RBI can be both short-term and long-term, therefore, monetized deficit is the
sum of the net issuance of short-term treasury bills, dated securities (that is, long-term borrowing from
the RBI) and rupee coins held exclusively by the RBI, net of Government’s deposits with the RBI.
This is different from the Traditional Budget deficit in two ways:
1. Traditional Budget deficit includes 91-day treasury bills held by both, the RBI and non-RBI entities
whereas Monetized deficit includes 91-day Treasury Bills held only by the RBI.
2. Traditional Budget deficit includes only short-term sources of finance whereas Monetized deficit
includes long-term securities also.
6.9 Composition of Fiscal Deficit

We have discussed that revenue expenditure goes to meeting the consumptive needs of the government
whereas capital expenditure goes towards creation of capital assets. Taking this line of thought forward –
revenue deficit is considered less desirable than capital deficit; running a revenue deficit implies
government is borrowing to meet its consumption expenditure whereas running a capital deficit implies
that the government is borrowing to meet its investment expenditure requirement. Investment
expenditure will lead to creation of assets that can help in increasing the productive capacity of the
economy.
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It is essential to analyse the composition of the fiscal deficit of a government. Out of two broad deficit
obligations of a government - revenue deficit and capital deficit - the following combinations of deficit
composition are suggested:
1. A fiscal deficit with a surplus revenue budget or a zero-revenue deficit is the best composition of
fiscal deficit and the most suitable time for deficit financing.
2. Fiscal deficit with a lower share of revenue deficit and a higher share of capital deficit is the next
best situation for deficit financing, provided revenue deficit is eliminated soon.
3. The last could be the situation when major part of deficit financing is to fulfil revenue deficit and a
minor part to goes for capital deficit.
4. The total money of the fiscal deficit might go to fulfil revenue deficit, which could be the worst form
of it.
6.10 Significance of Different Measures of Deficit
6.10.1 Fiscal Deficit

 Widely used as a summary indicator of the macroeconomic impact of the budget in several
industrialized countries.
 This measure has been adopted by the International Monetary Fund (IMF) as the principal policy
target in their programmes. In India, the government began to report the fiscal deficit only after 1991.
 Since the shortfall in receipts over expenditure must be covered through borrowing, therefore, Gross
Fiscal Deficit, gives the overall borrowing requirements of the government over a given financial
year.
 And it thus shows the net addition to the level of public debt during a financial year.
6.10.2 Budget Deficit

 In the presence of the system of automatic monetization of deficits through issuance of ad-hoc
treasury bills, this measure of deficit, becomes an important target to keep in check.
 However, in the year 1997, the government discontinued the issuance of ad-hoc and tap treasury
bills.
 As a result of this, now, the concept of budget deficit in the traditional sense has lost its significance
in public finance and is now not reported in the Budget documents of the Government of India.
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6.10.3 Monetized Deficits

 Monetization of deficits, which increases the money supply, is inflationary if the rate of growth of
money supply is greater than the rate of increase of the demand for cash balances arising from the
growth of the economy.
 Thus, monetized deficits are an important indicator of the inflationary impact of the increase in
government’s budgetary deficits.
6.10.4 Primary Deficits

 It excludes the burden of the past debt and shows the net increase in the government’s indebtedness
due to the current year’s fiscal operations.
 A reduction in primary deficit is reflective of government’s efforts at bridging the fiscal gap during a
financial year.
6.10.5 Revenue Deficit

 A positive revenue deficit implies that the government is resorting to borrowing to finance current
consumption.
6.11 Deficit Financing

The act/process of financing/supporting a deficit budget by a government is deficit financing. In this
process, the government knows well in advance that its total expenditures are going to turn out to be
more than its total receipts and enacts/follows such financial policies so that it can sustain the burden of
the deficits proposed by it.
Means of Deficit Financing are as follows:
1. External Aids are the best money as a means to fulfil a government's deficit requirements even if it is
a soft loan (A soft loan is a loan with a below-market rate of interest). If they are coming without
interest nothing could be better.
2. External Grants are even better elements in this case as they come free - neither interest nor any
repayments.
3. External Borrowings are the next best way to manage fiscal deficit with the condition that the external
loans are comparatively cheaper and longer term.
4. Internal Borrowings come as the next preferred route of fiscal deficit management. But going for it
in a huge way can hamper the consumption and investment prospect of the public and the corporate
sector as these sectors have less access to domestic funds since government has already borrowed a
huge chunk of it. External borrowing may be preferred over internal borrowings due to 'crowding out
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effect'. If the government itself goes on borrowing from the banks in the country, from where will
others borrow for investment purposes?
KEY DEFINITION
Crowding out effect: The crowding out effect is an economic theory arguing that rising public sector
spending drives down or even eliminates private sector spending. The government spending is
"crowding out" investment because it is demanding more loanable funds and thus causing increased
interest rates and therefore reducing investment spending.
5. Printing Currency: This is the last resort for the government in managing its deficit. But it has a
damaging effect on the economy: (a) It increases inflation proportionally. (India regularly went for it
since the early 1970s and usually has to bear double digit inflations.) (b) It brings in regular pressure
and obligation on the government for upward revision in wages and salaries of government
employees - ultimately increasing the government expenditures necessitating further printing of
currency and further inflation - a vicious cycle into which economies entangle themselves.
RELATED CONCEPT
Golden Rule: The proposition that a government should borrow only to invest (i.e. capital expenditure
in India) and not to finance current spending (i.e. revenue expenditure in India) is known as the golden
rule of public finance.
7 Part 7: Public Debt in India
7.1 Borrowings by the Centre and the States – Constitutional Provisions

Article 292 of Constitution of India "Borrowing by the Government of India": The executive power of
the Union extends to borrowing upon the security of the Consolidated Fund of India within such limits,
if any, as may from time to time be fixed by Parliament by law and to the giving of guarantees within such
limits, if any, as may be so fixed.
(Note: Government of India can borrow both internally as well as externally.)
The Union government describes those of its liabilities as public debt, which are contracted against the
Consolidated Fund of India. This is as per Article 292 of the Constitution.
The Union government includes all other funds received outside Consolidated Fund of India under Article
266 (2) of the Constitution, where the government merely acts as a banker or custodian. The second type
of liabilities is called public account.
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Article 293 of Constitution of India "Borrowing by States"
1. Subject to the provisions of this article, the executive power of a State extends to borrowing within
the territory of India upon the security of the Consolidated Fund of the State within such limits, if
any, as may from time to time be fixed by the Legislature of such State by law and to the giving of
guarantees within such limits, if any, as may be so fixed.
(Note: State Governments can borrow only internally.)
2. The Government of India may, subject to such conditions as may be laid down by or under any law
made by Parliament, make loans to any State or, so long as any limits fixed under Article292 are not
exceeded, give guarantees in respect of loans raised by any State, and any sums required for the
purpose of making such loans shall be charged on the Consolidated Fund of India.
3. A State may not without the consent of the Government of India raise any loan if there is still
outstanding any part of a loan which has been made to the State by the Government of India or by
its predecessor Government, or in respect of which a guarantee has been given by the Government
of India or by its predecessor Government.
4. A consent under clause (3) may be granted subject to such conditions, if any, as the Government of
India may think fit to impose.
Therefore, in India, total Central Government Liabilities constitutes the following three categories:
 Internal Debt
 External Debt
 Public Account Liabilities
7.2 Internal Debt

The major instruments covered under Internal Debt are as follows:
 Dated Securities: Primarily fixed coupon securities of short, medium- and long-term maturity which
have a specified redemption date.
 Treasury-Bills: Zero coupon securities that are issued at a discount and redeemed in face value at
maturity. These are issued to address short term receipt-expenditure mismatches under the auction
program of the Government. These are primarily issued in three tenors, 91,182 and 364 day.
 14 Day Treasury Bills.
 Securities issued to International Financial Institutions: Securities issued to institutions viz. IMF, IBRD,
IDA, ADB, IFAD etc. for India’s contributions to these institutions etc.
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 Securities issued against ‘Small Savings’: All deposits under small savings schemes are credited to the
National Small Savings Fund (NSSF). The balance in the NSSF (net of withdrawals) is invested in special
Government securities.
 Market Stabilization Scheme (MSS) Bonds: Governed by a MoU between the GoI and the RBI, MSS
was created to assist the RBI in managing its sterilization operations. GoI borrows under this scheme
from the RBI, while proceeds from such borrowings are maintained in a separate cash account with
the latter and is used only for redemption of T-bills /dated securities raised under this scheme.
Internal loans that make up for the bulk of public debt are further divided into two broad categories –
marketable and non-marketable debt.
 Marketable Debt: Dated government securities (G-Secs) and treasury bills (T-bills) are issued through
auctions and fall in the category of marketable debt.
 Non-marketable Debt: Intermediate treasury bills (with a maturity period of 14 days) issued to state
governments and public sector banks, special securities issued to National Small Savings Fund (NSSF)
are classified as non-marketable debt.
Concept Check
Q. Which of these is/are components(s) of internal debt?
(a) Market borrowing
(b) Treasury bills
(c) Special securities issued to RBI
Answer: D
7.3 External Debt

Over the years, the Union government has followed a considered strategy to reduce its dependence on
foreign loans in its overall loan mix. Internal debt constitutes more than 93% of the overall public debt.
Also, note that external loans are not market loans. They have been raised from institutional creditors
at concessional rates. Most of these external loans are fixed-rate loans, free from interest rate or
currency volatility.
Most of India’s external debt was owed by private businesses which borrowed at attractive rates from
foreign lenders.
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While external debt may be denominated in either the rupee or a foreign currency like the U.S. dollar,
most of India’s external debt is linked to the dollar. This means Indian borrowers will have to pay back
their lenders by first converting their rupees into dollars.
7.4 Deficit Reduction

Government deficit can be reduced by an increase in taxes or reduction in expenditure. This process is
also referred to as Fiscal Consolidation.
1. Cutting down expenditure-

(i) Cutting down the burden of salaries, pensions and the PFs (down-sizing/right-sizing of the
government, out of every 3 vacancies 1 to be filled up, interest cut on the PF, pension
reforms-PFRDA, etc.)
(ii) Cutting down the subsidies
(iii) Interest burden to be cut down (by going for lesser and lesser borrowings, pre-payment of
external debts, debt swaps, minimal dependence on costlier external borrowings, etc.);
(iv) Defence being one major item of the expenditure, bilateral peace initiatives with Pakistan
and China could be pursued with the ultimate aim to rationalise defence expenditure.
(v) Budgetary supports to the loss-making PSUs to be an exception than a rule;
(vi) Expenditure reform started by the governments in different areas and departments;
(vii) General Services to be motivated towards profit with subsidised services to the needy only
(railways, power, water, etc.)
(viii) Postal deficits to be checked by involving the post offices in other areas of profit;
(ix) Higher education declared a non-priority sector; fees of institutions of professional courses
revised upward; etc.
2. Increasing receipts:
(i) Tax reforms to increase tax mop-up
(ii) PSUs to be disinvested and even privatised
(iii) Surplus forex reserves to be used in external lending and purchasing foreign high quality
sovereign bonds, etc.
Concept Check
Q. Which of the following actions can be taken by the government to reduce the deficit?
(a) Reducing revenue expenditure
(b) Introducing new welfare schemes
(c) Rationalizing subsidies
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(d) Raising taxes

(e) All except (b)
Answer: E
Concept Check
Q. Which of the following measures can be used to control the fiscal deficit in India?
(a) Privatization of higher educational Institutions
(b) Down-sizing of bureaucracy
(c) Selling/offloading the shares of Public Sector Undertakings
Answer: D
7.5 Fiscal Responsibility & Budget Management Act 2003

In a multi-party parliamentary system, electoral concerns play an important role in determining
expenditure policies. A legislative provision, it is argued, that is applicable to all governments – present
and future – is likely to be effective in keeping deficits under control.
The enactment of the FRBMA, in August 2003, marked a turning point in fiscal reforms, binding the
government through an institutional framework to pursue a prudent fiscal policy.
The FRBM Act aims to introduce transparency in India's fiscal management systems. The Act’s long-term
objective is for India to achieve fiscal stability and to give the Reserve Bank of India (RBI) flexibility to
deal with inflation in India (by committing the government to follow a path of fiscal prudence – i.e.
government will not irrationally increase its own spending causing an upward pressure on inflation. The
FRBM Act was enacted to introduce more equitable distribution of India's debt over the years.
The FRBM Act made it mandatory for the government to place the following along with the Union Budget
documents in Parliament annually:
1. Medium Term Fiscal Policy Statement

2. Macroeconomic Framework Statement
3. Fiscal Policy Strategy Statement
The FRBM Act proposed that revenue deficit, fiscal deficit, tax revenue and the total outstanding
liabilities be projected as a percentage of gross domestic product (GDP) in the medium-term fiscal policy
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statement. The objective of this act to put Indian on the fiscal path of elimination of revenue deficit and
reining in of fiscal deficit.
Concept Check:
Q. Fiscal Responsibility and Budget Management Act (FRBMA) concerns:
(a) Revenue Deficit
(b) Total outstanding Debt as percentage of GDP
(c) Fiscal Deficit
(d) Tax to GDP ratio
Answer: E
7.6 Independent Debt Management

The idea for a public debt management agency (PDMA) was proposed in the Union Budget 2015-16. It
was put on back burner probably due to clear objections from the Reserve Bank of India (RBI). By March
2019, the issue of having an independent debt management agency outside the preview of the RBI was
again voiced by the policy think tank, the NITI Aayog, saying it was an idea whose time has come. There
looks strong logic in this -
1. At present, the RBI manages the government debt, including market borrowing (RBI has been
reluctant to part with this function). There is a case of clear conflict of interest in this arrangement -
at one hand RBI decides the key interest rates (i.e., policy rates under monetary policy mechanism)
on the other hand it trades in the government bonds (treasury bills, cash management bill and G-
Secs) also.
2. Lack of alignment between India's domestic bond market (which is controlled by RBI's policy rates)
and the external bond marker / external commercial borrowings (which is linked to the global
variables). India has seen a rise in its external commercial borrowings in past years primarily due to
interest rates in the global market being much lower than in India. This discrepancy looks awkward in
today's times when the global financial market is converging.
3. It is believed that once the debt management office is separated from the RBI the government will be
able to pay much more attention on the aspect of debt having an eye on the changing needs of fund
over the time. It will help the Government to cut the cost of fund also.
Concept Check
Q. PDMA stands for
(a) Public Deficit Management Agency
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(b) Prudential Debt Management Agency

(c) Public Debt Management Agency
(d) Public Debt Monetization Agency
Answer: C
8 Part 8: GST: One Nation, One Tax, One Market (Linked to Tax Revenue)
Goods and Services Tax (GST) is the single comprehensive indirect tax, operational from 1 July 2017, on
supply of goods and services, right from the manufacturer/ service provider to the consumer.
It is a destination-based consumption tax with facility of Input Tax Credit in the supply chain. It is
applicable throughout the country with one rate for one type of goods/service. It has amalgamated a
large number of Central and State taxes and cesses. It has replaced large number of taxes on goods and
services levied on production/sale of goods or provision of service.
As there have been a number of intermediate goods/services, which were manufactured/provided in the
economy, the pre-GST tax regime-imposed taxes not on the value added at each stage but on the total
value of the commodity/service with minimal facility of utilisation of Input Tax Credit (ITC). The total
value included taxes paid on intermediate goods/services. This amounted to cascading of tax.
Under GST, the tax is discharged at every stage of supply and the credit of tax paid at the previous stage
is available for set off at the next stage of supply of goods and/or services. It is thus effectively a tax on
value addition at each stage of supply.
In view of our large and fast-growing economy, it addresses to establish parity in taxation across the
country, and extend principles of ‘value- added taxation’ to all goods and services.
It has replaced various types of taxes/cesses, levied by the Central and State/UT Governments. Some of
the major taxes that were levied by Centre were Central Excise Duty, Service Tax, Central Sales Tax, and
Cesses. The major State taxes were VAT/Sales Tax, Entry Tax, Luxury Tax, Octroi, Entertainment Tax,
Taxes on Advertisements, Taxes on Lottery /Betting/ Gambling, State Cesses on goods etc. These have
been subsumed in GST.
GST is categorized into CGST, SGST or IGST depending on whether the transaction is Intra-State or Inter-
State.
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To determine whether Central Goods & Services Tax (CGST), State Goods & Services Tax (SGST) or
Integrated Goods & Services Tax (IGST) will be applicable in a taxable transaction, it is important to first
know if the transaction is an Intra State or an Inter-State supply.
 Intra-State supply of goods or services is when the location of the supplier and the place of supply
i.e., location of the buyer are in the same state. In Intra-State transactions, a seller has to collect both
CGST and SGST from the buyer. The CGST gets deposited with Central Government and SGST gets
deposited with State Government.
 Inter-State supply of goods or services is when the location of the supplier and the place of supply
are in different states. Also, in cases of export or import of goods or services or when the supply of
goods or services is made to or by a SEZ unit, the transaction is assumed to be Inter-State. In an Inter-
State transaction, a seller has to collect IGST from the buyer.
What is Central Goods and Services Tax (CGST)?
Under GST, CGST is a tax levied on Intra State supplies of both goods and services by the Central
Government and will be governed by the CGST Act. SGST will also be levied on the same Intra State supply
but will be governed by the State Government.
This implies that both the Central and the State governments will agree on combining their levies with an
appropriate proportion for revenue sharing between them. However, it is clearly mentioned in Section 8
of the GST Act that the taxes be levied on all Intra-State supplies of goods and/or services but the rate of
tax shall not be exceeding 14%, each.
What is State Goods and Services Tax (SGST)?
Under GST, SGST is a tax levied on Intra State supplies of both goods and services by the State
Government and will be governed by the SGST Act. As explained above, CGST will also be levied on the
same Intra State supply but will be governed by the Central Government.
An example for CGST and SGST:
Let’s suppose Rajesh is a dealer in Maharashtra who sold goods to Anand in Maharashtra worth Rs.
10,000. The GST rate is 18% comprising of CGST rate of 9% and SGST rate of 9%. In such case, the dealer
collects Rs. 1800 of which Rs. 900 will go to the Central Government and Rs. 900 will go to the Maharashtra
Government.
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What is Integrated Goods and Services Tax (IGST)?
Under GST, IGST is a tax levied on all Inter-State supplies of goods and/or services and will be governed
by the IGST Act. IGST will be applicable on any supply of goods and/or services in both cases of import
into India and export from India.
Note: Under IGST,
 Exports would be zero-rated. (In economics, zero-rated supply refers to items subject to a 0% VAT tax
on their input supplies.)
 Tax will be shared between the Central and State Government.
An example for IGST:
Consider that a businessman Rajesh from Maharashtra had sold goods to Anand from Gujarat worth Rs.
1,00,000. The GST rate is 18% comprised of 18% IGST. In such case, the dealer has to charge Rs. 18,000 as
IGST. This IGST will go to the Centre.
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Five petroleum products have been kept out of GST for the time being but with passage of time, they will
get subsumed in GST. State Governments will continue to levy VAT on alcoholic liquor for human
consumption. Tobacco and tobacco products will attract both GST and Central Excise Duty.
GST has simplified the multiplicity of taxes on goods and services. The laws, procedures and rates of
taxes across the country are standardised. It has facilitated the freedom of movement of goods and
services and created a common market in the country. It is aimed at reducing the cost of business
operations and cascading effect of various taxes on consumers. It has also reduced the overall cost of
production, which will make Indian products/services more competitive in the domestic and international
markets. It will also result into higher economic growth as GDP is expected to rise by about 2%.
Compliance will also be easier as all tax payment related services like registration, returns, payments are
available online through a common portal www.gst.gov.in. It has expanded the tax base, introduced
higher transparency in the taxation system, reduced human interface between Taxpayer and
Government and is furthering ease of doing business.
Concept Check
Q. With reference to Goods and Services Tax, which of the following options is not correct?
(a) It is a type of value added tax.
(b) The tax under GST regime is imposed at the point of consumption.
(c) It is not applicable on imports of goods and services.
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Answer: C
9 Summary
In Economics, fiscal policy is the use of government spending and revenue collection to influence the
economy.
Fiscal policy can be contrasted with the other main type of economic policy, monetary policy, which
attempts to stabilize the economy by controlling interest rates and supply of money. The two main
instruments of fiscal policy are government spending and taxation. Changes in the level and composition
of taxation and government spending can have impact on the following variables in the economy:
 Aggregate demand the level of economic activity;

 The pattern of resource allocation;
 The distribution of income.
Fiscal policy refers to the overall effect of the budget outcome on economic activity. Governments use
fiscal policy to influence the level of aggregate demand in the economy, in an effort to achieve economic
objectives of price stability, full employment, and economic growth.
The annual budget of the country is called the Union Budget. It is presented by the Finance Minister in
Parliament. It was being presented on the last working day of February till the year 2016. Now, it is being
presented on the first of February. The rationale behind this change is that it provides to the government
to implement it from first of April when the new financial year starts. Another change which has been
introduced from the year 2017 is that the Rail Budget, which was earlier presented separately by the
Railway Minister, has ow been merged with the Union Budget.
Summary of various sources of receipts and expenditure of the government:
RECEIPTS
Tax Revenue
Gross Tax Revenue
1. Corporation Tax
2. Income Tax
3. Other taxes and duties
4. Customs
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5. Union Excise Duties
6. Service Tax
7. Taxes of the Union Territories
Net Tax Revenue: Gross Tax Revenue – NCCD transferred to the National Calamity Contingency Fund –
States’ Share
Total Non-Tax Revenue
1. Interest Receipt
2. Dividend and Profits
3. External Grants
4. Other Non-Tax Revenue
5. Receipt of Union Territories
Total Revenue Receipts: Net Tax Revenue + Total Non-Tax Revenue
Capital Receipts: Non-debt Receipts + Debt Receipts
Non-debt Receipt
1. Recoveries of Loans and Advances
2. Miscellaneous Capital Receipts
Debt Receipts
1. Market Loans
2. Short Term Borrowings
3. External Assistance (Net)
4. Securities issued against Small Savings
5. State Provident Fund (Net)
6. Other Receipts (Net)
EXPENDITURE
Non-Plan Expenditure
Revenue Expenditure
1. Interest Payments and Prepayment Premium
2. Defence
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3. Subsidies
4. Grants to State and UT Governments
5. Pensions
6. Police
7. Assistance to state from National Calamity Contingency Fund
8. Economic Services (Agriculture, Industry, Power, Transport, Communications, Science & Technology,
etc.)
9. Other General Services (Organs of State, Tax Collection, External Affairs, etc.)
10. Social Services (Education, Health, Broadcasting, etc.)
11. Postal Deficit
12. Expenditure of Union Territories without Legislature
13. Amount met from National Calamity Contingency Fund
14. Grants to Foreign Governments
Capital Expenditure
1. Defence
2. Other Non-plan Capital outlay
3. Loans to Public Enterprises
4. Loans to State and UT Governments
5. Loans to Foreign Governments
6. Others
Non-plan Expenditure: Revenue Non-Plan Expenditure + Capital Non-Plan Expenditure
Plan Expenditure
Revenue Expenditure
1. Central Plan
2. Central Assistance for State & Union Territory Plans
Capital Expenditure
1. Central Plan
2. Central Assistance for State & Union Territory Plans
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Plan Expenditure: Revenue Expenditure + Capital Expenditure
Total Expenditure: Total Non-Plan Expenditure + Total Plan Expenditure
Deficit Concepts
Revenue deficit is the excess of revenue expenditure over revenue receipts.
Gross fiscal deficit is the excess of total expenditure including loans, net of recoveries over revenue
receipts (including external grants) and non-dent receipts.
Net fiscal deficit is the difference between gross fiscal deficit and net lending.
Gross primary deficit is the difference between the gross fiscal deficit and interest payments.
Net primary deficit denotes net fiscal deficit minus net interest payments.
The net RBI credit to the Central Government is the sum of increase in the Reserve Bank’s holding of i)
Treasury Bills, ii) Government of India dated securities iii) rupee coins and iv) Loans and Advances from
the Reserve bank to centre since April 1, 1997 adjusted for changes in Centre’s cash balances with the
Reserve Bank.
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Monetary Policy
Since Reforms
of 1991
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Contents
1 Part I: Basics of Monetary Policy ............................................................................................................3
1.1 Meaning of Monetary Policy ...........................................................................................................3
1.2 Goals of Monetary Policy ................................................................................................................4
2 Part 2: Monetary Policy in India .............................................................................................................8
2.1 Reserve Bank of India – Establishment ...........................................................................................8
2.2 Role of Reserve Bank of India .........................................................................................................9
2.3 Inflation Targeting Framework in India ........................................................................................11
2.4 Monetary Policy Committee – Key Facts ......................................................................................13
2.5 Monetary Policymaking in India – The Process ............................................................................14
3 Part III: Instruments of Monetary Policy ..............................................................................................15
3.1 Quantitative Tools of Monetary Policy .........................................................................................15
3.1.1 Cash Reserve Ratio ................................................................................................................16
3.1.2 Statutory Liquidity Ratio ........................................................................................................19
3.1.3 Key differences between CRR & SLR .....................................................................................20
3.1.4 Repo Rate...............................................................................................................................21
3.1.5 Long Term Repo .....................................................................................................................23
3.1.6 Reverse Repo Rate .................................................................................................................24
3.1.7 Liquidity Adjustment Facility .................................................................................................25
3.1.8 Marginal Standing Facility......................................................................................................27
3.1.9 Liquidity Management Framework .......................................................................................28
3.1.10 Bank Rate ...............................................................................................................................28
3.1.11 Open Market Operation ........................................................................................................29
3.1.12 Market Stablisation Scheme ..................................................................................................30
3.1.13 Standing Deposit Facility Scheme ..........................................................................................31
3.1.14 Summary of Quantitative Tools .............................................................................................31
3.2 Qualitative Tools of Monetary Policy............................................................................................32
3.2.1 Credit Rationing .....................................................................................................................32
3.2.2 Loan to Value Ratio ................................................................................................................32
3.2.3 Moral Suasion ........................................................................................................................33
3.2.4 Direct Action ..........................................................................................................................33
3.3 Priority Sector Lending ..................................................................................................................33
4 Part IV: Types of Monetary Policy ........................................................................................................36
4.1 Expansionary Monetary Policy......................................................................................................36

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4.2 Contractionary Monetary Policy ...................................................................................................37

5 Part V: Financial Institutions in India ....................................................................................................38
5.1 Non-Banking Financial Companies................................................................................................38
5.2 Regional Rural Banks .....................................................................................................................40
5.3 Cooperative Banks ........................................................................................................................41
5.4 Small and Payment Banks .............................................................................................................43
5.4.1 Small Finance Bank ................................................................................................................43
5.4.2 Payments Bank ......................................................................................................................44
5.5 MUDRA Bank .................................................................................................................................45
6 Part VI: Summary of Key Concepts .......................................................................................................46
1 Part I: Basics of Monetary Policy
1.1 Meaning of Monetary Policy

 Monetary policy is the process by which the monetary authority of a country, like the central bank or
currency board, controls the supply of money, often targeting an inflation rate or interest rate to
ensure price stability and general trust in the currency.
 The Reserve Bank of India is India’s monetary authority responsible for monetary policy. This
responsibility is explicitly mandated under the Reserve Bank of India Act, 1934.
What is Money?
Money is anything which performs the following four functions:
1. Medium of Exchange: Individual goods and services, and other physical assets, are 'priced' in terms
of money and are exchanged using money.
2. A Measure of Value: Money is used to measure and record the value of goods or services.
3. A Store of Value over Time: Money can be held over a period of time and used to finance future
payments.
4. Standard for Deferred Payments: Money is used as an agreed measure of future receipts and
payments in contracts.
Money Supply
Money supply refers to the stock of money available in the economy at a given point of time. Money
supply data are recorded and published by the Reserve Bank of India on a fortnightly basis. Money
supply affects the price level, exchange rates and business cycle in the economy. It may also affect the
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Measures of Money Supply

The four most common measures of money supply, which are used in India, are as follows:
(a) Narrow Money (M1) = Currency with the public + Demand deposits with the banking system +
'Other' deposits with the RBI.
(b) M2 = M1 + Saving deposits of post office savings banks.
(c) M3 = M1 + Time deposits with the banking system
(d) M4 = M3 + All deposits with post office savings bank (excluding National Savings Certificates).
'Currency with the public' is currency in circulation less cash held by banks.
'Demand deposits' include all liabilities which are payable on demand and they include current
deposits, demand liabilities portion of saving bank deposits, margins held against letters of
credit/guarantees, balances in overdue fixed deposits, cash certificates and cumulative/recurring
deposits, etc.
'Time deposits' are those which are payable otherwise than on demand and they include fixed deposits,
cash certificates, cumulative and recurring deposits, time liabilities portion of savings bank deposits,
etc.
M1 and M2 are known as narrow money (Currency notes, coins and demand deposits held by the
public in commercial banks.). M3 and M4 are known as broad money (Narrow money + time deposits
held by commercial banks and post office savings organisation). These measures are in decreasing order
of liquidity.
M1 is most liquid and easiest for transactions whereas M4 is least liquid of all. M3 is the most
commonly used measure of money supply. It is also known as aggregate monetary resources.
1.2 Goals of Monetary Policy

 There are many possible goals of monetary policy. There are macroeconomic goals – for the entire
economy – and there are goals for the financial sector, since the RBI is charged with maintaining
stability in this sector. This second goal is more microeconomic in nature. In this section, we focus on
the macroeconomic goals of policy.
 The first is economic growth, which might be measured as the growth rate of real GDP, real personal
income, or even the size of investment expenditure (leading to capital formation) that will lead to
future growth.
 The second goal is price stability and might be measured by the stability of the inflation rate and by
the amount by which inflation exceeds a target level. Thus, price stability entails both a low inflation
rate and a stable inflation rate so that inflation rate is not jumping from 2 to 4 to 6 percent and back
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 The third category is a set of all other goals not contained in the first three categories. This includes
interest rate stability, stability of exchange rate and safety of the financial system to name a few.
How does Monetary Policy help in controlling Inflation?

 What is inflation? Inflation refers to a general increase in price level.
 Why do we have inflation in an economy or, in other words, why do prices in an economy
increase? The answer is simple. Why does price of tomato increase in a vegetable market? There
can be two reasons. Either there is a short supply of tomato in the market (i.e., supply has fallen
below demand) or the buyers are demanding greater than usual quantities of tomato (i.e., demand
has shot above supply). In either of the above scenarios, price of tomato will increase. What is true
for tomato is also true for all other goods and services. At the macroeconomic level, there will be
inflation when there is a demand supply mismatch as discussed above.
 What is monetary policy? The answer is simple. It is the policy adopted by a country’s monetary
authority (the Reserve Bank of India in case of India [RBI]). RBI decides India’s monetary policy. RBI
decides how much money should circulate in our economy. Just like we can regulate the flow of
water by turning the knob of a tap, RBI can control the money supply in the economy using various
financial knobs (don’t worry, we will be discussing each of these financial knobs in great detail going
ahead).
 What is the target of RBI’s monetary policy? RBI tries to ensure price stability while keeping in mind
the objective of growth. RBI tries to keep inflation under control.
 How can RBI ensure price stability? How can RBI keep inflation under control? Let us go back to
our tomato example. For the sake of simplicity, let us assume that ours is a single-product-economy,
with tomato being the sole product grown, sold, purchased and consumed. Inflation then is nothing
but an increase in price of tomato. As we discussed above, if demand exceeds supply, prices of
tomato will increase. In such a scenario, how can RBI help in controlling the inflation or, in other
words, how can RBI help in keeping the price of tomato under control? To answer this question, let
us take a step back.
 How is it that people purchase tomato? Answer is ridiculously simple! By paying the vegetable
vendor money in exchange for tomato.
 What if people did not have money in their pocket? Will they be able to create demand for
tomato? Obviously not.
 In a scenario of demand exceeding supply, what will happen if suddenly all the money in people’s
pocket vanishes? Will they be able to demand tomato? No. People will not be able to demand
tomato. Demand for tomato will crash. What will happen to prices when demand crashes?

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Obviously, since there is no one to purchase tomato, vegetable vendor will reduce the prices in an
effort to attract buyers back into the market. Decrease in price of tomato would imply that inflation
is back in control! Who controls the money supply? The central bank (RBI is India’s central bank) in
a country controls the money supply. Central bank can create conditions such that people have
easier access to money (liquidity) and have greater liquidity to spend. Conversely, central bank can
create conditions such that people will find it difficult to access and liquidity and thus have lower
power to purchase goods and services.
 How can RBI keep inflation under control? In a scenario where demand in the economy is
exceeding supply, RBI will adjust the financial knobs of the macroeconomy such that money supply
(liquidity) reduces. Reduced money supply  Lower money in people’s pocket  Lower ability to
demand goods and services  Demand may reduce  Prices may come down  Inflation under
control.
 Rules: In the scenario of price rise (or high inflation), central bank of a country needs to take steps
such that money supply in the economy is reduced.
Concept Check
Q. Steps taken by the Reserve Bank of India (RBI) that leads to a reduction in the supply of money in
the economy can lead to which of the following outcomes?
(a) Consumer demand can decrease.
(b) Increase borrower’s access to cheap credit.
(c) Lower citizens’ confidence in RBI’s monetary management process.
(d) Consumer demand can increase.
(e) Inflation in the economy can increase.
Answer: A
Concept Check
Q. High inflation in an economy is generally accompanied with which of the following?
(a) Demand being greater than supply.
(b) People having easy access to money.
(c) High liquidity in the economy.
(d) Increase in the production costs.
(e) All of the above.
Answer: E

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How can RBI’s monetary policy help in engendering economic growth?

Reserve Bank of India’s Core Purpose is:
To foster monetary and financial stability conducive to sustainable economic growth and to ensure
the development of an efficient and inclusive financial system.
The Core Purpose reflects the Reserve Bank’s commitment to the Nation:
 To foster confidence in the internal and external value of the rupee, and contribute to macro-
economic stability;
 To regulate markets and institutions under its ambit to ensure financial system stability and
consumer protection;
 To promote the integrity, efficiency, inclusiveness and competitiveness of the financial and
payments system;
 To ensure efficient management of currency as well as banking services to the Government and
banks; and
 To support the balanced, equitable and sustainable economic development of the country.
In the scenario of low GDP growth (i.e., less demand), central bank of a country needs to take steps that
will help in increasing demand in the economy. How can the demand in an economy be increased?
Increase in money supply, apart from other measures, can help in boosting demand. Logic is simple: if
reduction in money supply can bring demand down, increase in money supply should propel demand
up. After all, if people have easy access to a lot of cheap money, why won’t they borrow and spend!
Rule: In the scenario of low GDP growth (i.e., less demand), if the inflation is under control, central
bank of a country needs to take steps such that money supply in the economy is increased.
Concept Check
Q. Which of the following steps should be taken by the Reserve Bank of India if it wants to boost
economic growth of India in the short term?
(a) Increase policy rate.
(b) Increase money supply.
(c) Increase merchant charges levied on digital transactions.
(d) Issue new banking licenses.
Answer: B

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2 Part 2: Monetary Policy in India

Note:
The main objectives of monetary policy in India are:
 Maintaining price stability
 Ensuring adequate flow of credit to the productive sectors of the economy to support economic
growth but at the same time protecting the credit quality.
 Financial stability
 Monitor the global and domestic economic conditions and respond swiftly as required.
 Give thrust on interest rate management, inflation management and liquidity management.
2.1 Reserve Bank of India – Establishment

In this section, we will discuss the historical background behind the establishment of Reserve Bank of India
(RBI).
 RBI is India’s Central Bank.
 RBI was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India
Act, 1934.
 The Central Office of RBI was initially established in Calcutta but was permanently moved to Mumbai
in 1937. The Central Office is where the Governor sits and where policies are formulated.
 Though originally privately owned, since nationalisation in 1949, the RBI is fully owned by the
Government of India.
 The RBI operates today with its 27 regional offices, most of them situated in state capitals and its
affairs are governed by a central board of directors.
 Government of India constitutes the central board of directors by appointing or nominating the
directors for a period of four years in the following way –
o Official Directors: Governor and not more than four Deputy Governors.
o Non-Official Directors: 10 nominated from various fields and 2 government officials. It also
includes 4 Directors coming 1 each from the four local boards of RBI (also known as sub-
offices, they are situated at Chennai, Kolkata, Mumbai and New Delhi).
 Local Boards
o One each for the four regions of the country in Mumbai, Kolkata, Chennai and New Delhi
o Membership: It consist of five members each appointed by the Central Government for a term
of four years
 There are 4 fully-owned subsidiaries of the RBI, namely —
1. Deposit Insurance and Credit Guarantee Corporation of India (DICGC)

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2. Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL)

3. Reserve Bank Information Technology Private Limited (ReBIT)
4. Indian Financial Technology and Allied Services (IFTAS)
New Financial Year: Aimed at aligning its financial year with the government’s financial year, in
February 2020, the RBI decided to shift to April-March as its new financial year from 2020-21 (from its
existing financial year July-June). Thus, the RBI will do away with nearly eight decades of practice—it
used to follow January-December financial year before it was changed to July-June in 1940. Such a
change was recommended by the Jalan Committee (set up by the RBI on the Economic Capital
Framework, 2019).
Concept Check
Q. With reference to the Reserve Bank of India (RBI), which of the follow options is correct?
(a) It commenced operations on 1st April, 1936.
(b) It functions in accordance with the Reserve Bank of India Act, 1935.
(c) Central Office of the Reserve Bank of India is located in Kolkata.
(d) It is only partly owned by the Government of India.
Answer: B
2.2 Role of Reserve Bank of India

Now that we have read about the establishment of RBI, let us look at the role played by it in the Indian
economy.
Monetary Authority
 Formulates, implements and monitors the monetary policy.
 Objective: maintaining price stability while keeping in mind the objective of growth.
Regulator and supervisor of the financial system
 Prescribes broad parameters of banking operations within which the country's banking and financial
system functions.
 Objective: maintain public confidence in the system, protect depositors' interest and provide cost-
effective banking services to the public.
Manager of Foreign Exchange
 Manages the Foreign Exchange Management Act, 1999.
 Objective: to facilitate external trade and payment and promote orderly development and
maintenance of foreign exchange market in India.
Issuer of currency
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 Issues and exchanges or destroys currency and coins not fit for circulation.
 Objective: to give the public adequate quantity of supplies of currency notes and coins and in good
quality.
 RBI is the only institution which can issue currency. (except the currency and coins of rupee one or its
denominations, which are issued by Ministry of Finance itself)
 This function includes the distribution responsibility of the currencies and coins also (of those ones
also which are issued by the Ministry of Finance).
Developmental role
 Performs a wide range of promotional functions to support national objectives such as financial
literacy and inclusion.
 Playing this role, it did set up developmental banks like—IDBI, SIDBI, NABARD, NEDB (North Eastern
Development Bank), Exim Bank, NHB. Gradually, the ownership of these banks is being transferred
from the RBI to the Government of India (aimed at enhancing regulatory freedom and professionalism
of the central bank and enabling the Government to take care of the dynamic requirements of
development in a better way).
Regulator and Supervisor of Payment and Settlement Systems
 Introduces and upgrades safe and efficient modes of payment systems in the country to meet the
requirements of the public at large.
 Objective: maintain public confidence in payment and settlement system.
Related Functions
 Banker to the Government: performs merchant banking function for the central and the state
governments; also acts as their banker.
 Banker to banks: maintains banking accounts of all scheduled banks.
 When commercial banks need more funds in order to be able to create more credit, they may go to
market for such funds or go to the Central Bank. Central bank provides them funds through various
instruments. This role of RBI, that of being ready to lend to banks at all times is another important
function of the central bank, and due to this central bank is said to be the lender of last resort.
KEY DEFINITION
Lender of last resort: The function of the monetary authority of a country in which it provides guarantee
of solvency to commercial banks in a situation of liquidity crisis or bank runs.
Concept Check
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Q. Which one of the following is not one of the primary goals of Reserve Bank of India’s monetary
policy
(a) Ensure price stability.
(b) Engender economic growth.
(c) Attract foreign direct investment.
(d) Maintain stability in exchange rate.
(e) Maintain interest rate stability.
Answer: C
Concept Check
Q. Reserve Bank of India acts as the lender of the last resort because it wants to
(a) protect the interest of the depositors of the bank.
(b) prevent possible failure of the bank.
(c) ensure financial stability in the macroeconomy.
Answer: D
2.3 Inflation Targeting Framework in India

In the preceding section, we got an overview of all the roles RBI plays in the Indian economy. In the present
section, we will focus the discussion on price stability. We will be deep diving into the principle of ‘inflation
targeting’ and explore how this has become the mainstay of India’s monetary policy.
 Inflation targeting is a monetary policy strategy used by Central Banks for maintaining price level at
a certain level or within a range. It indicates the primacy of price stability as the key objective of
monetary policy.
 The argument for price stability stems from the fact that rising prices create uncertainties in decision
making, adversely affecting savings and encouraging speculative investments. Inflation targeting
brings in more predictability and transparency in deciding monetary policy. If the central banks could
ensure price stability, households and companies can plan ahead, negotiating wages on the basis of
expecting low and stable inflation.
 Various advanced economies including United States, Canada and Australia have been using inflation
targeting as a strategy in their monetary policy framework. The case for inflation targeting has been
made in India as the country has been experiencing a high level of inflation till recently.
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 The primary objective of RBI’s monetary policy is to maintain price stability while keeping in mind the
objective of growth. Price stability is a necessary precondition to sustainable growth.
 In May 2016, the Reserve Bank of India Act, 1934 was amended to provide a statutory basis for the
implementation of the flexible inflation targeting framework.
 The amended RBI Act also provides for the inflation target to be set by the Government of India, in
consultation with the Reserve Bank, once in every five years. Accordingly, the Central Government
has notified in the Official Gazette 4 per cent Consumer Price Index (CPI) inflation as the target for
the period from August 5, 2016 to March 31, 2021 with the upper tolerance limit of 6 per cent and
the lower tolerance limit of 2 per cent.
 The Central Government notified the following as factors that constitute failure to achieve the
inflation target:
1. the average inflation is more than the upper tolerance level of the inflation target for any three
consecutive quarters; or
2. the average inflation is less than the lower tolerance level for any three consecutive quarters.
 Management of monetary policy and the express objective of inflation targeting has been enshrined
as the responsibility of RBI by amending the preamble of the RBI Act, 1934 through the Finance Act
2016 (Chapter XII). Thus, ensuring price stability through inflation targeting is a legal responsibility
of RBI since 2016. A new Chapter (Chapter IIIF, Section 45Z) was introduced in the RBI Act, through
this Finance Bill, 2016, for detailing the operation of a Monetary Policy Committee (MPC), which
would be the institutional arrangement at the disposal of RBI for targeting inflation.
 Under Section 45ZA (1) of the RBI Act, 1934, the Central Government determines the inflation target
in terms of the Consumer Price Index, once in every five years in consultation with the RBI. This target
would be notified in the Official Gazette. Amongst other measures, RBI targets inflation primarily by
changing the "Policy Rate” which means the rate for repo-transactions as defined under sub-section
(12AB) of section 17 of the RBI Act.
KEY DEFINITION
Consumer Price Index (CPI): It is a measure of change in retail prices of goods and services consumed
by defined population group in a given area with reference to a base year. The CPI number measures
changes only in one of the factors: prices. This index is an important economic indicator and is widely
considered as a barometer of inflation, a tool for monitoring price stability.
Note: In 2014, RBI adopted CPI (Combined) as the key measure of inflation on the basis of
recommendations of Urjit R. Patel Committee.
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Concept Check
Q. With reference to the ‘inflation targeting’ framework being followed by the Reserve Bank of
India (RBI), which of the following options are correct?
(a) Ensuring price stability is legal responsibility of RBI.
(b) Government of India sets the target of inflation for RBI.
(c) Inflation targets are reviewed every five years.
(d) The inflation target has been fixed in terms of all-India CPI-Combined.
Answer: E
2.4 Monetary Policy Committee – Key Facts

We have learnt how monetary policy can be used to tackle inflation. We have also read about the inflation
targeting framework of the RBI. Now it is time to learn some key facts about the Monetary Policy
Committee – the top decision-making body for monetary policy in India.
 The Central Government constitutes the Monetary Policy Committee (MPC) through a notification
in the Official Gazette. Altogether, the MPC will have six members, - the RBI Governor (Chairperson),
the RBI Deputy Governor in charge of monetary policy, one official nominated by the RBI Board and
the remaining three members would represent the Government of India.
 These Government of India nominees are appointed by the Central Government based on the
recommendations of a search cum selection committee consisting of the cabinet secretary
(Chairperson), the RBI Governor, the secretary of the Department of Economic Affairs, Ministry of
Finance, and three experts in the field of economics or banking as nominated by the central
government.
 The three central government nominees of the MPC appointed by the search cum selection
committee will hold office for a period of four years and will not be eligible for re-appointment.
 RBI Act prohibits appointing any Member of Parliament or Legislature or public servant, or any
employee / Board / committee member of RBI or anyone with a conflict of interest with RBI or
anybody above the age of 70 to the MPC.
 The MPC is required to meet at least four times in a year. From being announced twice a year (before
slack and busy seasons) today the policy is a bi-monthly affair announced 6 times in a financial year
after the monetary policy committee (MPC) came into being in 2016.
 The quorum for the meeting of the MPC is four members.
 Each member of the MPC has one vote, and in the event of an equality of votes, the Governor has a
second or casting vote.
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 The resolution adopted by the MPC is published after conclusion of every meeting of the MPC in
accordance with the provisions of Chapter III F of the Reserve Bank of India Act, 1934.
 On the 14th day, the minutes of the proceedings of the MPC are published which include:
o the resolution adopted by the MPC;
o the vote of each member on the resolution, ascribed to such member; and
o the statement of each member on the resolution adopted.
 Once in every six months, the Reserve Bank is required to publish a document called the Monetary
Policy Report to explain:
o the sources of inflation; and
o the forecast of inflation for 6-18 months ahead.
2.5 Monetary Policymaking in India – The Process

 The amended RBI Act explicitly provides the legislative mandate to the Reserve Bank to operate the
monetary policy framework of the country.
 The framework aims at setting the policy (repo) rate based on an assessment of the current and
evolving macroeconomic situation; and modulation of liquidity conditions to anchor money market
rates at or around the repo rate. Repo rate changes transmit through the money market to the entire
the financial system, which, in turn, influences aggregate demand – a key determinant of inflation
and growth.
o Money Market: A Money Market is referred to as a market for securities that have a short-
term maturity period of up to 1 year. A money market is inclusive of banks, non-banking
financial companies, and other financial institutions and facilitates the transactions for short-
term funds, along with maintaining appropriate liquidity in the market.
 Once the repo rate is announced, the operating framework designed by the Reserve Bank envisages
liquidity management on a day-to-day basis through appropriate actions, which aim at anchoring the
operating target – the weighted average call rate (WACR) – around the repo rate.
o Call money is a method by which banks lend to each other to be able to maintain the cash
reserve ratio. The interest rate paid on call money is known as the call rate. It is a highly
volatile rate that varies from day to day and sometimes even from hour to hour.
 Section 45ZB of the amended RBI Act, 1934 also provides for an empowered six-member monetary
policy committee (MPC) headed by the Governor of the RBI to be constituted by the Central
Government by notification in the Official Gazette.
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 The MPC determines the policy interest rate required to achieve the inflation target.
 The Reserve Bank’s Monetary Policy Department (MPD) assists the MPC in formulating the
monetary policy. Views of key stakeholders in the economy, and analytical work of the Reserve Bank
contribute to the process for arriving at the decision on the policy repo rate.
 The Financial Markets Operations Department (FMOD) operationalises the monetary policy, mainly
through day-to-day liquidity management operations.
 The Financial Markets Committee (FMC) meets daily to review the liquidity conditions so as to ensure
that the operating target of the weighted average call money rate (WACR) is anchored around the
repo rate.
Concept Check
Q. With reference to the ‘Monetary Policy Committee’ of the Reserve Bank of India, which of the
following options is correct?
(a) It is a 12-member body.
(b) It decides the RBI’s benchmark interest rates.
(c) It is reconstituted every year.
(d) It is headed by Union Finance Minister.
(e) It must meet at least three times every year.
Answer: B
3 Part III: Instruments of Monetary Policy
3.1 Quantitative Tools of Monetary Policy

 Quantitative instruments influence the money volume and credit supply in the system. These include
variations in reserve ratio requirements, bank rate and Open Market Operations.
 Quantitative tools are indirect and general in nature.
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 Examples of quantitative tools are: Cash Reserve Ratio, Statutory Liquidity Ratio, Repo Rate, Reverse
Repo Rate, Marginal Standing Facility, Bank Rate and Open Market Operations. Let us discuss each
of these in detail.
3.1.1 Cash Reserve Ratio

Cash Reserve Ratio is an important quantitative tool of monetary policy. It is important not just from the
perspective of controlling inflation, but also from the perspective of smooth daily functioning of the
banking system. Let us read more about it.
 Cash Reserve Ratio (CRR) is the amount of money that the banks have to keep with RBI in cash form.
The cash reserve is either stored in the bank’s vault or is sent to the RBI.
 CRR was introduced in 1950 primarily as a measure to ensure safety and liquidity of bank deposits,
however over the years it has become an important and effective tool for directly regulating the
lending capacity of banks and controlling the money supply in the economy.
 The cash balance that is to be maintained by scheduled banks with the RBI should not be less than
such per cent of its Net demand and time liabilities (NDTL) that the Reserve Bank may notify from
time to time in the Gazette of India.
 In terms of Section 42 (1) of the Reserve Bank of India Act, 1934, the Reserve bank, having regard to
the needs of securing the monetary stability in the country, prescribes the CRR for SCBs without any
floor or ceiling rate.
 The CRR is to be calculated on the basis of DTL, with a lag of one fortnight, i.e., on the reporting
Friday, the DTL as at the end of the previous fortnight will form the basis for CRR calculation.
 NDTL refers to the total demand and time liabilities (deposits) that is held by the banks of public and
with other banks.
 Banks have to maintain cash balances with RBI to meet the prescribed CRR on average during the
fortnight, subject to daily cash balances not falling below 90% of the amount required for CRR.
Note:
As announced in the Statement of Developmental and Regulatory Policies of March 27, 2020, the
minimum daily maintenance of the Cash Reserve Ratio (CRR) was reduced from 90 per cent of the
prescribed CRR to 80 per cent effective the fortnight beginning March 28, 2020 till June 26, 2020.
Keeping in view the continuing of hardships faced by banks in terms of social distancing of staff and
consequent strains on reporting requirements, it has now been decided to extend the relaxation of
the minimum daily maintenance of the Cash Reserve Ratio of 80 per cent for a further period of three
months, i.e., up to September 25, 2020.
 There are two primary purposes of the CRR:
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 Since a part of the bank’s deposits is with the Reserve Bank of India, it ensures the security of the
amount. It makes it readily available when customers want their deposits back.
 Also, CRR helps in keeping inflation under control. At the time of high inflation in the economy, RBI
increases the CRR, so that banks need to keep more money in reserves so that they have less money
to lend further.
 How CRR helps in controlling inflation? At the time of high inflation, the government needs to ensure
that excess money is not available in the economy. To that extent, RBI increases the Cash Reserve
Ratio, and the amount of money that is available with the banks reduces. This curb excess flow of
money in the economy.
 How CRR can help in boosting growth? When the government needs to pump funds into the system,
it lowers the CRR rate, which in turn, helps the banks provide loans to a large number of businesses
and industries for investment purposes. Lower CRR also boosts the growth rate of the economy.
 Note: RBI does not pay interest on deposits held by banks to meet the CRR, even if the deposits are
in excess of minimum required by RBI. CRR, therefore, effectively increase cost of deposits to the
banking sector.
 Penalty for non-maintenance of CRR
o In case of default in maintenance of CRR requirement on a daily basis, penal interest will be
levied for that day at the rate of three per cent per annum above the Bank Rate on the amount
by which the amount actually maintained falls short of the prescribed minimum on that day
and if the shortfall continues on the next succeeding day/s, penal interest will be recovered at
the rate five per cent per annum above the Bank Rate.
o In cases of default in maintenance of CRR on average basis during a fortnight, penal interest
will be levied as envisaged in seb-section (3) of Section 42 of Reserve Bank of India Act, 1934
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Liabilities of Bank:
 Deposits of banks are its liability and consist of demand and time deposits of public and other banks.
 Demand deposits include all liabilities which are payable on demand and includes current deposits,
demand liabilities portion of savings bank deposits, demand drafts, balances in overdue fixed
deposits etc.
 Time deposits are those which are payable otherwise on demand and includes fixed deposits, staff
security deposits, time liabilities portion of savings bank deposits etc.
 NDTL is calculated and reported every fortnight Friday by banks.
Main components of DTL are:
 Demand deposits (held in current and saving accounts, margin money for LCs, overdue fixed
deposits etc.)
 Time deposits (in fixed deposits, recurring deposits, reinvestment deposits etc.)
 Overseas borrowings.
 Foreign outward remittances in transit (FC liabilities net of FC assets)
 Other demand and time liabilities (accrued interest, credit balances in suspense account etc.).
Concept Check:
Q. When the Reserve Bank of India announces an increase of the Cash Reserve Rate, what does it
mean?
(a) The commercial banks will have less money to lend
(b) The Reserve Bank of India will have less money to lend
(c) The Union Government will have less money to lend
(d) The commercial banks will have more money to lend
(e) The Reserve Bank of India will have more money to lend.
Answer: A
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3.1.2 Statutory Liquidity Ratio

Now that we have understood CRR, Statutory Liquidity Ratio too should not be difficult. Like CRR,
Statutory Liquidity Ratio too serves dual purpose – it helps ensure solvency of banks, and it can also be
used to control inflation. Let us read more about it.
 Every bank must have a specified portion of their Net Demand and Time Liabilities (NDTL) in the form
of cash, gold, or other liquid assets by the day’s end. The ratio of these liquid assets to the demand
and time liabilities is called the Statutory Liquidity Ratio (SLR).
 The Reserve Bank of India has the authority to increase this ratio by up to 40%. An increase in the
ratio constricts the ability of the bank to inject money into the economy.
 Section 24 and Section 56 of the Banking Regulation Act 1949 mandates all scheduled commercial
banks, local area banks, Primary (Urban) co-operative banks (UCBs), state co-operative banks and
central co-operative banks in India to maintain the SLR.
 RBI employs SLR regulation to have control over the bank credit. SLR ensures that there is solvency
in commercial banks and assures that banks invest in government securities.
 RBI raises SLR to control the bank credit during the time of inflation. Similarly, it decreases the SLR
during the time of recession to increase bank credit.
 Banks earn returns on money parked as SLR.
 If a banking company fails to maintain the required amount of SLR, it shall be liable to pay to RBI in
respect of that default, the penal interest for that day at the rate of three per cent per annum above
the Bank Rate on the shortfall and if the default continues on the next succeeding working day, the
penal interest may be increased to a rate of five per cent per annum above the Bank Rate for the
number of days of default on the shortfall.
 There are some reasons behind introducing Statutory Liquidity Ratio. The main objectives for
maintaining the Statutory Liquidity Ratio (SLR) are the following:
o SLR is maintained in order to control the expansion of bank credit. By changing the level of
SLR, Reserve Bank can increase or decrease bank credit expansion.
o SLR in a way ensures the solvency of commercial banks.
o By determining SLR, RBI, in a way, compels the commercial banks to invest in government
securities like government bonds.
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Concept Check:
Q. Which of the following terms indicates a mechanism used by commercial banks for providing credit
to the government?
(a) Cash Credit Ratio
(b) Debt Service Obligation
(c) Liquidity Adjustment Facility
(d) Statutory Liquidity Ratio
(e) Marginal Standing Facility
Answer: D
3.1.3 Key differences between CRR & SLR

It is important to note the difference between CRR and SLR. While both can be clubbed under the head
of ‘reserve requirement ratio’, these are two very different concepts. Let us see how.
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Form of Reserve
 The CRR requires banks to have only cash reserves with the RBI.
 In the case of SLR, banks are asked to have reserves of liquid assets which include cash, gold and
government securities.
Return
 Banks don’t earn returns on money parked as CRR.

 Banks earn returns on money parked as SLR.
Purpose
 The Central Bank controls the liquidity in the Banking system with CRR.
 SLR is used to control the bank’s leverage for credit expansion.
Holding
 In CRR, the cash reserve is maintained by the banks with the Reserve Bank of India.
 In the case of SLR, the securities are kept with the banks themselves which they need to maintain in
the form of liquid assets.
Note:
The minimum and maximum levels of CRR were prescribed at 3% and 20% of demand and time
liabilities (DTL) of the bank respectively, under Reserve bank of India Act of 1934. However, an
amendment to the Act in 2006 removed the floor and ceiling limits with effect from April 2007,
enabling RBI to stipulate the CRR at its discretion. Similarly, the minimum and maximum SLR were
prescribed at 25% and 40% of DTL respectively, under the Banking Regulation Act of 1949. An
amendment to the Act has removed the minimum requirement with effect from January 2007,
allowing greater flexibility to RBI.
3.1.4 Repo Rate

 Repo or repurchase option is a collaterised lending i.e. banks borrow money from Reserve bank of
India to meet short term needs by selling securities to RBI with an agreement to repurchase the same
at predetermined rate and date.
 The rate charged by RBI for this transaction is called the repo rate. Repo operations therefore inject
liquidity into the system.
 To put it in very simple terms: It is the rate at which RBI lends money to commercial banks against
securities in case commercial banks fall short of funds.
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 A high repo rate signals that access to money is expensive for banks and lesser credit will flow into
the system.
 Repo Rate in India is the primary tool in the RBI’s Monetary and Credit Policy.
 Repo Rate is the most significant rate for the common man too. Everything from interest rates on
loans to returns on deposits is influenced by this crucial rate set by the RBI, which is why interest rates
on home loans, car loans and other kinds of borrowings go up and down based on the direction of
Repo Rate change. Similarly, banks adjust savings account, fixed deposit returns based on this
benchmark.
Term Repos
Since October 2013, the RBI has introduced term repos (of different tenors, such as, 7/14/28 days), to
inject liquidity over a period that is longer than overnight. The aim of term repo is to help develop
inter-bank money market, which in turn can set market based benchmarks for pricing of loans and
deposits, and through that improve transmission of monetary policy.
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Concept Check
Q. With reference to ‘repo rate’, which of the following options is/are correct?
(a) It is a form of collateralised lending.
(b) It is the rate at which the Reserve Bank of India lends money to commercial banks.
(c) Lowering of repo rate can help in boosting the demand in an economy.
Answer: D
3.1.5 Long Term Repo

Aimed at promoting enhanced lending and cutting the cost of short-term funds for the banks, in a first
of its kind move, in February 2020 (6th Bi-monthly Monetary Policy of 2019-20), the RBI announced to
offer long term repo operation (LTRO) of ₹1.50 lakh crores at a fixed rate (i.e., at the Repo rate). The
tenure of the LTRO will be from one to three years. This was aimed at ensuring permanent and deeper
liquidity in the financial system together with enhancing lending by cutting cost of funds for the banks
(enabling them to lend cheaper loans).
RELATED CONCEPT: MCLR

As per the RBI, ‘for monetary policy transmission to occur, lending rates of banks have to be sensitive
to the policy rate (repo rate)’. But this was not occurring by now. During 2015–16, the RBI reduced the
policy rate by a total of 1.25 per cent. But in comparison, banks reduced the lending rate by maximum
0.6 per cent. By now, banks have been using either of the following three methods to compute their
Base Rate (minimum rate below which banks are not allowed to lend to its customers):
1. average cost of funds

2. marginal cost of funds
3. blended cost of funds (liabilities).
From the financial year 2016–17 (i.e., from 1st April, 2016), banks in the country have shifted to a new
methodology to compute their lending rate. The new methodology—MCLR (Marginal Cost of funds
based Lending Rate)—which was articulated by the RBI in December 2015. The main features of the
MCLR are—
 it will be a tenor linked internal benchmark, to be reset on annual basis.

 actual lending rates will be fixed by adding a spread to the MCLR.
 to be reviewed every month on a pre-announced date.
 existing borrowers will have the option to move to it.
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 banks will continue to review and publish ‘Base Rate’ as hitherto.

As per the RBI, the MCLR will bring in the following benefits:
 transmission of policy rate into the lending rates of banks to improve;

 computation of the interest rates by banks will get more transparent;
 cost of loan will be fairer to the borrowers as well as the banks.
 it will help the banks to become more competitive and enhance their long-run value.
By late March 2020, the MCLRs of banks were in the range of 7.40-7.90 per cent. As the idea of the
MCLR did not bring in the desired results (i.e., the healthy monetary transmission), RBI announced (in
its 5th bi-monthly monetary policy statement of December 2018) that from April 2019 all new floating
loans extended by banks will be ‘benchmarked’ (i.e., linked to) to one of the following four RBI-
prescribed ‘external’ benchmarks:
1. Repo rate
2. 91-day Treasury Bill yield
3. 182-day Treasury Bill yield
4. Any other benchmark produced by the FBIL (Financial Benchmarks India Private Ltd).
It means that the actual lending rates will not remain linked to the internal data of the banks (as the
case has been for MCLR) and banks will be forced to link the interest rates of their new loans with an
external and market-determined benchmark. After a short delay banks started switching over to the
external benchmarks from October 2019.
3.1.6 Reverse Repo Rate

If you and I have surplus cash, we can conveniently deposit the same with a commercial bank and earn
interest. What happens if a bank has surplus cash that it cannot easily lend? Does the bank need to
compulsorily hold that cash with itself? Or can the bank deposit that cash with the RBI? Answer is yes.
Bank can deposit their surplus cash with RBI. Does bank earn any interest on its deposit? Yes, it does. It is
called ‘reverse repo rate’. Reverse repo can also be used as a quantitative tool of monetary policy to
control inflation. Let us see how.
 Reverse repo operation is when banks deposit their money with the RBI.
 The interest rate paid by RBI in this case is called the reverse repo rate.
 Reverse repo operation therefore absorbs the liquidity in the system.
 The collateral used for repo and reverse repo operations are Government of India securities.
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 A high reverse repo rate implies that banks can get safe returns if they park their money with RBI;
therefore, Banks may either park their money with RBI or they may lend at a still higher rate of interest
to borrowers. Thus, high reverse repo rate either constricts credit, or makes it expensive.
Concept Check
Q. Reverse Repo Rate is
(a) the rate at which the Reserve Bank of India lends to commercial banks.
(b) the rate at which the Reserve Bank of India lends to non-banking finance companies.
(c) the rate at which the Reserve Bank of India lends to regional rural banks.
(d) the rate at which the Reserve Bank of India lends to Government of India.
Answer: E
3.1.7 Liquidity Adjustment Facility

The Liquidity Adjustment Facility is the principal operating instrument of Reserve Bank’s monetary policy.
While CRR and SLR help changes in the stance of monetary policy on a more permanent basis, LAF is
used to monitor day-to-day liquidity in the market.
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As the name suggests, this is a facility that helps in the adjustment of liquidity. If banks need liquidity,
they can access it; if banks have surplus liquidity, they can park it safely through LAF. Repo and reverse
repo, which we discussed in the preceding section, are basically the two channels of LAF that help banks
in liquidity adjustment. Let us read specifically about LAF.
 A LAF is a monetary policy tool, primarily used by the RBI, to manage liquidity and provide economic
stability.
 LAF’s include both repos and reverse repo agreements.
 The RBI introduced a LAF as a result of the Narasimham Committee on Banking Sector Reforms
(1998).
 LAF’s can manage inflation by increasing and reducing the money supply.
 The RBI can use the liquidity adjustment facility to manage high levels of inflation. It does so by
increasing the repo rate, which raises the cost of servicing debt. This, in turn, reduces investment
and money supply in India’s economy.
 Conversely, if the RBI is trying to stimulate the economy after a period of slow economic growth, it
can lower the repo rate to encourage businesses to borrow, thus increasing the money supply.
 Through LAF, banks are permitted to borrow only a certain percentage of its Net Demand and Time
Liabilities (NDTL). In case the Bank requires more funds, beyond what is permissible under LAF, it can
access another window called Marginal Standing Facility (MSF).
 Since October 2013, the Reserve Bank has introduced Term Repo (repos of duration more than a day)
under the Liquidity Adjustment Facility (LAF) for 14 days and 7 days tenors for banks (scheduled
commercial banks other than RRBs) in addition to the existing daily LAF (repo and reverse repo) and
MSF.
 While banks can engage in repo transactions with other banks/institutions, LAF refers exclusively to
repo transactions with RBI. Bids have to be submitted for a minimum amount of Rs 5 crore and in
multiples of Rs 5. Crore thereafter.
Concept Check
Q. ‘Liquidity Adjustment Facility’ consists of
(a) Repurchase Agreement
(b) Reverse Repurchase Agreement
(c) Marginal Standing Facility
(d) Only (a) and (b)
(e) All (a), (b) and (c)
Answer: E
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3.1.8 Marginal Standing Facility

Banks can borrow a certain amount of money from the RBI under repo mechanism. But what if banks are
in need of even greater liquidity than what is available through repo mechanism? Is there any facility that
banks can tap and get access to this additional liquidity? Yes, there is. It is called Marginal Standing Facility.
Let us discuss about Marginal Standing Facility and also see what role it plays in controlling inflation.
 Marginal Standing Facility (MSF) is a new scheme announced by the RBI in its Monetary Policy (2011-
12) and refers to the penal rate at which banks can borrow money from the central bank over and
above what is available to them through the LAF window.
 It is a facility under which scheduled commercial banks can borrow additional amount of overnight
money from the Reserve Bank by pledging their Statutory Liquidity Ratio (SLR) portfolio up to a limit
at a penal rate of interest.
 MSF, being a penal rate, is always fixed above the repo rate. The MSF would be the last resort for
banks once they exhaust all borrowing options including the liquidity adjustment facility by pledging
government securities, where the rates are lower in comparison with the MSF.
 This provides a safety valve against unanticipated liquidity shocks to the banking system.
 MSF represents the upper band of the interest corridor with repo rate at the middle and reverse
repo as the lower band.
So, the correct decreasing order becomes:
MSF > REPO RATE > REVERSE REPO RATE
Concept Check
Q. With reference to ‘Marginal Standing Facility’ (MSF), which of the following options is not correct?
(a) It is the penal rate at which banks borrow from the Reserve Bank of India over and above the limit
of borrowing available under the Liquidity Adjustment Facility.
(b) It represents the upper band of the ‘interest rate corridor’.
(c) Option of borrowing through MSF is available only to Scheduled Commercial Banks.
(d) It helps tackle the challenges posed by unanticipated liquidity shocks.
Answer: C
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3.1.9 Liquidity Management Framework

A liquidity management framework (LMF) was provisioned by the RBI in 2014 to check volatility in the
inter-bank call money market (CMM) and allow banks manage their needs of short-term capital. As per
the last revision done by the RBI in February 2020, the LMF guidelines were as given below—
 The combined repo borrowings of all banks put together on a day cannot be more than 1 per cent of
the combined NDTL of the banks (known as the upper ceiling on repo borrowing).
 Individual banks can borrow not more than 1 per cent of their NDTL under repo operation—0.25 per
cent of it as overnight repo (i.e., overnight borrowing for a day) and rest of the 0.75 per cent as term
repo for 7/14/28 days (i.e., borrowing for 7/14/28 days).
 After exhausting the option of the various repos, banks can borrow upto 2 per cent of their NDTL
directly from the RBI for one day (called overnight) under the marginal standing facility (MSF).
Note: On March 27, 2020 banks were allowed to avail of funds under the marginal standing facility
(MSF) by dipping into the Statutory Liquidity Ratio (SLR) by up to an additional one per cent of net
demand and time liabilities (NDTL), i.e., cumulatively up to 3 per cent of NDTL. This facility, which was
initially available up to June 30, 2020 was extended on June 26, 2020 up to September 30, 2020, in view
of disruptions imposed by COVID-19. This dispensation provides increased access to funds to the extent
of ₹1.49 lakh crore, and also qualifies as high-quality liquid assets (HQLA) for the Liquidity Coverage
ratio (LCR). With a view to providing comfort to banks on their liquidity requirements as also to enable
to continue to meet LCR requirements, it has been decided to continue with the MSF relaxation for a
further period of six months, i.e., up to March 31, 2021.
 The long-term repo started by the RBI in February 2020 is an extra window over and above the 1 per
cent upper cap on the repo operation.
3.1.10 Bank Rate

While this is an outdated concept, we still discuss about Bank Rate just so that there are no gaps in our
understanding.
 Bank rate is also referred to as the discount rate.

 It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other
commercial papers.
 The Bank Rate is published under Section 49 of the Reserve Bank of India Act, 1934.
 This rate has been aligned to the MSF rate and, therefore, changes automatically as and when the
MSF rate changes alongside policy repo rate changes.
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 The role of the bank rate as an instrument of monetary policy has been very limited in India because
of these basic factors:
o The structure of interest rates is not automatically linked to the bank rate.
o Commercial banks enjoy specific refinance facilities, and not necessarily rediscount their
eligible securities with RBI at bank rate.
o The bill market is under-developed and the different sub-markets of the money market are not
influenced by the bank rate.
3.1.11 Open Market Operation

Open Market Operations are one of the most potent tools available with the RBI for liquidity management.
Through these operations, RBI can absorb and release huge sums of money from and into the economy.
So, depending upon the inflation-growth scenario, RBI may decide to release money or absorb money.
For either of these course of action, open market operations are very useful. Let us read more about
these.
 These include both, outright purchase and sale of government securities by the RBI, for injection and
absorption of durable liquidity, respectively.
 What happens when the securities are purchased? There is more money in the economy as the RBI
purchases security and gives money. This leads to more money in the market, leading to more demand
and thus higher growth rate.
 What happens when the securities are sold? There is less money in the economy and thus less
demand leading to lowering of prices.
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Concept Check
Q. In the context of Indian economy, ‘Open Market Operations’ refers to
(a) borrowing by scheduled banks from the RBI
(b) lending by commercial banks to industry and trade
(c) purchase and sale of government securities by the RBI
(d) Operation undertaken by the RBI to manage exchange rate volatility.
Answer: C
3.1.12 Market Stablisation Scheme

There are certain tools that have been created for use in extra-ordinary times. Market Stabilisation
Scheme is one such arrangement. Let us read more about it.
 Market Stabilization scheme (MSS) is a monetary policy intervention by the RBI to withdraw excess
liquidity (or money supply) by selling government securities in the economy.
 The MSS was introduced in April 2004.
 The issued securities are government bonds and they are called as Market Stabilization Bonds (MSBs).
Thus, the bonds issued under MSS are called MSBs.
 These securities are owned by the government though they are issued by the RBI.
 For the issue of MSS, there is a MoU between the government and the RBI about the total limit of
MSBs to be issued by the RBI during a year.
 The securities or bonds/Treasury bills issued under MSS are purchased by financial institutions. They
will get an interest for purchasing the securities.
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 Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through sale
of short-dated government securities and treasury bills. The mobilised cash is held in a separate
government account with the Reserve Bank. The instrument thus has features of both, SLR and CRR.
 In the wake of demonetization, the government has increased the amount of MSBs to be issued to
Rs 6 lakh crores from just 0.3 lakh crores.
 After demonetization, huge deposits were put into the banking system. At the same time, banks
can’t lend it to customers as it is just temporary money. The RBI has instructed banks to keep all the
additional deposits as CRR. But here, the banks will suffer losses as they have to pay interest to the
depositors. To compensate banks, the MSS policy is revived. Here, banks can put the excess money
obtained from deposits in MSBs. They can get an interest payment as well.
 The intention of MSS is essentially to differentiate the liquidity absorption of a more enduring nature
by way of sterilization from the day-to-day normal liquidity management operations.
Concept Check
Q. With reference to the Market Stabilization Scheme (MSS), which of the following options is
correct?
(a) It allows RBI to infuse liquidity in the market during liquidity shortage.
(b) RBI used MSS Bonds in the aftermath of demonetisation for liquidity management.
(c) Investment in MSS Bonds is akin to Cash Reserve Ratio.
Answer: B
3.1.13 Standing Deposit Facility Scheme

The new scheme has been proposed by the Union Budget 2018–19. Such a tool was proposed by the RBI
in November 2015 itself. The scheme is aimed at helping RBI to manage liquidity in a better way, especially
when the economy is flush with excess fund (as was seen after the demonetisation of the high value
currency notes post- November 2016).
3.1.14 Summary of Quantitative Tools
To induce inflation/ combat

Tool To Combat Inflation
disinflation/ combat deflation
CRR Increase Decrease

SLR Increase Decrease
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REPO RATE Increase Decrease

REVERSE REPO RATE Increase Decrease
MSF Increase Decrease
BANK RATE Increase Decrease
OPEN MARKET
RBI sells Government Securities RBI buys Government Securities
OPERATIONS
3.2 Qualitative Tools of Monetary Policy

Having gone through the Quantitative tools of Monetary Policy, it is time to turn our attention to
Qualitative tools of Monetary Policy. These tools help in ensuring that prudent practices are followed in
the financial sector, while also ensuring that credit is channelized in the right direction.
 Qualitative tools are direct and specific in nature.

 Qualitative tools include persuasion by the Central bank in order to make commercial banks
discourage or encourage lending which is done through moral suasion.
 Qualitative also called selective credit control instruments work through regulation of margin
requirement, credit rationing, regulation of consumer credit and direct action.
3.2.1 Credit Rationing

 Rationing of credit is another method of selective credit control. It is done by regulating the purposes
for which the loans are given among the various member banks. To ensure overall development of a
nation, development of various sectors is a must. Finance is to be distributed to various sectors as
per these requirements.
 Priority sector should be given preference in lending loans.
 For others, minimum attention only will be given in this respect. It paves way for the optimum
utilization of money.
3.2.2 Loan to Value Ratio

 It is the amount of loan that is given against a fixed value of collateral.
 Loan-to-Value is calculated as follows: Financial institutions calculate LTV of a borrower using given
method: (Amount borrowed / Value of property) x 100 = LTV ratio in percentage
 For example: Suppose a person wants to get a loan by mortgaging its gold worth Rs.1 lakh.
 The LTV is 60%, then the amount of loan the person will receive is Rs. 60,000.
 By using this method, during the period of inflation with a view to control credit, the RBI lowers the
LTV Ratio and during deflation it raises the LTV to expand the credit.
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3.2.3 Moral Suasion

 Moral suasion aims at strengthening natural confidence and understanding between the
monetary authority and the banks as well as financial institutions. It is not a statutory obligation.
 Moral Suasion is just as a request by the RBI to the commercial banks to take certain actions and
measures as per the trend of the economy.
 RBI may request commercial banks not to give loans for unproductive purpose which does not
add to economic growth but increases inflation.
3.2.4 Direct Action

 This step is taken by the RBI against banks that don’t fulfill conditions and requirements.
 RBI may refuse to rediscount their papers or give excess credits or charge a penal rate of interest
over and above the Bank rate, for credit demanded beyond a limit.
Concept Check
Q. Which one of the following is not an instrument of selective credit control in India?
(a) Regulation of consumer credit
(b) Rationing of credit
(c) Margin requirements
(d) Variable cash reserve ratios
(e) Direct Action
Answer: D
3.3 Priority Sector Lending

Priority Sector Lending is an important role given by the RBI to the banks for providing a specified
portion of the bank lending to few specific sectors like agriculture and allied activities, micro and
small enterprises, poor people for housing, students for education and other low-income groups and
weaker sections. This is essentially meant for an all-round development of the economy.
Priority Sector includes the following categories:
1. Agriculture: The activities covered under Agriculture are classified under three sub-categories viz.
Farm credit, Agriculture infrastructure and Ancillary activities.
2. Micro, Small and Medium Enterprises: For classification under priority sector, no limits are
prescribed for bank loans sanctioned to Micro, Small and Medium Enterprises engaged in the
manufacture or production of goods under any industry. Bank loans to Micro, Small and Medium
Enterprises engaged in providing or rendering of services and defined in terms of investment in
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equipment under MSMED Act, 2006, irrespective of loan limits, are eligible for classification under
priority sector, w.e.f. March 1, 2018.
3. Export Credit
4. Education: Loans to individuals for educational purposes including vocational courses upto ₹ 1
million irrespective of the sanctioned amount are eligible for classification under priority sector.
5. Housing: Loans to individuals up to ₹3.5 million in metropolitan centres (with population of ten
lakh and above) and loans up to ₹ 2.5 million in other centres for purchase/construction of a
dwelling unit per family, are eligible to be considered as priority sector provided the overall cost
of the dwelling unit in the metropolitan centre and at other centres does not exceed ₹ 4.5 million
and ₹ 3 million, respectively.
6. Social Infrastructure
a. Bank loans up to a limit of ₹ 50 million per borrower for building social infrastructure for
activities namely schools, health care facilities, drinking water facilities and sanitation
facilities (including loans for construction/ refurbishment of toilets and improvement in
water facilities in the household) in Tier II to Tier VI centres are eligible for classification
under priority sector.
b. Bank credit to Micro Finance Institutions (MFI) extended for on-lending to individuals/
members of (Self-Help Groups) SHGs/ (Joint Liability Group) JLGs for water and sanitation
facilities is also eligible for classification as priority sector loans under ‘Social
Infrastructure’ subject to certain criteria.
7. Renewable Energy
a. Bank loans up to a limit of ₹ 150 million to borrowers for purposes like solar based power
generators, biomass based power generators, wind mills, micro-hydel plants and for non-
conventional energy based public utilities viz. street lighting systems, and remote village
electrification are eligible to be classified under priority sector loans under ‘Renewable
Energy’.
b. For individual households, the loan limit is ₹ 1 million per borrower.
8. Others
a. Bank credit to MFIs (NBFC-MFIs, societies, trusts, etc) extended for on-lending to
individuals and also to members of SHGs/JLGs is eligible for categorisation as priority
sector advance under respective categories viz., Agriculture, Micro, Small and Medium
Enterprises, Social Infrastructure and Others
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Priority sector loans to the following borrowers are eligible to be considered under Weaker Sections
category:
What are Priority Sector Lending Certificates (PSLCs)?
Priority Sector Lending Certificates (PSLCs) are a mechanism to enable banks to achieve the priority
sector lending target and sub-targets by purchase of these instruments in the event of shortfall. This
also incentivizes surplus banks as it allows them to sell their excess achievement over targets thereby
enhancing lending to the categories under priority sector. Under the PSLC mechanism, the seller sells
fulfilment of priority sector obligation and the buyer buys the obligation with no transfer of risk or
loan assets.
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What is the rate of interest for loans under priority sector?
The rate of interest on bank loans will be as per directives issued by the Department of Banking
Regulation of RBI, from time to time. Priority sector guidelines do not lay down any preferential
rate of interest for priority sector loans.
Concept Check
Q. Which of the following sectors is/are eligible to receive credit under the ‘Priority Sector
Lending’ mechanism in India?
(a) Agriculture
(b) Renewable Energy
(c) Export Credit
(d) Social Infrastructure
Answer: E
4 Part IV: Types of Monetary Policy
4.1 Expansionary Monetary Policy
Expansionary monetary policy or easy money results if the RBI increases the money supply and lowers
interest rates and is the recommended policy to counter a slowdown in GDP growth. Expansionary
moves include:
 The decreases in the repo rate/Bank rate/MSF rate: As these rate falls, corporations and consumers
can borrow more cheaply.
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 Purchases of government securities: As RBI purchases government securities from financial

institutions, it increases money supply in the market.
 Reductions in the reserve ratio (CRR/SLR): The central bank seeks to encourage increased lending by
banks by decreasing the reserve ratio, which is essentially the amount of capital a commercial bank
needs to hold onto when making loans.
Expanding the money supply results in lower interest rates and borrowing costs, with the goal to boost
consumption and investment.
This type of policy is also called as Easy / Loose / Accommodative / Dovish Monetary Policy.
Concept Check
Q. If the Reserve Bank of India is following an expansionary monetary policy, it can
(a) Lower the Statutory Liquidity Ratio
(b) Lower the Cash Reserve Ratio
(c) Lower the Repo Rate
(d) Lower the Reverse Repo Rate
Answer: E
4.2 Contractionary Monetary Policy
Contractionary monetary policy or tight money occurs if the RBI decreases the money supply and raises
interest rates and is the recommended policy to reduce inflation. Contractionary moves include:
 The increases in the repo rate/Bank rate/MSF rate: As these rate rises, corporations and consumers
borrowings become more expensive.
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 Sales of government securities: As RBI sells government securities to financial institutions, it

decreases money supply in the market.
 Increase in the reserve ratio (CRR/SLR): The central bank seeks to discourage increased lending by
banks by increasing the reserve ratio.
Contracting the money supply results in higher interest rates and borrowing costs, with the goal to control
inflation.
Calibrated tightening is a version of contractionary monetary policy – it means interest rates can only
move upward.
This type of policy is also called as Tight / Hawkish / Restrictive Monetary Policy.
Note: Neutral stance means interest rates may move either way—upward or downward.
Concept Check
Q. An increase in the Bank Rate generally indicates that the
(a) Market rate of interest is likely to fall
(b) Central Bank is no longer making loans to commercial banks
(c) Central Bank is following an easy money policy
(d) Central Bank is following a tight money policy
Answer: D
5 Part V: Financial Institutions in India
5.1 Non-Banking Financial Companies

Bank is a financial institution engaged primarily in mobilising deposits and forwarding loans. The deposits
and loans are highly differentiated in nature. Banks are regulated by the Central bank of the country—in
case of India, the RBI. Another category of financial institution—the Non-Banking Financial Companies
(NBFC)—is almost similar in its functions but main difference (though, highly simplified) being that it does
not allow its depositors to withdraw money from their accounts.
NBFCs are fast emerging as an important segment of Indian financial system. It is a heterogeneous group
of institutions (other than commercial and co-operative banks) performing financial intermediation in a
variety of ways, like accepting deposits, making loans and advances, leasing, hire purchase, etc. They
cannot have certain activities as their principal business—agricultural, industrial and sale-purchase or
construction of immovable property.
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They raise funds from the public, directly or indirectly, and lend them to ultimate spenders. They advance
loans to the various wholesale and retail traders, small-scale industries and self-employed persons.
Thus, they have broadened and diversified the range of products and services offered by a financial
sector. Gradually, they are being recognised as complementary to the banking sector due to their—
 customer-oriented services;
 simplified procedures;
 attractive rates of return on deposits; and
 flexibility and timeliness in meeting the credit needs of specified sectors.
RBI, the regulator of the NBFCs, has given a very wide definition of such companies (a kind of ‘umbrella’
definition)— “a financial institution formed as a company involved in receiving deposits or lending in any
manner.”
Based on their liability structure, they have been classified into two broad categories:
1. deposit-taking NBFCs (NBFC-D), and

2. non-deposit taking NBFCs (NBFC-ND).
It is mandatory for a NBFC to get itself registered with the RBI as a deposit taking company. For
registration they need to be a company (incorporated under the Companies Act, 1956) and should have
a minimum NOF (net owned fund) of ₹100 crore.
To obviate dual regulation, certain category of the NBFCs which are regulated by other financial
regulators are exempted from the regulatory control of the RBI:
1. venture capital fund, merchant bank, stock broking firms (SEBI registers and regulates them);
2. insurance company (registered and regulated by the IRDA);
3. housing finance company (regulated by the National Housing Bank);
4. nidhi company (regulated by the Ministry of Corporate Affairs under the Companies Act, 1956);
5. chit fund company (by respective state governments under Chit Funds Act, 1982).
Some of the important regulations relating to acceptance of deposits by the NBFCs are:
 allowed to accept and/or renew public deposits for a minimum period of 12 months and maximum
period of 60 months.
 cannot accept demand deposits (i.e., the saving and current accounts).
 cannot offer interest rates higher than the ceiling rate prescribed by the RBI.
 cannot offer gifts, incentives or any other additional benefit to the depositors.
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 should have minimum investment grade credit rating.

 their deposits are not insured.
 the repayment of deposits by NBFCs is not guaranteed by RBI.
 need to maintain Capital Adequacy Ratio (CAR) norm as prescribed by the RBI.
To promote financial inclusion through direct interaction between small lenders and small borrowers
together with addressing consumer protection, during 2017–18, RBI introduced two new categories of
the NBFC—Peer to Peer (P2P) and Account Aggregators (AA).
In order to provide with greater ‘operational flexibility’ to the NBFCs and their enhanced regulation, the
RBI announced in 2019 that existing three categories of NBFCs (asset finance companies, investment
companies and loan companies) were merged into a new category—NBFC-Investment and Credit
Companies (NBFC-ICCs). E.g. Bajaj Finserv, Muthoot Finance etc.
Concept Check
Q. With reference to ‘Non-Banking Financial Companies’ (NBFC) in India, which of the following
options is not correct
(a) NBFCs need to maintain capital adequacy ratio.
(b) NBFCs come under RBI’s regulatory purview.
(c) NBFCs can be either be deposit taking or non-deposit taking.
(d) The repayment of deposits by NBFCs is not guaranteed by RBI.
(e) NBFCs can accept demand deposit.
Answer: E
5.2 Regional Rural Banks

The Regional Rural Banks (RRBs) were first set up on the recommendations of the Narasimhan Committee
on 2 October, 1975 (only 5 in numbers) with the aim to take banking services to the doorsteps of the
rural masses specially in the remote areas with no access to banking services with twin duties to fulfil
1. to provide credit to the weaker sections of the society at concessional rate of interest who
previously depended on private money lending, and
2. to mobilise rural savings and channelise them for supporting productive activities in the rural areas.
The Government of India, the concerned state government and the sponsoring nationalised bank
contribute the share capital of the RRBs in the proportion of 50 per cent, 15 per cent and 35 per cent,
respectively. The area of operation of the RRB is limited to notified few districts in a state.
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Following the suggestions of the Kelkar Committee, the government stopped opening new RRBs in
1987—by that time their total number stood at 196. Due to excessive leanings towards social banking
and catering to the highly economically weaker sections, these banks started incurring huge losses by
early 1980s. For restructuring and strengthening of the banks, the governments set up two committees—
the Bhandari Committee (1994–95) and the Basu Committee (1995–96). Out of the total, 171 were
running in losses in 1998–99 when the government took some serious decisions:
(i) The obligation of concessional loans abolished and the RRBs started charging commercial interest
rates on its lendings.
(ii) The target clientele (rural masses, weaker sections) was set free now to lend to anybody.
After the above-given policy changes, the RRBs started coming out of the red/losses. The Committee on
the Financial System – CFS – has recommended to get them merged with their managing nationalised or
public sector banks and finally make them part of the would-be three-tier banking structure of India. By
April 2020, as per the RBI, there were 53 RRBs operating in the country (over 13 of them were under the
process of amalgamation with their parent PSBs)—in coming times to be fully replaced by the Small Banks.
E.g., Allahabad U.P Gramin Bank etc.
Concept Check
Q. Which of the following committees dealt with the issue of Regional Rural Banks in India?
(a) Narasimhan Committee
(b) Kelkar Committee
(c) Bhandari Committee
(d) Basu Committee
Answer: E
Note on Committees that have dealt with the issue of RRBs: 1. Committee on Restructuring of RRBs,
1994 (Bhandari Committee) 2. Committee on Revamping of RRBs, 1996 (Basu Committee) 3. Expert
Group on RRBs in 1997 (Thingalaya Committee) 4. Expert Committee on Rural Credit, 2001 (Vyas
Committee I) 5. Group of CMDs of Select Public Sector Banks, 2004 (Purwar Committee) 6. Sardesai
Committee, 2005
5.3 Cooperative Banks

Banks in India can be broadly classified under two heads—commercial banks and co-operative banks.
While commercial banks (nationalised banks, State Bank group, private sector banks, foreign banks and
regional rural banks) account for an overwhelming share of the banking business, co-operative banks
also play an important role. Initially set up to supplant indigenous sources of rural credit, particularly
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money lenders, today they mostly serve the needs of agriculture and allied activities, rural-based
industries and to a lesser extent, trade and industry in urban centres. Co-operative banks have a three-
tier structure—
1. Primary Credit Societies-PCSs (agriculture or urban),

2. District Central Co-Operative Banks-DCCBs, and
3. State Co-Operative Banks-SCBc (at the apex level).
Urban Co-operative Banks (UCBs): Primary credit societies (PCSs) in urban areas that meet certain
specified criteria can apply to RBI for a banking license to operate as UCBs. They are registered and
governed under the co-operative societies acts of the respective states and are covered by the Banking
Regulation Act, 1949—thus are under dual regulatory control. The managerial aspects of these banks—
registration, management, administration, recruitment, amalgamation, liquidation, etc. are controlled
by the state governments, while the matters related to banking are regulated by RBI.
Traditionally, the area of operation of the UCBs is confined to metropolitan, urban or semi-urban centres
and caters to the needs of small borrowers including MSMEs, retail traders, small entrepreneurs,
professionals and the salaried class. However, there is no formal restriction as such and today UCBs can
conduct business in the entire district in which they are registered, including rural areas. Well managed
primary UCBs with deposits of over ₹50 crore are also allowed to operate in more than one state subject
to certain norms.
As they are covered by the RBI Act, 1934 (2nd Schedule) they have certain rights and obligations—rights
of obtaining refinance and loans from the RBI and obligations such as maintenance of cash reserves,
submission of returns to the RBI etc.
DCCBs & SCBs: As their names suggest, they operate at the district and state levels. One district can have
no more than one DCCB with a number of DCCBs reporting to the SCB. They were under supervision of
the RBI—later on this function was delegated to the NABARD. E.g., Saraswat bank, COSMOS bank etc.
Concept Check
Q. With reference to ‘Cooperative Banks’ in India, which of the following option is correct?
(a) Cooperative Banks are covered under Schedule I of the Reserve Bank of India Act 1934.
(b) Cooperative Banks come under the exclusive regulatory purview of the Reserve Bank of India.
(c) Cooperative Banks cannot avail of credit from the Reserve Bank of India under the Liquidity
Adjustment Framework.
(d) Cooperative Banks do not have to maintain CRR and SLR.
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Answer: E
5.4 Small and Payment Banks

By mid-July 2014, the RBI issued the draft guidelines for setting up small banks and payment banks. The
guidelines said that both are ‘niche’ or ‘differentiated’ banks with the common objective of furthering
financial inclusion. It is in pursuance of the announcement made in the Union Budget 2014–15. The
details regarding the provisions to set up such banks and their operational criteria are as given below: The
guidelines to set up both the banks are same—
 The minimum capital requirement would be ₹200 crore.

 Promoter should hold a minimum of 40% of the paid-up voting equity capital for five years. If the
initial promoter shareholding is above 40%, it should be brought down to 40% within a period of five
years, 30% within 10 years, and 15% in 15 years.
 Foreign shareholding in these banks will be as per current FDI policy.
 Voting rights to be line with the existing guideline for private banks.
 Entities other than promoters will not be permitted to have shareholding in excess of 10 per cent.
 The bank should comply with the corporate governance guidelines, including ‘fit and proper’ criteria
for Directors as issued by RBI.
 Operations of the bank should be fully networked and technology driven from the beginning.
5.4.1 Small Finance Bank

The purpose of the small banks will be to provide a whole suite of basic banking products such as deposits
and supply of credit, but in a limited area of operation. The objective of the Small Banks to increase
financial inclusion by provision of savings vehicles to under-served and unserved sections of the
population, supply of credit to small farmers, micro and small industries, and other unorganised sector
entities through high technology low-cost operations. Other features of the small banks are as follows:
1. Resident individuals with 10 years of experience in banking and finance, companies and Societies
will be eligible as promoters to set up small banks. NFBCs, microfinance institutions (MFIs), and
Local Area Banks (LABs) can convert their operations into those of a small bank. Local focus and
ability to serve smaller customers will be a key criterion in licensing such banks.
2. The area of operations would normally be restricted to contiguous districts in a homogenous
cluster of states or union territories so that the Small Bank has a ‘local feel’ and culture. However,
if necessary, it would be allowed to expand its area of operations beyond contiguous districts in
one or more states with reasonable geographical proximity.
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3. The bank shall primarily undertake basic banking activities of accepting deposits and lending to
small farmers, small businesses, micro and small industries, and unorganised sector entities. It
cannot set up subsidiaries to undertake non-banking financial services activities.
4. The promoters’ other financial and non-financial services activities, if any, should be distinctly
ring-fenced and not co-mingled with banking business.
5. A robust risk management framework is required and the banks would be subject to all prudential
norms and RBI regulations that apply to existing commercial banks, including maintenance of CRR
and SLR.
6. The maximum loan size and investment limit exposure to a single and group would be restricted
to 10 per cent and 15 per cent of its capital funds, respectively.
7. Loans and advances of up to ₹25 lakhs, primarily to micro enterprises, should constitute at least
50 per cent of the loan portfolio.
8. For the first three years, 25 per cent of branches should be in unbanked rural areas. E.g., A U
Small Finance Bank etc.
Concept Check
Q. With reference to Small Finance Banks, which of the following options is not correct?
(a) Minimum capital requirement to set up Small Finance Bank is Rs 200 crore.
(b) Small Finance Banks have to observe all prudential regulations of the RBI, including the maintenance
of CRR and SLR.
(c) Cooperative Banks that meet the regulatory requirements can convert into small finance banks.
(d) Loans less than Rs 50 lakhs should constitute 25% of the loan portfolio of small finance banks.
Answer: D
5.4.2 Payments Bank

The objective of payments banks is to increase financial inclusion by providing small savings accounts,
payment/remittance services to migrant labour, low income households, small businesses, other
unorganised sector entities and other users by enabling high volume-low value transactions in deposits
and payments/remittance services in a secured technology-driven environment.
 Those who can promote a payments banks can be a non-bank Prepaid Payment Instruments (PPIs),
NBFCs, corporate’s, mobile telephone companies, super market chains and public sector entities.
Even banks can take equity in Payments Banks.
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 Payments Banks can accept demand deposits (only current account and savings accounts). They
would initially be restricted to holding a maximum balance of ₹100,000 per customer. Based on
performance, the RBI could enhance this limit.
 The banks can offer payments and remittance services, issuance of prepaid payment instruments,
internet banking, functioning as business correspondent for other banks.
 Payments Banks cannot set up subsidiaries to undertake NBFC business.
 As in the case of small banks, other financial and non-financial services activities of the promoters
should be ring-fenced.
 The Payments Banks would be required to use the word ‘Payments’ in its name to differentiate it
from other banks.
 No credit lending is allowed for Payments Banks.
 The float funds can be parked only in less than one year G-Secs. E.g., India Post Payment Bank, Airtel
Payment Bank etc.
Concept Check
Q. With reference to Payments Banks, which of the following options is correct?
(a) They are meant to primarily provide remittance services.
(b) Minimum capital requirement for setting up a Payments Bank is the same what is required for a
Small Finance Bank.
(c) Maximum balance limit for customers of Payments Bank is Rs 1 lakh.
Answer: D
5.5 MUDRA Bank

As per the Government of India, large industries provide employment to only 1.25 crore people in the
country while the micro units employ around 12 crore people. There is a need to focus on these 5.75
crore self-employed people (owners of the micro units) who use funds of ₹11 lakh crore, with an average
per unit debt of merely ₹17,000. Capital is the key to small entrepreneurs. These entrepreneurs depend
heavily on the local money lenders for their fund requirements.
Looking at the importance of these enterprises, the Government of India launched (April 2015) the Micro
Units Development and Refinance Agency Bank (MUDRA Bank) with the aim of funding these unfunded
non-corporate enterprises. This was launched as the PMMY (Prime Minister Mudra Yojana). Important
features of the MUDRA Bank are as given below:
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 Under this banking model, the micro units can avail up to ₹10 lakh loan through refinance route
(through the Public and private sector banks, NBFCs, MFIs, RRBs, District Banks, etc).
 The products designed under it are categorized into three buckets of finance named Shishu (loan up
to ₹50,000), Kishor (₹50,000 to ₹5 lakh) and Tarun (₹5 lakh to ₹10 lakh).
 Though the scheme covers the traders of fruits and vegetables, in general, it does not refinance the
agriculture sector.
 There is no fixed interest rate in this scheme. Interest rates on the loans are supposed to vary
according the risk involved in the enterprises seeking loans. There is no general subsidy offered on
interest rates except if the loan is linked to some other government scheme.
Concept Check
Q. R in ‘MUDRA’ stands for
(a) Redevelopment
(b) Regulation
(c) Refinance
(d) Retail
(e) Remittances
Answer: C
6 Part VI: Summary of Key Concepts

This is the last Part of this chapter. Herein we will summarise the key concepts that we have learnt so far.
 Repo Rate: The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks
against the collateral of government and other approved securities under the liquidity adjustment
facility (LAF).
 Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs liquidity, on an
overnight basis, from banks against the collateral of eligible government securities under the LAF.
 Marginal Standing Facility (MSF): A facility under which scheduled commercial banks can borrow
additional amount of overnight money from the Reserve Bank by dipping into their Statutory Liquidity
Ratio (SLR) portfolio up to a limit at a penal rate of interest. This provides a safety valve against
unanticipated liquidity shocks to the banking system.
 Corridor: The MSF rate and reverse repo rate determine the corridor for the daily movement in the
weighted average call money rate.
 Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or
other commercial papers. The Bank Rate is published under Section 49 of the Reserve Bank of India
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Act, 1934. This rate has been aligned to the MSF rate and, therefore, changes automatically as and
when the MSF rate changes alongside policy repo rate changes.
 Cash Reserve Ratio (CRR): The average daily balance that a bank is required to maintain with the
Reserve Bank as a share of such per cent of its Net demand and time liabilities (NDTL) that the Reserve
Bank may notify from time to time in the Gazette of India.
 Statutory Liquidity Ratio (SLR): The share of NDTL that a bank is required to maintain in safe and liquid
assets, such as, unencumbered government securities, cash and gold. Changes in SLR often influence
the availability of resources in the banking system for lending to the private sector.
 Open Market Operations (OMOs): These include both, outright purchase and sale of government
securities, for injection and absorption of durable liquidity, respectively.
 Market Stabilisation Scheme (MSS): This instrument for monetary management was introduced in
2004. Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through
sale of short-dated government securities and treasury bills. The cash so mobilised is held in a separate
government account with the Reserve Bank.
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Political Economy

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Contents
1 Political Economy: Concept ....................................................................................................................3
2 Underdevelopment at the Time of Independence ................................................................................4
3 Development Thinking ...........................................................................................................................6
4 Development Planning ...........................................................................................................................8
5 The Regime of Economic Liberalisation ...............................................................................................13
6 Political Economy of Liberalisation ......................................................................................................16
1 Political Economy: Concept

Political economy offers a framework of analysis that is wider than conventional economics.
Conventional economics has markets at the center of analysis. Society is seen as an aggregation of
individuals as rational agents maximising their utility or profit. In this view of the economy, markets
solve practically all problems of interest to the economist. These include production (namely, what and
how much to produce along with the technique of production); exchange (or what prices various goods
and services should be fetching); distribution (or the claims of different ‘factors’ of production on national
income); and growth (the rate and pattern of growth of national income). The state or its agent, the
government of the day, exists on the sidelines of the market economy without playing an essential role
in it.
You may be wondering how political economy is different from this conventional view.
Political economy is equally concerned with the four basic economic processes just mentioned. However,
its approach is different in three fundamental ways.
 First, individuals in society are first and foremost members of social classes. The social classes
relate to the economy in specific ways, for example as owners of capital, workers, landlords,
peasants, bureaucracy and so on. The distribution of economic power among the social classes
and its impact on policies of the state are of particular importance to political economists.
Individuals are thus social individuals, their activities and behaviour being conditioned by the
social class to which they belong.
 Secondly, while markets are important as an economic institution, political economy views the
historical, social and political forces underpinning markets to be more fundamental. It is these
forces that determine the nature and functioning of markets.

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 Finally, the state is an integral part of the economy. Its economic policies mediate the interests
of social classes. Often, there is a conflict of interests and the state must deal with them one way
or another.
2 Underdevelopment at the Time of Independence

Indian independence from British rule in 1947 raised hopes of a new India. Two and a half centuries of
colonial experience (from c.1700 to 1947) left our economy in ruins. Both agriculture and industry were
characterised by extremely low levels of productivity. This implied mass poverty, widespread disease
and ignorance. Any hope of improving the general standard of living on a sustained basis rested on the
creation of a firm economic foundation. This was the major challenge before India after independence.
There was a second challenge as well. This related to nation-building in the vast sub-continent. A diverse
society deeply divided by language, geography, caste, religion and feudal power structures was to be
transformed into a modern democracy based on universal suffrage and commitment to a national
constitution.
Any programme of economic reconstruction could not rely exclusively on private enterprise (or market
economy) and required an active role of the state (or, roughly speaking, the public sector). In fact, the
development of private enterprise itself depended heavily on the basic economic foundation to be
created by the state. The programme of economic reconstruction therefore had to be executed in the
context of a ‘mixed’ economy with clearly demarcated areas for the market and the state. Moreover,
such an economic leadership of the state was to operate within the political framework of democracy.
This was undoubtedly a great social experiment with no parallel in history. It was eagerly awaited by the
world divided into two major power blocks led by the United States of America and Soviet Russia.
To understand the problem of underdevelopment in India at the time of independence, we need a

historical perspective. India’s colonial experience provides that perspective. The framework of political
economy requires that we look at colonial impact on broad sectors of the economy and social classes.
Since the eighteenth century, the world economy has been transformed by two major forces: (i)
Industrial Revolution, and (ii) colonialism. These forces combined to divide the world into ‘developed’
and ‘developing’ economies.
Industrial Revolution in Western Europe, especially Britain, led to significant increases in productivity of
labour and prosperity there. However, the benefits of that revolution did not spread over to much of
Asia, Africa and Latin America because of colonialism. These regions became especially impoverished
after they became colonies. Industrial Revolution and colonialism operated in tandem because the

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countries that prospered were imperial powers of Europe and the countries which were impoverished
were their colonies.
India’s colonial experience, primarily under the British, spanned two and a half centuries, from c.1700 to
1947. The period from 1700 to 1857 was marked by the rule by East India Company, while the period from
1858 to 1947 witnessed direct rule by the British Crown. The two sub-periods presented different kinds
of British interests in India and therefore economic policies for India. The trading activities of East India
Company, often involving underpayment, coercion and violence, damaged local merchants, peasants
and weavers. Indian agriculture and peasantry received a major setback through land revenue
settlements. Both the zamindari and ryotwari systems of land settlement led to a new class of
intermediaries between the tiller and the company. The peasantry was weighed down by onerous
revenue demands of the company and margins of intermediaries even during famines. Because revenue
payments had to be made in cash, farmers were forced to shift cultivation from food crops to commercial
crops. They became market-dependent for food grains.
Under the combined weight of revenue demands, usury and rack-renting, peasants were forced to sell
their lands to merchants and moneylenders or become tenants on the estate lands. The simultaneous
decline of rural crafts and urban industry meant that crafts persons and industrial workers joined the
ranks of the rural landless and the poor. The intermediaries emerged as the new dominant social class.
Neither the company nor intermediaries showed any interests in the longterm development of
agriculture through investments.
These tendencies only worsened during the rule by the crown. A shift from company rule to direct rule
by the crown became imminent as British industry required India to be both a major source of raw
materials and an assured market for British manufactures. These considerations did force the imperial
power to invest in India in the selected sectors of irrigation and transport network to port towns. As
manpower requirements of civil and revenue administration grew, liberal English education was
introduced. However, increasing commercialisation of agriculture to serve British interests did not
provide any relief to the peasantry that continued to reel under revenue demands and the combined
hold of landlords, merchants and moneylenders on the rural economy. Labour employed in British tea,
coffee and rubber plantations in India lived in slave-like conditions.
Indian industry also suffered a major decline under the crown rule. Competition from British
manufactures meant a decline in demand for domestic handlooms, metals, tools, glass, paper products
and so on. This ruined millions of artisans and craft industries. The decline of traditional industries was
not compensated by the development of modern industries. As British capital was mainly directed to

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banking, commerce, shipping and insurance, no foundation was laid for the development of heavy
industries. There was no scope for nurturing a native entrepreneurial class. This phenomenon of decline
of traditional industries and the lack of development of modern and heavy industries is known as de-
industrialisation.
New ways of draining away the economic surplus generated in India were introduced. India’s foreign
trade surplus was transferred to British accounts. Home Charges and making India pay for British wars in
Afghanistan and China were other means of drain. The economic impact of colonial rule in India was
devastating. The colonial state took no responsibility for the general welfare of Indians. While markets
in output advanced significantly, labour, credit and land markets remained underdeveloped. The colonial
legacy of economic stagnation and decline posed a major challenge for development in independent India.
3 Development Thinking
On attaining independence India had to reckon with the challenge of building from scratch an economy
that could promise a life of security and dignity for the millions within an acceptable time frame. Leaders
of the nationalist movement were aware that freedom from foreign rule was not the ultimate goal.
Nationalist writings and regional social reform movements also bear testimony to an understanding of
what we today call ‘human development’. The Gandhian approach to economic development
emphasised voluntary limitation of wants, sustainable use of natural resources and self-sufficient village
communities. Although this approach did generate some debate before and after independence, the
modernising approach of Nehru, stressing growth in commodity production and capital stock found
favour with both congress workers and the left wing politicians. In terms of development thinking, there
was a general consensus among all classes on two issues: (i) that industrialisation was the key to
economic growth, and (ii) that the state must take the lead to initiating the process of economic growth.
Both the ‘Bombay Plan’ prepared by leading industrialists even before independence and the Industrial
Policy Resolution of 1948 bore testimony to this consensus. Industry, unlike agriculture, has the potential
of unlimited expansion of output, employment and productivity. Its development is imperative for
transferring the huge reservoir of underemployed labour from low productivity agriculture. On the
other hand, modernisation of agriculture required industrial inputs such as farm machinery, irrigation
and transport equipment and fertilizers. Active role of the state in industrialisation was envisaged on
two grounds. First, a native class of industrialists was yet undeveloped. Secondly, the quantum of
resources required for creating basic industries and infrastructure being huge, and the risks of such large
projects being very high, private enterprise could not be relied up on to take the lead in industrialisation.

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An important idea that emerged out of this development thinking was that of planning. This idea and its
formal acceptance as a vehicle for carrying out the programme of industrialisation had two major sources.
At the political level, Prime Minister Nehru was impressed by the industrial achievements of socialist
planning in Soviet Union after the Russian Revolution. The Industrial Policy Resolution 1948 accepted the
idea of planning as a time-bound process of achieving prespecified targets through prioritised allocation
of investments. The IPR demarcated broad areas of action for the government (public sector), the big
private industry and the traditional industry. A Planning Commission as a non-statutory advisory body
was set up with the Prime Minister as the chairman. At the theoretical level, planning was inspired by the
experience of post-War reconstruction in Eastern Europe. The literature that grew out of this experience
emphasised the advantages of coordinated industrial investments. These included complementarities,
linkages, spread effects and externalities of a major industrialisation programme. Since markets either
did not exist or could not adequately signal these advantages in a backward economy, a plan was thought
to be essential. Accordingly, the First Five Year Plan (1951-55) was put together rather hastily based on a
meagre data base of the Indian economy. A target rate of growth of national income over the plan period
was derived from an estimated saving rate and an estimated capital-output ratio.
A technically more sophisticated plan model was developed by the physicist turned statistician P.C.
Mahalanobis. This model emphasised a conscious bias towards heavy industry and came to be known as
the Nehru-Mahalanobis strategy. The Mahalanobis model became the bedrock of the Second Five Year
Plan (1956-60) and all subsequent plans until the early 1990’s. The final version of the model divides the
economy into two sectors: the capital goods sector and the consumer goods sector. The model
demonstrates how long-term rate of growth of the economy would be the maximum if the share of
annual investment going into the capital goods sector increased progressively. However, the country
had the technical option of importing capital goods rather than produce them at home. This option was
ruled out as there was a shortage of foreign exchange reserves. The development of a domestic capital
goods industry would then have a double advantage. First, the country could save on its meagre foreign
exchange resources and secondly, it could reap the benefits of creating a base for industrial growth. It is
also important to note that certain critical components of infrastructure such as power and transport
networks cannot be imported. They must be erected domestically. Such items are known as ‘non-
tradables’. Each five year plan will have separate components for the public and private sectors giving out
targets of growth and investment. Thus, a state-led import-substituting industrialisation strategy with a
bias towards heavy industry through five year plans came to be established in India. In the following
section, we shall evaluate the career of this system of development planning in India. Our focus, again
in the spirit of political economy framework, will be on in sectors, institutions, social classes and the
state.

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4 Development Planning
We can identify the following four major components of the Nehru-Mahalanobis strategy:
1) The need for a comprehensive programme of import-substituting industrialisation to break out of the
syndrome of centuries of economic backwardness; 2) A conscious bias towards heavy industries; 3) The
commanding role of the state in a ‘mixed’ economy with a private sector; and 4) The need to carry out
the programme in a framework of five-year/annual plans.
Translating the first three strategic choices into implementable plans, a policy framework was needed.
First and foremost, the separate domains of operation for the state (public) sector and the private sector
were demarcated. For this, the policy instrument of reservation of industries for the two sectors was
implemented. According to the Industrial Policy Resolution 1956, the public sector was to cover, apart
from defence production, atomic energy and railways, the core industries of coal, iron and steel,
shipbuilding, communications, heavy machinery and heavy electrical. The private sector had an
exclusive schedule of industries. However, it could enter some areas reserved for the public sector
subject to a system of licensing. Small and village industries also had a list of items reserved for them.
The scope of industrial licensing was wide. In addition to regulation of entry into particular industries,
licensing covered capacity, production level, product mix and import of technology and capital goods.
There were wide-ranging import controls, covering quantitative restrictions and tariffs, to protect and
promote home industry. Controls on foreign exchange were also put in place. Planned industrial
development thus involved a plethora of controls.
The era of planning with the dominant role for the public sector and an elabourate system of controls,
licensing and permits operated for at least three and a half decades, viz. from 1956 to 1990. The career
of planning must be evaluated against the objectives set out for planning. It is important to take a
dispassionate and balanced view of the outcome of Nehru-Mahalanobis strategy. There were significant
achievements but also significant failures. Development planning helped the economy overcome some
constraints but it was also subject to new constraints.
In the first half of the twentieth century Indian economy suffered a near stagnation in growth. As
compared to this, real national income (at 1948-49 prices) grew at an average of four per cent per annum
during 1950-90. By itself, this was a significant achievement. A second major achievement was that a solid
foundation for industrial development was laid during this period. Apart from basic infrastructure, key
basic and capital goods industries were established. As envisaged by the plan strategy, the public sector
took the lead role in building this base. The private sector achieved a significant growth and
diversification in intermediate and consumer goods industries. This would not have been possible without
the foundation laid by the public sector. The size of the public sector, measured as its share in gross
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domestic product (GDP), rose from ten per cent in the early 1960’s to 24 per cent in the early 1990’s. The
economy built up production and technological competencies and manpower and skills in a host of
industrial lines. This implied that the country became self-reliant (i.e., not critically dependent on imports)
over a wide range of industrial goods and services.
There were two major failures of planning over a long haul of nearly four decades. First, the overall rate
of economic growth, respectable though it was historically, did not translate into an appreciable rise in
average standard of living in India. As against the overall growth of four per cent per annum, growth in
per capita income averaged only 1.8 per cent per annum. This was well below the plan targets. The
proximate reason for this was population growth. Following a decline in the death rate after
independence, population growth in India averaged 2.1 per cent per annum. Given the large base of
India’s population, this amounted to huge additions to the stock of population year after year.
Note: Above table presents decadal compound rates of growth since the early 1950s, for Gross Domestic
Product and per capita Net National Product at constant 1993-94 prices. It is evident that real GDP
growth rates increased to a higher level in the latter two decades. Increases in per capita income were
even more marked because of the fall in the rate of population growth.
A second major failure of development planning in India has been a very slow growth of employment.
Although Indian economy grew appreciably over the four decades under reference, Indians did not
benefit from either employment growth or productivity growth. The share of agricultural sector in GDP
steadily declined, but there was no corresponding decline in the concentration of workforce in
agriculture. The non-agricultural sectors of the economy, whose share in GDP rose sharply, did not
generate opportunities of productive employment on a scale necessary to ease pressure on agriculture.
This asymmetry between economic growth and employment growth holds the key to the paradox of
economic growth and persistence of absolute poverty in India. In particular, employment growth in

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manufacturing sector was extremely low. This is because, contrary to the original intent of Mahalanobis,
traditional and small scale industries have not been developed.
Note: India’s economic growth has been associated with some amount of structural change, although
perhaps not as much as might be expected. Investment rates have increased over time, which is only to
be expected in a developing economy achieving higher rates of per capita income, but the rate of
increase actually slowed down, until the last decade shows almost no change in the investment rate.
Meanwhile, the share of agriculture in GDP has fallen along predictable lines in the course of
development, but there has been little increase in the share of the secondary sector, which has not
changed at all since the early 1990s. Rather, the share of the tertiary sector has increased dramatically,
to the point where it now accounts for around half of national income.
The long-run growth of the economy at four per cent mentioned above is an average. It hides significant
fluctuations in growth year to year or plan to plan. There were also unexpected ‘shocks’ to the economy
induced by weather, wars, internal emergency and international developments. The lowest average
growth occurred in the Third Plan (1961-66). In this period India had wars with China and Pakistan, apart
from famines. This led to the suspension of planning for three consecutive years (1966-69). The Fourth
Plan (1969-74) saw India’s second war with Pakistan, the Bangladesh war and the First Oil Shock of 1973.
The Fifth Plan (1974-79) witnessed declaration of internal emergency and the Second Oil Shock. The
economy posted negative growth in 1979-80.
What led to the “secular stagnation” of the Indian economy observed in late-1960s and 1970s?
 The basic stimulus to growth during the early post independence years came from the State itself.
It provided domestic capitalists with a large once-for-all market for manufactures by widening and
intensifying trade protection and displacing imported goods from the domestic market. It sought to
expand that market through its current and capital expenditures and it supported the domestic
capitalist class by investing in crucial infrastructure sectors and directing household savings to
finance private investment through the creation of a number of industrial development banks.
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 One consequence of the persistence of asset and income inequality was that there were definite
limits to the expansion of the market for mass consumption goods in the country. Under these
circumstances, continuous growth in State spending was essential for the growth of the market
since it was the key element in whatever overall dynamism the system displayed.
 This strategy did pay dividends during the decade and a half immediately following Independence.
In this period rates of industrial growth were creditable by international standards, India built up a
diversified industrial base, and the public sector expanded rapidly enough to provide crucial
infrastructural services, industrial raw materials and capital goods to sustain industrial growth even
when the foreign exchange available to import these commodities was limited.
 By the mid-1960s, however, not only was the once-for-all stimulus offered by import substitution
exhausted, but the ability of the State to continue to provide the stimulus to growth was also
undermined by its inability to raise adequate resources. In consequence, aggregate growth
decelerated leading to the “secular stagnation” of the late-1960s and 1970s.
It would, however, be wrong to attribute the failures of planning to these unanticipated shocks. There
were specific constraints on economic growth that were operating and these were well known to
planners. There were four major constraints: food, savings, foreign exchange and demand. They were
also interrelated. Overcoming them required a policy framework beyond controls and licensing,
institutional changes and political mobilisation, apart from dealing with class interests and conflicts.We
must consider the constraints briefly.
A growing output of food grains is absolutely crucial in a situation of growing population and additional
purchasing power that plan expenditure generates. Yet a proliferation of small holdings, traditional
technologies of farm production under mainly rain-fed conditions and the specific characteristics of
agrarian markets meant that food grain output was not elastic with respect to demand. The consequent
rise in food prices fuels general inflation. In the 1950’s and early 1960’s India was dependent on food
imports. This was not a long-term solution.
To deal with the institutional aspects of agricultural backwardness, land reforms were vigorously debated
as a means to increase productivity and production in agriculture. However, comprehensive land
reforms, especially a radical redistribution of land, were a non-starter given that the Indian state was
dominated by landed interests. Consequently, India had only token land reforms in terms of abolition of
intermediaries and legal protection of tenants. A way-out to increased food production without radical
land reforms was found in new agricultural technology. Better known as Green Revolution technology,
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this involved short-duration high yielding varieties of seeds of rice and wheat, controlled application of
water through irrigation and chemical fertilizer. This yield-raising technology was initially adopted in the
more favourable regions of Punjab, Western Uttar Pradesh and deltaic regions and took a long time to
diffuse to other regions. This technology was combined with a policy of food procurement and buffer
stocks, along with minimum support prices. This policy did succeed in achieving self-sufficiency in food
grains but led to other contradictions in terms of regional and social inequalities, land degradation due
to intensive cropping and decline of water tables in several regions following extensive use of ground
water for irrigation. The agricultural policy also started a conflict of interest between industrialists and
large farmers whereby the relative prices of agricultural commodities and manufacturing, known as
intersectoral terms of trade, became a major political issue.
Impact of Failure of Land Reforms

 There were a number of features of India’s post-Independence growth strategy that structurally
limited the potential of the system. To start with, despite talk of land reform, of providing “land-to-
the-tiller” and curbing the concentration of economic power, little was done to attack or redress
asset and income inequality after Independence.
 The worst forms of absentee landlordism were done away with, but the monopoly of land remained
intact in most of rural India.
 Large mass of peasantry, faced with insecure conditions of tenure and often obtaining only small
shares of the outputs they produced, had neither the means not the incentive to invest.
 The prospect of increasing productivity and incomes in rural India (which was home to the majority
of its population) in order to stimulate domestic demand was therefore restricted. The absence of
any radical land redistribution meant that the domestic market, especially for manufactured goods,
remained socially narrowly based. It also meant that the growth of agricultural output, though far
greater than in the colonial period, remained well below potential.
 For the country as a whole, the benefits of such agricultural growth as did occur was largely confined
to a relatively narrow stratum of landlords-turned-capitalists and sections of rich peasants who had
improved their economic status. Meanwhile, industrial growth was not sufficiently employment
generating to create large increases in demand from this source.
A second constraint related to shortage of savings. The huge investment demands for new industrial
projects coupled with a low rate of saving in the economy and limited possibility of foreign investment
meant that the plans depended heavily on budget deficits. In the context of low elasticity of supply of
wage goods, especially food, and long gestations periods of industrial projects, this led to high rates of
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price inflation. The burden of taxation inevitably fell on indirect taxes. This contributed among other
things to increased inequality.
Thirdly, shortage of foreign exchange resources meant limited ability to import critical capital
equipment. The cost of imports also was high because of a fall in the exchange rate. At the same time,
Indian exports were not cost competitive in the international markets. All these cumulated into an
endemic pressure on account of balance of payments.
Finally, because of the various mechanisms operating to sustain mass poverty in the country, the
economy has faced a persistent problem of insufficiency of domestic demand. This is despite the fact
that India has a potentially huge home market given the size of her population. All these constraints
operated to ensure that economic growth and development in the era of planning was low and halting.
Planning could not get over the structural problems of poverty and unemployment.
This is despite some radical measures such as nationalisation of scheduled commercial banks in 1969 by
Indira Gandhi. Bank nationalisation did achieve expansion of banking facilities throughout the length and
breadth of the country, besides directing credit to agriculture and household and small industry. Such
measures were not by themselves sufficient to make a dent on mass poverty. In fact, by the late 1960’s
it became clear that two decades of planned economic development had not improved the general
levels of living of people. This was because planning had not delivered on expansion of productive
employment for labour at large. Indira Gandhi’s subsequent call for GaribiHatao (Banish Poverty) took a
turn towards various poverty alleviation programmes without reorienting industrialisation for growth of
productive employment.
5 The Regime of Economic Liberalisation

The year 1991 marks an important landmark in the history of Indian economy. For in this year, the country
adopted comprehensive macro-economic reforms. The reforms were to replace the Nehru-Mahalanobis
strategy with policies aimed at reducing the role of the state including the public sector, dismantling of
controls, opening up the economy to foreign trade, investment and finance. We survey the background,
the process and the general outcome of this ongoing programme of economic liberalisation.
The switch to a regime of economic liberalisation was driven by a crisis of balance of payments.
Government finances were in a bad shape thanks to regular fiscal deficits. The country’s foreign
exchange resources were at a record low. Early 1991, foreign reserves were not adequate to finance even
a month of imports. Inflation was high. There was political instability with frequent changes in
government. Internationally, the turbulent situation in the Middle East and the collapse of the USSR
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meant that the remittances from non-resident Indians declined sharply and the panic-stricken NRIs
actually sought to withdraw their foreign currency deposits in India, making our payments position even
more precarious. Driven by this acute payments crisis, India contracted a huge loan of 3.6 billion SDR
(Special Drawing Rights, an international reserve asset) from the International Monetary Fund (IMF) in
June 1991. However, the loan came with the condition that India, as loan recipient, would carry out
comprehensive economic reforms.
There was also an important shift in the intellectual climate worldwide at the time. The new approach
to managing the world economies, including the developing countries, recommended an enlarged role
for the market (as against the state) and deregulation of foreign trade and financial markets. Promoted
by the World Bank and the IMF, the approach came to be known as ‘Washington Consensus’. It replaced
the older ‘development consensus’ of the 1950’s which favoured pursuit of autonomous
industrialisation strategies including protection of domestic industry by the developing countries. The
change in the intellectual climate was also occasioned by the success stories of several East Asian
countries. Liberal economic policies followed earlier in the 1980’s by President Reagan in the US and
Prime Minister Thatcher in Britain lent political support to the shift. Not in the least, the decline of
Keynesian macro-economics and its replacement by orthodoxy in the academia and the policies of
central banks in the West were an influence. Meanwhile, there was a tremendous growth in global
finance capital which came to dominate trade in goods, services and investment. Multinational banks
and corporations controlling the global finance were mounting pressure on all economies to open up
their markets to it.
The programme of liberalisation adopted by India in 1991 had two major components: (1) stabilisation
and (2) structural adjustment. Both are based on the conviction that the economy works best when it is
left to market forces with minimal state interference.
The programme of stabilisation, recommended by the IMF, seeks to stabilise prices, budget and balance
of payments deficits and exchange rates in the short run. There are two instruments for achieving
stabilisation. The first is deflation, or reduction of aggregate demand, particularly through reduction in
government expenditure. Deflation is supposed to improve balance of payments through reduced
imports. Deflation would bring down the price level and therefore take the exchange rate to a realistic
level. The second component is monetary policy. A tight monetary policy and the resulting high interest
rates would attract private capital flows into the economy.
Structural adjustment, the other major component of the liberalisation programme, is recommended by
the World Bank. It is focused on long-run growth and efficiency. According to this, a developing country
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will place itself on to a high and efficient growth path when it aligns domestic prices with international
prices and its resources shift to private uses and exports. On this belief, the Bank would recommend
complete liberalisation of foreign trade in goods, investment, technology and finance. In addition, it
recommends deregulation and privatisation in the domestic economy.
The Fund-Bank prescriptions are thus a complete reversal of ‘development consensus’ and the Nehru-
Mahalanobis strategy.
The Fund-Bank package of reforms would obviously affect the interests of certain social classes while
they may damage the interests of other classes. Which section of India should bear the burden of
adjustment? This, of course, was a hard political choice. While India accepted the package in full, it had
to adopt a particular sequencing of reforms that would meet with least political resistance. The external
sector, domestic private industry and financial sector were favoured for reforms. Agriculture and the
public sector have hardly been touched so far.
On the external front, major reforms have been implemented. Practically all restrictions on trade have
been removed. Peak customs duties have been reduced. Capital flows of both direct and portfolio types
have been freed. The exchange rate is more or less market determined.
The new industrial policy of 1991 brought out far-reaching changes. Industrial licensing was effectively
abolished and limits on investment were softened through amendments to Monopolies and Restrictive
Trade Practices (MRTP) Act. The new policy permits mergers and acquisitions among companies.
Reforms in the financial sector spanned banking, government securities market and deficit financing
following the recommendations of the Committee of the Financial System, better known as the
Narasimham Committee. To improve profitability of banks, strict limits were placed on government
borrowing from banks. The policy envisaged reduction in the non-performing assets (NPAs),
improvement of capital adequacy of banks and reduction in cash reserve ratio (CRR) and statutory
liquidity ratio (SLR).
The post-reform, especially since 1996-97 saw a clear acceleration in the growth of Indian economy. The
same period saw a striking growth of the tertiary sector, while agriculture posted a steady decline as a
share of GDP. Growth of employment remains dismal. Deflationary policy has meant that government
expenditure, especially on capital account, has declined. This has especially affected agriculture and
created a scenario of agrarian distress. There was a spate of farmer suicides all over the country and
traditional, labour-intensive industries such as handlooms have suffered. Poverty ratio remained as high
as 37 per cent in 2004-05. Despite all the focus of reforms, the share of secondary sector, in particular
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manufacturing, in GDP has not shown a marked growth. The service sector growth, while it has been
impressive, has been concentrated on selected sub-sectors such as financial services, information
technology, real estate and public administration with limited opportunities for ordinary labour for
productive employment. The foreign exchange reserves, thanks to IT exports and large inflows of short
term capital, have improved. These gains have been lost, however, after the global economic crisis since
2008. This period has seen again a stress on balance of payments, high inflation combined with a tight
monetary policy and slippages on fiscal deficit targets. A paradox of the reform process for a long time
was that agriculture sector and the public sector remain untouched, excepting the policy of
disinvestment in public sector enterprises. The long-term objectives of economic development –
elimination of structural poverty, unemployment and inequality – remain unfulfilled after both the
major shifts in economic policy in independent India.
Even so, the very process of economic reforms faced a political constraint. The decline of hegemonic
national political parties and the emergence of coalitional politics after the 1980’s has led to a lack of
consensus on the pace and pattern of economic reforms. According to the dominant view, more through-
going reforms are needed to realise the full growth potential of the Indian economy.
6 Political Economy of Liberalisation

There is no doubt that, whatever the external pressures upon the state, the neoliberal reform process
could not have occurred without what was at first conditional and subsequently more unqualified
support extended to it by various elements of the domestic large capitalist class, along with other social
groups with substantial political voice, such as the middle classes. To some extent this can be explained
by the proliferation and diversification of the Indian capitalist class that took place during the years of
import-substituting growth and later. The emergence of new capitalists operating outside the traditional
bases of existing monopolistic groups, such as trade, finance, services of various kinds and operations
abroad by Non-Resident Indian groups, was an important factor. These new entrants sought to diversify
into manufacturing, and therefore welcomed deregulation and also, because of access to newer
technology, were less averse to import competition.
This created a direct challenge for several of the traditional monopolies, which had in the past been
protected by the barriers to entry created by the state’s industrial and trade policies. Such established
large capital found its relative position worsening in the economy over time. To reverse this decline, it
looked for new avenues, including expansion abroad through the export of capital and by moving into
areas previously reserved for small-scale entrepreneurs. So even the established big businesses that
were, to start with, the beneficiary of state controls of various kinds, began to chafe against these controls
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at a certain stage. Among certain other sections such as the agricultural capitalists the economic regime
change met with qualified approval. Rich farmers were hostile to the withdrawal of subsidised inputs
and directed credit, but still favourably anticipated the prospect of exporting at favourable prices in the
international market. This meant that a substantial section of domestic capital was willing to make
compromises with metropolitan capital, in the hope of being able to better its own prospects as a junior
partner, both in the domestic as well as in the international market. It was therefore in favour of import
liberalisation and a retreat from state interventionism.
In addition, there was support for economic liberalisation from other quarters: from new businessmen
involved in what were essentially “parallel market” transactions; a section of the top bureaucracy; and
perhaps more significantly, the large and politically powerful urban middle classes, along with more
prosperous rural farming groups, whose real incomes increased in the consumption-led boom of the
1980s. The latter groups actively began to desire access to international goods and gave potency to the
demands for trade liberalisation. And of course the technological and media revolutions, especially the
growing importance of satellite television, imparted a significant impetus to the international
demonstration effect, which further fuelled liberalising and consumerist demands. This process was
given further stimulus by the accelerated globalisation of a section of Indian society. Apart from the
media, one major instrument of this was the postwar Indian diaspora. The “NRI phenomenon”, by means
of which a qualitatively significant number of people from the Indian elites and middle classes actually
became resident abroad, contributed in no small measure to consumerist demands for opening up the
economy. The importance of Non-Resident Indians was not only because they were viewed as potentially
important sources of capital inflow, but also because of their close links with dominant groups within
the domestically resident society.
Despite (or rather, because of) the imbalanced and unequal economic growth pattern of these years,
there was a definite improvement in material conditions for a substantial section of the upper and
middle classes. Since these groups had a political voice that was far greater than their share of
population, they were able to influence economic strategy to their own material advantage. So, the local
elites and middle classes were not only complicit in the process of integration with the global economy,
but active proponents of the process.
This becomes clear even from data on the distribution of consumption expenditure by different fractile
groups. As the following chart suggests, in the 1990s and until 2002, the urban top 20 per cent of the
population (in terms of per capita household consumption categories) experienced increases in per capita
consumption which were the most rapid in post-Independence history. The other groups that also
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appear to have increased per capita consumption significantly were the next 40 per cent of the urban
population and the top 20 per cent of the rural population.
By contrast, the per capita consumption of the bottom 40 per cent of the rural population actually
declined over this same period. Such patterns not only give some idea of the spread of the “gainers” of
the economic growth process, but also indicate the political constituency for the liberalising reforms of
the 1990s.
While the neoliberal economic reform programme entailed a changed relationship of government
interaction with economy and polity, it was not a “withdrawal of the state” so much as a change in the
character of the association. Thus, while the state effectively reneged on many of its basic obligations in
terms of providing its citizens access to minimum food, housing, health and education, it was still the
case that state actions were essential in determining the way in which markets functioned and the ability
of capital to pursue its different goals. Government and bureaucracy remained crucial to economic
functioning; in fact the overall context became one of greater centralisation of economic and financial
power. Many had believed that a “retreat of the state” and the exposure of the economy to the discipline
of the market would cut out arbitrariness of decision-making and the corruption that is inevitably
associated with it. What happened instead in the Indian economy during this period of neoliberal
structural adjustment was an increase in the levels of corruption, cronyism, and arbitrariness to
unprecedented levels. For example, the privatisation exercise became another vehicle of primitive
accumulation by private capital as it acquired public assets cheaply. With the wider corruption that
increasingly pervaded the system, the “discipline of the market” proved to be a chimera.
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The increased income inequalities over this period have accentuated certain longerterm structural
features of Indian society, whereby more privileged groups have sought to perpetuate and increase their
control over limited resources and channels of income generation in the economy. This in turn has
involved the effective economic disenfranchisement of large numbers of people, in rural India as well as
among the urban poor. These concomitant trends of greater economic and financial centralisation and
increased income inequality in turn operated to aggravate various regional, fissiparous and community-
based tensions. While the roots of such tensions are obviously complex, these conflicts both emerged
from the prevailing material contradictions and contributed to them.
This situation was neither inevitable nor permanent. The economic context of India was one in which the
need to rethink, modify and revise at least some of the economic strategy of the recent past, was
becoming increasingly obvious. In particular, the supposed emphasis on fiscal discipline, which had not
been reflected so much in actual declines in the fiscal deficit to GDP ratios, but in compression of
important productive public expenditure with high linkage and multiplier effects, required reversal. The
neglect of important policy issues with respect to agriculture could not continue. In addition to greater
emphasis on public expenditure with high direct and indirect effects on employment generation,
addressing the issue of higher resource mobilisation from the rich had become urgent. Further, it was
necessary to counter some of the adverse effects of trade liberalisation on employment, apart from
more directly addressing the basic structural issues of asset and income inequality and the persistence
of low-productivity employment mentioned above, which remained so significant in the Indian economy.
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Changes in Industrial &

Labour Policy,
Industrial Developments
in India

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Contents
1 Industrial Policy Introduction .................................................................................................................5
2 Evolution of India’s Industrial Policy ......................................................................................................6
2.1 Industrial Policies of India prior to Independence..........................................................................6
2.1.1 India’s Economic Activity before Independence .....................................................................6
2.1.2 Situation of India during the Colonial Period ..........................................................................6
2.1.3 Industrial Policies Formulated .................................................................................................7
2.2 Industrial Policies of India after Independence up to 1990............................................................7
2.2.1 Industrial Policy Resolution, 1948 ...........................................................................................7
2.2.2 Industries (Development and Regulation) Act (IDRA), 1951 ...................................................8
2.2.3 Industrial Policy Resolution, 1956 ...........................................................................................8
2.2.4 Monopolies Commission .........................................................................................................9
2.2.5 Industrial Policy Statement, 1973..........................................................................................10
2.2.6 Industrial Policy Statement, 1977..........................................................................................10
2.2.7 Industrial Policy, 1980............................................................................................................11
2.2.8 Industrial Policy Resolution, 1985 & 1986 .............................................................................11
2.3 New Industrial Policy of 1991 .......................................................................................................12
2.3.1 Objectives of the New Industrial Policy .................................................................................13
3 Disinvestment .......................................................................................................................................15
3.1 Types of Disinvestment .................................................................................................................16
3.1.1 Token Disinvestment .............................................................................................................16
3.1.2 Strategic Disinvestment .........................................................................................................17
3.2 Comprehensive Management of Public Assets ............................................................................17
4 Micro, Small and Medium Enterprises in India ....................................................................................18
4.1 Why Small Scale Industries are Important? ..................................................................................18
5 Special Economic Zones (SEZ) ..............................................................................................................19
5.1 The Special Economic Zone Act 2005 ...........................................................................................20
5.2 Objectives of SEZ ...........................................................................................................................20
5.3 Salient Features.............................................................................................................................20
6 National Investment and Manufacturing Zones (NIMZ) ......................................................................22
6.1 Difference between SEZ & NIMZ ..................................................................................................22
6.2 Size ................................................................................................................................................22
6.3 Who will own NIMZ? .....................................................................................................................22
7 National Manufacturing Policy .............................................................................................................22

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7.1 Important Provisions .....................................................................................................................22

7.2 How the policy would achieve its objectives? ..............................................................................23
7.3 Which industry verticals will be given special attention?.............................................................23
7.4 Formulation of a New Industrial Policy.........................................................................................24
7.5 What are the areas that would be covered in this policy? ...........................................................24
8 Industrial Corridors...............................................................................................................................25
8.1 What is an Industrial Corridor? .....................................................................................................25
8.2 Five Industrial/Economic Corridors ..............................................................................................25
8.2.1 Delhi Mumbai Industrial Corridor (DMIC) .............................................................................25
8.2.2 Chennai-Bengaluru Industrial Corridor (CBIC) .......................................................................26
8.2.3 Bengaluru-Mumbai Industrial Corridor (BMIC) .....................................................................26
8.2.4 Vizag-Chennai Industrial Corridor (VCIC)...............................................................................26
8.2.5 Amritsar-Kolkata Industrial Corridor (AKIC) ..........................................................................26
8.3 National Industrial Corridor Development And Implementation Trust (NICDIT) .........................26
9 What are Dedicated Freight Corridors (DFC)? .....................................................................................27
9.1 Objectives of DFC ..........................................................................................................................27
9.2 Western Dedicated Freight Corridor and Eastern Dedicated Fright Corridor ..............................27
10 Doing Business Report ......................................................................................................................28
10.1 Why this report? ...........................................................................................................................28
10.2 What does it measure? .................................................................................................................29
10.3 The Ease of Doing Business Index .................................................................................................29
10.4 Distance to Frontier scores ...........................................................................................................30
10.5 What is the difference between the Ease of Doing Business Index and DTF score? ...................30
10.6 Ease of Doing Business Rankings in India .....................................................................................30
11 Indices/Surveys to Measure Industrial Performance in India ..........................................................31
11.1 Index of Industrial Production ......................................................................................................31
11.1.1 IIP Index Components ............................................................................................................31
11.2 Index of Eight Core Industries .......................................................................................................31
11.3 Annual Survey of Industries ..........................................................................................................32
12 Improvement of Business Environment: e-Biz Project .....................................................................33
12.1 Components ..................................................................................................................................33
12.2 Foreign Direct Investment in India................................................................................................34
13 Labour Policy.....................................................................................................................................34
13.1 Background ...................................................................................................................................34

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13.2 Constitutional Status of Labour Jurisdiction .................................................................................35

13.3 Legislative Measures .....................................................................................................................35
13.3.1 Code on Wages, 2019 ............................................................................................................37
13.3.2 Industrial Relations Code, 2020 .............................................................................................38
13.3.3 Code on Social Security, 2020................................................................................................41
13.3.4 Occupational Safety, Health and Working Conditions Code, 2020 .......................................43
13.4 Institutions ....................................................................................................................................44
13.4.1 Office of Chief Labor Commissioner ......................................................................................44
13.4.2 Labor Bureau..........................................................................................................................45
13.4.3 Employee State Insurance Corporation – Autonomous Statutory Organization ..................45
13.4.4 Employee Provident Fund Organization – Autonomous Statutory Organization .................45
13.4.5 International Labor Organization ..........................................................................................45
13.5 Why are the labour reforms required in India? ............................................................................45
13.5.1 Low employment ...................................................................................................................45
13.5.2 Benefits limited to Organised Sector only .............................................................................46
13.5.3 Multiplicity, Complexity and Rigidities ..................................................................................46
13.5.4 Ease of Doing Business is affected .........................................................................................46
13.5.5 Jobless Growth.......................................................................................................................46
13.5.6 Skill Development ..................................................................................................................46
13.5.7 Global Competitiveness .........................................................................................................47
13.6 What are the reforms needed? ....................................................................................................47
13.6.1 Labor to be shifted to ‘State List’...........................................................................................47
13.6.2 Simplification of archaic laws ................................................................................................47
13.6.3 Separate independent judicial system ..................................................................................47
13.6.4 Improving Enforcement of Labour Laws ...............................................................................47
13.6.5 Dispute Resolution.................................................................................................................47
13.6.6 Digitization .............................................................................................................................48
13.6.7 Insurance Mechanism............................................................................................................48
1 Industrial Policy Introduction

 The industrial policy means the procedures, principles, policies, rules and regulations which control
the industrial undertaking of the country and pattern of industrialization.
 It explains the approach of Government in context to the development of industrial sector.

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 In India the key objective of the economic policy is to achieve self-reliance in all sectors of the
economy and to develop socialistic pattern of society.
 The industrial policy in the pre-reform period i.e. before 1991 put greater emphasis on the state
intervention in the field of industrial development.
 These policies no doubt have resulted into the creation of diversified industrial structure but caused
a number of inefficiencies, distortions and rigidities in the system.
 Thus, during late 70s and 80s, Government initiated liberalization measures in the industrial policy
framework.
 The drastic liberalization measures were however, carried out in 1991.
2 Evolution of India’s Industrial Policy
2.1 Industrial Policies of India prior to Independence
2.1.1 India’s Economic Activity before Independence

 India was never an industrially developed country prior to independence.
 It was an agrarian country where in handicrafts attained supremacy unmatched anywhere else in the
world.
 India with abundance of natural wealth had attained excellence in handicrafts.
 There are very few lines of economic activity which became traditional in nature and could be
included under the products produced under the factory system of 19th and 20th century.
 For instance, silk manufacturing, utensil manufacturing, wood works, some products under
pharmaceuticals etc. could be categorized as industrial activity.
2.1.2 Situation of India during the Colonial Period

 During the colonial period, industrial policies and economic policies were shaped by the British
Government in favour of British interests.
 The tariff policy pursued by British rulers in India was based on the principal of one-way free trade
while the Indian interest for industrialization in India remained deliberately neglected.
 Interestingly, imports were tariff free whereas the exports were not duty free.
 This one-sided free trade in raw material and semi and manufactured items was the established
norm which very partially was industry oriented, but the industrialization could not take place in
India. It took place in England.

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2.1.3 Industrial Policies Formulated

 Though the British Government established Department of Commerce and Industry in 1905 but the
activities pursued through this department favored industrial activity in England.
 Thereafter, the prevailing Government established board of Scientific and Industrial Research in
1940 but not much could come out of it.
 In 1945, the government had announced an industrial policy but this policy could never see the light.
 The industrial policy drafted in 1945 was referred as the Industrial Policy of 1946 also but since the
said policy was drafted in haste so it could not satisfy the new leaders of independent country.
Concept Check
Q. India could not develop a sound industrial base under the colonial rule because:
(a) India was reduced to the status of a mere exporter of important raw materials
(b) India was turned into a sprawling market for the finished products
(c) Decline of the indigenous handicraft industries
(d) Increasing imports of cheap manufactured goods from Britain
Answer: E
2.2 Industrial Policies of India after Independence up to 1990
2.2.1 Industrial Policy Resolution, 1948

 The first important industrial policy statement was made in the Industrial policy Resolution (IPR), 1948.
 The main thrust of IPR, 1948 was to lay down the foundation of mixed economy whereby the private
and public sector was accepted as important components in the development of industrial economy
of India.
The major highlights of the policy are:
 Some of the important industries were put under the Central List such as coal, power, railways,
civil aviation, arms and ammunition, defence, etc.
 Some other industries (usually of medium category) were put under a State List such as paper,
medicines, textiles, cycles, rickshaws, two-wheelers, etc.
 Rest of the industries (not covered by either the central or the state lists) were left open for
private sector investment—with many of them having the provision of compulsory licencing.
 IPR, 1948 gave public sector vast area to operate.
 Government took the role of catalytic agent of industrial development.
 The resolution assigned complementary role to small-scale and cottage industries.

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 The foreign capital which was seen with suspect in the pre-independent era was recognized as an
important tool to speedup up industrial development.
2.2.2 Industries (Development and Regulation) Act (IDRA), 1951

 IDRA, 1951 is the key legislation in the industrial regulatory framework.
 IDRA, 1951 gave powers to the government to regulate industry in a number of ways.
 The main instruments were the regulation of capacity (and hence output) and power to control prices.
 It specified a schedule of industries that were subject to licensing.
 Even the expansion of these industries required prior permission of the government which means
the output capacity was highly regulated.
 The Government was also empowered to control the distribution and prices of output produced by
industries listed in the schedule.
 The IDR Act gave very wide powers to the Government.
 This resulted in more or less complete control by the bureaucracy on the industrial development of
the country.
The main provisions of the IDRA, 1951 were
 All existing undertakings at the commencement of the Act, except those owned by the Central
Government were compulsorily required to register with the designated authority.
 No one except the central Government would be permitted to set up any new industrial undertaking
“except under and in accordance with a licence issued in that behalf by the Central Government.”
 Such a license or permission prescribed a variety of conditions, such as, location, minimum standards
in respect of size and techniques to be used, which the Central Government may approve.
 Such licenses and clearances were also required in cases of ‘substantial expansion’ of an existing
industrial undertaking.
2.2.3 Industrial Policy Resolution, 1956

IPR, 1956 is the next important policy statement. The important provisions are as follows:
 New classification of Industries: IPR, 1956 divided the industries into the following three categories:
 Schedule A industries: This schedule had 17 industrial areas in which the Centre was given
complete monopoly. The industries set up under this provision were known as the Central Public
Sector Undertakings (CPSUs) later getting popularity as ‘PSUs’. Though the number of industries
were only 17, the number of PSUs set up by the Government of India went to 254 by 1991. These
included those industrial units too which were taken over by the government between 1960 to
1980 under the nationalisation drives. These industries belonged to Schedules B and C (other than
Schedule A).
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 Schedule B industries: There were 12 industrial areas put under this schedule in which the state
governments were supposed to take up the initiatives with a more expansive follow up by the
private sector. This schedule also carried the provisions of compulsory licencing. It should be
noted here that neither the states nor the private sector had monopolies in these industries
unlike Schedule A, which provided monopoly to the Centre.
 Schedule C industries: All industrial areas left out of Schedules A and B were put under this in
which the private enterprises had the provisions to set up industries. Many of them had the
provisions of licencing and have necessarily to fit into the framework of the social and economic
policy of the state and were subject to control and regulation in terms of the Industries
Development and Regulation (IDR) Act and other relevant legislations.
Thus, the IPR, 1956 emphasized the mutual existence of public and private sector industries.
 Encouragement to Small-scale and Cottage Industries: In order to strengthen the small-scale sector
supportive measures were suggested in terms of cheap credit, subsidies, reservation etc.
 Emphasized on Reduction of Regional Disparities: Fiscal concessions were granted to open industries
in backward regions. Public sector enterprises were given greater role to develop these areas.
The basic rationale of IPR, 1956 was that the state had to be given primary role for industrial
development as capital was scarce and entrepreneurship was not strong. The public sector was enlarged
dramatically so as to allow it to hold commanding heights of the economy.
Concept Check
Q. Which of the following statements is/are correct about the Industrial Policy Resolution 1956?
(a) The policy tried to build the basis for a capitalist pattern of society.
(b) The purpose of this policy was to promote regional equality.
(c) Private sector was given primary role for industrial development.
Answer: B
2.2.4 Monopolies Commission

 In April 1964, the Government of India appointed a Monopolies Inquiry Commission “to inquire into
the existence and effect of concentration of economic power in private hands.”
 The Commission looked at concentration of economic power in the area of industry.
 On the basis of recommendation of the commission, Monopolistic and Restrictive Trade Practices Act
(MRTP Act), 1969 was enacted. The act sought to control the establishment and expansion of all

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industrial units that have asset size over a particular limit. The firms with assets of ₹25 crore or more
were put under obligation of taking permission from the Government of India before any expansion,
greenfield venture and takeover of other firms (as per the MRTP Act). Such firms came to be known
as the ‘MRTP Companies’. The upper limit (known as the ‘MRTP limit’) for such companies was
revised upward to ₹50 crore in 1980 and ₹100 crore in 1985.
2.2.5 Industrial Policy Statement, 1973

 A new classificatory term i.e., core industries was created. The industries which were of fundamental
importance for the development of industries were put in this category such as iron and steel,
cement, coal, crude oil, oil refining and electricity. In the future, these industries came to be known
as basic industries, infrastructure industries in the country.
 Out of the six core industries defined by the policy, the private sector may apply for licences for the
industries which were not a part of schedule A of the Industrial Policy, 1956. The private firms eligible
to apply for such licences were supposed to have their total assets at ₹20 crore or more.
 Some industries were put under the reserved list in which only the small or medium industries could
be set up.
2.2.6 Industrial Policy Statement, 1977

The Industrial Policy Statement of 1977 was chalked out by a different political set up from the past with
a different political fervour—the dominant voice in the government was having an anti-Indira stance
with an inclination towards the Gandhian-socialistic views towards the economy. We see such elements
in this policy statement:
The main elements of the new policy were:
 Foreign investment in the unnecessary areas were prohibited (opposite to the IPS of 1973 which
promoted foreign investment via technology transfer in the areas of lack of capital or technology). In
practice, there was a complete ‘no’ to foreign investment.
 Development of Small-Scale Sector:
 The District Industries Centres (DICs) were set to promote the expansion of small and cottage
industries at a mass scale.
 Restrictive Approach towards Large Business Houses

 Expanding Role of Public sector
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2.2.7 Industrial Policy, 1980
The year 1980 saw the return of the same political party at the Centre. The new government revised the
Industrial Policy of 1977 with few exceptions in the Industrial Policy Resolution, 1980. Foreign investment
via the technology transfer route was allowed again (similar to the provisions of the IPS, 1973).
 The industrial policy 1980 emphasized that the public sector is the pillar of economic infrastructure
for reasons of its greater reliability, for the large investments required and the longer gestation
periods of the projects crucial for economic development.
 The IPR, 1956 forms the basis of this statement.
The important features of the policy were:
 Effective Management of Public Sector: The policy emphasized the revival of efficiency of public
sector undertaking.
 Liberalization of Industrial licensing:
 Redefining Small-Scale Industries

Industrial policy, 1980 focused attention on the need for promoting competition in the domestic market,
technological up gradation and modernization. The policy laid the foundation for an increasingly
competitive export based industries and for encouraging foreign investment in high-technology areas.
2.2.8 Industrial Policy Resolution, 1985 & 1986

The industrial policy resolutions announced by the governments in 1985 and 1986 were very much similar
in nature and the latter tried to promote the initiative of the former. The main highlights of the policies
are:
 Foreign investment was further simplified with more industrial areas being open for their entries. The
dominant method of foreign investment remained as in the past, i.e., technology transfer, but now
the equity holding of the MNCs in the Indian subsidiaries could be upto 49 per cent with the Indian
partner holding the rest of the 51 per cent shares.
 The ‘MRTP Limit’ was revised upward to ₹100 crore—promoting the idea of bigger companies.
 The provision of industrial licencing was simplified. Compulsory licencing now remained for 64
industries only.
 High level attention on the sunrise industries such as telecommunication, computerisation and
electronics.
 Modernisation and the profitability aspects of public sector undertakings were emphasised.
 Industries based on imported raw materials got a boost.
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 Under the overall regime of FERA, some relaxations concerning the use of foreign exchange was
permitted so that essential technology could be assimilated into Indian industries and international
standard could be achieved.
 The agriculture sector was attended with a new scientific approach with many technology missions
being launched by the government.
These industrial provisions were attempted at liberalising the economy without any slogan of ‘economic
reforms’. The government of the time had the mood and willingness of going for the kind of economic
reforms which India pursued post-1991 but it lacked the required political support.
The industrial policies conjoined with the overall micro-economic policy followed by the government had
one major loophole that it was more dependent on foreign capital with a big part being costlier ones.
Once the economy could not meet industrial performance, it became tough for India to service the
external borrowings—the external events (the Gulf war, 1990–91) vitiated the situation, too. Finally, by
the end of 1980s India was in the grip of a severe balance of payment crisis with higher rate of inflation
(over 13 per cent) and higher fiscal deficit (over 8 per cent). The deep crisis put the economy in a financial
crunch, which made India opt for a new way of economic management in the coming times.
Concept Check
Q. In context of the Indian economy, which of the following correctly defines the economic structure
before 1991 reforms?
(a) Closed economy with high private sector participation.
(b) Closed economy with high public sector participation.
(c) Open economy with high private sector participation.
(d) Open economy with high public sector participation.
Answer: B
2.3 New Industrial Policy of 1991

 With the gradual liberalization of the 1956 Industrial policy in the mid-eighties the tempo of
industrial development started picking up.
 But the industry was still feeling the burden of many controls and regulations.
 For a faster growth of industry, it was necessary that even these impediments should be removed.
 The new government by Shri Narasimha Rao, which took office in June 1991, announced a package of
liberalization measures under its Industrial Policy on July 24, 1991.
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Economic Background of New Industrial Policy, 1991:

India was faced with severe balance of payment crisis by June 1991. Basically, in early 1990s, there were
inter-connected set of events, which were growing unfavourable for the Indian economy:
 Due to the Gulf War (1990–91), the higher oil prices were rapidly depleting India’s foreign reserves.
 Sharp decline in the private remittances from the overseas Indian workers in the wake of the Gulf
War, specially from the Gulf region.
 Inflation peaking at nearly 17 per cent.
 The gross fiscal deficit of the Central Government reaching 8.4 per cent of the GDP.
 By the month of June 1991, India’s foreign exchange had declined to just two weeks of import
coverage.
2.3.1 Objectives of the New Industrial Policy

The broad objectives of New Industrial Policy are as follows:
 Liberalizing the industry from the regulatory devices such as licenses and controls.
 Enhancing support to the small-scale sector.
 Increasing competitiveness of industries for the benefit of the common man.
 Ensuring running of public enterprises on business lines and thus cutting their losses.
 Providing more incentives for industrialization of the backward areas, and
 Ensuring rapid industrial development in a competitive environment.
De-reservation of the Industries

The industries which were reserved for the Central Government by the IPR, 1956, were cut down to
only eight. In coming years many other industries were also opened for private sector investment.
De-licensing of the Industries
The number of industries put under the compulsory provision of licencing (belonging to Schedules B
and C as per the IPR, 1956) were cut down to only 18. Reforms regarding the area were further
followed and presently there are only four industries which carry the burden of compulsory licencing:
 Aero space and defence related electronics

 Gun powder, industrial explosives and detonating fuse
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 Dangerous chemicals
 Tobacco, cigarette and related products
Abolition of the MRTP Limit
The MRTP limit was ₹100 crore so that the mergers, acquisitions and takeovers of the industries could
become possible. In 2002, a competition Act was passed which has replaced the MRTP Act. In place
of the MRTP commission, the Competition Commission has started functioning (though there are still
some hitches regarding the compositional form of the latter and its real functions and jurisdictions).
Promotion to Foreign Investment
Functioning as a typical closed economy, the Indian economy had never shown any good faith
towards foreign capital. The new industrial policy was a pathbreaking step in this regard. Not only the
draconian FERA was committed to be diluted, but the government went to encourage foreign
investment (FI) in both its forms—direct and indirect.
The direct form of FI was called as the foreign direct investment (FDI) under which the MNCs were
allowed to set up their firms in India in the different sectors varying from 26 per cent to 100 per cent
ownership with them—Enron and Coke being the flag-bearers. The FDI started in 1991 itself.
The indirect form of foreign investment (i.e., in the assets owned by the Indian firms in equity capital)
was called the portfolio investment scheme (PIS) in the country, which formally commenced in 1994.
Under the PIS the foreign institutional investors (FIIs) having good track record are allowed to invest
in the Indian security/stock market. The FIIs need to register themselves as a stock broker with SEBI.
It means India has not allowed individual foreign investment in the security market still, only
institutional investment has been allowed till now.
FERA Replaced by FEMA
The government committed in 1991 itself to replace the draconian FERA with a highly liberal FEMA,
which same into effected in the year 2000–01 with a sun-set clause of two years.
Location of Industries
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Related provisions were simplified by the policy which was highly cumbersome and had time-consuming
process. Now, the industries were classified into ‘polluting’ and ‘non-polluting’ categories and a highly
simple provision deciding their location was announced:
 Non-polluting industries might be set up anywhere.

 Polluting industries to be set up at least 25 kms away from the million cities.
Compulsion of Phased Production Abolished
With the compulsion of phased production abolished, now the private firms could go for producing as
many goods and models simultaneously. Now the capacity and capital of industries could be utilised to
their optimum level.
Concept Check
Q. Which of the following reforms were undertaken with the New Industrial Policy, 1991?
(a) Limitations on monopoly of public sector.
(b) Introduction of a policy of automatic approval for FDI.
(c) Abolition of industrial licensing in select sectors.
Answer: D
3 Disinvestment
Disinvestment is the process of ‘selling ownership’ in a company. Technically, the term may be used in
case of any company (i.e., privately-owned company), but in practice, it is used only in case of a
government-owned company. Disinvestment commenced in the country with three inter-related co-
ordinates—
 As a tool of public sector reforms;

 As a part of the economic reform process (i.e., as part of the de-reservation of industries); and
 As a tool of resource mobilisation for budgetary needs.
The approach towards public sector reforms in India has been much more cautious than that of the other
developing countries. India did not follow the radical solution to it—under which outright privatisation
of commercially viable PSUs is done and the unviable ones are completely closed.
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There was an emphasis on increasing functional autonomy of public sector organisations to improve their
efficiency in the 1980s in India as part of the public sector reforms. Once the process of economic reforms
started in the early 1990s, disinvestment became a part of the public sector reforms.
The government started the process of disinvestment in 1991 itself. In 1997 the government government
did set up a Disinvestment Commission to advice upon the various aspects of the disinvestment process.
The financial year 1999–2000 saw a serious attempt by the government to make disinvestment a political
process to expedite the process of disinvestment in the country—first a Disinvestment Department and
later a full-fledged Ministry of Disinvestment was set up (dismantled in 2004).
Concept Check
Q. Which of the following is not one of the reasons for Government of India disinvesting its equity in
the Central Public Sector Enterprises?
(a) Bring about reforms in the public sector.
(b) Give space to the private sector for functioning.
(c) Generate resources for budgetary needs.
(d) The Government intends to use the revenue earned from the disinvestment mainly to pay back the
external debt.
Answer: D
3.1 Types of Disinvestment
3.1.1 Token Disinvestment

Disinvestment started in India with a high political caution—in a symbolic way known as the ‘token’
disinvestment (presently being called as ‘minority stake sale’). The general policy was to sell the shares
of the PSUs maximum upto the 49 per cent (i.e., maintaining government ownership of the companies).
But in practice, shares were sold to the tune of 5–10 per cent only. This phase of disinvestment though
brought some extra funds to the government (which were used to fill up the fiscal deficit considering the
proceeds as the ‘capital receipts’) it could not initiate any new element to the PSUs, which could enhance
their efficiency. It remained the major criticism of this type of disinvestment, and experts around the
world started suggesting the government to go for it in the way that the ownership could be transferred
from the government to the private sector. The other hot issue raised by the experts was related to the
question of using the proceeds of disinvestment.
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3.1.2 Strategic Disinvestment

In order to make disinvestment a process by which efficiency of the PSUs could be enhanced and the
government could de-burden itself of the activities in which the private sector has developed better
efficiency (so that the government could concentrate on the areas which have no attraction for the private
sector such as social sector support for the poor masses), the government initiated the process of strategic
disinvestment. The government classifying the PSUs into ‘strategic’ and ‘non strategic’ announced in
March 1999 that it will generally reduce its stake (share holding) in the ‘non-strategic’ public sector
enterprises (PSEs) to 26 per cent or below if necessary and in the ‘strategic’ PSEs (i.e., arms and
ammunition; atomic energy and related activities; and railways) it will retain its majority holding. There
was a major shift in the disinvestment policy from selling small lots of share in the profit-making PSUs
(i.e., token disinvestment) to the strategic sale with change in management control both in profit and
loss-making enterprises. The essence of the strategic disinvestment was—
 The minimum shares to be divested will be 51 per cent

 The wholesale sale of shares will be done to a ‘strategic partner’ having international class experience
and expertise in the sector.
3.2 Comprehensive Management of Public Assets

Since 2016, disinvestment has become a part of the broader policy known as the comprehensive
management of public assets. Before announcing the current disinvestment policy, the Government
changed the name of the existing Department of Disinvestment to the Department of Investment and
Public Asset Management (DIPAM) (under Ministry of Finance) along with its mandate from taking care
of disinvestment to Comprehensive management of the Government’s investment in the CPSEs. Under
it, the following ‘four actions’ are to be taken in regard to the CPSEs:
 Achieving optimum return and accelerating growth.

 Leveraging assets by capital and financial restructuring.
 Improving investors’ confidence through capital market exposure.
 Rationalizing decision-making process for efficient management.
Concept Check
Q. Which of the following reforms were undertaken with the New Industrial Policy, 1991?
(a) Limitations on monopoly of public sector.
(b) Introduction of a policy of automatic approval for FDI.
(c) Abolition of industrial licensing in select sectors.
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Answer: D
4 Micro, Small and Medium Enterprises in India

Small industries have always had an important place in the overall planning framework in India. In the
industrial policy resolutions, the small sector was given special role for creating employment with low
capital investment. The small industries contributed to overall growth and have provided employment
to the relatively unskilled, uneducated and vulnerable sections of the society. The small-scale industries
were earlier known as village and small enterprises, but in 2006, a new legislation Micro, Small and
Medium Enterprises Development Act was enacted which defined Micro, Small and Medium enterprises.
The medium enterprises were introduced for the first time in 2006.
After 14 years since the MSME Development Act came into existence in 2006, a revision in MSME
definition was announced in the Atmnirbhar Bharat package on 13th May, 2020. As per this
announcement, the definition of Micro manufacturing and services units was increased to Rs. 1 Crore of
investment and Rs. 5 Crore of turnover. The limit of small unit was increased to Rs. 10 Crore of investment
and Rs 50 Crore of turnover. Similarly, the limit of medium unit was increased to Rs. 20 Crore of
investment and Rs. 100 Crore of turnover. The Government of India on 01.06.2020 decided for further
upward revision of the MSME Definition. For medium Enterprises, now it will be Rs. 50 Crore of investment
and Rs. 250 Crore of turnover.
Category Old Capital Old Turnover New Capital New Turnover

Micro 25 Lakh 10 Lakh 1 Crore 5 Crore
Small 5 Crore 2 Crore 10 Crore 50 Crore
Medium 10 crore 5 Crore 50 Crore 250 Crore
4.1 Why Small Scale Industries are Important?

The Industrial Policy Resolution of 1956 states that “They (small scale industries) provide immediate
large-scale employment; they offer a method of ensuring a more equitable distribution of the national
income and they facilitate an effective mobilisation of resources of capital and skill which might otherwise
remain unutilised.”
Employment argument: According to Karve Committee 1955 – “The Principle of self-employment is at

least as important to a successful democracy as that of self-government.” It is assumed here that small
enterprises are more labour intensive. And therefore, they create more employment per unit of capital
used.
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Equality Argument: It suggests that the small enterprises are more dispersed in the country, and hence
the income generated by them is dispersed more widely in the community than the income generated
in a few large enterprises. This implies that income benefit of small enterprise is derived by a large
population whereas the large enterprises encourage more concentration of economic growth.
Latent Resources Argument: This argument is based on the assumption that the small enterprises are
able to “use” the otherwise unutilised resources. The unutilised resources can be the small hoarded
wealth, small entrepreneurial activity, etc. This way the small enterprises are encouraged. And this
introduces a dynamic element in the economy.
Decentralised Argument: It is generally argued that the small enterprises are based in small towns and in
the countryside. Whereas, the large enterprises are mostly located in metropolitan cities. This being the
case, the small enterprises bring about the regional balances in the country.
Concept Check
Q. Consider the following statements:
Small-scale industries are, in most cases, not as efficient and competitive as the large-scale ones. Yet
the Government provides preferential treatment and reservations in a range of products to the small
firms because small-scale industries:
1. provide higher employment on a per unit capital deployment basis
2. promote a regional dispersion of industries and economical activities
3. have performed better in export of manufactured products than the large scale ones
4. provide jobs to low-skill workers, who otherwise may not find employment avenues elsewhere
Which of the above statements is/are correct?
(a) 1 and 4
(b) 1 and 2
(c) 2 and 3
(d) 3 and 4
(e) All of the above statements are correct
Answer: B
5 Special Economic Zones (SEZ)

Government of India first introduced the concept of SEZ in the export import policy 2000 with a view to
provide an internationally competitive and hassle-free environment for exports.
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SEZ refers to a specially demarcated territory usually known as ‘deemed foreign territory’ with tax
holidays, exemption from duties for export and import, world level economic and social infrastructure
for production and augmentation of export activities within the territory along with facilities like
abundant and relatively cheap labour, strategic location and market access etc.
5.1 The Special Economic Zone Act 2005

The Act provides the umbrella legal framework, covering all important legal and regulatory aspects for
setting up of SEZ’s as well units operating in SEZ.
5.2 Objectives of SEZ

 To attract Foreign Direct Investment (FDI),
 Earn foreign exchange and contribute to exchange rate stability,
 Boost the export sector especially non-traditional exports,
 To create employment opportunities,
 Introduce new technology,
 Develop backward regions etc. by stimulating sectors as electronics, information technology, R & D,
tourism, infrastructure and human resource development that are regarded as strategically important
to the economy.
5.3 Salient Features

 A SEZ is a designated duty-free enclave to be treated as foreign territory for the purpose of trade
operations and duties and tariffs.
 A SEZ does not require a license for imports.
 The units must become net foreign exchange earners within 3 years.
 SEZ are allowed manufacturing, trading and service activities.
 Full freedom for subcontracting.
 The domestic sales from the SEZ are subject to full custom duties and import policy is in force, when
they sell their produce to domestic markets.
 There was no routine examination by the custom authorities.
 The corporation in SEZs will not have to pay any income tax on their profits for the first five years
and only 50% of the tax for 2 more years thereafter.
 If half of the profit is reinvested in the corporation, the concession of 50% tax is extendable for next 3
years.
 For SEZ developers, the raw material from cement to steel to electrical parts are subject to zero tax
and duty.
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 For the SEZ, the Government acquires vast land tracts and gives to the developers. The basic
condition involves that 25% of the area of the SEZ must be used only for export related activities.
Rest 75% area can be used for economic and social infrastructure. However, all SEZ benefits are
applicable over the entire SEZ area.
 There were provisions for sector specific SEZs and Multiproduct SEZs.
Concept Check
Q. Which among the following is/are the major objectives of setting up of Special Economic Zones?
(a) To attract Foreign Direct Investment
(b) To create employment opportunities
(c) To boost export of goods and services
(d) To earn foreign exchange
Answer: E
Concept Check
Q. Highest number of operational SEZs are located in which of the following Indian states?
(a) Tamil Nadu
(b) Telangana
(c) Karnataka
(d) Maharashtra
(e) Gujarat
Answer: A
Concept Check
Q. Asia’s first export processing zone (EPZ) was set up in 1965 at
(a) Haldia
(b) Vishakhapatnam
(c) Kandla
(d) Chennai
Answer: C
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6 National Investment and Manufacturing Zones (NIMZ)

 National Investment and Manufacturing Zones (NIMZs) will be developed as integrated industrial
townships with state-of-the art infrastructure and land use on the basis of zoning; clean and energy
efficient technology; necessary social infrastructure; skill development facilities, etc., to provide a
productive environment to persons transitioning from the primary sector to the secondary and
tertiary sectors.
 These NIMZs would be managed by SPVs (Special Purpose Vehicles) which would ensure master
planning of the Zone; pre-clearances for setting up the industrial units to be located within the zone
and undertake such other functions as specified in the various sections of this policy.
 To enable the NIMZ to function as a self-governing and autonomous body, it will be declared by the
State Government as an Industrial Township under Article 243 Q(c) of the Constitution.
 In sum, the NIMZs would be large areas of developed land, with the requisite eco-system for
promoting world class manufacturing activity.
6.1 Difference between SEZ & NIMZ

NIMZ would be different from SEZs in terms of size, level of infrastructure planning, and governance
structures related to regulatory procedures and exit policies.
6.2 Size
An NIMZ would have an area of at least 5000 hectares in size.
6.3 Who will own NIMZ?

 It is left to the State Government to adopt a model that it considers most workable.
 The State Government may keep the ownership of NIMZ itself or transfer the ownership to a state
government undertaking.
 The state Government may have joint ownership with a private partner and adopt any other
appropriate model.
7 National Manufacturing Policy
7.1 Important Provisions

This policy has been brought out in the year 2011:
 Manufacturing’s share in India’s GDP has been stuck at 16% since the 1980s.
 The policy aims to increase the share of manufacturing in the country’s GDP from the current 16%
to 25% by 2022.
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 It aims to create 100 million additional jobs in the next decade.

 It envisages establishment of National Investment and Manufacturing Zones (NIMZ) equipped with
world-class infrastructure that would be autonomous and self-regulated developed in partnership
with the private sector.
 Each National Investment and Manufacturing Zones to have 5,000 hectares.
 Land will be selected by State Governments. Preference would be given to uncultivable land.
 Both state and central Government would fund trunk infrastructure.
 The policy embodies an easy exit policy and single window clearance in zones
 The NIMZ would be managed by special entity
 The policy has envisaged fiscal sops to boost manufacturing.
 Small & medium enterprises to be reimbursed for technology purchase.
 Industrial training and skills development programmes
 Flexible labor laws and simplified & expeditious exit mechanism for sick units
 Relaxation in environmental regulations
 Financial and tax incentives to small and medium enterprises
 Incentives to states for infrastructure development
 Incentives for Green Manufacturing
7.2 How the policy would achieve its objectives?

 Foreign investments and technologies will be welcomed while leveraging the country’s expanding
market for manufactured goods to induce the building of more manufacturing capabilities and
technologies within the country.
 Competitiveness of enterprises in the country will be the guiding principle in the design and
implementation of policies and programmes.
 Compliance burden on industry arising out of procedural and regulatory formalities will be reduced
through rationalization of business regulations.
 Innovation will be encouraged for augmenting productivity, quality, and growth of enterprises; and
Effective consultative mechanism with all stake holders will be instituted to ensure mid-course
corrections.
7.3 Which industry verticals will be given special attention?

 Employment intensive industries such as textiles and garments; leather and footwear; gems and
jewellery; and food processing industries
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 Capital Goods such as machine tools; heavy electrical equipments; heavy transport, earth moving and
mining equipments.
 Industries with strategic significance such as aerospace; shipping; IT hardware and electronics;
telecommunication equipment; defence equipment; and solar energy.
 Industries where India enjoys a competitive advantage such as automobiles; pharmaceuticals; and
medical equipment.
 Small and Medium Enterprises:
 The Small and Medium Enterprises (SME) segment of manufacturing has in particular attracted
due attention in the new policy as can be seen from the various financial and development
incentives that have been envisaged therein.
 Public Sector Enterprises specially in defense and Energy sectors.
7.4 Formulation of a New Industrial Policy

 The Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and
Industry initiated the process of formulation of a new Industrial Policy in May 2017.
 Since the last Industrial Policy announced in 1991, India has transformed into one of the fastest
growing economies in the world.
 With strong macro-economic fundamentals and several path breaking reforms in the last three
years, India is equipped to deploy a different set of ideas and strategies to build a globally competitive
Indian industry.
 The new Industrial Policy will subsume the National Manufacturing Policy.
7.5 What are the areas that would be covered in this policy?
 A consultative approach has been taken for industrial policy formulation wherein six thematic focus
groups and an online survey on DPIIT website have been used to obtain inputs.
 Focus groups, with members from government departments, industry associations, academia, and
think tanks have been setup to delve deep into challenges faced by the industry in specific areas.
The six thematic areas include
 Manufacturing and MSME;
 Technology and Innovation;
 Ease of Doing Business;
 Infrastructure, Investment,
 Trade and Fiscal policy; and
 Skills and employability for the future
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 A Task Force on Artificial Intelligence for India’s Economic Transformation has also been constituted
which will provide inputs for the policy.
 It is proposed that the new Industrial Policy will aim at making India a manufacturing hub by
promoting ‘Make in India’.
 It will also suitably incorporate the use of modern smart technologies such as IOT, artificial
intelligence and robotics for advanced manufacturing.
Concept Check
Q. Make in India aims to:
(a) Improve the Ease of Doing Business
(b) Open new sectors for FDI
(c) Improve the quality of infrastructure
(d) Make India a globally competitive manufacturing destination
Answer: E
8 Industrial Corridors
8.1 What is an Industrial Corridor?

 An industrial corridor is a package of infrastructure spending allocated to a specific geographical area,
with the intent to stimulate industrial development.
 It aims to create an area with a cluster of manufacturing or other industry.
 Such corridors are often created in areas that have pre-existing infrastructure, such as ports, highways
and railroads.
 These modalities are arranged such that an "arterial" modality, such as a highway or railroad,
receives "feeder" roads or railways.
 Concerns when creating corridors including correctly assessing demand and viability, transport
options for goods and workers, land values, and economic incentives for companies.
8.2 Five Industrial/Economic Corridors
8.2.1 Delhi Mumbai Industrial Corridor (DMIC)

 The project spans the states of Maharashtra, Gujarat, Madhya Pradesh, Rajasthan, Haryana, Uttar
Pradesh and Delhi.
 This corridor lies along the Western Dedicated Freight Corridor (DFC) of the railways. It would initially
have 8 nodes (cities) in the six DMIC states for development purpose.
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8.2.2 Chennai-Bengaluru Industrial Corridor (CBIC)

 It has three industrial nodes (cities) viz. Ponneri (Tamil Nadu), Tumkur (Karnataka) and Krishnapatnam
(Andhra Pradesh).
 Japan International Cooperation Agency (JICA) is implementing the project.
8.2.3 Bengaluru-Mumbai Industrial Corridor (BMIC)

 It will be now called as Bengaluru Mumbai Industrial Corridor (BMIC) for the sake of uniformity of
nomenclature.
 Dharwad node in Karnataka has been identified for development by State Government. Government
of Maharashtra has given in principle approval for development of Sangli/Solapur Node in the State.
8.2.4 Vizag-Chennai Industrial Corridor (VCIC)

VCIC forms a part of the East Coast Economic Corridor.
8.2.5 Amritsar-Kolkata Industrial Corridor (AKIC)

 This will be structured around the Eastern Dedicated Freight Corridor (EDFC) as the backbone and
also the highway system that exists in this route. The
 AKIC will also leverage the Inland Water System being developed along National Waterway-1 which
extends from Allahabad to Haldia.
 The AKIC will cover the seven states namely Punjab, Haryana, Uttar Pradesh, Uttarkhand, Bihar,
Jharkhand and West Bengal.
8.3 National Industrial Corridor Development And Implementation Trust (NICDIT)

 Government of India has accorded approval for expanding the mandate and scope of Delhi Mumbai
Industrial Corridor Project Implementation Trust Fund (DMIC-PITF) and re-designated it as National
Industrial Corridor Development and Implementation Trust (NICDIT) for integrated development of
industrial corridors in the country.
 NICDIT will function under the administrative control of the DPIIT.
 NICDIT will take up new Industrial Corridors, Nodes, Early Bird Projects and Standalone Projects on
the recommendation of State Governments.
 It will develop the overall enabling institutional, funding and operational framework for the Industrial
Corridors; support project development activities through a Knowledge Partner for the Industrial
Corridors and agencies like SPVs and State Governments involved in implementation of industrial
cities/ projects in the Industrial Corridors; assist States in identifying Anchor Investors for industries;
and appraise all project proposals placed before it and sanction equity/ debt to SPVs and grants for
project development as per extant financial delegation.
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9 What are Dedicated Freight Corridors (DFC)?

 The Indian Railway has a big potential to develop goods transportation.
 In recent years, industrialisation and growing international trade along existing Eastern and Western
Routes has led to the demand for additional capacity for rail freight transportation.
 To develop the freight traffic infrastructure, the Government has designed an expansion drive in the
form of Dedicated Freight Corridors (DFC).
 In the first phase, two corridors-the Western DFC (1504 route km) and Eastern DFC (Estimated 1856
route km)- with a total length of about 3360 route km were launched.
 Construction responsibility of DFCs is with Dedicated Freight Corridor Corporation of India Limited.
 The Dedicated Freight Corridor Corporation of India (DFCCIL) is a Special Purpose Vehicle set up
under the administrative control of Ministry of Railways to undertake planning & development,
mobilization of financial resources and construction, maintenance and operation of the Dedicated
Freight Corridors.
9.1 Objectives of DFC

 To create world-class rail infrastructure with advanced technology and knowledge to carry higher
throughput per train.
 To improve overall transport efficiency.
 To offer customer guaranteed, faster transit, energy efficient, environment-friendly transport.
 To encourage total supply chain management.
 Reduce the unit cost of transport logistics.
 Increase Rail share in the freight market.
9.2 Western Dedicated Freight Corridor and Eastern Dedicated Fright Corridor
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 The Dedicated Freight Corridors have two wings- the Western DFC and the Eastern DFC.
 The Western Corridor connecting Dadri in NCR Delhi to Mumbai - Jawaharlal Nehru Port (JNPT), will
go through six states- Uttar Pradesh, Delhi NCR, Haryana, Rajasthan, Gujarat and Maharashtra.
 It is the Western DFC that provides the connectivity of the Delhi Mumbai Industrial Corridor.
 The Eastern Corridor, starting from Dankuni in West Bengal will pass through the states of Jharkhand,
Bihar, Uttar Pradesh and Haryana to terminate at Ludhiana in Punjab.
 Traffic on EDFC comprises of coal for the power plants in the northern region of India from Coalfields
located in state of Bihar, Jharkhand and Bengal, finished steel, food grains, cement, fertilizer,
limestone from Rajasthan to steel plants in the east and general goods.
 The Western DFC will join Eastern DFC at Dadri.
10 Doing Business Report

The World Bank releases the Doing Business report every year. As part of this report, The Ease of Doing
Business Index and the Distance to Frontier scores are released.
10.1 Why this report?

 The foundation of Doing Business is the notion that economic activity benefits from clear and
coherent rules: rules that set out and clarify property rights and facilitate the resolution of disputes;
and rules that enhance the predictability of economic interactions and provide contractual partners
with essential protections against arbitrariness and abuse.
 Such rules are much more effective in shaping the incentives of economic agents in ways that
promote growth and development where they are reasonably efficient in design, are transparent and
accessible to those for whom they are intended and can be implemented at a reasonable cost.
 The quality of the rules also has a crucial bearing on how societies distribute the benefits and finance
the costs of development strategies and policies.
So, in total this report gives a reflection of the business environment of a country.
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10.2 What does it measure?
Note:
 Ten of these areas—starting a business, dealing with construction permits, getting electricity,
registering property, getting credit, protecting minority investors, paying taxes, trading across
borders, enforcing contracts and resolving insolvency—are included in the distance to frontier score
and ease of doing business ranking.
 Doing Business also measures features of labor market regulation, which is not included in these two
measures.
10.3 The Ease of Doing Business Index

 The Ease of Doing Index was introduced in the year 2004.
 Higher ranking (low numerical value) indicates better & simpler regulations for business and stronger
protection of property rights.
 It signifies that the regulatory environment in a country is more conducive for starting and operating
a firm.
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10.4 Distance to Frontier scores

 The Distance to Frontier measure shows the distance of each economy from the frontier, which
represents the best performance observed on each of the indicators across all economies in the Doing
Business sample since 2005.
 The score is out of 100 with 0 representing the lowest performance and 100 being the frontier.
10.5 What is the difference between the Ease of Doing Business Index and DTF score?
 While governments and international investors look at the overall Doing Business ranking, the
Distance to Frontier is a more relevant indicator of conditions faced by domestic small and medium
enterprises.
 An ease of doing business ranking shows only how much a country’s regulatory environment has
changed relative to that in other economies.
 A Distance to Frontier score, on the other hand, shows how much the regulatory environment for
entrepreneurs in an economy has changed over time in absolute terms.
So, summarizing the main difference:
 Distance to Frontier’ scores, which are an absolute measure of progress by a country.

 The rankings, on the other hand, are relative, and hence subject to reform actions taken by other
countries.
10.6 Ease of Doing Business Rankings in India

 In India, the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce
and Industry in collaboration with the World Bank has conducted an annual reform exercise for all
States and UTs under the Business Reform Action Plan (BRAP).
 The aim of this exercise is to improve delivery of various Central Government regulatory functions
and services in an efficient, effective and transparent manner.
 States and UTs have conducted reforms to ease their regulations and systems in areas such as labour,
environmental clearances, single window system, construction permits, contract enforcement,
registering property and inspections.
 States and UTs have also enacted Public Service Delivery Guarantee Act to enforce the timelines on
registrations and approvals.
Note: Kindly refer EduTap’s Current Affairs magazine for all the updates regarding year specific
ranking of the States and UTs in India.
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11 Indices/Surveys to Measure Industrial Performance in India

11.1 Index of Industrial Production
Index of Industrial Production data or IIP as it is commonly called is an index that tracks manufacturing
activity in different sectors of an economy. The IIP number measures the industrial production for the
period under review, usually a month, as against the reference period. IIP is a key economic indicator of
the manufacturing sector of the economy. It is a composite indicator that measures the short-term
changes in the volume of production of a basket of industrial products during a given period with respect
to that in a chosen base period.
There is a lag of six weeks in the publication of the IIP index data after the reference month ends. IIP
index is currently calculated using 2011-2012 as the base year.
IIP data is compiled and published by NSO every month. NSO or National Statistical Office operates under
the Ministry of Statistics and Programme Implementation (MoSPI).
11.1.1 IIP Index Components

Electricity, crude oil, coal, cement, steel, refinery products, natural gas, and fertilisers are the eight core
industries that comprise about 40 percent of the weight of items included in the Index of Industrial
Production. Mining, manufacturing, and electricity are the three broad sectors in which IIP constituents
fall.
11.2 Index of Eight Core Industries

The monthly Index of Eight Core Industries (ICI) is a production volume index. The objective of the ICI is
to provide an advance indication on production performance of industries of ‘core’ nature before the
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release of Index of Industrial Production (IIP) by National Statistical Office. These industries are likely to
impact on general economic activities as well as industrial activities.
ICI measures collective and individual performance of production in selected eight core industries viz.
Coal, Crude Oil, Natural Gas, Petroleum Refinery Products, Fertilizers, Steel, Cement and Electricity.
Components covered in these eight industries for the purpose of compilation of index are as follows:
 Coal – Coal Production excluding Coking coal.

 Crude Oil – Total Crude Oil Production.
 Natural Gas – Total Natural Gas Production.
 Refinery Products – Total Refinery Production (in terms of Crude Throughput).
 Fertilizer – Urea, Ammonium Sulphate (A/S), Calcium Ammonium Nitrate (CAN), Ammonium
chloride (A/C), Diammonium Phosphate (DAP), Complex Grade Fertilizer and Single
superphosphate (SSP).
 Steel – Production of Alloy and Non-Alloy Steel only.
 Cement – Production of Large Plants and Mini Plants.
 Electricity – Actual Electricity Generation of Thermal, Nuclear, Hydro, imports from Bhutan.
The Index is compiled and released by Office of the Economic Adviser (OEA), Department for
Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce & Industry, Government of
India.
After the base revision to 2011, the Eight Core Industries comprise 40.27 per cent of the weight of
items included in the Index of Industrial Production (IIP). The industry-wise weights indicated in the
ICI are individual industry weight derived from IIP and blown up on pro rata basis to a combined
weight of ICI equal to 100 - (Coal 10.33 %, Crude Oil production 8.98 %, Natural Gas 6.88%, Petroleum
Refinery 28.04 %, Fertilizers 2.63 %, Steel 17.92 %, Cement production 5.37 % and Electricity
generation 19.85%.)
The Index of Eight Core Industries is a provisional index which is released every month. The index is
calculated by using the Laspeyre’s formula of weighted arithmetic mean of quantity relatives.
11.3 Annual Survey of Industries

Annual Survey of Industries (ASI) is the principal source of industrial statistics in India providing
information on important characteristics of registered manufacturing sector. ASI is considered as the
most comprehensive and reliable source of organised manufacturing sector data providing disaggregated
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industry specific details of production, investment, employment and costs. It does not cover unorganised
or unregistered or informal sector enterprises.
ASI is the main survey conducted by National Statistical Office (NSO) Industrial Statistics (IS) wing. It
ensures timely dissemination of statistical information to asses and evaluate the dynamics in composition,
growth and structure of organized manufacturing sector.
12 Improvement of Business Environment: e-Biz Project

 e-Biz is one of the integrated services projects and part of the Mission Mode Projects (MMPs) under
the National E-Governance Plan (NEGP).
 The project envisages setting up a G2B (Government to Business) portal to serve as a one-stop shop
for delivery of services to the investors and addresses the need of business and industry from
inception through the entire life-cycle.
 It aims to create a business and investor friendly ecosystem in India by making all business and
investment related regulatory services across Central, State and local governments available on a
single portal. This project aims at creating an investor-friendly business environment in India by
encouraging ease of doing business.
 The eBiz project is being implemented on a Public Private Partnership (PPP) model, with M/s Infosys
Technologies Ltd selected as the concessionaire for designing, developing, maintaining and expanding
the eBiz solution & services for 10 years.
 Nodal Agency: DPIIT, Ministry of Commerce & Industry, Government of India.
12.1 Components
The eBiz Platform consist of 2 components namely:
 eBiz Portal which is the front-end that acts as the single point of entry and,
 The eBiz shared services infrastructure such as payment gateway, business vault to store
documents, SMS gateway etc.
That enables development of application and provisioning of G2B services.
Concept Check
Q. With reference to eBiz Portal, which of the following statements is not correct?
(a) It has been launched under the National E-Governance Plan.
(b) It works under the aegis of the Ministry Commerce & Industry.
(c) It is being implemented on a Public Private Partnership (PPP) model
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(d) It is a single window clearance online portal only for foreign investors.
(e) None of the above statements are incorrect.
Answer: D
12.2 Foreign Direct Investment in India

 FDI is an investment made by a company or individual in one country in another country, in the form
of either establishing business operations or acquiring business assets in the other country, such as
ownership or controlling interest in a foreign company.
 In India, the Department for Promotion of Industry and Internal Trade (DPIIT), is the nodal
department for the formulation of the policy of the Government on Foreign Direct Investment (FDI).
 It is also responsible for maintenance and management of data on inward FDI into India, based upon
the remittances reported by the Reserve Bank of India.
 FDI in India can be done through two routes: Automatic Route and Government Route.
 Automatic route: In this, prior approval by the Government of India or Reserve Bank of India is not
required.
 Government route: In this, prior approval by government is required.
**For a detailed understanding of what is FDI and how is it different from FII, please refer to the Balance
of Payments (BoP) document.
(Please refer to EduTap’s Current Affairs Magazine to read more about the latest changes in India’s FDI
policy)
13 Labour Policy
13.1 Background
"Labour" is a subject in the "Concurrent List" under the Constitution of India where both the Central and
State Governments are competent to enact legislations subject, however, to reservation of certain
matters for the Central Government.
The Constitutional status of labour jurisdiction has been explained in the following table:
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13.2 Constitutional Status of Labour Jurisdiction
13.3 Legislative Measures

As per the recommendations of the 2nd National Commission on Labour, Government of India has taken
steps for codification of existing Central labour laws into 4 Codes by simplifying, amalgamating and
rationalizing the relevant provisions of the Central Labour laws. 29 labour laws are being subsumed in the
simplified, easy to understand transparent 4 labour codes.
Name of the Code Number & name of amalgamated laws

Labour Code on Wages 4 laws:
1. The Payment of Wages Act, 1936
2. The Minimum Wages Act, 1948
3. The Payment of Bonus Act, 1965
4. The Equal Remuneration Act, 1976
Labour Code on Industrial Relations 3 laws:
1. The Trade Unions Act, 1926
2. The Industrial Employment (Standing orders)
Act, 1946
3. The Industrial Disputes Act, 1947
Labour Code on Social Security & Welfare 9 laws:
1. The Employees’ Compensation Act, 1923
2. The Employees’ State Insurance Act, 1948
3. The Employees Provident Fund and
Miscellaneous Provisions Act, 1952
4. The Employment Exchanges (Compulsory
Notification of Vacancies) Act, 1959
5. The Maternity Benefit Act, 1961
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6. The Payment of Gratuity Act, 1972

7. The Cine Workers Welfare Fund Act, 1981
8. The Building and Other Construction Workers
Welfare Cess Act, 1996
9. The Unorganised Workers’ Social Security Act,
2008
Labour Code on Occupational Safety, Health & 13 laws:
Working Conditions 1. The Factories Act, 1948
2. The Plantations Labour Act, 1951
3. The Mines Act, 1952
4. The Working Journalists and other Newspaper
Employees (Conditions of Service) and
Miscellaneous Provisions Act, 1955
5. The Working Journalists (Fixation of Rates of
Wages) Act, 1958
6. The Motor Transport Workers Act, 1961
7. The Beedi and Cigar Workers (Conditions of
Employment) Act, 1966
8. The Contract Labour (Regulation and
Abolition) Act, 1970
9. The Sales Promotion Employees (Conditions of
Service) Act, 1976
10. The Inter-State Migrant Workmen (Regulation
of Employment and Conditions of Service) Act,
1979
11. The Cine-Workers and Cinema Theatre
Workers (Regulation of Employment) Act,
1981
12. The Dock Workers (Safety, Health and
Welfare) Act, 1986
13. The Building and Other Construction Workers
(Regulation of Employment and Conditions of
Service) Act, 1996
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13.3.1 Code on Wages, 2019

 It seeks to regulate wage and bonus payments in all employments where any industry, trade,
business, or manufacture is carried out. The Code replaces the following four laws: (i) the Payment
of Wages Act, 1936, (ii) the Minimum Wages Act, 1948, (iii) the Payment of Bonus Act, 1965, and (iv)
the Equal Remuneration Act, 1976.
 Coverage: The Code will apply to all employees. The central government will make wage-related
decisions for employments such as railways, mines, and oil fields, among others. State governments
will make decisions for all other employments.
 Wages include salary, allowance, or any other component expressed in monetary terms. This does
not include bonus payable to employees or any travelling allowance, among others.
 Floor wage: According to the Code, the central government will fix a floor wage, taking into account
living standards of workers. Further, it may set different floor wages for different geographical
areas. Before fixing the floor wage, the central government may obtain the advice of the Central
Advisory Board and may consult with state governments.
 The minimum wages decided by the central or state governments must be higher than the floor
wage. In case the existing minimum wages fixed by the central or state governments are higher than
the floor wage, they cannot reduce the minimum wages.
 Fixing the minimum wage: The Code prohibits employers from paying wages less than the minimum
wages. Minimum wages will be notified by the central or state governments. This will be based on
time, or number of pieces produced. The minimum wages will be revised and reviewed by the central
or state governments at an interval of not more than five years. While fixing minimum wages, the
central or state governments may take into account factors such as: (i) skill of workers, and (ii)
difficulty of work.
 Overtime: The central or state government may fix the number of hours that constitute a normal
working day. In case employees work in excess of a normal working day, they will be entitled to
overtime wage, which must be at least twice the normal rate of wages.
 Payment of wages: Wages will be paid in (i) coins, (ii) currency notes, (iii) by cheque, (iv) by crediting
to the bank account, or (v) through electronic mode. The wage period will be fixed by the employer
as either: (i) daily, (ii) weekly, (iii) fortnightly, or (iv) monthly.
 Deductions: Under the Code, an employee’s wages may be deducted on certain grounds including: (i)
fines, (ii) absence from duty, (iii) accommodation given by the employer, or (iv) recovery of advances
given to the employee, among others. These deductions should not exceed 50% of the employee’s
total wage.
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 Determination of bonus: All employees whose wages do not exceed a specific monthly amount,
notified by the central or state government, will be entitled to an annual bonus. The bonus will be at
least: (i) 8.33% of his wages, or (ii) Rs 100, whichever is higher. In addition, the employer will
distribute a part of the gross profits amongst the employees. This will be distributed in proportion
to the annual wages of an employee. An employee can receive a maximum bonus of 20% of his
annual wages.
 Gender discrimination: The Code prohibits gender discrimination in matters related to wages and
recruitment of employees for the same work or work of similar nature. Work of similar nature is
defined as work for which the skill, effort, experience, and responsibility required are the same.
 Advisory boards: The central and state governments will constitute advisory boards. The Central
Advisory Board will consist of: (i) employers, (ii) employees (in equal number as employers), (iii)
independent persons, and (iv) five representatives of state governments. State Advisory Boards will
consist of employers, employees, and independent persons. Further, one-third of the total members
on both the central and state Boards will be women. The Boards will advise the respective
governments on various issues including: (i) fixation of minimum wages, and (ii) increasing
employment opportunities for women.
 Offences: The Code specifies penalties for offences committed by an employer, such as (i) paying less
than the due wages, or (ii) for contravening any provision of the Code. Penalties vary depending on
the nature of offence, with the maximum penalty being imprisonment for three months along with a
fine of up to one lakh rupees.
Concept Check
Q. With reference to ‘Code on Wages 2019’, which of the following statements is not correct?
(a) Equal Remuneration Act, 1976 is one of the laws subsumed under the Code.
(b) The minimum wages set under the code will be revised and reviewed by the central or state
governments at an interval of not more than three years.
(c) As per the Code, an employee can receive a maximum bonus of 20% of his annual wages.
(d) Overtime wages should be at east twice the normal wages.
(e) All of the above statements are correct.
Answer: B
13.3.2 Industrial Relations Code, 2020

 It seeks to replace three labour laws: (i) the Industrial Disputes Act, 1947, (ii) the Trade Unions Act,
1926, and (iii) the Industrial Employment (Standing Orders) Act, 1946.
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 Trade unions: Under the Code, seven or more members of a trade union can apply to register it.
Trade unions that have a membership of at least 10% of the workers or 100 workers, whichever is
less, will be registered. The central or state government may recognise a trade union or a federation
of trade unions as Central or State Trade Unions, respectively.
 Negotiating unions: The Code provides for a negotiation union in an industrial establishment, having
registered trade unions, for negotiating with the employer. If there is only one trade union in an
industrial establishment, the employer is required to recognise such trade union as the sole
negotiating union of the workers. In case of multiple trade unions, the trade union with support of
at least 51% of workers on the muster roll of that establishment will be recognised as the sole
negotiating union by the employer.
 Unfair labour practices: The Code prohibits employers, workers, and trade unions from committing
any unfair labour practices listed in a Schedule to the Code. These include: (i) restricting workers
from forming trade unions, (ii) establishing employer sponsored trade union of workers, (iii) coercing
workers to join trade unions, (iv) damage to employer’s property, and (v) preventing any worker from
attending work. Any person who commits unfair labour practices is punishable with a fine between
ten thousand rupees and two lakh rupees.
 Standing orders: All industrial establishments with at least 300 workers must prepare standing
orders on certain matters. These include: (i) classification of workers, (ii) manner of informing workers
about hours of work, holidays, paydays, and wage rates, (iii) termination of employment, (iv)
suspension for misconduct, and (v) grievance redressal mechanisms for workers. The central
government will prepare model standing orders, based on which the industrial establishments will
prepare their standing orders.
 Notice of change: Employers must not change the conditions of service in certain matters without
giving notice of the proposed changes to the workers being affected, or within 21 days of giving such
notice. These matters include wages, contribution, allowances, working hours, and leave.
 Lay-off and retrenchment: Employers of non-seasonal industrial establishments such as mines,
factories, and plantations with 50 to 300 workers must (i) pay 50% of basic wages and dearness
allowance to a worker who has been laid off, and (ii) give one month’s notice or wages for the notice
period to the retrenched worker. Lay-off is the inability of an employer from giving employment to a
worker due to reasons such as shortage of coal, power, or breakdown of machinery. Retrenchment
means termination of services of a worker for reasons other than disciplinary action. Any person
who contravenes these provisions is punishable with a fine between fifty thousand rupees and two
lakh rupees.
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 Non-seasonal industrial establishments with at least 300 workers must take prior permission of the
central or state government before lay-off, retrenchment or closure. The central or state government
may increase this threshold by notification. Such establishments must pay 50% of basic wages and
dearness allowance to a worker who has been laid off. In case of retrenchment, the employer must
either give three months’ notice or pay the retrenched worker for the notice period. Any employer
who violates these provisions will be punishable with a fine between one lakh rupees and ten lakh
rupees.
 Within one year of retrenchment of workers, if an employer seeks to re-employ a person, he must
prefer retrenched workers over other persons.
 Voluntary arbitration: The Code allows for industrial disputes to be voluntarily referred to arbitration
by the employer and workers through a written agreement. After investigating the dispute, the
arbitrator will submit the arbitration award to the government. Industrial disputes include disputes
related to terms of employment, non-employment and dismissal, retrenchment, or termination of
workers.
 Resolution of industrial disputes: The central or state governments may appoint conciliation officers
to mediate and promote settlement of industrial disputes. These officers will investigate the dispute
and hold conciliation proceedings to arrive at a fair and amicable settlement of the dispute. If no
settlement is arrived at, either party to the dispute can make an application to the Industrial Tribunal,
constituted under the Code. The central government may also constitute National Industrial
Tribunals for settlement of industrial disputes which: (i) involve questions of national importance, or
(ii) could impact industrial establishments situated in more than one state. The tribunals will have
two members each, one judicial member and one administrative member with the specified
qualifications.
 Exemptions from the Code: The 2020 Bill provides that the central or state government may exempt
any new establishment or a class of new establishment from all or any provisions of the Code in public
interest.
Concept Check
Q. Industrial Relations Code, 2020 does not subsume which of the following laws?
(a) The Trade Unions Act, 1926
(b) The Contract Labour (Regulation and Abolition) Act, 1970
(c) The Industrial Employment (Standing orders) Act, 1946
(d) The Industrial Disputes Act, 1947
(e) All of the above laws are subsumed under the Code.
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Answer: B
13.3.3 Code on Social Security, 2020

 It replaces nine laws related to social security, including the Employees’ Provident Fund Act, 1952,
the Maternity Benefit Act, 1961, and the Unorganised Workers’ Social Security Act, 2008. Social
security refers to measures to ensure access to health care and provision of income security to
workers.
 Social security schemes: Under the Code, the central government may notify various social security
schemes for the benefit of workers. These include an Employees’ Provident Fund (EPF) Scheme, an
Employees’ Pension Scheme (EPS), and an Employees’ Deposit Linked Insurance (EDLI) Scheme.
These may provide for a provident fund, a pension fund, and an insurance scheme, respectively. The
government may also notify: (i) an Employees’ State Insurance (ESI) Scheme to provide sickness,
maternity, and other benefits, (ii) gratuity to workers on completing five years of employment (or less
than five years in certain cases such as for journalists and fixed term workers), (iii) maternity benefits
to women employees, (iv) cess for welfare of building and construction workers, and (v)
compensation to employees and their dependents in the case of occupational injury or disease.
 In addition, the central or state government may notify specific schemes for gig workers, platform
workers, and unorganised workers to provide various benefits, such as life and disability cover. Gig
workers refer to workers outside of the traditional employer-employee relationship (e.g.,
freelancers). Platform workers are workers who access other organisations or individuals using online
platforms and earn money by providing them with specific services. Unorganised workers include
home-based and self-employed workers. It also provides for social security funds for unorganised
workers, and gig and platform workers.
 Coverage and registration: The Code specifies different applicability thresholds for the schemes. For
example, the EPF Scheme will apply to establishments with 20 or more employees. The ESI Scheme
will apply to certain establishments with 10 or more employees, and to all establishments which
carry out hazardous or life-threatening work notified by the central government. These thresholds
may be amended by the central government. All eligible establishments are required to register under
the Code, unless they are already registered under any other labour law.
 Contributions: The EPF, EPS, EDLI, and ESI Schemes will be financed through a combination of
contributions from the employer and employee. For example, in the case of the EPF Scheme, the
employer and employee will each make matching contributions of 10% of wages, or such other rate
as notified by the government. All contributions towards payment of gratuity, maternity benefit, cess
for building workers, and employee compensation will be borne by the employer. Schemes for gig
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workers, platform workers, and unorganised workers may be financed through a combination of
contributions from the employer, employee (or aggregators for gig workers and platform workers),
and the appropriate government.
 For the purpose of schemes for gig and platform workers, the Bill specifies a list of aggregators
including ride sharing services and food delivery services. Any contribution from an aggregator may
be at a rate notified by the government falling between 1-2% of the annual turnover of the aggregator,
subject to a cap of 5% of the amount paid or payable by an aggregator to the gig and platform workers.
 Social security organisations: The Code provides for the establishment of several bodies to administer
the social security schemes. These include: (i) a Central Board of Trustees, headed by the Central
Provident Fund Commissioner, to administer the EPF, EPS and EDLI Schemes, (ii) an Employees State
Insurance Corporation, headed by a Chairperson appointed by the central government, to administer
the ESI Scheme, (iii) National and State Social Security Boards, headed by the central and state
Ministers for Labour and Employment, respectively, to administer schemes for unorganised workers
(with the National Board also responsible for gig and platform workers), and (iv) state-level Building
Workers’ Welfare Boards, headed by a Chairperson nominated by the state government, to
administer schemes for building workers.
 Inspections and appeals: The appropriate government may appoint Inspector-cum-facilitators to
inspect establishments covered by the Code, and advise employers and employees on compliance
with the Code. Administrative authorities may be appointed under the various schemes to hear
appeals under the Code. For instance, the appropriate government may notify an appellate authority
to hear appeals against the order of the Inspector-cum-facilitator for non-payment of maternity
benefits. The Code also specifies judicial bodies which may hear appeals from the orders of the
administrative authorities. For example, industrial tribunals (constituted under the Industrial Disputes
Act, 1947) will hear disputes under the EPF Scheme.
 Offences and penalties: The Code specifies penalties for various offences, such as the failure to pay
gratuity, which may be punished with imprisonment of one year. Some offences may also be
compounded (settled).
Concept Check
Q. Code on Social Security, 2020 provides for the establishment of which of the following boards for
the administration of social security schemes?
(a) Central Board of Trustees
(b) Employees State Insurance Corporation
(c) National Social Security Board
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(d) Building Workers’ Welfare Boards

Answer: E
13.3.4 Occupational Safety, Health and Working Conditions Code, 2020

 The Code consolidates 13 existing Acts regulating health, safety, and working conditions. These
include the Factories Act, 1948, the Mines Act, 1952, and the Contract Labour (Regulation and
Abolition) Act, 1970.
 Coverage: The Code will apply to establishments employing at least 10 workers. It will apply to all
mines, docks, and establishments carrying out any hazardous or life-threatening activity (may be
notified by the central government). Certain provisions of the Code, such as health and working
conditions, apply to all employees. Employees include workers and all other persons earning wages
for any work, including managerial, administrative, or supervisory work.
 Exemptions: The appropriate government can exempt any workplace or activity from the Code in
case of a public emergency, disaster, or pandemic for up to a year. Further, the state government can
exempt new factories from the Code for the specified period for creating more economic activity and
employment.
 Registration and license: Establishments covered by the Code are required to register within 60 days
(of the commencement of the Code) with registering officers, appointed by the central or state
government. Factories may be required to obtain a license to operate. The Code requires those hiring
workers such as beedi and cigar workers and contract labourers to obtain licenses.
 Duties of employers: Duties of employers include: (i) providing a workplace that is free from hazards,
(ii) providing free annual health examinations in notified establishments, and (iii) informing relevant
authorities in case any accident at the workplace leads to death or serious bodily injury to any
employee. Additional duties are prescribed for employers in factories, mines, docks, plantations,
and building and construction work, including provision of a risk-free work environment, and
instructing employees on safety protocols.
 Rights and duties of employees: Duties include taking care of their own health and safety, complying
with safety and health standards, and reporting unsafe work incidents to the Inspector. Employees
also have certain rights including the right to obtain information on safety and health standards from
the employer.
 Work hours: No worker will be required or allowed to work in any establishment for more than
eight hours in a day. For overtime work, workers must be paid at twice the rate of daily wages. Prior
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consent of workers is required for overtime work. Women can work past 7 pm and before 6 am,
subject to any safety-related or other conditions prescribed by the government.
 Leave: Workers cannot be required to work for more than six days a week. Further, they must
receive one day of leave for every 20 days of work per year.
 Working conditions: Working conditions will be notified by the central government. Conditions may
include hygienic work environment, clean drinking water, toilets, ventilation, and adequate lighting.
 Welfare facilities: Welfare facilities such as canteens, first aid boxes, and crèches, may be provided
as per standards notified by the central government. Additional facilities may be specified for
factories, mines, docks, and building and construction works, such as welfare officers and temporary
housing.
 The Code includes three schedules containing lists of: (i) 29 diseases that the employer is required to
notify the authorities of, in case a worker contracts them, (ii) 73 safety matters that the government
may regulate, and (iii) 40 industries involving hazardous processes. The lists may be amended by the
central government.
 Inspectors: The government can appoint inspector-cum-facilitators to conduct inspections and
inquire into accidents. They have certain additional powers in case of factories, mines, docks, and
building and construction works, including: (i) reducing the number of employees working in sections
of the establishment, and (ii) prohibiting work in dangerous situations.
 Advisory boards: The central and state governments will set up Occupational Safety and Health
Advisory Boards at the national and state level. These Boards will advise the respective government
on the standards, rules, and regulations to be framed under the Code.
 Safety committees: The government may require certain establishments to constitute safety
committees in case of a certain class of workers. The committees will be composed of representatives
of the employer and workers and will function as a liaison between them. The number of
representatives of workers in the committee must not be less than that of the employer.
13.4 Institutions
Ministry of Labor is there at Centre with 4 attached offices, 10 subordinate offices, 4 autonomous
organizations and adjudication bodies and Arbitration body.
Let us have a look at some important ones are:
13.4.1 Office of Chief Labor Commissioner

 It is an attached office. It’s also known as ‘Central Industrial Relation Machinery’.
 It Is responsible for handling Industrial Disputes, Implementation of laws for which ministry is
responsible, Settlements and awards, verification of membership of Trade Unions etc
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13.4.2 Labor Bureau

Collection, compilation and dissemination of labor statistics, construction and maintenance of working
class consumer price index numbers (WC-CPI) for selected centers and all India basis for industrial
workers, construction of CPI numbers for agricultural and rural workers, maintenance of up to date data
relating to working conditions of industrial workers, undertaking research into specific problems
concerning labor with a view to supplying date and information needed for the formulation of labor policy,
publishing reports, pamphlets and brochures on various aspects of labor are its functions.
13.4.3 Employee State Insurance Corporation – Autonomous Statutory Organization

The organization administers various benefits under the ESI Act, for instance, sickness benefit, maternity
benefit, dependents’ expenses, funeral benefit, which are cash benefit s, and medical benefit. The medical
benefit has been made available to the family members of the insured employees.
13.4.4 Employee Provident Fund Organization – Autonomous Statutory Organization

Administers various schemes under Employees Provident Fund and Miscellaneous Provisions Act. There
are schemes like – Employee provident fund scheme, Employee Deposit linked Insurance Scheme, Pension
scheme etc.
13.4.5 International Labor Organization

 Founded in 1919 as a result of Treaty of Versailles, it became first specialized agency under United
Nations in 1945.
 Its vision is to secure humane working conditions for workers and to attain social justice for them
universally.
 In short it carries ‘Decent Work Agenda’.
 It has produced about 189 legally binding conventions on member countries and more than 200 non-
binding recommendations.
 It is also global center for research and study on work and labor.
 It also gave 4 core standards on labor which are part of general human rights as per UN declarations.
These are:
 Freedom of Association, Right to Organize and Right to Collective Bargaining
 Abolition of forced labor
 Minimum age of employment and abolition of child labor
 Prohibition on workplace discrimination and Equal pay for men and women for work of equal value
13.5 Why are the labour reforms required in India?
13.5.1 Low employment

 Because India still does not use its vast labour force productively or judiciously.
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 In 2014, India’s labour force was estimated to be about 490 million, or 40 per cent of the population,
but 93 per cent of this force was in the unorganised sector, ranging from vegetable vending to
diamond trading.
 Over the last decade, the compounded annual growth rate (CAGR) of employment has slowed to 0.5
per cent, with 13.9 million jobs created in 2012 when the labour force increased by 14.9 million.
13.5.2 Benefits limited to Organised Sector only

 These labour laws apply to organised sector which employs only 8 to 9 percent of workforce leaving
vast majority of Indian workforce remain unregulated.
 The workers under unorganised sector have limited rights and face deplorable working conditions.
13.5.3 Multiplicity, Complexity and Rigidities

 The multiplicity of labour laws and difficulty in coping with them are the impediment to industrial
development in India.
 Many of the laws are obsolete and are required to be reviewed to align them with current economic
situation.
13.5.4 Ease of Doing Business is affected

 Employers contend that labour laws in India are excessively pro-worker in the organized sector. There
is too much of inspection, and industries are looked upon with suspicion when comes to enforcing
labour laws.
 The legal provisions of job security and institutional factors like the pressure of trade unions make
adjustment of the workforce of enterprises difficult and discourage organised sector enterprises from
expansion.
 The small size of labour-intensive firms prevents them from reaping economies of scale, thereby
lowering India’s comparative advantage in labour-intensive manufacturing.
13.5.5 Jobless Growth

 Economists, industry associations believe deceleration in employment growth in India is due to
inflexibility in the labour market.
 The existing labour laws are designed to protect employment and do not encourage employability.
13.5.6 Skill Development

 The industries play crucial role in skill development.
 However, these laws discourage firms from employing a large number of permanent workers and
steer them towards employing more casual or contract workers.
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13.5.7 Global Competitiveness

 The Restrictive labour regulations prevent firms from making the required adjustments to their inputs
in response to shocks to demand and technology.
 It makes them difficult to compete with firms in countries where labour market rigidity is not a
problem.
13.6 What are the reforms needed?
13.6.1 Labor to be shifted to ‘State List’

 Labour being in the concurrent list of the constitution, both central and state government legislate on
it.
 But the State Governments have limited space to enact labor laws to address their own requirements
– promoting investment and employment generation.
 It is in best interest of all to shift labor in State list.
13.6.2 Simplification of archaic laws

 The Government has undertaken the exercise of rationalization of the 38 Labour Acts by framing 4
labour codes viz Code on Wages, Code on Industrial Relations, Code on Social Security and Code on
occupational safety, health and working conditions.
 A separate set of simple labour laws should apply to enterprises employing less than 50 employees
to promote micro and small enterprises with a self-contained code covering laws on employment
relations, wages and social security.
 The penal provisions in all labour laws need to be revisited and the penalty of imprisonment, wherever
it appears, should be converted into pecuniary fines. It will reduce the compliance cost and fear in the
employers.
13.6.3 Separate independent judicial system

Due to already overburdening of judicial system, a separate independent judicial system for labor issues
may be created. It should be entrusted with interpretation of all the labor laws and regulations.
13.6.4 Improving Enforcement of Labour Laws

Strengthening of enforcement machinery: Increased manpower, improved infrastructure is essential for
effective implementation of labor laws. All India Service for labor administration must be formed that
will provide professional experts in the field of labor administration.
13.6.5 Dispute Resolution

Regular Lok Adalats could enable faster disposal of cases.
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13.6.6 Digitization
 Digitization of the Employment Exchanges, digital sharing of data on registered job seekers should be
made mandatory for all Employment Exchanges.
13.6.7 Insurance Mechanism

An insurance scheme should be started for the retrenched workers from the time the industry
commenced operations, so that workers are not put to hardship later.
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Indian
Agriculture
1|Page WWW.EDUTAP.CO.IN QUERY? HELLO@EDUTAP.CO.IN /

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Contents
1 Introduction ............................................................................................................................................ 5
2 Agriculture Characteristics ..................................................................................................................... 5
3 Technological and Institutional Reforms ............................................................................................... 7
3.1 Technological Reforms ................................................................................................................... 7
3.2 Institutional Reforms....................................................................................................................... 7
4 Agricultural Performance ....................................................................................................................... 8
5 Issues in food security in India ............................................................................................................... 9
5.1 What is food security?..................................................................................................................... 9
5.2 National Food Security Act, 2013................................................................................................... 9
5.3 Challenges in ensuring food security ............................................................................................ 10
5.3.1 Public Distribution System (PDS) ......................................................................................... 11
5.3.2 Integrated Child Development Scheme (ICDS) .................................................................... 11
5.3.3 Mid-Day Meal (MDM) Scheme ............................................................................................ 11
5.3.4 National Nutrition Mission (NNM) ....................................................................................... 12
6 Non-Institutional and Institutional Agencies in rural credit ................................................................. 13
6.1 Agricultural Credit System in India .............................................................................................. 13
6.2 Non-Institutional Sources of Finance in India .............................................................................. 14
6.3 Institutional Credit Agencies ........................................................................................................ 15
7 Significance of Agriculture in India ..................................................................................................... 16
8 Issues in Indian agriculture................................................................................................................... 17
8.1 Agricultural land at risk ................................................................................................................ 17
8.2 Poor utilization of water resources................................................................................................ 17
8.3 Unemployment among agricultural workers................................................................................. 17
8.4 Falling Investment in Agriculture ................................................................................................. 18
8.5 Subsidy and Related Issues ........................................................................................................... 18
8.6 Harvest and post-harvest losses .................................................................................................... 18
8.7 Minimum Support Price (MSP) and Related Issues ..................................................................... 18
8.8 Land Size....................................................................................................................................... 18
8.9 Low crop yields ............................................................................................................................. 19
8.10 Dependence on monsoon .............................................................................................................. 19
8.11 Low share in global markets ......................................................................................................... 19
8.12 Indebtedness and farmer suicides ................................................................................................. 19
8.13 Poor Linkage with Industrial Sector ............................................................................................. 19
9 Impact ................................................................................................................................................... 20
9.1 Low income for farmers ................................................................................................................ 20
9.2 Less Farm investments .................................................................................................................. 20
9.3 Farmer Suicides............................................................................................................................. 20
9.4 Food Security ................................................................................................................................ 20
10 Steps taken to Increase Agricultural Production in India ................................................................. 20
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10.1 Technological Measures ............................................................................................................... 20

10.2 Land reforms ................................................................................................................................. 20
10.3 Cooperation and consolidation of holdings .................................................................................. 21
10.4 Institution involving people’s participation in planning ............................................................... 21
10.5 Institutional credit ......................................................................................................................... 21
10.6 Procurement and support prices .................................................................................................... 21
10.7 Input subsidies to agriculture ........................................................................................................ 21
10.8 Food security system ..................................................................................................................... 22
10.9 Rural Employment Programmes ................................................................................................... 22
10.10 Doubling farmers' income by 2022-23 ...................................................................................... 22
10.11 Priority Sector Lending (PSL) ................................................................................................... 22
11 Important Schemes initiated by the government .............................................................................. 22
11.1 Pradhan Mantri Krishi Sinchayee Yojana ..................................................................................... 23
11.2 Rashtriya Krishi Vikas Yojana – RAFTAAR (RKVY-RAFTAAR) ............................................ 23
11.3 National Food Security Mission ................................................................................................... 23
11.4 Soil Health Card Scheme .............................................................................................................. 23
11.5 PM Fasal Bima Yojana ................................................................................................................. 23
11.6 National Agricultural Market (NAM) ........................................................................................... 23
11.7 Pradhan Mantri Annadata Aay SanraksHan Abhiyan (PM-AASHA) .......................................... 23
11.8 Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) ................................................................... 23
12 Measures to be taken for Sustainable Agriculture ............................................................................ 24
12.1 Addressing Subsidies Problem...................................................................................................... 24
12.2 Allowing Land Leasing ................................................................................................................. 24
12.3 Increasing Avenues for Non-Farm Income ................................................................................... 24
12.4 Improving Agricultural Export Scenario ...................................................................................... 24
12.5 Investing in Agriculture Infrastructure ......................................................................................... 25
12.6 Agricultural Marketing Reforms ................................................................................................... 25
12.7 Need For Cooperative Federalism ................................................................................................ 25
12.8 Improvements in allied sectors ..................................................................................................... 26
12.9 Cooperative Farming..................................................................................................................... 26
12.10 Diversification ........................................................................................................................... 26
12.11 Unified National Market ........................................................................................................... 26
12.12 Efforts for doubling farmers income ......................................................................................... 26
12.13 Innovations ................................................................................................................................ 27
12.14 Incentives................................................................................................................................... 27
13 Conclusion ........................................................................................................................................ 27
14 Unresolved Issues ............................................................................................................................. 28
14.1 Changing Climate Affecting Agriculture...................................................................................... 28
14.2 Farmers’ Suicides .......................................................................................................................... 29
14.3 Farm Loan Waiver ........................................................................................................................ 32
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1 Introduction
 Indian agriculture employs the largest share of the workforce – about 42 percent – though its share
in overall gross domestic product (GDP) is only about 16.5 percent. India is still largely a rural economy
with 66 percent of the country’s population living in rural areas and agriculture continues to be the
mainstay of a large segment of this section of the population.
 India is among the 15 leading exporters of agricultural products in the world.
 As per the Economic survey of India, the growth rate of agriculture is estimated to be 3.4%. The
contribution of the sector to Gross Value Added (GVA) declined from 18.3% to 17.8% between 2014-
15 and 2019-20.
 As per Agriculture Census 2015-16, the average size of operational holding has declined to 1.08
hectare in 2015-16 as compared to 1.15 hectare in 2010-11. The small and marginal holdings (<2 ha)
now constitute 86%, while the large holdings (>10 ha) are merely 0.57% of the total land holdings.
2 Agriculture Characteristics
The history of Agriculture in India dates back to Indus Valley Civilization and in some parts of Southern
India, it was found to be practised even before the Harappans. Features of Indian Agriculture are as
follows:
 Source of livelihood: About 54.6 per cent of the total workforce in the country is still engaged in
agricultural and allied sector activities (Census 2011) which accounts for approximately 17.8 per cent
of the country’s Gross Value Added (GVA) for the year 2019-20 (at current prices).

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 Dependence on monsoon: Agriculture in India mainly depends on monsoon. If monsoon is good, the
production will be more and if monsoon is less than average then the crops fail. Sometimes floods
play havoc with our crops. As irrigation facilities are quite inadequate, the agriculture depends on
monsoon.
 Labour intensive cultivation: Due to increase in population, the pressure on land holding has
increased. Land holdings get fragmentated and subdivided and become uneconomical. Machinery and
equipment cannot be used on such farms.
 Under employment: Due to inadequate irrigation facilities and uncertain rainfall, the production of
agriculture is less, farmers find work a few months in the year. Their capacity of work cannot be
properly utilised. In agriculture there is under employment as well as disguised unemployment.
 Small size of holdings: Due to large scale sub-division and fragmentation of holdings, land holding size
is quite small. Average size of land holding is 1.15 hectares in India while in Australia it was 4,331ha
hectares and in USA it was 160 hectares.
 Traditional methods of production: In India methods of production of agriculture along with

equipment are traditional. It is due to poverty and illiteracy of people. Traditional technology is the
main cause of low production.
 Low Agricultural production: Agricultural production is low in India. India produces 27 Qtls. wheat per
hectare. France produces 71.2 Qtls per hectare and Britain 80 Qtls per hectare. Average annual
productivity of an agricultural labourer is 162 dollars in India, 973 dollars in Norway and 2408 dollars
in USA.
 Dominance of food crops: 75% of the cultivated area is under food crops like Wheat, Rice and Bajra,
while 25% of cultivated area is under commercial crops. This pattern is cause of backward agriculture.
 Drivers of Indian Agriculture

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The various features which were hindering the growth of agriculture have compelled the government to
act through technological and institutional reforms, which are discussed in the next topic.
3 Technological and Institutional Reforms
 Agriculture has been practised in India for thousands of years. Sustained uses of land without
compatible techno-institutional changes have hindered the pace of agricultural development.
 Agriculture provides a livelihood for more than 60% population in India.
 Realising the importance of agricultural sector in the growth of an economy, the Government of India
initiated technological and institutional reforms to ensure the increase in agricultural production.
They are:
3.1 Technological Reforms
1. The Green Revolution based on the use of package technology and the White Revolution (Operation
flood) were some of the strategies initiated to improve Indian agriculture. (Discussed later)
2. Introduction of High Yielding Varieties of seeds, chemical fertilisers, insecticides and pesticides.
3. Development of surface and ground water irrigation and rural electrification.
4. Introduction of modern farming tools and equipment’s like power tiller, tractor, harvestor etc.
5. Special weather bulletins and agricultural programmes for farmers were introduced on radio and
television to acquaint farmers with modern farming techniques.
6. In the 1980s and 1990s, a comprehensive land development programme was initiated, which includes
both institutional and technological reforms.
Successful Revolutions
 Green Revolution: It refers to increase in crop production. It is based on package technology

which include
i. Use of HYV seeds,
ii. Use of chemical fertilisers, insecticides and pesticides,
iii. Development of surface and ground water irrigation,
iv. Farm mechanisation,
v. Rural electrification, development of rural roads, and storage facilities for crops.
 White Revolution: It refers to increase in milk production in the country. It is also called Operation
Flood. This has been achieved by
i. Introducing better breeds of cattle,
ii. Providing them nutritious food,
iii. Controlling their diseases etc.
3.2 Institutional Reforms
1. Collectivisation, consolidation of land holdings, cooperation etc. were given priority by the
government after independence.
2. Abolition of zamindari system and land reforms was the main focus of our first five-year plan.

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3. Establishment of Grameen Banks, cooperative societies and banks for providing loan facilities to the
farmers at lower rates of interest.
4. Provision for crop insurance against drought, flood, cyclone, fire and disease.
5. The government also announces minimum support price (MSP) and remunerative and procurement
prices for important crops to check the exploitation of farmers by speculators and middlemen.
6. Kisan credit cards and personal accident insurance schemes introduced.
Steps taken by the Government to modernise agriculture

The government of India made concerted efforts to modernise agriculture.
1. Establishment of Indian Council of Agricultural Research (ICAR) for co-ordinating agricultural
education and research in India.
2. Establishment of Agricultural Universities to create scientific temperament among the youths.
3. Providing veterinary services and animal breeding centres to boost animal husbandry.
4. Horticulture development.
5. Research and development in the field of meteorology and weather forecast.
6. Establishment of NABARD (1982) for agricultural and rural development.
These Technological and Institutional measures have enhanced the agricultural performance. It’s time to
understand agricultural performance in brief, so that one is well aware of the economic developments
that have taken place in agriculture post- independence.
4 Agricultural Performance
Contribution of agriculture to the national economy, employment and output is the focus of agriculture
performance. Agriculture has been the backbone of the Indian economy though its share in the Gross
Domestic Product has registered a declining trend from 1951 onwards.
1. Share in employment: Agriculture is the largest employment providing sector in India. About 54.6%
of the total workforce in the country is still engaged in agricultural and allied sector activities (Census
2011).
2. Share in GDP: The share of agriculture in GDP increased to 19.9 per cent in 2020-21 from 17.8 per
cent in 2019-20. The last time the contribution of the agriculture sector in GDP was at 20 per cent was
in 2003-04.
3. Source of raw materials: Agriculture provides raw materials to a large number of agro-based
industries in India.
- Ex: Cotton, jute, silk, woollen textiles, sugar and edible oil, etc. industry are based on agricultural
raw materials.
4. Source of foreign exchange: Agriculture is one of the most important sources of foreign exchange in
India. India earns a lot of foreign exchange by exporting agro-products.
5. Food security: Agriculture ensures food security to people in India. Let’s Understand the issue of food
security in detail in the next subheading.

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5 Issues in food security in India
5.1 What is food security?
It means availability, accessibility and affordability of food to all people at all times.
1. Food is a basic need and every citizen of the country should have access to food which provides
minimum nutritional level.
2. If any segment of our population does not have this access, that segment suffers from lack of food
security.
3. The number of people who do not have food security is disproportionately large in some regions of
our country particularly in economically less developed states with the higher incidence of poverty.
4. In order to ensure availability of food to all sections of society, the Government of India carefully
designed a national food security system, which is discussed later in the document.
5. National food security system consists of two components
a. Buffer Stock and
b. Public Distribution System (PDS)
6. The primary objective of India’s food security policy is to ensure availability of food grains to
common people at an affordable price.
7. The focus of this policy is on growth in agricultural production and on fixing the support price for
procurement of wheat and rice to maintain their stocks.
8. Food Corporation of India is responsible for procuring and stocking food grains. The FCI procures food
grains from the farmers at the government announced minimum support price.
Quantitative dimension of food security
India gained self-sufficiency in the food grains in 1970s mainly because of green revolution and has
sustained it since then. India's food grains production is estimated at a record 305.44 million tonnes in
the 2020-21 crop year. Thus, in terms of per capita food requirements, India is self-sufficient in the
production of major food crops like wheat and rice.
Qualitative dimension of food security
While the per capita food availability is sufficient, food is not equally distributed. Due to anomalies in the
distribution channels and disproportionate purchasing power capacity of people, the nutritional
requirements of vulnerable sections are not adequately addressed.
 The Global Hunger Index 2020 report has placed India at 94th position among 107 countries,
much behind Bangladesh, Pakistan and Nepal.
 Hence the government came up with National food security act in 2013 to address the food
security issue at large.
5.2 National Food Security Act, 2013
It marks a paradigm shift in approach to food security – from a welfare to rights-based approach. The Act
legally entitles up to 75% of the rural population and 50% of the urban population to receive subsidized
food grains under Targeted Public Distribution System. About 67% of the total population therefore is
covered under the Act to receive highly subsidized food grains.

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The Act seeks to provide food and nutritional security in human life cycle approach, by ensuring access to
adequate quantity of quality food at affordable prices to people to live a life with dignity and for matter
connected therewith or incidental to it. The Act brings the Right to Food within the framework of legally
mandated entitlements.
Key Features of the Act
1. It entitles 75% of the rural population and 50% of the urban population (67% of the population i.e., 80
crore people) for subsidized grain under TPDS (Targeted public distribution system).
2. The act provides ‘individual entitlement’ and each individual will be provided 5 kg of wheat, rice or
coarse cereals a month at the rate of Rs 3, Rs 2, and Re 1 per kg respectively. These Prices may be
changed by the Central Government from time to time, but after 3 years of the act only.
3. 2.43 crore people under AAY (Antyodaya Anna Yojana) will get 35 kg food grain per household per
month.
4. There is a special focus on nutritional support to pregnant women and lactating mothers and children
up to 14 years of age by entitling them to nutritious meals. Pregnant women will also be entitled to
receive cash maternity benefit of Rs. 6,000 in order to partly compensate her for the wage loss during
the period of pregnancy and also to supplement nutrition.
5. The act contains an important provision for women empowerment by giving status of head of the
household to the eldest woman of the household, for the purpose of issuing of ration cards.
6. State Governments have been given responsibilities to identify the households within 365 days of the
passage of the act.
7. For children below 6 months, exclusive breast feeding is to be promoted. For children between 6
months to 6 years, age-appropriate free meals will be provided by the aanganwadi Centres. For
children between 6-14 years of age (unto Class VIII) will be given Mid-Day Meal at public schools.
8. Every pregnant and lactating mother will get free meal at local aanganwadi (till 6 months of delivery)
and a maternity benefit of Rs 6000 in instalments.
5.3 Challenges in ensuring food security

Over the coming decades, a changing climate, growing global population, rising food prices,
poor agricultural growth rate (trends shown below) and environmental stress factors will have
significant yet highly uncertain impacts on food security.
Moreover, a significant proportion of population is economically backward to be able to afford

adequate food for fulfilling their dietary requirements. Despite the availability of government
support programs, there have been numerous questions at international forums like WTO over
government public procurement and distribution of food grains to the needy people.
To tackle the quantitative and qualitative aspect of food security problem, India provides three
food-based safety nets and one monitoring programme.
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 Public Distribution System (PDS)

 Integrated Child Development
Scheme (ICDS)
 Mid-Day Meals Program (MDM)
 National Nutrition Mission (POSHAN
ABHIYAAN) – Monitoring program.
5.3.1 Public Distribution System (PDS)

 The Public Distribution System (PDS) evolved as a system of management of scarcity through
distribution of food grains at affordable prices.
 Over the years, PDS has become an important part of Government’s policy for management of food
economy in the country.
 PDS is supplemental in nature and is not intended to make available the entire requirement of any of
the commodities distributed under it to a household or a section of the society.
 PDS is operated under the joint responsibility of the Central and the State Governments.
 The Central Government, through Food Corporation of India (FCI), has assumed the responsibility for
procurement, storage, transportation and bulk allocation of food grains to the State Governments.
 The operational responsibility including allocation within State, identification of eligible families, issue
of Ration Cards and supervision of the functioning of Fair Price Shops (FPSs) etc., rest with the State
Governments.
 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
5.3.2 Integrated Child Development Scheme (ICDS)

A centrally sponsored scheme launched in 1975, it is a one of the largest child intervention programs in
the world with a holistic package of 6 basic services for children up to 6 years of age, and for pregnant
and lactating mothers. These services are:
a. Supplementary feedings (Child-500 calories, 12-15gm protein for 300 days, Pregnant mothers-600
calories, and 18-20 gm protein).
b. Immunization
c. Health Check-ups
d. Referral services
e. Health and nutrition education to adult women.
f. Non- formal pre-school education to 3-6 years old.
5.3.3 Mid-Day Meal (MDM) Scheme

MDM is the world’s largest school feeding program reaching out to about 11 crore children in Schools
and Education Guarantee centres (EGS) across the country. National Program of nutritional support to
primary education, also called MDM scheme was launched in 1995. It is
a nationwide central scheme intended to improve:
 The enrolment and regular attendance and
 To reduce the dropouts in schools.
 To improve nutritional status of primary school children.
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From 2008-09, Children from upper primary level i.e., till Class VIII were also included in the scheme.
 For Primary students- 300 calories and 8-12 gm protein and
 For Upper primary students-700 calories and 20 gm protein has been kept as norm.
Critical Appraisal of ICDS and MDM
India’s one of the biggest flagship programs, the Rs 8,000 crore-a-year Supplementary Nutrition Program
(SNP) to fight child malnourishment under ICDS suffers from gross violations and
misuse of rules and has failed in meeting its ends.
1. Due to meagre allocation of resources and faulty policy designs, the overall impact of ICDS and MDM
over malnutrition has remained very limited. The states with high degree of malnutrition, have low
coverage of both the schemes.
2. Nutrient deficient meal: is being served at most of the schools. Since food is nutrition deficient in ICDS
as well, children are facing the problem of hidden hunger i.e., prevalence of Iodine, calcium, iron or
Vitamin A deficiency.
3. Disproportionate focus: ICDS has limited itself with just one function of Supplementary Nutritional
Program (SNP) and is not concerned about other functions. Also, it focuses on children of 3-6 years of
age, so, 0-3 years (when maximum nutrition is required) old are neglected.
4. Poor Implementation: ICDS is poorly implemented. Also, several posts such as of CDPO (Child
development project officer) and supervisors remain vacant in many states.
5. Corruption in the implementation: Rampant corruption, fudged records and bland panjiri has become
the reality of ICDS. FOCUS reports (Focus on Children Under Six Report by Right to Food Campaign
NGO) show that corruption is the main reason for failure of ICDS and MDM in removing malnutrition.
It was found that ‘panjiri’ (ready-to-eat energy mix) meant for children is being used illegally to feed
the cattle of rich and influential in Uttar Pradesh.
6. Misuse of resources: MDM is falling prey to private contractors. Also, political leaders and influential
business people have formed SHGs (Self Help Groups) and Mahila-mandals to gain such contracts.
5.3.4 National Nutrition Mission (NNM)

It is a flagship programme which would be executed with the Ministry of Women and Child Development
(WCD) as the nodal ministry along with other ministries like Ministry of Drinking Water and Sanitation,
Ministry of Health and Family Welfare etc. which ensures convergence with various programmes.
Target: The mission, to be implemented in three phases, has a target to reduce
1. Stunting- low height-for-age

2. Undernutrition, and
3. Low birth weight by 2 per cent per annum, and
4. Anaemia among children (of 6-59 months) and women/adolescent girls (15-49 years) by 3 per cent
annually.
It would also strive to achieve reduction in stunting from 38.4% (NFHS-4) to 25% by 2022 (Mission 25 by
2022
Salient Features: The salient features of India’s National Nutritional Mission include the following:
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 NNM as an apex body will monitor, supervise, fix targets and guide the nutrition related interventions
through the life cycle concept.
 Mapping of various schemes contributing under malnutrition.
 ICT (Information and Communication Technology) based real time monitoring system.
 Incentivizing states/UTs for meeting targets.
 Incentivizing Anganwadi Workers (AWW) for using IT based tools and eliminating the need for
registers.
 Measurement of height of children at Anganwadi Centres.
 Social Audits to track the health progress of the children.
 Setting-up Nutrition Resource Centres.
6 Non-Institutional and Institutional Agencies in rural credit
History of Financing Agriculture in India
1. Finance in agriculture is as important as other inputs being used in agricultural production.

2. Technical inputs can be purchased and used by farmer only if he has money (funds). But his own
money is always inadequate and he needs outside finance or credit.
3. Professional money lenders were the only source of credit to agriculture till 1935. They used to
charge unduly high rates of interest and follow serious practices while giving loans and recovering
them. As a result, farmers were heavily burdened with debts and many of them perpetuated debts.
4. With the passing of Reserve Bank of India Act 1934, District Central Co-op. Banks Act and Land
Development Banks Act, agricultural credit received impetus and there were improvements in
agricultural credit.
5. A powerful alternative agency came into being. Large scale credit became available with reasonable
rates of interest at easy terms, both in terms of granting loans and recovery of them.
6. Although the co-operative banks started financing agriculture with their establishments in 1930’s real
impetus was received only after Independence when suitable legislation were passed and policies
were formulated. Thereafter, bank credit to agriculture made phenomenal progress by opening
branches in rural areas and attracting deposits.
6.1 Agricultural Credit System in India
Farmers get external financial assistance from two sources namely,

 Non-institutional or unorganized agencies, and
 Institutional or organized agencies.
It is a fact that agriculture has been financed by non-institutional agencies for a long time and institutional
agencies were started functioning only during the early part of this century.
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6.2 Non-Institutional Sources of Finance in India

Non-institutional sources include money lenders, land lords, traders, commission agents, friends and
relatives.
1. Money Lenders
There are two types of money lenders in rural areas -
A. Agricultural money lenders, and
B. Professional money lender.
Agricultural money lender's main occupation is farming and money lending is secondary one. Professional
money lender's main profession is money lending. Although the reliance on money lender by rural poor
declined over the years, the credit disbursed by money lenders still forms a major portion of the total
credit obtained by the farmers.
2. Land Lords
I. Small farmers and tenants rely on land lords for finance to meet out their productive and
unproductive expenses. This source of finance has all the defects associated with money lenders.
II. Interest rates are exorbitant. Often small farmers are forced to sell out their lands to these land
lords and they become land less labourers. Landless labourers bonded labourers.
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III. The reliance on this agency by farmers has been decreased over years, i.e., from 1.5 per cent in
1951 to 1.0 per cent in 2002.
3. Traders and Commission Agents

I. They are functioning either to get regular supply of products for their trade or to have a control
over the provision of credit by other creditors. Ex: Traders at APMC Mandis.
II. Though the rate of interest charged by them is not as high as charged by the money lenders,
they charge more in the form of concessions and service charges (Ex: weighing charges, finding
buyers for the product)
III. They mostly finance for the cultivation of commercial crops like sugarcane, cotton, ground-nut,
tobacco, onion, etc. The share of credit provided by these agencies to total credit decreased
from 5.5 per cent in 1951 to 2.5 per cent in 2002.
4. Relatives
Farmers borrow from their relatives for temporary exigencies. It is simply a mutual help. Since all farmers
are living under similar conditions, they cannot lend large sums as loans. Normally, no interest is paid on
such loans.
6.3 Institutional Credit Agencies

 As compared to the quantum of credit requirement and the capacity of institutions to meet these
credit demands under multiagency system, it is impossible to completely wipe out the private agencies
from the rural scene.
 The Banking committee (1931) and the Banking Commission (1972) offered suggestions to get over
the evil aspects of private lending agencies and bring them under sound credit system. These
suggestions may be adopted till the institutional agencies attain the capacity to meet the full demand
for credit.
The major institutions supplying credit to agricultural sector are:

i) Government
ii) Cooperatives
iii) Commercial Banks
iv) Regional Rural Banks
v) NABARD (National Bank for Agricultural and Rural Development)
i) Government
The Government provides both direct and indirect finance to farming sector.
Direct Finance
The government provides taccavi loans in times of distress like famine, flood, drought etc. Land
Improvement Act of 1883 and the Agriculturists Loans Act of 1984 were enacted to extend long and short-
term financial assistance to farmers for agricultural development and also as a relief measures during
distress times.
Merits
 They are granted for long period of time.
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 Low interest is charged.

 The repayment plan is convenient, i.e., repayment in equal annual instalments.
Demerits
 Quantum of loan is determined on the basis of value of security offered, by which, large farmers
receive more credit than small and marginal farmers.
 As these loans are not production oriented, they do not satisfy the standard needed for sound system
of form credit.
 The loan amount is inadequate.
i) The land less labourers were left out in the lurch at the time of distress.
Indirect Finance to Agriculture by Government

1. It allocates subsidized fertilizer to states according to their needs.
2. It provides technical assistance to farmers through Krishi Vigyan Kendra’s.
3. It implements Price stabilization schemes for various crops.
4. In consultation with the RBI, the government prescribes the rates of interest to be charged on loans
granted to weaker sections of rural areas.
5. It contributes to the share capital and debentures of co-operatives
Instead of playing direct role in providing credit, the government may also play a vital role in creating
conditions for infra-structural facilities to the promotion of institutional credit.
Important note: Rest of the institutions are covered in detail in the concept notes of Rural banking and
Financial institutions in India.
7 Significance of Agriculture in India
 Highest Employment Provider: More Indians depend directly or indirectly on agriculture for
employment than on any other sector.
 Addresses Malnutrition and provides food security: Agriculture holds a key to reducing India’s
malnutrition problem, directly affecting public health and worker productivity.
 Augmenting Economic Growth: Agriculture has the potential to spur India’s overall gross domestic
product growth. Agricultural growth of 4%, would add at least a percentage point to GDP, increase
exports and improve India’s trade deficit.
 Economic transformation: Economic transformation in developing nations is propelled by increase

in agricultural incomes underpinning industrial growth. For example, China's economic growth.
 Effective utilisation of vital resources: India’s vital land and water resources, which farmers use for
agricultural production, assume more significance especially in the face of mounting scarcity,
environmental degradation, and climate change.
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8 Issues in Indian agriculture
8.1 Agricultural land at risk
At 169.6 million hectares, India’s cultivated landmass is the largest in the world. But the Government of
India’s top research institute reports that nearly 60% of agricultural land is at risk because of fertilizer
misuse, poor cropping practices and soil nutrient deficiencies.
8.2 Poor utilization of water resources
India uses 13% of the world’s extracted water and 87% used for irrigation. Irrigation water use efficiency
is very low. 35-40% efficiency in surface irrigation such as flooding or canals, and 65-75% efficiency when
pumping groundwater. These unsustainable practices are depleting the country’s aquifers. One of the
recommendations of the M.S. Swaminathan Committee was to reform irrigation resources and its
distribution among farmers. The commission also suggested the use of rainwater harvesting, water level
recharging to increase water supply.
8.3 Unemployment among agricultural workers
55% of the population is engaged in agricultural production. As farms are divided among family members,
average farm size today is half what it was 40 years ago. Unemployment among agricultural workers rose
from 9.5% in 1993-94 to 15.3% in 2004-05.
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8.4 Falling Investment in Agriculture
The Gross Capital Formation (GCF) in agriculture as a percentage of the total GCF in the economy
has fallen from 8.5 % in Financial Year 2011-12 to 6.5 % in Financial Year 2018-19. This is because the
share of private investment has shrunk. Though public investment has gone up it is not sufficient to
check the slide or keep the GCF at FY12 level.
8.5 Subsidy and Related Issues
Government subsidies to farmers for fertilizer, electricity and irrigation increased more than eightfold
between 1990-91 and 2006-07. Areas receiving the highest subsidies regularly underperform those
with lower subsidies. Government subsidies for buying and distributing food grains to low income and
disadvantaged households grew from 2.2% of agricultural GDP during the 1990s to 5% in the 2000s,
crowding out investments in agricultural education, research, technology and extension.
8.6 Harvest and post-harvest losses
Ministry of Agriculture reports that from 2005-2007, 30% of harvest and post-harvest economic losses
came from the fruit and vegetable sectors, although that sector comprised only 13.6% of total production.
8.7 Minimum Support Price (MSP) and Related Issues
 Selective Procurement: The government declares MSP for 23 crops, only wheat and paddy (rice)
are procured in large quantities as they are required to meet the requirement of the Public
Distribution System (PDS), which is about 65 million tonnes.
 Stagnant Rates of MSP: The government declaration of Minimum support prices do not increase
at par with increase in cost of production.
 Unequal Access: The benefits of this scheme do not reach all farmers and for all crops. There are
many regions of the country like the north-eastern region where the implementation is too weak.
 Non-Scientific Practices: MSP leads to non-scientific agricultural practices whereby the soil, water
is stressed to an extent of degrading ground water table and salinisation of soil.
8.8 Land Size
 Decreasing Area: Area under agriculture has been shrinking, it reduced from 159.5 million
hectares (mn ha) in 2010-11 to 157 mn ha in 2015-16.
 Increase in Land Holdings: The number of operational holdings has been rising (increased from
138.3 million to about 146 million) owing to increasing population. This leads to falling average
landholdings’ size of farmers, which has come down from 1.2 ha to about 1.08 ha.
 Forced Selling: Smaller landholdings produce smaller pockets of produce, aggregation of which
becomes essential for even a trolley-load to be carried to an Agricultural Produce Market
Committee mandi or a nearby market. Due to small holdings caused by fragmentation, small and
marginal farmers are forced to sell their produce at the farm gate itself. This is especially so in
states that have a weak network of APMC mandis.
 No Access to Modern Technology: Bringing new technologies and practices to such a large number
of smallholders scattered over a vast countryside and integrating them with the modern input and
output markets is a huge challenge for Indian agriculture.
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8.9 Low crop yields
India has reported a record food grain production of an estimated around 296 million tonnes in recent
years. Production of food grains has seen a rise over the last few years with India being the largest
producer of pulses and the third largest producer of cereals in the world. Likewise, yield of food grains
has increased as well; however, it lags when compared with other agrarian economies. For instance, India
accounted for 24 percent of the world pulses production in 2017. While in terms of yield (664 kg/hectare)
it was lowest among the top 10 countries, well below the global average (1009 kg/hectare). The case is
the same for other crops as well. India, despite being the second-largest producer of paddy and wheat
after China, reports low yield compared to other countries and below the world average.
8.10 Dependence on monsoon
Reliance on seasonal rainfall hampers productivity. Additionally, change in climatic conditions and erratic
weather patterns such as cyclones and droughts can impact yields of agricultural crops. The growth of
India’s agriculture sector has been dependent on monsoons, and as a result, it has been volatile.
8.11 Low share in global markets
Another positive development amidst the pandemic for the sector has been an uptick in exports of
agriculture commodities between March and September. Overall, while India has emerged as an agri-
exporter nation with regards to crops such as rice, spices, tea, sugar etc., the share of India’s agricultural
exports in world trade remains low. The share of agri-exports to the country’s total merchandise exports
needs to improve as well. It has remained in the range of 12 percent on an average over the last five years,
falling to 11.9 percent in 2018-19, from a high of 20.33 percent in 1996-97.
8.12 Indebtedness and farmer suicides
The average monthly income of an Indian agriculture household was estimated at Rs 6,426, with a wide-
spread disparity across states, ranging from Rs 18,059 in Punjab to Rs 3,558 in Bihar. About 52 percent of
agricultural households in India are indebted. Nearly 64 percent of the marginal farmers (holding land less
than one hectare) or agricultural households are indebted, followed by small (1 to 2 hectares) agricultural
households (18 percent). As many as 10,000 suicides were reported in the farming sector in recent years,
of which 58 percent were farmers/cultivators and remaining were agricultural. Over 86 percent of
agricultural land-holdings belong to the marginal and small farmers, according to the Agriculture Census
2015-16.
8.13 Poor Linkage with Industrial Sector
Indian agriculture in most parts of the country has a very limited forward linkage with other activities. The
links between agriculture and industry in terms of labour and material inputs are still very weak. The
existing links are to provide raw materials for agro-based industries and a provider of raw materials to the
industrial sector.
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9 Impact
9.1 Low income for farmers
The above factors have resulted in low income for farmers which is evident from the incidence of
poverty among farm households.
9.2 Less Farm investments
The low and highly fluctuating farm income is causing a detrimental effect on the interest in farming
and farm investments and is also forcing more and more cultivators, particularly younger age group, to
leave farming.
9.3 Farmer Suicides
The country also witnessed a sharp increase in the number of farmers suicides in the last decades. For
instance, major farmers suicide has been noted from Maharashtra, Chhattisgarh etc.
9.4 Food Security
This can cause an adverse effect on the future of food security and the state of agriculture in the country.
10 Steps taken to Increase Agricultural Production in India
10.1 Technological Measures
Measures are taken to increase agricultural production substantially to meet the growing needs of the
population and also to provide a base for industrial development including steps to increase both
extensive cultivation and intensive cultivation. The Green Revolution based on the use of package
technology and the White Revolution (Operation flood) were some of the strategies initiated to improve
Indian agriculture
10.2 Land reforms
Land reform measures are taken to abolish intermediatory

interests in land (viz. Zamindars, Jagirdars etc.) and transfer of
land to actual tiller of the soil were expected to be taken up
on a priority basis. Measures taken are:
 Abolition of intermediaries,
 Tenancy reform to
A. regulate rents paid by tenants to landlord
B. provide security of tenure to tenants
C. confer ownership rights on tenants and
 Imposition of ceiling on holdings in a bid to procure land for distribution among landless labourers and
marginal farmers. These land reform measures are taken to irradiate the parasitic class of Zamindars.
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10.3 Cooperation and consolidation of holdings
To prevent fragmentation of holdings, Indian agricultural policy introduced the programmes of

cooperation and consolidation of holdings. Latter programmes aimed at consolidating plots owned by a
particular farmer in different places of village by sanctioning land at one place of equal area or value to
his plot of land. This avoids wastage of time and energy employed in cultivation and he can practise
scientific technique of production. Cooperation aims at uniting small and marginal farmers together to
reap the harvest of large-scale farming. Under cooperative farming small and middle-class farmers use
their land and resources and practise joint cultivation.
10.4 Institution involving people’s participation in planning
No planning is possible without the cooperation of the masses. Nothing is possible unless the masses are
encouraged to join hands with the planning authorities for the betterment of the plans and programmes.
The programme of community development that was initiated in 1952 was aimed to be a project of the
people, by the people and for the people. The role of the government and administrative authority was
defined as ‘to help the people’ to help themselves. The experience of the community development
programme reads a sad story. The programme of democratic decentralization, commonly known as
Panchayat Raj, proved to be worse. The local ‘dadas’ and political elements exploited the masses to their
advantage.
10.5 Institutional credit
Another important measure was expansion of institutional credits to farmers through cooperative and
commercial banks. After nationalisation of banks in 1969, nationalised banks have paid increasing
attention to the needs of agriculture. Regional Rural Banks were also set up to deal specially, with the
needs of agricultural credit. A National Bank for Agriculture and Rural Development (NABARD) was also
set up. As a result, credit facilities were available to the farmers, the importance of money lenders has
declined and exploitation of farmers at the hands of moneylenders is reduced. This was also
recommended by the M.S. Swaminathan Committee (National Commission on Farmers).
10.6 Procurement and support prices
Announcement of procurement of support prices to ensure fair returns to the farmers so that even in
years of surplus the prices do not tumble down and farmers do not suffer loss. In fact, the policy of the
commission for agricultural cost and price in recent years has been to announce fairly high prices in a bid
to provide incentive to farmers to expand production.
10.7 Input subsidies to agriculture
The government has provided massive subsidies to farmers on agricultural inputs like irrigation, fertilizers
and power. The objectives of input subsidisation are to increase agricultural production and productivity
by encouraging the use of modern inputs in agriculture. Under this policy various inputs are given to the
farmers at a subsidised rate.
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10.8 Food security system
To provide food grains and other essential good to consumers at cheap and subsidised rate, the
Government of India has built up an elaborate food security system in the form of Public Distribution
System during the planning period. It operates as a ‘safety net’ by maintaining the stock of food grain in
order to fight the shortage of food.
10.9 Rural Employment Programmes
To provide purchasing power to the poor, rural employment the programmes are needed. Government
introduced poverty alleviation programmes from the Fourth Plan onwards like Small Farmers
Development Agency (SFDA), Marginal Farmers and Agricultural Labour Development Agency (MFAL),
National Rural Employment Programme (NREP), Rural Landless: Employment Guarantee Programme
(RLECP) Jawahar Rozgar Yojana (JRY), Sampoorna Grameen Rozgar Yojana (SCRY) etc.
10.10 Doubling farmers' income by 2022-23
It is central to promote farmers welfare, reduce agrarian distress and bring parity between the income
of farmers and those working in non-agricultural professions.
10.11 Priority Sector Lending (PSL)
Agriculture is a major component of Priority Sector Lending (PSL), and the target for bank lending to
agriculture has been revised upwards every year.
11 Important Schemes initiated by the government
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11.1 Pradhan Mantri Krishi Sinchayee Yojana
 To achieve convergence of investments in irrigation at the field level.

 To enhance the recharge of aquifers and introduce sustainable water conservation practices.
11.2 Rashtriya Krishi Vikas Yojana – RAFTAAR (RKVY-RAFTAAR)
 To make farming a remunerative economic activity through strengthening the farmer’s efforts, risk
mitigation and promoting agribusiness entrepreneurship.
11.3 National Food Security Mission
 Increasing production of rice, wheat, pulses, coarse cereals and commercial crops through area
expansion and productivity enhancement in a sustainable manner.
 Restore soil fertility and productivity at the individual farm level.
11.4 Soil Health Card Scheme
 To issue soil health cards every 3 years, to all farmers of the country, so as to provide a basis to address
nutrient deficiencies in fertilization practices.
11.5 PM Fasal Bima Yojana
 To provide insurance coverage and financial support to the farmers in the event of natural calamities,
pests & diseases.
 To stabilise the income of farmers to ensure their continuance in farming.
11.6 National Agricultural Market (NAM)
 To promote genuine price discovery

 Increases farmers’ options for sale and access to market
 Liberal licensing of traders / buyers and commission agents. One license for a trader valid across
all markets in the State
11.7 Pradhan Mantri Annadata Aay SanraksHan Abhiyan (PM-AASHA)
 The Scheme is aimed at ensuring remunerative prices to the farmers for their produce as announced
in the Union Budget for 2018.
 It is expected that the increase in MSP will be translated to farmers’ income by way of robust
procurement mechanism in coordination with the State Governments.
11.8 Pradhan Mantri Kisan Samman Nidhi (PM-KISAN)
 To provide income support to all farmer families having cultivable land.

 To supplement the financial needs of the farmers in procuring various inputs to ensure proper crop
health and appropriate yields, commensurate with the anticipated farm income.
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12 Measures to be taken for Sustainable Agriculture

12.1 Addressing Subsidies Problem
 Freeing up input prices to market levels, or charging an optimum cost pricing for fertilisers, power,
agri-credit, and canal waters fees.
 Channelizing the resulting savings for expenditures on investments in agricultural R&D, irrigation,
marketing infrastructure, building value chains by involving Farmer Producer Organisations
(FPOs) and linking farms to organised retail, food processing, and export markets.
 Direct income transfers to farmers should be promoted by leveraging the trinity of Jan Dhan–
Aadhaar–Mobile (JAM) to reduce the leakages and pilferage.
12.2 Allowing Land Leasing
 As recommended by M.S. Swaminathan committee, the central government, in association with the
state governments, should free up land lease markets, which can help provide farmers with a steady
income, while maintaining asset security.
 In remote dry areas, leasing land to solar or wind power companies could provide farmers with
relatively higher and steadier incomes.
 The Model Land Lease Act, 2016 offers an appropriate template for the states and UTs to draft their
own piece of legislations, in consonance with the local requirements and adopt an enabling Act.
12.3 Increasing Avenues for Non-Farm Income
 Subsidised electricity should be rationalised, as today solar water pumps are operationally and
financially sustainable.
 This will reduce government burden of electricity subsidies, while at the same time allowing surplus
power from the solar powered pumps to be sold back to the grid.
 Promoting value-added uses of biomass like Bamboo for construction and other applications, rice
husk and bagasse-based mini-power plants, and ethanol from sugar cane and corn can all help
augment farmer incomes in sustainable ways while developing more dynamic local rural economies.
12.4 Improving Agricultural Export Scenario
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 India needs to address the composition of its agriculture export basket. Currently agricultural
exports constitute 10% of the country’s exports, but the majority of its exports are low value, raw or
semi-processed, and marketed in bulk.
 The share of India’s high value and value-added agriculture produce is less than 15%.
 Robust agriculture exports will increase the demand for India’s farm output (and hence, incomes of
farmers).
 In this context, the government has launched Agriculture Export Policy 2018. It is aimed at doubling
the agricultural exports and integrating Indian farmers and agricultural products with the global
value chains. Effective implementation and political will are the need of the hour.
12.5 Investing in Agriculture Infrastructure
 The most sustainable way to augment farmers’ real incomes over the long term is through
investments in productivity-enhancing areas, ranging from agricultural research and development
(R&D), to irrigation to the development of rural and marketing infrastructure.
 Local level investments that seek to build village level storage facilities, better surface irrigation
management, and investments in drip irrigation, tile drainage, trap crops, etc, that can give results
in a relatively short period of time.
12.6 Agricultural Marketing Reforms
 Farmers’ income can improve substantially if they are able to capture a greater share in the supply
chain from farm gate to consumer.
 For this to happen, farmers must have the freedom to sell what they want, where they want, and
when they want without any restrictions on sale, stocking, movement, and export of farm produce.
 These will require legal and institutional changes, major investments in market infrastructure and
storage (including cold-chain storage), and incentives for the creation and operation of infrastructure
by FPOs.
 In this context, the state needs to adopt Model Agriculture Produce and Livestock Marketing Act,
2017.
12.7 Need For Cooperative Federalism
 Agriculture is a state subject and many of the important levers—water, power, irrigation, extension,
etc—are controlled by the states. However, the central government continues to play a larger role.
 Thus, reforms can only succeed if the central and state governments work closely together in a spirit
of “cooperative federalism.”
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12.8 Improvements in allied sectors
Many small farmers cannot leave agriculture because of a lack of opportunities in the non-farm sector.
Hence, allied sectors like horticulture, food processing, poultry etc needs to be pushed. For instance,
government initiative like Project CHAMAN, AGRI-UDAAN programme, Scheme for Agro-Marine
Processing and Development of Agro-Processing Clusters (SAMPADA) etc. are notable.
12.9 Cooperative Farming
As recommended by the M.S. Swaminathan Committee, consolidation of land holdings also becomes
important to raise farmer incomes. Farmers can voluntarily come together and pool land to gain the
benefits of size. Through consolidation, farmers can reap the economies of scale both in input
procurement and output marketing.
12.10 Diversification
There is a need to make a shift from rice and wheat-centric policies to millet, pulses, fruits, vegetables,
livestock and fish.
12.11 Unified National Market
The creation of a competitive, stable and unified national market is needed for farmers to get better
prices. National Agricultural Market (NAM) was launched in 2016. It needs to be more strenghthened.
12.12 Efforts for doubling farmers income
The quantitative framework for doubling farmers income has the following seven sources of growth:
 Increase in productivity of crops

 Increase in production of livestock
 Improvement in the efficiency of input use (cost saving)
 Increase in crop intensity
 Diversification towards high-value crops
 Improved price realization by farmers
 The shift of cultivators to non-farm jobs
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12.13 Innovations
The major innovations in production technologies that can significantly impact overall productivity and
production in India include:
 Climate resilient seeds - The Indian Council of Agricultural Research (ICAR) has introduced climate-
smart rice varieties – CR Dhan 801 and 802. These varieties, which have greater tolerance to
submergence as well as drought, are a first for rice research and are unique globally. There is lot of
ongoing research on seed varieties that are resistant to drought and submergence. The farmers just
need to be incentivised to use such seeds and adopt climate smart farming practices such as changing
sowing and harvesting timings, cropping patterns and inter-cropping.
 Protected and sustainable agriculture - Intensified agriculture with high input and high output has
resulted in huge stresses on limited natural resources and the rural environment. In India,
technologies to address this issue include micro-irrigation, solar pumps, neem coating of urea and soil
health cards. Neem coating of urea, which is said to increase nutrient efficiency by 10 percent, has
reduced the quantity of urea required by crops. In addition, unfolding innovations in farming practices
such as soil-less farming systems – hydroponics, aeroponics, aquaponics and poly-house farming
systems – need to be evaluated before being scaled up.
12.14 Incentives
 Direct income/cash transfer - Given the extensive leakages and inefficiencies involved in input
subsidies, along with their low impact on poverty alleviation and growth, it is important to shift the
priority from subsidies to investment as well as supporting farmers in a more predictable and
structured manner. This points to income-support measures, which are less distorting and directly
reach the real beneficiaries.
 Incentive for water and energy conservation - Both the Central and state governments have
introduced different incentives for farmers to save water and use solar technology. A crucial step in
this direction has been the introduction of the Pradhan Mantri Krishi Sinchai Yojana in 2015-16 and
popularising micro-irrigation to ensure ‘per drop, more crop’. The scheme is a step in the right
direction towards promoting efficient water and electricity use. But whether or not it is scalable is a
matter of further research.
13 Conclusion
 The ever-changing agriculture sector requires proactive policy management which can maximize
benefits for all stakeholders.
 Raising the MSP, price deficiency payments or income support schemes can only be a partial
solution to the problem of providing remunerative returns to farmers.
 A sustainable solution is market reforms to enable better price discovery combined with long-term
trade policies favourable to exports.
 For better price for farmers, agriculture has to go beyond farming and develop a value
chain comprising farming, wholesaling, warehousing, logistics, processing and retailing.
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 The most effective and least distortionary way to support farmers would be through direct benefit
transfers.
 What is abundantly clear is that loan waivers aren’t the panacea they’re made out to be politically.
Those who want to help India’s farmers should be working much harder to figure out what they
really need.
14 Unresolved Issues
14.1 Changing Climate Affecting Agriculture
 Extreme heat: Crops need suitable soil, water, sunlight, and heat to grow. However, extreme heat
events and reductions in precipitation and water availability have hampered the crop productivity.
 Changing Rainfall Patterns: Rainfall patterns have already begun shifting across the country, and
such changes are expected to intensify over the coming years. This is likely to mean more intense
periods of heavy rain and longer dry periods, even within the same regions.
 Floods: Flooding in many agricultural regions of the country have been witnessed and these floods
have devastated crops and livestock, accelerated soil erosion and have polluted water.
Measures that can be taken
 Low External Input Systems: Moving our current agricultural production systems from an input-
intensive regime to low external input systems requires engaging with farmers to first demonstrate
alternate practices and then convincing them to change their practices.
Concepts such as Low External Input Sustainable Agriculture (LEISA) are receiving increased
attention as a sustainable alternative to chemical farming.
 Zero Budget Natural Farming (ZBNF): It encourages farmers to use low-cost locally sourced input
and should be promoted to minimise the use of chemical fertilisers and pesticides.
 Small and Marginal Farmers: They should be persuaded to shift to alternate packages of practices,
demonstrated the effectiveness of these practices and encouraged to work in collaboration with
the Krishi Vigyan Kendras to increase the outreach. For example, Cotton farmers in Maharashtra’s
Yavatmal district are making the shift to a package of practices that lower the use of water (through
in-situ soil moisture conservation and other demand management measures), promote the use of
biofertilizers and biopesticides as a means to reduce the cost of cultivation and lower the
environmental footprint of cotton cultivation.
 Multiple stress tolerant varieties: Developing varieties tolerant to multiple abiotic and biotic
stresses using stress-tolerant QTLs, genes and alleles in elite cultivars, is an efficient way of achieving
climate resilience with easy access to farmers. ICAR developed crop varieties such as CR Dhan 801
and CR Dhan 802 for rice and several others for other crops, which are tolerant to multiple stresses
i.e., submergence, salinity, drought, heat, pests and diseases.
 Conservation agriculture: Conservation agriculture helps to reduce the carbon footprint of the
production system, improves productivity and enhances adaptability by modulating soil moisture
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and temperature regimes. Such practices are followed by farmers on a large scale in the Indo-
Gangetic Plains. However, refinement and promotion are required to extend the technology in
climatic stressed, dry land areas.
 Mechanisation in agriculture with renewable energy sources: Solar-powered machineries such as

water pumps, sprayers and weeders are better alternatives to diesel powered machines in India.
Such machines are economical, help in timely field operation at low cost, affordable to small farmers,
and do not release greenhouse gases. Individual farmers, panchayats, cooperatives, farmer producer
organisations can install solar power plants for which government is providing incentives.
14.2 Farmers’ Suicides
India is an agrarian country with around 70% of its people depending directly or indirectly upon
agriculture. But farmers’ suicides in India is worrying. As per the Central Government despite a multi-
pronged approach to improving income and social security of farmers, over 12,000 suicides were reported
in the agricultural sector every year since 2013. Farmer suicides account for approximately 10% of all
suicides in India. There is no denying that the menace of farmer’s suicides exists and runs counter to the
aspirations of reaping benefits of our demographic dividend.
Facts
 Seven states account for 87.5% of total suicides in the farming sector in the country. The states are
Maharashtra, Karnataka, Telangana, Madhya Pradesh, Chhattisgarh, Andhra Pradesh and Tamil Nadu.
 Both marginal farmers and small farmers are committing suicide.
 Ironically, Punjab, which benefited most from the Green Revolution, also presents a depressing picture
of farmer’s suicides in India.
Causes
 The surge in input costs: A major cause of the farmers’ suicides in India has been the increasing burden
on the farmers due to inflated prices of agricultural inputs. The culmination of these factors is seen in
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the overall increase in the cost of cultivation, for wheat, the cost at present is three times than it was
in 2005.
 Cost of chemicals and seeds: Be it the fertilisers, crop protection chemicals or even the seeds for
cultivation, farming has become expensive for the already indebted farmers.
 Costs of Agricultural equipment: The input costs, moreover, aren’t limited to the basic raw materials.
Using agricultural equipment and machinery like tractors, submersible pumps etc adds to the already
surging costs. Besides, these secondary inputs have themselves become less affordable for the small
and marginal farmers.
 Labour costs: Likewise, hiring labourers and animals is getting costlier too. While this may reflect an
improvement in the socio-economic status of the labourers, driven primarily by MGNERGA and hike
in minimum basic income, this has not gone too well with boosting the agriculture sector.
 Distressed due to loans: NCRB data points out that in 2474 suicides out of the studied 3000 farmer
suicides in 2015 the victims had unpaid loans from local banks. This is clear enough an indication for
drawing correlations between the two. Whether or not the banks had been harassing them, however,
is a long-drawn debate and needs more specific empirical evidence.
 Lack of direct integration with the market: Although initiatives like the National Agricultural
Market and contract farming are helping integrate the farmers’ produce directly with the market,
cutting the role of intermediaries, the reality is still lagging behind.
 Lack of awareness: The digital divide, as well as the literacy gap, has made the marginal and small
farmers particularly vulnerable due to their inability to utilise the positives of government policies.
This is reflected in the continued unsustainable cropping practices – like cultivating sugarcane in
water-deficit regions.
 Water crisis: The concentration of these suicides in the water-deficit regions of states like
Maharashtra, Karnataka is a manifestation of how the water crisis and thereby failure to meet
production demands have intensified the menace. This is particularly true in the backdrop of
continued failed monsoons.
 Interstate water disputes: What has added to the already prevalent crisis is the unwillingness to cater
to each other’s water needs amongst the states. A case in point is the recently resurfaced Kaveri
dispute that saw Karnataka and Tamil Nadu battle out water shortage both in and outside the tribunal
even to the extent of non-compliance with the tribunal award.
 Climate change has acted as the last nail in the coffin by resulting in furthering of the uncertainties
associated with the already uncertain monsoon system and hence agricultural production. While
incidents like flash floods have led to crop losses, deferred monsoons have seen production shortfall
year-in and year-out.
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 India’s urban consumer-driven economic policies: The political economy of India is driven more by
urban consumers than rural producers. This is reflected in the urgency to impose price controls in case
of price rise (imposing Minimum Export Prices, bringing items under Essential Commodities etc) and
a lacklustre withdrawal once the price is under control. Contrast this with how we have been imposing
a minimum import price to secure our steel sector. This differential treatment to primary sector also
limits profit margin and thereby hinders farmers’ chances of breaking free from the cycle of
indebtedness.
 Loan waivers instead of restructuring, re-investment measures: Our approach of handling farmer
indebtedness and hence farmer suicides have been appeasement politics like the recent move by the
UP government to waive off Rs 36000 crore worth of loans. Surprisingly this comes at a time when the
agricultural yield is expected to be better in the wake of a good monsoon.
 In essence, the factors sum up to crop failure, unsustainable production and subsequent farmer
indebtedness leading to failure of strengthening the economic state of the farmer as the driving force
behind these suicides.
Way Ahead
 Lower fertilizer costs – Helping fertiliser industries cut down on costs, through internal funding rather
than external borrowing should lower the input costs.
 Leveraging advancements in Science and Technology by ensuring that state seed policies focus on new
genotypes, contract farming and sensitization to adverse weather conditions.
 Precision farming techniques like SRI (Systematic Rice Intensification) must be encouraged.
 Farm equipment policy must focus on imported equipment to provide for cheaper local manufacture,
some incentives like grant of duty credit scrips may be tried.
 Subsidies must be rerouted towards capital generation and entrepreneurial Custom Hiring
Centers (CHCs) and the implementation must be ensured in a timely fashion.
 Corporate Social Responsibility (CSR) must be encouraged in the agricultural sector, particularly
towards capacity-building, skill development and the establishment of CHCs.
 Institutional financing must also be ensured to be adequate and inclusive rather than catering to the
elites within the farming community.
 Cooperative farming must be promoted amongst small and marginal farmers to ensure that they are
not left lurking while the big farmers reap the benefit at their cost.
 Doubling the farmer income by 2022 is a healthy aim, but loan waivers can’t be the answer. Instead,
sustainable agriculture that thrives on re-investment & restructuring is the way ahead. The role that
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the state has been playing is one of emancipation, but what the primary sector and the farmer needs
is empowerment.
 Direct interventions:
 Early-warning signals for unsustainable loans to launch a 2-pronged approach catering to both the
burdened farmers as well as stressed banks.
 Options for restructuring loans must be used wherever possible.
 Insurance claim settlements must be speedy and just.
 District wise list of indebted farmers and efforts in de-stressing them through counselling and
other alternative mechanisms should be tried.
 NABARD and local administration must take control of the situation and play a greater role in
curbing farmers’ suicides.
 Innovative efforts like Crowdfunding can be employed through the involvement of Civil Society
Organizations (CSOs).
 Efforts like Agro-Climatic zoning, education through DD Kisan, Soil Health Card Scheme, various crop
insurance and facilitative schemes like PM Krishi Sinchayi Yojana will go a long way in helping out.
 Community-led awareness must be taken employing a role model approach highlighting progress of
farmers who have benefited from sustainable & climate-tailored agricultural practices
14.3 Farm Loan Waiver
Loan waivers, originally intended for a one-time settlement. However, the past two decades have seen
such schemes announced with increasing regularity, signalling the chronic distress of the agricultural
sector in India. Though these demands seem more legitimate in the wake of the loss of livelihood due
to lockdown amid Covid-19, yet such loan waivers may prove detrimental to the banking system and
credit culture.
Rationale for Loan Waiver

 More than 85% of small and marginal farmers in India possess less than 1-2 hectares of holdings and
lack basic inputs for farming.
 In this context, the credit is a critical resource to farming households for carrying out crop production
and meeting consumption & daily-life expenses.
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 However, in India, the crop yield and production are highly dependent on monsoon. Farmers invest
heavily in crops by taking loans. If the crop fails due to lack of rains or insufficient market demand,
farmers will get trapped in debt. Due to this, there has been an increase in farmer suicides. Thereby,
waiving farm loans address this humanitarian crisis.
Issues Related to Loan Waivers
 Reputational Consequences: Loan waiver schemes will disrupt credit discipline as farm loan waivers
may act as a temporary solution and can prove to be a moral hazard in future. This is because those
farmers who can afford to pay their loans might not pay it expecting a waiver.
 Free Rider Problem: Some farmers may take loans even if there is no need, in the hope of the next
loan waiver scheme. This will impact the farmers who are genuinely in need of loans.
 Decline in Formal Access to Credit: After the implementation of debt waiver schemes and
subsequent losses to the banking industry, banks will be reluctant to lend further to the farm sector.
This leads to a rise in farmer’s dependence on informal sector lenders. In other words, waivers lead
to the shrinkage of a farmer’s future access to formal sector credit and thereby compel them to
depend on varying informal sources (like local moneylenders, Sahookaar) for credit.
 Impact on Banking Sector: A report by the Indian Council for Research on International Economic
Relations stated that the 2008 farm-loan waiver led to three-fold increase in non-performing assets
of commercial banks between 2009–2010 and 2012–2013. This further affects credit-deposit ratio
and risk-weighted capital adequacy ratio, return on assets and economic value of equity of banks.
This downgrades the ratings of banks in particular and destabilizes the functioning of the credit
market in general.
 Against the Interests of Depositors: Banks receive money from the depositors and lend money to
borrowers under different contracts and agreements. Thus, the loss to the bank, due to loan waivers,
is directly or indirectly against the interests of the depositors. Moreover, banks being custodians of
depositors’ money, need to be guided primarily by the protection of depositors’ interests.
Way Ahead
In the present situation, farm loan waivers act only as a temporary solution to the problems of farmers
and it will not make them free from issues like decreasing farm income, debt trap or crop failures. In this
context, there is a need for creative engagement through which the surplus workers in the farming sector
can be taken away to more productive sectors and farming can be made more profitable and sustainable
for all the people.
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Services Sector
in India

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Contents
1 Introduction ............................................................................................................................................3
2 Services Sector: Concept & Meaning .....................................................................................................3
2.1 Composition of GDP ........................................................................................................................4
2.2 Composition of Services Sector in India..........................................................................................4
3 Performance of Service Sector in India ..................................................................................................5
3.1 Sectoral Composition of GDP Growth.............................................................................................5
3.2 Employment Contribution of the Service Sector ............................................................................6
3.3 Causes of Rapid Increase in Tertiary Sector....................................................................................7
3.4 Prospects & Opportunities ..............................................................................................................8
3.4.1 Domestic Factors .....................................................................................................................8
3.4.2 International Factors ...............................................................................................................8
1 Introduction
We have come a long way from the days of physiocrats and mercantilists when agriculture and trade in
goods respectively were the engines of growth of economies. Production and trade in services have come
to the forefront. In modern economies, service sector performs many important roles.
 First, it represents a major share of the developed economies and is increasingly integrated in the
overall production system.
 Second, it plays an active role in market integration and globalisation.
 Third, the creation of employment, value added, income and exports is increasingly related to the
good performance of the services.
2 Services Sector: Concept & Meaning

The economy has basically three sectors.
 First, the primary sector comprising of agriculture, fishing, and extraction such as mining.
 Second sector is the secondary sector comprising of manufacturing.
 Third sector is the tertiary sector also referred to as service sector.
The basic characteristic of service sector is the production of services rather than end-products. Services
are intangible goods which include attention, advice, experience, and discussion. These are used to
enhance productivity, performance, potential and sustainability. The production of information is also
regarded as a service. However, some economists like to classify services relating to the information
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service in a fourth sector, now known as the quaternary sector i.e., the sector that comes after the third
and just before the fifth in position.
The tertiary sector involves the provision of services to other businesses. Services may involve the
transport, distribution and sale of goods from producer to a consumer, pest control, entertainment or
hotel industry. The goods are transformed in the process of providing the service. However, the focus is
on people interacting with people and serving the customer rather than transforming physical goods.
The composition of GDP of an economy explains the relative significance of the different producing
sectors. When a country is in a state of underdevelopment, primary sector makes the largest
contribution to the national income. As the country grows and gets developed, the contribution of the
industrial and service sectors gradually increases.
The explanation for this shift is as follows:
Income elasticity of demand for agricultural products is relatively low; as a result, with rising levels of
income, the demand for agricultural products relatively declines and that for industrial goods increases
and, after reaching a reasonably high level of income, demand for services increases sharply.
Accordingly, the shares of different sectors in the national product get determined by the changes in the
pattern of demand. On the supply side, agriculture, being mainly dependent on a fixed factor of
production, namely land, faces a limit on its growth and is subject to early operation of the law of
diminishing returns. Industry, specially manufacturing, on the other hand, offers large scope for use of
capital and technology, which could be augmented almost without limit with human effort. The same
applies to services where application of technologies seems to offer much larger scope.
2.1 Composition of GDP

For the past few decades, there has been a considerable shift from the primary and secondary sectors
to the tertiary sector in the Indian Economy. The tertiary sector is now the largest sector of the economy
and is also the fastest-growing sector. Examples of service sector employment include: Government,
hospitals, public health, waste disposal, education, banking, insurance, financial services, legal services,
consulting, news media, hospitality industry (e.g. restaurants, hotels, casinos), tourism, retail sales,
franchising, real estate, and sales.
2.2 Composition of Services Sector in India

In the National Income Accounting in India, service sector includes the following:
1) Trade, Hotels and Restaurants (THR)

o Trade
o Hotels and Restaurants

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2) Transport, Storage and Communication

o Railways
o Transport by other Means
o Storage
o Communication
3) Financing, Insurance, Real Estate and Business Services
o Banking and Insurance
o Real Estate, Ownership of Dwellings and Business Services
4) Community, Social and Personal Services
o Public Administration and Defense (PA & D)
o Other Services
The services sector has been the most dynamic sector of the Indian economy. Following table shows
the changes that have been taking place in the composition of GDP over the last few decades.
From a low level of 27.5 per cent of GDP in 1950-51, the share of services increased to about 60.0 per
cent in 2011-12. Between 1950-51 and 1990-91, the share of Services Sector in GDP rose by only 13.1
percentage points, which is an increase of about 0.3 percentage points per annum. However, between
1990-91 and 1999-2000, the share had increased by 7.3 percentage points, which is an increase of 0.8
percentage points per annum. Clearly, the rate of growth was significantly higher in the 1990s.
3 Performance of Service Sector in India

3.1 Sectoral Composition of GDP Growth
The share of each of the Primary, Secondary and Tertiary Sector in India’s GDP and their relative rate of
growth is shown in following table.

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It would be seen that over the period, the primary sector’s share has fallen by 40 per cent, while those
of the secondary and tertiary sectors have increased. This trend is projected to go further in wake of
liberalisation of the economy. This may happen primarily because of the following factors:
(a) reduced restrictions on private sector involvement in areas like software development and
information services
(b) technological advances
(c) lower fixed capital requirements.
The rate of growth of the secondary and tertiary sectors has been more than double than that of the
primary sector, with the secondary sector having an edge over the tertiary sector during the first two
decades.
As a result, the service sector has become the growth-driver in the Indian economy.
Presently, about two-thirds of the incremental growth in the Indian economy can be attributed to the
tertiary sector.
This pattern of structural change in Indian economy has deviated from the development pattern of
Western and South East Asian economies. Those economies experienced first a shift from primary to
secondary sector and only in their advanced stage did they experience a significant shift in favour of
tertiary sector. That pattern of development enabled them to transfer growing labour force from
primary to secondary sector.
In India, this has not been possible because secondary sector has not expanded fast enough to absorb
growing labour force. The unskilled and uneducated rural masses have continued to struggle in the
primary sector and those who have been forced out by economic, social and political factors have joined
the urban slum sector. Moreover, the sharp increase in the share of tertiary sector in GDP in India has
occurred at a much lower level of per capita income than that in the developed countries when they
experienced a similar expansion. This pattern of growth underlines the link between the growing poverty
and unemployment and the inadequate growth of manufacturing and building activity in the country
3.2 Employment Contribution of the Service Sector

The sectoral distribution of workforce in India during the period 1983 to 2009-10 reveals that the
structural changes in terms of employment have been slow in India as the primary sector continued to
absorb 54.9 per cent of the total workforce even in 2009-10, followed by tertiary and industrial sectors
(25.5 per cent and 19.6 per cent) respectively.

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There has been disproportionate growth of tertiary sector, as its share in employment has been far less
when compared to its contribution to GDP. It is important to understand that, within the services sector
employment growth rate is highest in finance, insurance, and business services, followed by trade, hotels
and restaurants, and transport etc. The community, social and personal services occupy the last rank in
growth rates of employment. Further, there was a sharp drop in labour absorptive capacity of growth in
the economy (employment elasticity of growth) from 0.40 to 0.15 during post-reform period (1993-94 to
1999-2000) initially, reflecting the phenomenon of jobless growth. However, during 1999-2000 to 2009-
10 period the employment elasticity of growth registered an increase from 0.15 to 0.51. With the
exception of one subsector of tertiary sector i.e. transport, storage, communication all other sub-sectors
of services sector exhibited an increasing trend in employment elasticities and thereby overall elasticity
of employment increased from 0.15 to 0.51.
3.3 Causes of Rapid Increase in Tertiary Sector

 A very important factor has been the advent of information technology and the knowledge economy.
This has enhanced the growth of the high productivity segment of the services sector as well as a
variety of service activities involving low productivity activities catering to a large mass of people.
 A large part of the service sector consists of infrastructure such as banking, insurance, finance,
transport and communication and social and community services such as educational and medical
facilities. An urgent requirement of development is the proper expansion of infrastructure to cater
to the needs of other sectors of the economy and the expansion of the social and community services
for the well-being of the people.
 Public services grow more rapidly where national Governments have significant role in planning and
production in the economy as a whole. In fact, the ‘visible hands’ of the modern governments as
reflected in the government policies and in the expansion patterns of the national and international
authorities during the last few decades are directed towards the creation of fast economic and social
infrastructures.
 Operation of the demonstration effect as a consequence of the growing mobility due to expanding
foreign trade, tourism and cultural and educational tours is another important factor.
 Increasing urbanisation may be regarded as another cause of expansion of the service sector in the
economy. In fact, urbanisation is closely associated with a rise in demands for infrastructure services
such as communications, public utilities and distribution services. A substantial change in the private
consumption pattern of the economy is observed with increasing urbanisation. Many new goods and
services enter into the consumption basket.

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 Tourism is becoming more and more international as knowledge is being spread through television
and Internet, and modern technology has made air transport and hotel accommodations quite
comfortable. Tourism, in turn, has promoted all types of services.
 With the increasing complexities of modern industrial organisation, manufacturing industries have
become service oriented. This has been reflected in the increasing functions of accounting, finance,
legal services, advertisement, marketing, public relations etc. Because of the prevalent labour laws,
these services are being increasingly outsourced, so that growth in industry is actually being counted
as growth in services.
3.4 Prospects & Opportunities

Both domestic and international factors augur well for the growth of services sector in India.
3.4.1 Domestic Factors

Some of the important factors can be briefly stated as follows:
 As real per capita GDP grows, demand for services increases more than proportionately and this, in
turn, reinforces GDP growth itself.
 Within the services sector, demand for producer and government services, which constitute mainly
intermediate consumption, have strong multipliers effects on real GDP.
 The growth of such dynamic service activities, which are intensive users of communication and
information technology, will generate employment opportunities on a rising scale.
 The process of economic growth has itself led to the emergence and expansion of new series such as
advertising, publicity, marketing, etc. These sub-sectors provide essential service inputs to other
sectors in the economy, thereby developing strong linkages with the rest of the economy.
 Efficient delivery of services increases the productivity of both labour and capital in the economy as
a whole. In general, services sector appears to be highly growth inducing with positive externalities
for other services making service a catalytic agent of growth.
3.4.2 International Factors

Some of the recent global developments which provide opportunities for substantial growth are as
follows:
 The fastest growing segment of services is the rapid expansion of knowledge-based services, such as,
professional and technical services. India has a tremendous advantage in the supply of such services
because of a developed structure of technological and educational institutions and lower labour
costs.

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 Progress in IT is making it increasingly possible to unbundle the production and consumption of

information-intensive service activities. These activities – research and development, computing,
inventory management, quality control, accounting, personnel administration, secretarial,
marketing, advertising distribution and legal services — are performed in all economic sectors.
 Unlike most other prices, world prices of transport and communication services have fallen
dramatically. The cost of communication is becoming independent of distance. India’s geographical
distance from several important industrial markets is no longer an important element in the cost-
structure of skill-based activities.
 India does not necessarily have a low-cost producer of certain types of goods (e.g., computers or discs)
before it can become an efficient supplier of services embodied in them (e.g., software or music). It is
possible now to provide value added services without waiting to ‘catch up’ in technology for
production of sophisticated equipment or products.
 The decline in the share of manufacturing in the output of rich countries implies a relative decline in
their demand for industrial raw materials and fuels. It means that growth in exports of developing
countries in the future will depend less on natural resources endowments and more on efficiency
in providing services and service-intensive goods.
 The aging of population in the developed world implies that the demand for services will continue
to grow.

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Regional
Economic
Cooperation

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Contents
Regional Economic Integration......................................................................................................................5
1.1 Regional Trading Agreement ..........................................................................................................6
1.2 Features of RTAs .............................................................................................................................6
1.3 Benefits of RTAs ..............................................................................................................................7
1.4 Limitations of RTAs .........................................................................................................................7
1.5 RTAs & WTO ....................................................................................................................................7
1.6 RTAs & Developing Countries .........................................................................................................8
1.6.1 Options for Developing Countries ...........................................................................................8
2 South Asian Association for Regional Co-operation ..............................................................................9
2.1 Introduction ....................................................................................................................................9
2.2 History .............................................................................................................................................9
2.3 Secretariat .......................................................................................................................................9
2.4 SAARC recent and important summits ...........................................................................................9
3 Association of Southeast Asian Nations ...............................................................................................10
3.1 History ...........................................................................................................................................10
3.2 ASEAN Motto ................................................................................................................................11
3.3 ASEAN Flag ....................................................................................................................................11
3.4 ASEAN Day.....................................................................................................................................11
3.5 ASEAN Anthem ..............................................................................................................................11
3.6 ASEAN Headquarters ....................................................................................................................11
3.7 ASEAN Recent and Important summits ........................................................................................11
4 Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Co-operation .............................12
4.1 Introduction ..................................................................................................................................12
4.2 History ...........................................................................................................................................12
4.3 Permanent Secretariat ..................................................................................................................13
4.4 BIMSTEC Summits .........................................................................................................................13
5 Bangladesh, China, Indian and Myanmar.............................................................................................13
5.1 Introduction ..................................................................................................................................13
5.2 History ...........................................................................................................................................13
6 Comprehensive and Progressive Agreement for Trans-Pacific Partnership ........................................14
6.1 Introduction ..................................................................................................................................14
6.2 History ...........................................................................................................................................14
7 Regional Comprehensive Economic Partnership .................................................................................15

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7.1 Introduction ..................................................................................................................................15

7.2 Importance ....................................................................................................................................15
7.3 Objective .......................................................................................................................................15
7.4 China’s Role ...................................................................................................................................15
7.5 Indian Perspective .........................................................................................................................15
7.6 Why India decided not to join RCEP?............................................................................................16
7.7 Why not joining RCEP is the right decision for India?...................................................................17
7.8 What are the possible downsides of not joining RCEP? ...............................................................17
7.9 Way Forward .................................................................................................................................18
8 One Belt, One Road and Maritime Silk Route ......................................................................................18
8.1 The policy has two components ...................................................................................................18
8.2 Objectives of China behind the One Belt, One Road ....................................................................19
8.3 Which are the countries involved? ...............................................................................................19
8.4 India’s position regarding One Belt, One Road .............................................................................19
9 Shanghai Cooperation Organisation ....................................................................................................19
9.1 Genesis ..........................................................................................................................................19
9.2 Objectives......................................................................................................................................20
9.3 Structure of the SCO .....................................................................................................................20
9.4 Strengths of SCO ...........................................................................................................................20
9.5 Challenges for SCO ........................................................................................................................20
9.6 Importance for India .....................................................................................................................20
9.6.1 Security ..................................................................................................................................20
9.6.2 Energy ....................................................................................................................................21
9.6.3 Trade ......................................................................................................................................21
9.6.4 Geopolitical ............................................................................................................................21
9.7 Challenges of SCO Membership for India .....................................................................................21
10 Indian Ocean Rim Association ..........................................................................................................21
10.1 Genesis ..........................................................................................................................................21
10.2 Members .......................................................................................................................................22
10.3 Dialogue Partners..........................................................................................................................22
10.4 Objectives......................................................................................................................................22
10.5 Indian Ocean Dialogue ..................................................................................................................22
11 Indian Ocean Commission ................................................................................................................23
11.1 About IOC ......................................................................................................................................23

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11.2 India and IOC .................................................................................................................................23

12 Asia Pacific Economic Cooperation ..................................................................................................23
12.1 Functions .......................................................................................................................................23
12.2 Members .......................................................................................................................................23
13 BRICS .................................................................................................................................................24
13.1 Structure .......................................................................................................................................24
13.2 Salient Features.............................................................................................................................24
13.3 Genesis ..........................................................................................................................................24
13.4 Timeline .........................................................................................................................................25
13.5 Areas of Cooperation ....................................................................................................................25
13.5.1 Economic Cooperation ..........................................................................................................25
13.5.2 People-to-People Exchange ...................................................................................................25
13.5.3 Political and Security Cooperation ........................................................................................25
13.5.4 Cooperation Mechanism .......................................................................................................25
13.6 New Development Bank ...............................................................................................................25
13.7 Contingent Reserve Arrangement ................................................................................................26
14 India’s experience with Free Trade Agreements ..............................................................................26
14.1.1 What are Free Trade Agreements (FTAs)? ............................................................................26
14.1.2 What is the difference between the terms such as PTA, CECA, RTA, CEPA, Customs Union,
Common Market and Economic Union? How are these related to FTAs? ..........................................26
14.1.3 What is an Early Harvest Scheme/Programme (EHS) and how different is it from an FTA? 27
14.1.4 How is CECA/CEPA different from FTA? ................................................................................27
14.1.5 Why are almost all the countries signing Free Trade Agreements? .....................................28
14.1.6 What are the key macro takeaways from India’s experience with respect to some
comprehensive agreements that it has signed in the past decade? ...................................................28
14.1.7 What are the factors to be considered while negotiating/signing an FTA? ..........................29
Regional Economic Integration

Efforts at reaching agreements through multilateral trade negotiations and those towards region-centric
initiatives are two major developments in the global trading environment witnessed in the past two
decades. Both these developments are interrelated in a substantive sense. The former aims at integrating
national markets through the process of globalisation. It is intended to improve efficiency by removing
barriers and thus promoting a competitive environment. This thrust has motivated countries to take
greater interest in regional groupings that facilitate larger market access, which in turn, enables them to
enjoy scale economies and thus provide a competitive edge in the global market.

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The above developments, would have far-reaching implications on economic ties between countries. The
former would result in a larger world trade while the latter would enhance the role of trading blocks in
it. This implies that prominent trading blocs and their member states would play an increasingly
important role in the emerging global economic order. This would pose many challenges to the
developing countries, particularly those which are outside the major blocs, necessitating changes in their
policies and perceptions.
1.1 Regional Trading Agreement

The global trading system has always been a witness to some form of economic integration between
countries, across continents or within a region. The different forms of such economic integration are
known as regional trading arrangements (RTAs).
With globalisation, regionalism is on the rise. This is in fact ironical and inconsistent with the spirit of
multilateralism. Hence, initially, the DG of WTO was opposed to the proliferation of regional
arrangements, after WTO was launched in 1995. The number of regional trading agreements (RTAs)
notified to the WTO stands at about 200. An estimated 70 percent of the world trade is now covered by
RTAs. For instance, the Americas - North and South, all of Europe, including the transition economies of
the eastern part, most of Africa, Asia, Australia and New Zealand are signatories to free trade areas,
customs unions and partial scope agreements. The new trends in regionalism, however, can be accepted
as a supplement to globalisation.
1.2 Features of RTAs

 Almost all RTAs show an inherent dynamism towards greater liberalisation and open market.
o The best example is the European Union (EU) where a single market and a common
currency have been introduced to strengthen internal competition and external
competitiveness.
o In Asia, members of the Association of South-East Asian Nations (ASEAN) are accelerating
trade liberalisation within the ASEAN Free Trade Area (AFTA). On January 1, 2016, ASEAN,
inaugurated the ASEAN Economic Community ("AEC"). The AEC aims to create a single
market and production base for the free flow of goods, services, investment, capital, and
skilled labor within ASEAN.
 The new regionalism brings with it an increase in the size of regional groupings.
o Once again, the best example of the enlargement dynamics can be seen in the European
Union (EU). EU started off as a coal and steel community in 1952. The European Common
Market (ECM) initially consisted of six countries and European Free Trade Area (EFTA)
consisted of seven countries. Today, European Union is a political and economic union of
27 member states.
 There is emergence of overlapping regionalism. Countries belong to more than one RTA. There is an
inherent scope that these RTAs may turn the world trade system into what Jagdish Bhagwati calls a
‘noodle blow’ of overlapping and potentially inconsistent and unmanageable RTAs.
o For example, India has an RTA with Malaysia and Singapore separately while they are also
a member of India ASEAN CECA. Another interesting example is Sri Lanka wherein an Indian
trader can use either of the four RTAs for trading with Sri Lanka. The multiplicity of RTA’s
may lead to inconsistencies.
 In the current practice, regionalism covers many issues beyond the removal of barriers to trade in
goods and services, such as social policy, environmental policy and competition policy.
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 RTAs thus exist in all regions of the world. They follow a strategy that combines internal liberalisation
with external agreements.
Thus, in general, currently regionalism is a benign and dynamic initiative compatible with the overall aims
of the multilateral trade order.
1.3 Benefits of RTAs

The motivation for forming regional trading blocs differs from region to region, and even from country to
country within a bloc, but a few factors play a key role. These are:
 members see economic benefits from a more efficient production structure by exploiting economies
of scale. In addition to spreading fixed costs over larger regional markets, it enhances economic
growth from foreign direct investment, and research and development.
 members value non-economic benefits such as strengthening political ties and managing migration
blocs.
 smaller countries seek increased security of market access by forming regional trading blocs and
joining with associations of larger countries.
 countries may want to lock-in unilateral domestic policy reforms.
 Members’ bargaining power in multilateral trade negotiations is improved where they can more
effectively express in pursuance of their regional interests.
 Members can promote industries that are not viable without a protected regional market – e.g.
regional infant industries – the idea being that they would be internationally competitive if given
sufficient time and scope to develop.
 open regionalism – i.e., agreements with low external trade barriers, service markets and a dominant
focus on reducing transaction costs at borders, help get around the complexity of the international
trading system.
1.4 Limitations of RTAs

Formation of regional blocs invariably implies that the constituent members are keen on promoting their
economies. However, quite often what is good for individual nations may not be good for the global
economy. Most economists agree that the emergence of regional blocks diverts trade to less efficient
producers, thereby preventing the global economy from growing as fast as it can. Nonetheless, when
seen from a purely national perspective, it would suit a country to create and protect a regional market.
There has thus been a clear movement towards the regionalisation of trade.
1.5 RTAs & WTO

 Increased emphasis on regionalism is a prominent feature of international economics since the mid-
1990s. Currently, there are more than 200 active Regional Trade Agreements in force and majority of
these agreements are north-south RTAs or RTAs between developed and developing countries.
 RTAs represent an important exception to the WTO’s principle of non-discrimination through the
most-favoured nation (MFN) rule.
 According to the MFN rules, WTO members must extend the same market access conditions to all
WTO members.
 However, as an exception to MFN, WTO allows countries with a RTA (i.e. members of a RTA) to trade
among themselves using preferential tariffs and easier market access conditions than what is
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 Such RTAs are, however, permitted under WTO only when they have a clause to move towards global
Free Trade Area without discrimination, in a time bound manner.
 The advantage to the RTA members thus come from the preference margins i.e., the gap between
MFN rates and preferential tariff rates. As a result, WTO member countries that are not a part of the
RTA lose out in these markets.
 Also, trading within the regional trading blocks does not come under the purview of WTO.
1.6 RTAs & Developing Countries

 The basic principles embodied in the GATT/WTO, viz. open markets, non-discrimination and global
competition are unexceptionable. These are designed to foster a non-discriminatory, competitive
and unified world market.
 Developing countries have, however, attempted to integrate their national economies with the
world economy at a varying pace.
 In the process of integration, developing countries have encountered several adverse consequences.
 For instance, easy market access, liberalised merger and acquisition laws, permitting majority to
full foreign ownership and liberalised foreign exchange regulations, financial liberalisation etc.
that come in the course of integration process have facilitated large scale entry of global
economic players into developing countries. This has led to many local entrepreneurs
surrendering their ventures to the global giants or assuming a position of joint partnership, if at
all, in the re-structured collaborative ventures. In the face of such threat to their survival,
particularly for the small-scale sector, local entrepreneurs in developing countries have started
demanding a level playing field and protection.
 Another adverse consequence of globalisation is that the emerging order would provide
significant growth opportunities to only a few of the developing countries while for others it
could result in several risky exposures. Some studies have brought out that many of the
developing countries would be worse off as a result of WTO agreements. This is expected to widen
inter-country disparities, as visualised by the centre-periphery doctrine of Samir Amin and Andre
Gunder Frank: developing countries, except a few, would be placed in a disadvantageous position
(on periphery) while the system would work well for a few mighty developed countries and fast-
growing developing countries.
1.6.1 Options for Developing Countries

Basically, there are two options for the developing countries:
 to join one or the other prominent bloc so as to remain within the mainstream of RTAs, or
 to strengthen economic ties among developing countries themselves on bilateral basis so as to
provide a cushion to export growth.
The problem with regard to the first option is that membership of regional trading blocs is not easily
available. There are usually too many restrictive qualifying criteria. For instance, India was denied
membership of ASEAN for not being a south-east Asian nation.
While the role of a bloc in promoting economic ties is widely recognized, attempts at bloc formation by
developing countries have rarely met with big success. ASEAN is one rare example of a successful
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member, is a classic case to demonstrate how difficult it is to promote effective co-operation even after
more than three decades of its existence.
Also, developing countries took specific initiatives to strengthen bilateral economic ties. India’s Look East
Policy is a good example of such initiatives.
2 South Asian Association for Regional Co-operation

2.1 Introduction
 The South Asian Association for Regional Cooperation (SAARC) is the regional intergovernmental
organization and geopolitical union of eight South Asian nations.
 SAARC was founded in Dhaka on 8 December 1985 with the aim of promoting friendship and
cooperation among themselves and other developing countries.
 Its secretariat is based in Kathmandu, Nepal.
 Covering a population of more than 2 billion, SAARC is the largest regional organization in the world.
2.2 History
 The idea of co-operation in South Asia was discussed in at least three conferences:
 Asian Relations Conference held in New Delhi on April 1947
 Baguio Conference held in Philippines on May 1950
 Colombo Powers Conference held in Sri Lanka in April 1954
 First concrete proposal for establishing a framework for regional cooperation in South Asia was made
by the late president of Bangladesh, Zia-ur-Rehman on May 2, 1980.
 Finally, SAARC was established on 8 December 1985 in Dhaka, Bangladesh.
 Its seven founding members are Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri
Lanka. Afghanistan later joined the group in 2007.
 Observers – Australia, China, European Union, Japan, Iran, Mauritius, Myanmar, South Korea, USA
2.3 Secretariat
 The SAARC Secretariat is located in Nepal and it is headed by the Secretary-General appointed by the
Council of Ministers.
 Its function includes coordinating & monitoring SAARC activities, servicing the SAARC meetings, act as
communication link between the SAARC & other international firms etc.
2.4 SAARC recent and important summits
Note: Kindly refer EduTap’s monthly current affairs magazine for updates regarding the latest summits
of SAARC.

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Concept Check
Q. Which of the following is not a member of SAARC?
(a) Maldives
(b) Mauritius
(c) Afghanistan
(d) Nepal
Answer: B
Concept Check
Q. SAARC is headquartered in
(a) Kathmandu
(b) Colombo
(c) New Delhi
(d) Islamabad
(e) Dhaka
Answer: A
3 Association of Southeast Asian Nations

 Association of Southeast Asian Nations (ASEAN) is an international organization established by the
governments of Indonesia, Malaysia, Philippines, Singapore and Thailand on 8 August in 1967 to
accelerate economic growth, social progress, cultural development and to promote peace & security
in Southeast Asia.
 Brunei joined in 1984, followed by Vietnam in 1995, Laos and Myanmar in 1997 and Cambodia in
1999.
 The ASEAN region has a population of more than 600 million, covers a total area of 4.5 million square
km and a combined GDP of $2.57 trillion.
3.1 History
 ASEAN was preceded by an organization formed in 31 July 1961 called the Association of Southeast
Asia (ASA), a group consisting of the Philippines, Federation of Malaya, and Thailand.
 ASEAN itself was created on 8 August 1967 when the foreign ministers of five countries: Indonesia,
Malaysia, Philippines, Singapore, and Thailand signed the ASEAN Declaration, more commonly
known as the Bangkok Declaration.
 ASEAN's first summit meeting held in Bali, Indonesia in 1976 resulted in an agreement on several
industrial projects and the signing of a Treaty of Amity and Cooperation (TAC).
 In 2007, the ten members adopted the ASEAN Charter, a constitutional document providing the
grouping with legal status and revamping its institutions. The charter enshrines core ASEAN
principles and delineates requirements for membership. It entered into force on 15 December 2008.
 ASEAN Plus Three: "ASEAN Plus Three" was founded in 1997 with People's Republic of China, Japan,
and South Korea to address mutual issues and concerns in energy security, natural gas development,
oil market studies, renewable energy etc.
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 ASEAN Plus Six: ASEAN became ASEAN Plus Six with additional countries: Australia, New Zealand
and India also known as Regional Comprehensive Economic Partnership (RCEP).
3.2 ASEAN Motto

The motto of ASEAN is “One Vision, One Identity, One Community”.
3.3 ASEAN Flag

 The ASEAN Flag represents a stable, peaceful, united and dynamic ASEAN.
 The main colors of the Flag – blue, red, white and yellow. The blue represents peace & stability, red
depicts courage & dynamism, white shows purity and yellow symbolizes prosperity.
 The stalks of padi in the centre represents that all the countries in Southeast Asia bounded together
in friendship and solidarity.
3.4 ASEAN Day

8th August is observed as ASEAN Day.
3.5 ASEAN Anthem

The ASEAN Anthem is titled “THE ASEAN WAY”. The ASEAN Anthem is an expression of ASEAN unity. It
also strengthens the sense of ASEAN identity and belonging among the peoples of the region.
3.6 ASEAN Headquarters

Its headquarters are located at Jakarta, Indonesia.
3.7 ASEAN Recent and Important summits

No. Date Country Host
1st 23–24 February 1976 Indonesia Bali
2nd 4–5 August 1977 Malaysia Kuala Lumpur
35th 31 October–4 November 2019 Thailand Bangkok
36th 26 June 2020 Vietnam Hanoi
37th 12-15 November 2020 Vietnam Hanoi
Note: Kindly refer EduTap’s monthly current affairs magazine for updates regarding the latest summits
of ASEAN.
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Concept Check
Q. Which of the following countries is not a member of ASEAN?
(a) Cambodia
(b) Myanmar
(c) Brunei
(d) China
(e) Laos
Answer: D
Concept Check
Q. What is the full form of ASEAN?
(a) Association of South East Asian Nations
(b) Administration of Southern East Asian Nations
(c) Organisation of South East Asian Nations
(d) Administration of South East Asian Nations
Answer: A
4 Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Co-

operation
4.1 Introduction
 The Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) is a
regional organization comprising seven Member States lying in the littoral and adjacent areas of the
Bay of Bengal constituting a contiguous regional unity.
 It constitutes seven Member States: five from South Asia including Bangladesh, Bhutan, India, Nepal
& Sri Lanka and two from Southeast Asia including Myanmar and Thailand.
 Starting with six sectors—including trade, technology, energy, transport, tourism and fisheries—for
sectoral cooperation in the late 1997, it expanded to embrace nine more sectors—including
agriculture, public health, poverty alleviation, counter-terrorism, environment, culture, people to
people contact and climate change—in 2008.
 The BIMSTEC region is home to around 1.5 billion people which constitute around 22% of the global
population with a combined gross domestic product (GDP) of 2.7 trillion economy.
4.2 History
On June 6, 1997, a new sub-regional grouping was formed in Bangkok through Bangkok Declaration
under the name BIST-EC (Bangladesh, India, Sri Lanka and Thailand Economic Cooperation).
Following the inclusion of Myanmar on 22 December 1997 during a special Ministerial Meeting in
Bangkok, the Group was renamed ‘BIMST-EC’ (Bangladesh, India, Myanmar, Sri Lanka and Thailand
Economic Cooperation).
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With the admission of Nepal and Bhutan at the 6th Ministerial Meeting (February 2004, Thailand), the
name of the grouping was changed to ‘Bay of Bengal Initiative for Multi-Sectoral Technical and Economic
Cooperation’ (BIMSTEC).
4.3 Permanent Secretariat

After a span of 17 years of the founding of BIMSTEC as a regional organization, it’s long cherished
Permanent Secretariat was established in Dhaka, Bangladesh on 13th September 2014 to serve the
BIMSTEC Member States.
4.4 BIMSTEC Summits

No. Date Host country Host city
1st 31 July 2004 Thailand Bangkok
2nd 13 November 2008 India New Delhi
3rd 4 March 2014 Myanmar Naypyidaw
4th 30–31 August 2018 Nepal Kathmandu
5th 2022 Sri Lanka Colombo
Concept Check
Q. Which of the following statements is/are correct regarding BIMSTEC?
(a) It includes five countries from South Asia and two from ASEAN.
(b) The grouping was formed in 1997.
(c) It has a permanent secretariat established in Dhaka.
Answer: D
5 Bangladesh, China, Indian and Myanmar

5.1 Introduction
 The concept of economic cooperation within the BCIM region was first developed by Professor
Rehman Sobhan.
 Bangladesh, China, India and Myanmar (BCIM) Economic Corridor is a multi-modal transport corridor
which will cover 1.65 million square kilometres with the aim to connect India (Kolkata) and China
(Kunming) via Bangladesh (Dhaka) and Myanmar (Mandalay).
 It is intended to advance multi-modal connectivity, promote investment & trade etc. through a
combination of road, rail, water and air linkages in the region.
5.2 History
 In 1990s, idea of sub-regional cooperation within BCIM was envisaged to promote connectivity in the
region through infrastructure development, by stimulating trade thereby alleviating poverty and
promote overall growth.
 The idea was given a shape in the form of BCIM forum in 1999 in the first ‘Kunming Initiative’, the
capital of Chinese Yunnan province. The aim of the forum was to create a platform for discussion
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among the major stakeholders regarding issues concerning trade and growth in the region and
institutionalize the arrangements to deepen BCIM ties.
 The turning point came in 2013 during the meeting between Chinese Premier Li and Indian
PM Manmohan Singh wherein the importance of development of a trade corridor between BCIM was
discussed and final shape was given in December 2013 in Kunming with the launch of BCIM-Economic
corridor.
6 Comprehensive and Progressive Agreement for Trans-Pacific Partnership

6.1 Introduction
 The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), also known as
TPP11 or TPP-11, is a trade agreement between Australia, Brunei, Canada, Chile, Japan, Malaysia,
Mexico, New Zealand, Peru, Singapore, and Vietnam.
 It evolved from the Trans-Pacific Partnership (TPP), which never entered into force due to the
withdrawal of the United States.
 At the time of its signing, the eleven countries' combined economies represented 13.4 percent of the
global gross domestic product (approximately US$13.5 trillion), making the CPTPP the third largest
free-trade area in the world by GDP after the United States–Mexico–Canada Agreement and the
European Single Market.
6.2 History
 The TPP began as an expansion of the Trans-Pacific Strategic Economic Partnership
Agreement (TPSEP or P4) which was signed by Brunei, Chile, New Zealand and Singapore in 2005
and entered into force in 2006.
 TPSEP is a comprehensive agreement affecting trade in goods, rules of origin, trade
remedies, sanitary and phytosanitary measures, technical barriers to trade, intellectual property,
government procurement etc.
 It called for a 90 percent reduction of all tariffs between member countries by 1 January 2006
and reduction of all trade tariffs to zero by the year 2015.
 Beginning in 2008, additional countries joined the discussion for a broader
agreement: Australia, Canada, Japan, Malaysia, Mexico, Peru, United States, and Vietnam
bringing the total number of countries participating in the negotiations to twelve.
Concept Check
Q. ______ countries signed the Comprehensive and Progressive Agreement for Trans Pacific
Partnership (CPTPP).
(a) Eight
(b) Ten
(c) Eleven
(d) Twelve
(e) Thirteen
Answer: C
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7 Regional Comprehensive Economic Partnership

The Regional Comprehensive Economic Partnership (RCEP) is a proposed agreement between the
member states of the Association of Southeast Asian Nations (ASEAN) and its free trade agreement (FTA)
partners. The pact aims to cover trade in goods and services, intellectual property, etc.
7.1 Introduction
The Regional Comprehensive Economic Partnership was introduced during the 19th ASEAN meet held in
November 2011. The RCEP negotiations were kick-started during the 21st ASEAN Summit in Cambodia
in November 2012.
Member states of ASEAN and their FTA partners are Brunei, Cambodia, Indonesia, Laos, Malaysia,
Myanmar, the Philippines, Singapore, Thailand, Vietnam, China, Japan, India, South Korea, Australia
and New Zealand.
7.2 Importance
The 16 countries negotiating the RCEP together account for a third of the world gross domestic product
(GDP) and almost half the world’s population, with the combined GDPs of China and India alone making
up more than half of that. RCEP's share of the world economy could account for half of the estimated $0.5
quadrillion global (GDP, PPP) by 2050.
7.3 Objective
RCEP aims to create an integrated market with 16 countries, making it easier for products and services of
each of these countries to be available across this region.
The negotiations are focused on the following: Trade in goods and services, investment, intellectual
property, dispute settlement, e-commerce, small and medium enterprises, and economic cooperation.
7.4 China’s Role

RCEP was pushed by Beijing in 2012 in order to counter another FTA that was in the works at the time:
The Trans-Pacific Partnership (TPP). The US-led TPP excluded China. However, in 2016 US President
Donald Trump withdrew his country from the TPP. Since then, the RCEP has become a major tool for China
to counter the US efforts to prevent trade with Beijing.
7.5 Indian Perspective

On November 4, 2019 India decided against joining the 16-nation Regional Comprehensive Economic
Partnership (RCEP) trade deal, saying it was not shying away from opening up to global competition across
sectors, but it had made a strong case for an outcome which would be favourable to all countries and all
sectors.
Prime Minister Narendra Modi, in his speech at the RCEP Summit said "the present form of the RCEP
agreement does not fully reflect the basic spirit and the agreed guiding principles of RCEP. It also does not
address satisfactorily India's outstanding issues and concerns in such a situation."
There was a fear in India that its industries would be unable to compete with China and Chinese goods
would flood Indian markets. India’s farmers were also worried given that they would be unable to
compete on a global scale.
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A section of Indian industry felt that being part of RCEP would have allowed the country to tap into a huge
market. Some like pharmaceuticals, cotton yarn and the services industry were confident of making
substantial gains.
Concept Check
Q. Regional Comprehensive Economic Partnership (RCEP) is presently being negotiated between
ASEAN and which of the following countries?
(a) New Zealand
(b) Australia
(c) China
(d) Japan
Answer: E
7.6 Why India decided not to join RCEP?

In November 2019, External Affairs Minister S Jaishankar, delivering the Fourth Ramnath Goenka
Memorial Lecture on November 14, had said,
India’s stance was based on a “clear-eyed calculation” of the gains and costs of entering a new
arrangement, and that no pact was better than a “bad agreement”.
Following are the issues that India faced in signing the RCEP:
 Market access to India: RCEP also lacked clear assurance over market access issues in countries
such as China and non-tariff barriers on Indian companies.
 Trade Deficit: In financial year 2019, India registered trade deficit with 11 out of the 16 RCEP
countries.
 India’s trade deficit with these countries has almost doubled in the last five-six years – from
$54 billion in 2013-14 to $105 billion in 2018-19.
 India’s trade deficit with RCEP countries stood at $105 billion, out of which China alone
accounted for $52 billion.
 Auto-trigger mechanism: India was unable to ensure countermeasures like an auto-trigger
mechanism to raise tariffs on products when their imports crossed a certain threshold.
 MFN clause: It also wanted RCEP to exclude most-favored-nation (MFN) obligations from the
investment chapter, as it did not want to hand out, especially to countries with which it has border
disputes, the benefits it was giving to strategic allies or for geopolitical reasons.
 Opening up of sensitive sectors: India felt the agreement would force it to extend benefits given
to other countries for sensitive sectors like defense to all RCEP members.
 Country of Origin: Signing of RCEP deal would have meant dumping of unwanted products by
routing them through other countries i.e. possible circumvention of rules of origin criterion set by
India to determine the national source of products.
 Tariff reductions: The RCEP deal format required India to abolish tariffs on more than 70% of
goods from China, Australia, and New Zealand, and nearly 90% goods from Japan, South Korea,
and ASEAN. This would have made imports to India, cheaper.
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 Past Experience: The NITI Aayog, in 2017, had published a report that pointed out that free trade
agreements have not worked well for India.
 It analyzed multiple free trade agreements that India signed in the past decade. Among
those were FTA with Sri Lanka, Malaysia, Singapore, and South Korea.
 The Niti Aayog analysis showed that imports from FTA countries increased while export to
these destinations did not match up.
 The Niti Aayog found that FTA utilization by India has been abysmally low between 5 and
25 percent.
 Plantation products like rubber: Vietnam and Indonesia have very cheap rubber to export.
 Dairy Sector: New Zealand is the second-largest exporter of milk and milk products. New Zealand’s
milk producers are more efficient than India’s small producers. Both Australia and New Zealand
are waiting for free access to India for their dairy products.
 Services trade: India has “long pushed for other countries to allow greater movement of labor and
services” in return for opening up its own market. Any agreement on trade in goods without
simultaneous agreement on services trade and investment will only harm India’s interests.
7.7 Why not joining RCEP is the right decision for India?
 China Factor: In the backdrop of rising tensions at India-China borders and the strong presence of
China as a center of RCEP trade deal, it would have been difficult for India to reduce its exposure
to China’s products, at a time when India is striving hard to find alternatives for China-made
products.
 Made in India: As India is pursuing its objective to become an Atmanirbhar Bharat, domestic
industries are required to be shielded by the use of Tariffs. By joining RCEP, India could have to
compromise on this front.
 Recession in India: At a time, when India is gripped under ‘Technical Recession’ and
unemployment is on rise, giving a boost to domestic industries becomes of utmost importance.
 Existing FTAs: As per a few experts, RCEP hardly makes a difference as it has FTAs with ASEAN, and
CEPAs (Comprehensive Economic Partnership Agreements) with Japan and South Korea already.
 Clarity of India’s strategic vision: India’s strategic vision seems clear by not joining the China-
centric RCEP, whereas it raises questions regarding the strategic vision of other Indo-Pacific
countries whether China is seen as a threat or as a partner by them. This step will have implications
for the Indo-Pacific concept and the Quad.
7.8 What are the possible downsides of not joining RCEP?

 New Delhi has gambled that by not joining the RCEP and building a self-reliant India, it would be
in a position to craft future FTAs from a position of strength. That is an unlikely scenario. As China’s
accession to the World Trade Organization demonstrated, joining an existing deal requires paying
a higher price in terms of trade concessions.
 Further, not joining RCEP robbed India of the chance to play a role in setting norms in new issue
areas in trade such as e-commerce.
 Building an economically strong India requires reforming New Delhi’s policy and regulatory
environment and revisiting and renegotiating past agreements. Staying out of new ones is not the
answer.
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 There have been voices of discontent at home as well on the government’s stand.
 Need For Economic Realism: India should deter seeing RCEP only from the Chinese perspective.
 Strategic Need: It is not just because gains from trade are significant, but the RCEP’s membership
is a prerequisite to having a say in shaping RCEP’s rules.
o This is necessary to safeguard India’s interests and the interests of several countries that
are too small to stand up to the largest member, China.
o Moreover, staying out of RCEP may also affect India's Act East policy.
7.9 Way Forward

India, as an original negotiating participant of RCEP, has the option of joining the agreement without
having to wait 18 months as stipulated for new members in the terms of the pact.
 India required to make its domestic industries competitive and strong enough to compete in any
international market. It will make negotiating any international agreement easy and profitable.
 Adoption of ASEAN-India Plan of Action for 2021-2025 proves that despite conclusion of RCEP,
ASEAN countries are welcoming towards India. India must try to find out possibilities of increasing
trade with ASEAN countries.
 India currently has agreements with members like the ASEAN bloc, South Korea and Japan and is
negotiating agreements with members like Australia and New Zealand.
 Reviews of its existing bilateral FTAs with some of these RCEP members as well as newer
agreements with other markets with potential for Indian exports.
 India should invest strongly in negotiating bilateral agreements with the US and the EU.
8 One Belt, One Road and Maritime Silk Route

 Chinese President Xi Jinping announced one of China’s most ambitious foreign policy and economic
initiatives at the end of 2013. He called for the building of a Silk Road Economic Belt and a 21st
Century Maritime Silk Road, collectively referred to as One Belt One Road (OBOR).
 One Belt One Road (OBOR) is one of the largest development plans in modern history.
 It is basically investment and trade promotion scheme aiming to deepen economic connections
between China and rest of the world.
 It is a development strategy to connect China with Central Asia, Europe, and Indo-Pacific littoral
countries.
8.1 The policy has two components

 Belt: The “One Belt” refers to the land-based “Silk Road Economic Belt”. Here Beijing aims to connect
the country’s underdeveloped hinterland to Europe through Central Asia.
 Road: The “One Road” references the ocean-going “Maritime Silk Road”. It is to connect the fast-
growing South East Asian region to China’s southern provinces through ports and railways.
The plan is to connect the Pacific Ocean and the Indian Ocean. This will connect Chinese coastline with
South-East Asia, South Asia, Gulf and East coast of Africa.
China will build maritime infrastructure. It includes custom co-ordination, formation of SEZ, new ports,
e-commerce, trade liberalization etc.
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8.2 Objectives of China behind the One Belt, One Road

 The OBOR strategy is often reported as China’s ambitious push to take a bigger role in global affairs
and expand its friend circle.
 While China insists that investment in OBOR is economically motivated and it will bring economic
benefits to host countries but the project is multi-prolonged and is intended to serve its diplomatic,
economic and strategic purposes.
 It is also intended to address its domestic needs in economic transformation. The demand for
industrial output will increase and thus will revitalise its economy.
 It is also an attempt to counter US propaganda that rising China is a threat to world peace. Thus it is
to convince that rising China is not a threat rather creates a win-win situation for all.
8.3 Which are the countries involved?

 The ‘Belt’ and ‘Road’ covers primarily Asia and Europe, encompassing around 60 countries.
 On China’s “One Belt, One Road” official website, it also says the initiative is open to all countries as
well as international and regional organisations for cooperation.
8.4 India’s position regarding One Belt, One Road

 India is opposed to Chinese One Belt One Road (OBOR) initiative since the China-Pakistan Economic
Corridor (CPEC) passes through the Indian territory.
CPEC:
 CPEC is an extension of China’s Silk Road initiative.
 It is expected to connect Kashgar in Xinjiang in China’s far west with the Port of Gwadar in the
province of Baluchistan via a network of highways, railways, and pipelines.
 This project would allow China to transport energy resources such as petroleum from Middle
Eastern countries to China via a land route through Pakistan.
9 Shanghai Cooperation Organisation

 SCO is a permanent intergovernmental international organisation.
 It’s a Eurasian political, economic and military organisation aiming to maintain peace, security and
stability in the region.
 It was created in 2001.
 The SCO Charter was signed in 2002, and entered into force in 2003. It is a statutory document which
outlines the organisation's goals and principles, as well as its structure and core activities.
 The SCO's official languages are Russian and Chinese.
9.1 Genesis
 Prior to the creation of SCO in 2001, Kazakhstan, China, Kyrgyzstan, Russia and Tajikistan were
members of the Shanghai Five.
 Shanghai Five (1996) emerged from a series of border demarcation and demilitarization talks which
the four former Soviet republics held with China to ensure stability along the borders.
 Following the accession of Uzbekistan to the organisation in 2001, the Shanghai Five was renamed
the SCO.
 India and Pakistan became members in 2017.
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 Membership – Kazakhstan, China, Kyrgyzstan, Russia, Tajikistan, Uzbekistan, India, Pakistan

 Observer States – Afghanistan, Belarus, Iran, Mongolia
 Dialogue Partner – Azerbaijan, Armenia, Cambodia, Nepal, Turkey, Sri Lanka
9.2 Objectives
 Strengthening mutual trust and neighbourliness among the member states.
 Promoting effective cooperation in -politics, trade & economy, research & technology and culture.
 Enhancing ties in education, energy, transport, tourism, environmental protection, etc.
 Maintain and ensure peace, security and stability in the region.
 Establishment of a democratic, fair and rational new international political & economic order.
9.3 Structure of the SCO

 Heads of State Council – The supreme SCO body which decides its internal functioning and its
interaction with other States & international organisations, and considers international issues.
 Heads of Government Council – Approves the budget, considers and decides upon issues related
economic spheres of interaction within SCO.
 Council of Ministers of Foreign Affairs – Considers issues related to day-to-day activities.
 Regional Anti-Terrorist Structure (RATS) – Established to combat terrorism, separatism and
extremism.
 SCO Secretariat – Based in Beijing to provide informational, analytical & organisational support.
9.4 Strengths of SCO

 The SCO covers 40%of the global population, nearly 20% of the global GDP and 22% of the world’s
land mass.
 The SCO has a strategically important role in Asia due to its geographical significance - this enables it
to control the Central Asia and limit the American influence in region.
 SCO is seen as counterweight to the North Atlantic Treaty Organisation.
9.5 Challenges for SCO

 The SCO security challenges include combating terrorism, extremism and separatism; drug and
weapons trafficking, illegal immigration, etc.
 Despite being geographically close, the rich diversity in member’s history, backgrounds, language,
national interests and form of government, wealth and culture makes the SCO decision making
challenging.
9.6 Importance for India

India’s membership of SCO can help in achieving regional integration, promote connectivity and stability
across borders.
9.6.1 Security
 India through RATS can improve its counterterrorism abilities by working toward intelligence sharing,
law enforcement and developing best practices and technologies.
 Through the SCO, India can also work on anti-drug trafficking and small arms proliferation.
 Cooperation on common challenges of terrorism and radicalisation.
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9.6.2 Energy
 India being an energy deficient country with increasing demands for energy, SCO provides it with an
opportunity to meet its energy requirements through regional diplomacy.
 Talks on the construction of stalled pipelines like the TAPI (Turkmenistan-Afghanistan-Pakistan-India)
pipeline; IPI (Iran-Pakistan-India) pipeline can get a much needed push through the SCO.
9.6.3 Trade
 SCO provides direct access to Central Asia – overcoming the main hindrance in flourishing of trade
between India and Central Asia.
 SCO acts as an alternative route to Central Asia.
 Economic Ties - Central Asian countries provides India with a market for its IT, telecommunications,
banking, finance and pharmaceutical industries.
9.6.4 Geopolitical
 Central Asia is a part of India's Extended Neighbourhood – SCO provides India an opportunity to
pursue the “Connect Central Asian Policy”.
 Helps India fulfil its aspiration of playing an active role in its extended neighbourhood as well as
checking the ever growing influence of China in Eurasia.
 Platform for India to simultaneously engage with its traditional friend Russia as well as its rivals, China
and Pakistan.
9.7 Challenges of SCO Membership for India

 Pakistan’s inclusion in SCO poses potential difficulties for India.
 India’s ability to assert itself would be limited and it may have to play second fiddle since China and
Russia are co-founders of SCO and its dominant powers.
 India may also have to either dilute its growing partnership with the West or engage in a delicate
balancing act - as SCO has traditionally adopted an anti-Western posture.
10 Indian Ocean Rim Association

The Indian Ocean Rim Association (IORA) is an international body comprising the coastal countries that
border the Indian Ocean.
10.1 Genesis
 The Indian Ocean Rim Association (IORA) was previously named the Indian Ocean Rim Initiative.
 It was also called the Indian Ocean Rim Association for Regional Cooperation or the IOR-ARC for
short.
 It is a regional tripartite forum that gathers government representatives, academia and business
leaders for encouraging cooperation and greater interaction between them.
 The organisation is founded upon the values of open regionalism for boosting economic cooperation
especially on the realms of trade facilitation, investment, the region’s social development and
promotion.
 Currently, it has 22 member states.
 The IORA was formed in March 1997.
 The idea for the IORA was formed by India and South Africa.
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 The Secretariat of the Indian Ocean Rim Association (IORA) is hosted by the Government of the
Republic of Mauritius which is based in Cyber City, Ebène, Mauritius.
10.2 Members
Member Countries of the Indian Ocean Rim Association
Australia Madagascar Seychelles
Bangladesh Malaysia Singapore
Comoros Maldives South Africa
India Mauritius Sri Lanka
Indonesia Somalia Tanzania
Iran Mozambique Thailand
Kenya Oman Yemen
United Arab
Emirates
10.3 Dialogue Partners

Dialogue Partners of the Indian Ocean Rim Association
China Germany United States
Egypt Japan Turkey
France United Kingdom South Korea
Italy
10.4 Objectives
 To promote sustainable growth and balanced development of the region and member states
 To focus on those areas of economic cooperation which provide maximum opportunities for
development, shared interest and mutual benefits
 To promote liberalisation, remove impediments and lower barriers towards a freer and enhanced
flow of goods, services, investment, and technology within the Indian Ocean rim.
IORA has identified six priority areas, namely:
 maritime security,
 trade and investment facilitation,
 fisheries management,
 disaster risk reduction,
 academic and scientific cooperation and
 tourism promotion and cultural exchanges.
In addition to these, two focus areas are also identified by IORA, namely Blue Economy and Women's
Economic Empowerment.
10.5 Indian Ocean Dialogue

The Indian Ocean Dialogue (IOD) is a flagship initiative of the Indian Ocean Rim Association (IORA), with
its origins in the 13th Council of Ministers meeting, held in November 2013 in Perth, Australia.
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11 Indian Ocean Commission

11.1 About IOC
 The Indian Ocean Commission (IOC) is an intergovernmental body created in 1984 to protect the
interests of the Western Indian Ocean islands.
 It consists of Madagascar, Comoros, La Réunion (French overseas territory), Mauritius and
Seychelles.
 The Commission has five observers — India, China, European Union (EU), Malta and International
Organisation of La Francophonie (OIF).
o OIF is a 54 French speaking nations collective.
 It was institutionalized in 1984 by the Victoria Agreement in Seychelles.
 The Commission has a Secretariat which is located in Mauritius and headed by a Secretary General.
11.2 India and IOC

 India has been accepted as an observer of the Indian Ocean Commission (IOC).
 India's joining of the IOC as an observer has strategic importance as the Commission is an important
regional institution in the Western/African Indian Ocean.
12 Asia Pacific Economic Cooperation

 The Asia-Pacific Economic Cooperation (APEC) is an inter-governmental forum for 21 member
economies in the Pacific Rim that promotes free trade throughout the Asia-Pacific region.
 Following the success of ASEAN's series of post-ministerial conferences launched in the mid-1980s,
APEC started in 1989, in response to the growing interdependence of Asia-Pacific economies and the
advent of regional trade blocs in other parts of the world; it aimed to establish new markets for
agricultural products and raw materials beyond Europe.
 Headquartered in Singapore, APEC is recognized as one of the highest-level multilateral blocs and
oldest forums in the Asia-Pacific region, and exerts a significant global influence.
12.1 Functions
 APEC works to help all residents of the Asia-Pacific participate in the growing economy. APEC projects
provide digital skills training for rural communities and help indigenous women export their products
abroad.
 Recognizing the impacts of climate change, APEC members also implement initiatives to increase
energy efficiency and promote sustainable management of forest and marine resources.
 The forum adapts to allow members to deal with important new challenges to the region’s economic
well-being. This includes ensuring disaster resilience, planning for pandemics, and addressing
terrorism.
12.2 Members
APEC’s 21 member economies are Australia; Brunei Darussalam; Canada; Chile; People’s Republic of
China; Hong Kong, China; Indonesia; Japan; Republic of Korea; Malaysia; Mexico; New Zealand; Papua
New Guinea; Peru; The Philippines; The Russian Federation; Singapore; Chinese Taipei; Thailand; United
States of America; Viet Nam.
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India has requested membership in APEC, and received initial support from the United States, Japan,
Australia and Papua New Guinea. Officials have decided not to allow India to join as India does not border
the Pacific Ocean, which all current members do.
India was invited to be an observer for the first time in November 2011.
Concept Check
Q. __________ is an inter-governmental forum for 21 member economies in the Pacific Rim that
promotes free trade throughout the Asia-Pacific region.
(a) Regional Comprehensive Economic Partnership
(b) Asia-Pacific Economic Cooperation
(c) Shanghai Cooperation Organisation
(d) Comprehensive and Progressive Agreement for Trans-Pacific Partnership
(e) Association of Southeast Asian Nations
Answer: B
13 BRICS
 BRICS is an acronym for the grouping of the world’s leading emerging economies, namely Brazil,
Russia, India, China and South Africa.
 The BRICS Leaders’ Summit is convened annually.
13.1 Structure
 BRICS does not exist in form of organization, but it is an annual summit between the supreme leaders
of five nations.
 The Chairmanship of the forum is rotated annually among the members, in accordance with the
acronym B-R-I-C-S.
 BRICS cooperation in the past decade has expanded to include an annual programme of over 100
sectoral meetings.
13.2 Salient Features

 Together, BRICS accounts for about 40% of the world’s population and about 30% of the GDP (Gross
Domestic Product), making it a critical economic engine.
 It’s an emerging investment market and global power bloc.
13.3 Genesis
The acronym "BRICS" was initially formulated in 2001 by economist Jim O'Neill, of Goldman Sachs, in a
report on growth prospects for the economies of Brazil, Russia, India and China – which together
represented a significant share of the world's production and population.
In 2006, the four countries initiated a regular informal diplomatic coordination, with annual meetings of
Foreign Ministers at the margins of the General Debate of the UN General Assembly (UNGA).
This successful interaction led to the decision that the dialogue was to be carried out at the level of Heads
of State and Government in annual Summits.
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13.4 Timeline
The first BRIC Summit took place in 2009 in the Russian Federation and focused on issues such as reform
of the global financial architecture.
South Africa was invited to join BRIC in December 2010, after which the group adopted the acronym
BRICS. South Africa subsequently attended the Third BRICS Summit in Sanya, China, in March 2011.
13.5 Areas of Cooperation
13.5.1 Economic Cooperation

 There are rapidly growing trade and investment flows between BRICS countries as well as economic
cooperation activities across a range of sectors.
 Agreements have been concluded in the areas of Economic and Trade Cooperation; Innovation
Cooperation, Customs Cooperation; strategic cooperation between the BRICS Business Council ,
Contingent Reserve Agreement and the New Development Bank.
 These agreements contribute to realisation of the shared objectives of deepening economic
cooperation and fostering integrated trade and investment markets.
13.5.2 People-to-People Exchange

 BRICS members have recognised the need for strengthening People-to-People exchanges and to foster
closer cooperation in the areas of culture, sport, education, film and youth.
 People-to-People exchanges seek to forge new friendships; deepen relations and mutual
understanding between BRICS peoples in the spirit of openness, inclusiveness, diversity and mutual
learning.
 Such People to people exchanges include the Young Diplomats Forum, Parliamentarian Forum, Trade
Union Forum, Civil BRICS as well as the Media Forum.
13.5.3 Political and Security Cooperation

BRICS member political and security cooperation is aimed at achieving peace, security, development and
cooperation for a more equitable and fair world.
BRICS provides opportunities for sharing policy advice and exchanges of best practices in terms of
domestic and regional challenges as well as advancing the restructuring of the global political architecture
so that it is more balanced, resting on the pillar of multilateralism.
BRICS is utilised as a driver for South Africa’s foreign policy priorities including the pursuit of the African
Agenda and South-South Cooperation.
13.5.4 Cooperation Mechanism

Cooperation among members is achieved through:
 Track I: Formal diplomatic engagement between the national governments.

 Track II: Engagement through government-affiliated institutions, e.g. state-owned enterprises and
business councils.
 Track III: Civil society and People-to-People engagement.
13.6 New Development Bank

 NDB is headquartered in Shanghai.
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 At the Fourth BRICS Summit in New Delhi (2012) the possibility of setting up a new Development Bank
was considered to mobilize resources for infrastructure and sustainable development projects in
BRICS and other emerging economies, as well as in developing countries.
 During the Sixth BRICS Summit in Fortaleza (2014) the leaders signed the Agreement establishing the
New Development Bank (NDB).
 Fortaleza Declaration stressed that the NDB will strengthen cooperation among BRICS and will
supplement the efforts of multilateral and regional financial institutions for global development thus
contributing to sustainable and balanced growth.
 NDB’s key areas of operation are clean energy, transport infrastructure, irrigation, sustainable urban
development and economic cooperation among the member countries.
 The NDB functions on a consultative mechanism among the BRICS members with all the member
countries possessing equal rights.
13.7 Contingent Reserve Arrangement

 Considering the increasing instances of global financial crisis, BRICS nations signed BRICS Contingent
Reserve Arrangement (CRA) in 2014 as part of Fortaleza Declaration at Sixth BRICS summit.
 The BRICS CRA aims to provide short-term liquidity support to the members through currency swaps
to help mitigating BOP crisis situation and further strengthen financial stability.
 The initial total committed resources of the CRA shall be one hundred billion dollars of the United
States of America (USD 100 billion).
 It would also contribute to strengthening the global financial safety net and complement existing
international arrangements (IMF).
Concept Check
Q. What might be the key characteristics that have set the BRICS apart?
(a) Increased influence and participation in international organisations such as the United Nations
(b) Increasing economic and military capabilities
(c) Increasing capacity for independent action in order to fulfill their own national interests
Answer: D
14 India’s experience with Free Trade Agreements

14.1.1 What are Free Trade Agreements (FTAs)?
FTAs are arrangements between two or more countries or trading blocs that primarily agree to reduce
or eliminate customs tariff and non-tariff barriers on substantial trade between them. FTAs, normally
cover trade in goods (such as agricultural or industrial products) or trade in services (such as banking,
construction, trading etc.). FTAs can also cover other areas such as intellectual property rights (IPRs),
investment, government procurement and competition policy, etc.
14.1.2 What is the difference between the terms such as PTA, CECA, RTA, CEPA, Customs Union,
Common Market and Economic Union? How are these related to FTAs?
 Preferential Trade Agreement (PTA): In a PTA, two or more partners agree to reduce tariffs on agreed
number of tariff lines. The list of products on which the partners agree to reduce duty is called
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positive list. India MERCOSUR PTA is such an example. However, in general PTAs do not cover
substantially all trade.
 Free Trade Agreement (FTA): In FTAs, tariffs on items covering substantial bilateral trade are
eliminated between the partner countries; however, each maintains individual tariff structure for non-
members. India Sri Lanka FTA is an example. The key difference between an FTA and a PTA is that
while in a PTA there is a positive list of products on which duty is to be reduced; in an FTA there is a
negative list on which duty is not reduced or eliminated. Thus, compared to a PTA, FTAs are generally
more ambitious in coverage of tariff lines (products) on which duty is to be reduced.
 Comprehensive Economic Cooperation Agreement (CECA) and Comprehensive Economic
Partnership Agreement (CEPA): These terms describe agreements which consist of an integrated
package on goods, services and investment along with other areas including IPR, competition etc.
The India Korea CEPA is one such example and it covers a broad range of other areas like trade
facilitation and customs cooperation, investment, competition, IPR etc.
 Custom Union: In a Customs union, partner countries may decide to trade at zero duty among
themselves, however they maintain common tariffs against rest of the world. An example is
Southern African Customs Union (SACU) amongst South Africa, Lesotho, Namibia, Botswana and
Swaziland. European Union is also an outstanding example.
 Common Market: Integration provided by a Common market is one step deeper than that by a
Customs Union. A common market is a Customs Union with provisions to facilitate free movements
of labour and capital, harmonize technical standards across members etc. European Common
Market is an example.
 Economic Union: Economic Union is a Common Market extended through further harmonization of
fiscal/monetary policies and shared executive, judicial & legislative institutions. European Union
(EU) is an example.
14.1.3 What is an Early Harvest Scheme/Programme (EHS) and how different is it from an FTA?
Early harvest scheme is a precursor to a free trade agreement (FTA) between two trading partners. This
is to help the two trading countries to identify certain products for tariff liberalisation pending the
conclusion of FTA negotiation. It is primarily a confidence building measure. A good example of an EHS is
between India and Thailand signed in October 2003, wherein 83 products were identified to be reduced
to zero in a phased manner. The EHS has been used as a mechanism to build greater confidence amongst
trading partners to prepare them for even bigger economic engagement.
14.1.4 How is CECA/CEPA different from FTA?

A Comprehensive Economic Cooperation Agreement (CECA) or a Comprehensive Economic Partnership
Agreement (CEPA) is different from a traditional Free Trade Agreement (FTA) on two counts.
Firstly, CECA/CEPA are more comprehensive and ambitious that an FTA in terms of coverage of areas
and the type of commitments. While a traditional FTA focuses mainly on goods; a CECA/CEPA is more
ambitious in terms of a holistic coverage of many areas like services, investment, competition,
government procurement, disputes etc.
Secondly, CECA/CEPA looks deeper at the regulatory aspects of trade than an FTA. It is on account of
this that it encompasses mutual recognition agreements (MRAs) that covers the regulatory regimes of
the partners. An MRA recognises different regulatory regimes of partners on the presumption that they
achieve the same end objectives.
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14.1.5 Why are almost all the countries signing Free Trade Agreements?
Countries negotiate Free trade Agreements for a number of reasons.
 By eliminating tariffs and some non-tariff barriers FTA partners get easier market access into one
another's markets.
 Exporters prefer FTAs to multilateral trade liberalization because they get preferential treatment
over non-FTA member country competitors. For example in the case of ASEAN, ASEAN has an FTA
with India but not with Canada. ASEAN's custom duty on leather shoes is 20% but under the FTA with
India it reduced duties to zero. Now assuming other costs being equal, an Indian exporter, because of
this duty preference, will be more competitive than a Canadian exporter of shoes. Secondly, FTAs may
also protect local exporters from losing out to foreign companies that might receive preferential
treatment under other FTAs.
 Possibility of increased foreign investment from outside the FTA. Consider 2 countries A and B having
an FTA. Country A has high tariff and large domestic market. The firms based in country C may decide
to invest in country A to cater to A's domestic market. However, once A and B sign an FTA and B offers
better business environment, C may decide to locate its plant in B to supply its products to A.
 Such occurrences are not limited to tariffs alone but it is also true in the case of non-tariff measures.
Especially when a Mutual Recognition Agreement (MRA) is reached between countries A and B. Some
experts are of the view that slow progress in multilateral negotiations due to complexities arising from
large number of countries to reach a consensus on polarising issues, may have provided the impetus
for FTAs.
14.1.6 What are the key macro takeaways from India’s experience with respect to some comprehensive
agreements that it has signed in the past decade?
 India’s exports to FTA countries have not outperformed overall export growth or exports to rest of
the world.
o Since 2006 (India has signed most of its RTAs after 2006), India’s exports to RTA partners
increased by 13% y-o-y. The trend to non-partner countries was no different with exports
increasing at the same pace (chart below). Thus, export to RTA countries has not outperformed
overall export growth, in fact, export to RTA countries parallels the trend growth as with other
exports.
o Thus, India’s export surge could be attributed more to diversification of India’s export basket
both in terms of destination and commodities and favourable global conditions and less to
RTAs.
 FTAs have led to increased imports and exports, although the former has been greater
 India’s trade deficit with ASEAN, Korea and Japan has widened post-FTAs
 According to Economic Survey 2016-17, FTAs have had a bigger impact on metals on the importing
side and textiles on the exporting side.
 A 10% percent reduction in FTA tariffs for metals increases imports by 1.4 %
 India’s exports are much more responsive to income changes as compared to price changes and thus
a tariff reduction/elimination does not boost exports significantly
 Utilisation rate of RTAs by exporters in India is very low (between 5 and 25%)
o Lack of information on FTAs, low margins of preference, delays and administrative costs
associated with rules of origin, non-tariff measures, are major reasons for underutilization.
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14.1.7 What are the factors to be considered while negotiating/signing an FTA?

While negotiating/signing an FTA, India needs to take due care of the following factors:
1. ensure that the FTA permits only those items that are wholly manufactured in the concerned
country;
2. discourage items that are highly subsidised;
3. discourage items that badly hurt the Indian industry and farmers while drawing up ‘the agreed list’
for FTAs;
4. ensure that any such agreement does not violate the WTO guidelines;
5. undertake detailed analysis of the positive effects of FTA on sectors and economy as a whole prior
to signing an agreement;
6. address all trade facilitation concerns, including mutual recognition agreements on standards,
customs collaboration agreements, and expansion of transport links so as to remove all NTBs with
each other;
7. reflect services prominently in all agreements so as to feature India’s dynamic comparative
advantage in services;
8. ensure high-level political attention to induce institutional improvements, such as commitments to
tariff reduction, customs co-operation, etc.
9. negotiating bilateral FTAs with countries where trade complementarities and margin of preference
is high may benefit India in the long run.
10. higher compliance costs nullify the benefits of margin of preference, thus reducing compliance cost
and administrative delays is extremely critical to increase utilization rate of FTAs.
11. proper safety and quality standards should be set to avoid dumping of lower quality hazardous goods
into the Indian market.
12. circumvention of rules of origin should be strictly dealt with by the authorities. In case of India-
SriLanka FTA, Srilanka had started exporting copper to India by under invoicing of imported scrap to
in order to show higher value addition for qualifying for preferential rates under the FTA. Thus, Rules
of Origin (ROO) norms can easily be circumvented by simple accounting manipulation to flood Indian
markets.
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International
Economic
Institutions – IMF
and World Bank -
WTO

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Contents
1 Introduction ............................................................................................................................................5
2 The World Bank ......................................................................................................................................5
2.1 History .............................................................................................................................................5
2.2 Composition ....................................................................................................................................5
2.3 Functions of the Five Institutions of the World Bank Group ..........................................................6
2.3.1 The International Bank for Reconstruction and Development ...............................................6
2.3.2 The International Development Association ...........................................................................6
2.3.3 The International Finance Corporation ...................................................................................7
2.3.4 The Multilateral Investment Guarantee Agency .....................................................................7
2.3.5 The International Centre for Settlement of Investment Dispute (ICSID): ...............................7
2.4 Purpose & Function of World Bank ................................................................................................7
2.5 How has the World Bank Group helped the countries over time? ................................................7
2.6 Membership ....................................................................................................................................8
2.7 Opposition to the World Bank ........................................................................................................9
3 The International Monetary Fund ........................................................................................................10
3.1 Background ...................................................................................................................................10
3.2 What does IMF work for? .............................................................................................................10
3.3 Internal Working Arrangement of IMF .........................................................................................11
3.4 IMF Benefits ..................................................................................................................................12
3.5 Facilities of IMF to lend money .....................................................................................................12
3.6 Special Drawing Rights ..................................................................................................................13
3.7 India and the IMF ..........................................................................................................................14
3.8 Emergency Funds ..........................................................................................................................15
3.9 Criticism.........................................................................................................................................15
3.10 Problem of Voting Procedure .......................................................................................................16
3.11 Recent IMF Reforms ......................................................................................................................16
4 World Trade Organisation ....................................................................................................................17
4.1 Background: The origin of WTO ....................................................................................................17
4.2 How was the System Developed? .................................................................................................17
4.3 Objectives of WTO ........................................................................................................................18
4.4 Functions of WTO..........................................................................................................................18
4.5 Structure of WTO ..........................................................................................................................18
4.5.1 Membership...........................................................................................................................18

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4.5.2 Decision Making.....................................................................................................................18

4.5.3 Secretariat..............................................................................................................................19
4.5.4 Ministerial Conferences .........................................................................................................19
4.6 WTO Agreements ..........................................................................................................................20
4.6.1 Goods .....................................................................................................................................20
4.6.2 Services ..................................................................................................................................20
4.6.3 Intellectual Property ..............................................................................................................21
4.6.4 Agreement on Subsidies and Counter-veiling Measures ......................................................21
4.6.5 Agreement on Agriculture .....................................................................................................22
4.6.6 Agreement on Sanitary and Phyto-Sanitary (SPS) Measures ................................................23
4.6.7 Agreement on Anti-Dumping (ADA) ......................................................................................23
4.6.8 Agreement on Technical Barriers to Trade (TBT) ..................................................................23
4.7 Dispute Settlement .......................................................................................................................24
4.8 Policy Review ................................................................................................................................25
4.9 Principles of the Trading System...................................................................................................26
4.9.1 Most Favoured Nation: Treating Other People Equally ........................................................26
4.9.2 National Treatment: Treating Locals & Foreigners Equally ...................................................26
4.9.3 Freer Trade: Gradually through Negotiations .......................................................................27
4.9.4 Predictability: Through Binding Agreements and Transparency...........................................27
4.9.5 Promising Fair Competition ...................................................................................................27
4.10 Doha Development Agenda ..........................................................................................................28
4.11 Agreement on Agriculture ............................................................................................................28
4.11.1 Domestic Support: Green Box, Blue Box, Amber Box ...........................................................29
4.11.2 De minimis Provision .............................................................................................................29
4.11.3 Market Access ........................................................................................................................29
4.11.4 Export Subsidy .......................................................................................................................29
4.12 Special Safeguard Mechanism ......................................................................................................30
4.13 Evaluation of the WTO ..................................................................................................................30
4.14 Achievements of WTO ..................................................................................................................31
4.15 Limitations of WTO .......................................................................................................................31
4.16 Criticism.........................................................................................................................................32
4.17 India and the WTO ........................................................................................................................33

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1 Introduction
 IFIs (International Financial Institutions) are institutions that provide financial support and
professional advice for economic and social development activities in developing countries and
promote international economic cooperation and stability.
 All IFIs are characterized by a broad country membership, including both borrowing developing
countries and developed donor countries; membership in the regional development banks is not
limited to countries from the region but includes countries from around the world.
 Each IFI has its own independent legal and operational status, but because a considerable number
of countries have membership in several IFIs, a high level of cooperation is maintained among them.
 All IFIs are active in supporting programs that are global in scope, in addition to their primary role of
financing and providing technical assistance to programs at the country level.
 Several other publicly owned international banks and funds also lend to developing countries, and
these are often grouped together as other multilateral financial institutions rather than as IFIs.
 They usually have a relatively narrow ownership or membership structure or focus on particular
sectors or activities.
2 The World Bank

2.1 History
The Bretton Woods Conference, formally known as the United Nations Monetary and Financial
Conference, was the gathering of 730 delegates from all 44 Allied nations at the Mount Washington
Hotel, situated in Bretton Woods, New Hampshire, United States, to regulate the international monetary
and financial order after the conclusion of World War II.
The conference was held from July 1–22, 1944. Agreements were signed that, after legislative ratification
by member governments, established the International Bank for Reconstruction and Development
(IBRD) and the International Monetary Fund (IMF).
Note: World Bank was formed in July 1944 with a motto of ‘Working for a World Free of Poverty’.
The International Bank for Reconstruction and Development (IBRD) was later known as the World Bank.
2.2 Composition
 The World Bank is an international organization that assists emerging market countries to reduce
poverty.
 The World Bank is not a bank in the conventional sense of the word. Instead, it consists of two
development institutions: ‘The International Bank for Reconstruction and Development (IBRD – 189
member countries) and the International Development Association (IDA – 173 member countries)’.
 The Bank works closely with three other organizations. They are the International Finance
Corporation (IFC – 184 member countries), the Multilateral Guarantee Agency (MIGA – 181 member
countries), and the International Centre for the Settlement of Investment Disputes (ICSID – 163
member countries). All five organizations make up the World Bank Group. All the five institutions
mentioned above are headquartered at Washington, D.C., U.S.A.

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Concept Check
Q. Which of the following institutions is not a part of the ‘World Bank Group’?
(a) International Bank for Reconstruction and Development
(b) International Finance Corporation
(c) International Development Association
(d) International Monetary Fund
(e) All of the above institutions are a part of the ‘World Bank Group’
Answer: D
2.3 Functions of the Five Institutions of the World Bank Group
2.3.1 The International Bank for Reconstruction and Development

 It offers assistance to middle income and poor but credit worthy countries, and it also works as an
umbrella for more specialized bodies under the World Bank.
 The IBRD was the original arm of the World Bank that was responsible for the reconstruction of post-
war Europe.
 Before gaining membership in the World Bank Group affiliates (the International Finance
Corporation, the Multilateral Investment Guarantee Agency and the International Center For
Settlement of Investment Disputes), a country must be a member of the IBRD.
2.3.2 The International Development Association

It offers loans to the world's poorest countries. These loans come in the form of "credits" and are
essentially interest-free. They offer a 10-year grace period and hold a maturity of 35 years to 40 years.
It complements the World Bank’s other lending arm— the International Bank for Reconstruction and
Development (IBRD) which serves middle-income countries with capital investment and advisory services.
IDA was created in 1960.
Concept Check
Q. The International Development Association, a lending agency, is administered by the
(a) International Bank for Reconstruction and Development

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(b) International Fund for Agricultural Development

(c) United Nations Development Programme.
(d) United Nations Industrial Development Organization
Answer: A
2.3.3 The International Finance Corporation

 It works to promote private sector investments by both foreign and local investors.
 It provides advice to investors and businesses, and it offers normalized financial market information
through its publications, which can be used to compare across markets.
 The IFC also acts as an investor in capital markets and will help governments privatize inefficient
public enterprises.
2.3.4 The Multilateral Investment Guarantee Agency

 It supports direct foreign investment into a country by offering security against the investment in the
event of political turmoil.
 These guarantees come in the form of political risk insurance, meaning that MIGA offers insurance
against the political risk that an investment in a developing country may bear .
2.3.5 The International Centre for Settlement of Investment Dispute (ICSID):

It facilitates and works towards a settlement in the event of a dispute between a foreign investor and a
country.
2.4 Purpose & Function of World Bank

 The World Bank provides low-interest loans, interest-free credits, and grants. It focuses on improving
education, health, and infrastructure.
 It also uses funds to modernize a country's financial sector, agriculture, and natural resources
management.
 The Bank's stated purpose is to "bridge the economic divide between poor and rich countries." It
does this by turning "rich country resources into poor country growth”. It has a long-term vision to
"achieve sustainable poverty reduction."
2.5 How has the World Bank Group helped the countries over time?
 The past 70 years have seen major changes in the world economy. Over that time, the World Bank
Group—the world’s largest development institution—has worked to help more than 100 developing
countries and countries in transition adjust to these changes by offering loans and tailored knowledge
and advice.
 The Bank Group works with country governments, the private sector, civil society organizations,
regional development banks, think tanks, and other international institutions on issues ranging from
climate change, conflict, and food security to education, agriculture, finance, and trade.
 All of these efforts support the Bank Group’s twin goals of ending extreme poverty by 2030 and
boosting shared prosperity of the poorest 40 percent of the population in all countries.
 Originally, its loans helped rebuild countries devastated by World War II.
 In time, the focus shifted from reconstruction to development, with a heavy emphasis on
infrastructure such as dams, electrical grids, irrigation systems, and roads.

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 With the founding of the International Finance Corporation in 1956, the institution became able to
lend to private companies and financial institutions in developing countries.
 And the founding of the International Development Association in 1960 put greater emphasis on the
poorest countries, part of a steady shift toward the eradication of poverty becoming the Bank Group’s
primary goal.
 The subsequent launch of the International Centre for Settlement of Investment Disputes and the
Multilateral Investment Guarantee Agency further rounded out the Bank Group’s ability to connect
global financial resources to the needs of developing countries.
 Today the Bank Group’s work touches nearly every sector that is important to fighting poverty,
supporting economic growth, and ensuring sustainable gains in the quality of people’s lives in
developing countries.
 While sound project selection and design remain paramount, the Bank Group recognizes a wide range
of factors that are critical to success—effective institutions, sound policies, continuous learning
through evaluation and knowledge-sharing, and partnership, including with the private sector.
 The Bank Group has long-standing relationships with more than 180-member countries, and it taps
these to address development challenges that are increasingly global.
 On critical issues like climate change, pandemics, and forced migration, the Bank Group plays a
leading role because it is able to convene discussion among its country members and a wide array of
partners.
 It can help address crises while building the foundations for longer-term, sustainable development.
2.6 Membership
 There are 189 member countries that are shareholders in the IBRD, which is the primary arm of the
WBG.
 To become a member, however, a country must first join the International Monetary Fund (IMF).
 The size of the World Bank's shareholders, like that of the IMF's shareholders, depends on the size of
a country's economy. Thus, the cost of a subscription to the World Bank is a factor of the quota paid
to the IMF.
 There is an obligatory subscription fee, which is equivalent to 88.29% of the quota that a country has
to pay to the IMF.
 In addition, a country is obligated to buy 195 World Bank shares (US$120,635 per share, reflecting a
capital increase made in 1988).
 Of these 195 shares, 0.60% must be paid in cash in U.S. dollars while 5.40% can be paid in a country's
local currency, in U.S. dollars, or in non-negotiable non-interest bearing notes.
 The balance of the 195 shares is left as "callable capital," meaning the World Bank reserves the right
to ask for the monetary value of these shares when and if necessary.
 A country can subscribe a further 250 shares, which do not require payment at the time of
membership but are left as "callable capital."
 The president of the World Bank traditionally comes from the largest shareholder, which is the
United States, and members are represented by a Board of Governors.
 Throughout the year, however, powers are delegated to a board of 24 Executive Directors (EDs).
 The five largest shareholders - the U.S., U.K., France, Germany and Japan - each have an individual ED,
and the additional 19 EDs represent the rest of the member states as groups of constituencies.

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 Of these 19, however, China, Russia and Saudi Arabia have opted to be single country constituencies,
which means that they each have one representative within the 19 EDs.
 This decision is based on the fact that these countries have large, influential economies, which
requires that their interests be voiced individually rather than diluted within a group.
 The World Bank gets its funding from rich countries as well as from the issuance of bonds on the
world's capital markets.
2.7 Opposition to the World Bank

 While the WBG strives to create a poverty-free world, there are groups that are passionately opposed
to the international patron.
 The opponents believe that, due to the fundamental structure of the Bank, the already existing
imbalance between the world's rich and poor is only exacerbated.
 The system allows the largest shareholders to dominate the vote, resulting in WBG policies being
decided by the rich but implemented by the poor.
 This can result in policies that are not in the best interests of the developing country in question,
whose political, social and economic policies will often have to be moulded around WBG resolutions.
 Moreover, even though the Bank provides training, assistance, information and other means that may
lead to sustainable development, opponents have observed that developing countries often have to
put health, education and other social programs on hold in order to pay back their loans.
 Opposition groups have protested by boycotting World Bank bonds. These are the bonds that the
WBG sells on global capital markets to raise money for some of its activities.
 These opposition groups also call for an end to all practices that require a country to implement
structural adjustment programs - including privatization and government austerity measures - an end
to debt owed by the poorest of the poor, and an end to environmentally damaging projects.
Report published by World Bank

• Global Economic Prospects
• World Development Report
• Ease of Doing Business
• International Debt Statistics
Concept Check
Q. India’s ranking in the ‘Ease of Doing Business Index’ is sometimes seen in the news. Which of the
following has declared that ranking?
(a) Organisation for Economic Cooperation and Development (OECD)
(b) World Economic Forum
(c) World Bank
(d) World Trade Organisation
Answer: C

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3 The International Monetary Fund

The International Monetary Fund is an organization of 190-member countries. (Principality of Andorra
joined the fund on October 16, 2020 as its 190th member.). It is headquartered in Washington, D.C
It stabilizes the global economy in three ways.
 First, it monitors global conditions and identifies risks.

 Second, it advises its members on how to improve their economies.
 Third, it provides technical assistance and short-term loans to prevent financial crises.
The IMF's goal is to prevent these disasters by guiding its members.
3.1 Background
 Formed in 1944 at the Bretton Woods Conference primarily by the ideas of Harry Dexter White and
John Maynard Keynes, it came into formal existence in 1945 with 29 member countries and the goal
of reconstructing the international payment system.
 It was created out of a need to prevent economic crises like the Great Depression.
 With its sister organization, the World Bank, the IMF is the largest public lender of funds in the world.
 Membership is open to any country that conducts foreign policy and accepts the organization's
statutes.
3.2 What does IMF work for?

 The IMF is responsible for the creation and maintenance of the international monetary system, the
system by which international payments among countries take place.
 It thus strives to provide a systematic mechanism for foreign exchange transactions in order to foster
investment and promote balanced global economic trade.
 To achieve these goals, the IMF focuses and advises on the macroeconomic policies of a country,
which affect its exchange rate and its government's budget, money and credit management.
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 The IMF will also appraise a country's financial sector and its regulatory policies, as well as structural
policies within the macro economy that relate to the labour market and employment.
 In addition, as a fund, it may offer financial assistance to nations in need of correcting balance of
payments discrepancies.
 The IMF is thus entrusted with nurturing economic growth and maintaining high levels of
employment within countries.
3.3 Internal Working Arrangement of IMF

Board of Governors:
 The Board of Governors, the highest decision-making body of the IMF, consists of one governor
and one alternate governor for each member country.
 The governor is appointed by the member country and is usually the minister of finance or the
governor of the central bank.
 All powers of the IMF are vested in the Board of Governors. The Board of Governors may delegate
to the Executive Board all except certain reserved powers.
 The Board of Governors normally meets once a year.
The Executive Board:

 The Executive Board (the Board) is responsible for conducting the day-to-day business of the IMF.
 It is composed of 24 Directors, who are elected by member countries or by groups of countries, and
the Managing Director, who serves as its Chairman.
 The Board usually meets several times each week.
 It carries out its work largely on the basis of papers prepared by IMF management and staff.
 The IMF gets its money from quota subscriptions paid by member states.
 The size of each quota is determined by how much each government can pay according to the size
of its economy.
 The quota in turn determines the weight each country has within the IMF - and hence its voting rights
- as well as how much financing it can receive from the IMF.
 Twenty-five percent of each country's quota is paid in the form of special drawing rights (SDRs),
which are a claim on the freely usable currencies of IMF members.
 Before SDRs, the Bretton Woods system had been based on a fixed exchange rate, and it was feared
that there would not be enough reserves to finance global economic growth.
 Therefore, in 1969, the IMF created the SDRs, which are a kind of international reserve asset. They
were created to supplement the international reserves of the time, which were gold and the U.S.
dollar.
Special Drawing Rights (SDRs)

 The SDR is not a currency; it is a unit of account by which member states can exchange with one
another in order to settle international accounts.
 The SDR can also be used in exchange for other freely-traded currencies of IMF members.
 A country may do this when it has a deficit and needs more foreign currency to pay its international
obligations.
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 The SDR's value lies in the fact that member states commit to honor their obligations to use and
accept SDRs.
 Each member country is assigned a certain amount of SDRs based on how much the country
contributes to the Fund (which is based on the size of the country's economy).
 However, the need for SDRs lessened when major economies dropped the fixed exchange rate and
opted for floating rates instead.
 The IMF does all of its accounting in SDRs, and commercial banks accept SDR denominated accounts.
 The currency value of the SDR is determined by summing the values in U.S. dollars, based on market
exchange rates, of a basket of major currencies (the U.S. dollar, Euro, Japanese yen, pound sterling
and the Chinese renminbi). The SDR currency value is calculated daily (except on IMF holidays or
whenever the IMF is closed for business) and the valuation basket is reviewed and adjusted every five
years.
 The larger the country, the larger its contribution; thus the U.S. contributes about 18% of total quotas
while the Seychelles Islands contribute a modest 0.004%. If called upon by the IMF, a country can pay
the rest of its quota in its local currency.
 The IMF may also borrow funds, if necessary, under two separate agreements with member countries.
In total, it has SDR 212 billion (USD 290 billion) in quotas and SDR 34 billion (USD 46 billion) available
to borrow.
Concept Check
Q. Special Drawing Rights are not
(a) a credit line allocated by the IMF to member countries according to each country's quota.
(b) backed by US dollars.
(c) the IMF's unit of account.
(d) a basket of five currencies.
Answer: B
3.4 IMF Benefits

 The IMF offers its assistance in the form of surveillance, which it conducts on a yearly basis for
individual countries, regions and the global economy as a whole.
 However, a country may ask for financial assistance if it finds itself in an economic crisis, whether
caused by a sudden shock to its economy or poor macroeconomic planning.
 A financial crisis will result in severe devaluation of the country's currency or a major depletion of the
nation's foreign reserves.
In return for the IMF's help, a country is usually required to embark on an IMF-monitored economic
reform program, otherwise known as Structural Adjustment Policies (SAPs).
3.5 Facilities of IMF to lend money

IMF lending aims to give countries breathing room to implement adjustment policies in an orderly
manner, which will restore conditions for a stable economy and sustainable growth. These policies will
vary depending upon the country’s circumstances.
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For instance, a country facing a sudden drop in the prices of key exports may need financial assistance
while implementing measures to strengthen the economy and widen its export base. A country suffering
from severe capital outflows may need to address the problems that led to the loss of investor
confidence—perhaps interest rates are too low; the budget deficit and debt stock are growing too fast;
or the banking system is inefficient or poorly regulated.
The IMF’s various lending instruments are tailored to different types of balance of payments need as well
as the specific circumstances of its diverse membership.
All IMF members are eligible to access the Fund’s resources in the General Resources Account (GRA) on
non-concessional terms, but the IMF also provides concessional financial support (currently at zero
interest rates through June 2021) through the Poverty Reduction and Growth Trust (PRGT), which is
better tailored to the diversity and needs of low-income countries.
Historically, for emerging and advanced market economies in crises, the bulk of IMF assistance has been
provided through Stand-By Arrangements (SBAs) to address short-term or potential balance of payments
problems. The Standby Credit Facility (SCF) serves a similar purpose for low-income countries.
The Extended Fund Facility (EFF) and the corresponding Extended Credit Facility (ECF) for low-income
countries are the Fund’s main tools for medium-term support to countries facing protracted balance of
payments problems. Their use has increased substantially since the global financial crisis, reflecting the
structural nature of some members’ balance of payments problems.
To help prevent or mitigate crises and boost market confidence during periods of heightened risks,
members with already strong policies can use the Flexible Credit Line (FCL) or the Precautionary and
Liquidity Line (PLL).
The Rapid Financing Instrument (RFI) and the corresponding Rapid Credit Facility (RCF) for low-income
countries provide rapid assistance to countries with urgent balance of payments need, including from
commodity price shocks, natural disasters, and domestic fragilities.
The IMF provides financial support for balance of payments needs upon request by its member countries.
Unlike development banks, the IMF does not lend for specific projects.
Concept Check
Q. International Monetary Fund provides financial assistance through which of the following
mechanism?
(a) Poverty Reduction and Growth Trust
(b) Stand-By Arrangements
(c) Standby Credit Facility
(d) Flexible Credit Line
Answer: E
3.6 Special Drawing Rights

The late 1960s witnessed that the growth in world resources did not keep pace with the growth in
international trade. The slackness in the growth of resources was mainly due to the dependence on the
accretion of gold to monetary reserves. It was foreboding that the slow growth of monetary resources
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would result in hampering the growth of international trade and in serious BOP difficulties to many
countries. The need to increase the international liquidity, i.e., resources for settlement of international
debts, was felt and after much thought on the subject, it resulted in the introduction of Special Drawing
Rights (SDRs) in 1970.
SDRs are entitlements granted to member-countries enabling them to draw from the IMF apart from
their quota. It is similar to a bank granting a credit limit to the customer. When SDRs are allocated the
country’s Special Drawing Account with the IMF is credited with the amount of the allotment.
Originally, SDRs were to be utilised only for meeting BOP difficulties. But as a consequence of endavours
to make it an international unit of account, the use of SDRs has been liberalised. Now SDRs can be used
directly among the members without the approval of the IMF. A country may swap SDRs with another
country to acquire a currency it desires. SDRs may be utilised to pay charges to IMF. SDR has gained
importance both as a reserve asset and as a unit of settlement of international transactions. Some
international banks accept time deposits designated in SDRs. Some countries have pegged their
currencies to SDRs.
3.7 India and the IMF

As founder member of the IMF, India was initially assigned a quota of $400 million or about 5.2 per cent
of the total. Being the fifth largest quota holder, India was also given a seat on the IMF’s Executive Board.
As a member of the Fund, India has derived following benefits:
• Foreign Exchange for Meeting BOP Deficits: The country has made use of the Fund’s facilities a
number of times to meet her BOP requirements. Such drawings of foreign exchange have enabled the
country to tide over the acute foreign exchange crisis and to maintain the imports of essentials goods.
o While India has not been a frequent user of IMF resources, IMF credit has been
instrumental in helping India respond to emerging balance of payments problems on two
occasions. In 1981-82, the borrowing amount by India was SDR 3.9 billion under an
Extended Fund Facility, the largest collection in IMF history at the time. In 1991-93, the
borrowing amount by India borrowed was a total of SDR 2.2 billion under two standby
arrangements, and in 1991 it borrowed SDR 1.4 billion under the Compensatory Financing
Facility. India has not taken any financial assistance from the IMF from 1993. All the loans
taken from International Monetary Fund have been completed repayed on 31 May, 2000.
• Oil Facility from the IMF: India resorted to drawals from the IMF under the Oil Facility created in June,
1974 to meet larger outlays for the import of petroleum crude.
• Assistance under SDRs: The SDRs provide unconditional liquidity since the participants have access to
foreign exchange resources at will.
• Aid from the World Bank: The country’s membership of the IMF has entitled it to become a member
of the World Bank; as a member of the Bank, India has received large technical and financial assistance
for the various development projects.
• Assistance under the Extended Credit Facility: Loan under this facility is contracted at softer terms
but there is a serious conditionality clause attached to it.
• Preparation of Valuable Reports: The country has availed the services of the specialists in the Fund
for the purpose of assessing the state of the Indian economy and for preparing valuable reports on
various aspects of the economy.
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• India has received technical assistance in a number of areas in the last few years from the Fund,
including the development of the government securities market, foreign exchange market reform,
public expenditure management, tax and customs administration, and strengthening statistical
systems. Indian officials have been provided with trainings in national accounts, tax administration,
balance of payments compilation, monetary policy, and other areas by the IMF since 1981.
In short, the membership of the Fund has been instrumental in implementing various schemes under the
developmental plans.
However, India has been highly selective in approaching the Fund. It was in early 1990s that it became
necessary for India to approach the IMF for a massive assistance to restore a sense of viability to her
foreign exchange position. With the aid of concessional loan from the IMF in 1991 and subsequent
adoption of stablisation and adjustment programme, India successfully overcame the BOP crisis. It
prepaid this loan it would be seen that India has all squared up its borrowings from the IMF.
3.8 Emergency Funds

 The IMF also offers emergency funds to collapsed economies, as it did for Korea during the 1997
financial crisis in Asia.
 The funds were injected into Korea's foreign reserves in order to boost the local currency, thereby
helping the country avoid a damaging devaluation.
 Emergency funds can also be loaned to countries that have faced economic crisis as a result of a
natural disaster.
All facilities of the IMF aim to create sustainable development within a country and try to create policies
that will be accepted by the local populations. However, the IMF is not an aid agency, so all loans are
given on the condition that the country implement the SAPs and make it a priority to pay back what it
has borrowed.
Currently, all countries that are using IMF programs are developing, transitional and emerging market
countries (countries that have faced financial crisis).
3.9 Criticism
 Because the IMF lends its money with "strings attached" in the form of its SAPs (Structural
Adjustment Policies), many people and organizations are vehemently opposed to its activities.
 Opposition groups claim that structural adjustment is an undemocratic and inhumane means of
loaning funds to countries facing economic failure.
 Debtor countries to the IMF are often faced with having to put financial concerns ahead of social ones.
 Thus, by being required to open up their economies to foreign investment, to privatize public
enterprises, and to cut government spending, these countries suffer an inability to properly fund their
education and health programs.
 Moreover, foreign corporations often exploit the situation by taking advantage of local cheap labor
while showing no regard for the environment.
 The oppositional groups say that locally cultivated programs, with a more grassroots approach
towards development, would provide greater relief to these economies. Critics of the IMF say that, as
it stands now, the IMF is only deepening the rift between the wealthy and the poor nations of the
world.
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 One of the other basic criticisms of the IMF has been that voting procedure in the governing body
gives abundant voting rights to the states which are major contributors to its fund. The procedure is
based on the Special Drawing Rights (SDR) which is supplementary foreign exchange reserves. The
decision-making power of each country depends on its SDR quota and is clearly against the interests
of the poorer countries.
3.10 Problem of Voting Procedure

 The countries that hold majority of vote are the capitalistic countries and their grip over the decision
making is bound to invite criticism and it does invite criticism.
 Let us take the example of the United States which hold nearly 17% of the total votes in the IMF; the
irony is that to take any special decision according to the Articles of agreement out of the total number
of votes 85% majority is required which means that the United States has the extraordinary power of
effectively vetoing every important policy making decision.
 This is just one of the many ways in which a group of four –five countries have literally hijacked the
working of the IMF.
 This also implies that such right quite emphatically excludes the majority of the member states in as
far as the working procedure is concerned.
3.11 Recent IMF Reforms

The reforms were agreed upon by the 188 members of the IMF in 2010 in the aftermath of the global
financial meltdown. However, there implementations were delayed due to the time taken by the US
Congress to approve the changes. But, were finally approved by the US Congress in December 2015, thus
making them finally effective.
 Gives boost the representation of emerging economies like India, China, Brazil, Russia and increases
their power and greater say in IMF.
 India’s voting rights increased by 0.3% from the current 2.3% to 2.6%. China’s voting rights increased
by 2.2% from current 3.8% to 6 %.
 These reforms shifted more than 6% of the quota shares to emerging and developing countries from
the US and European countries. Russia and Brazil also have gained from the reforms. US’s quota share
dropped from 16.7 per cent to 16.5 per cent but it will retain its veto power.
 China will have the 3rd largest IMF quota and voting share after the US and Japan. While, India, Russia
and Brazil will also be among the top 10 members of the IMF.
 The combined quotas or the capital resources of IMF also have doubled due to reforms to $659 billion
from current $329 billion.
 The doubling of quotas means that the shares (roles) of advanced European and Gulf countries have
been reduced and that of emerging nations particularly China has been increased.
 The voting power and quota shares of the IMF’s poorest member countries will be protected.
 Under the reform, for the first time IMF’s Executive Board will consist entirely of elected Executive
Directors and it ends the category of appointed Executive Directors.
What has been very interesting is the increase in the vote share of the certain Asian countries like China
and India which has changed the equations of power in the institution but it is also due to the fact that
these states are the beneficiaries of the SDR procedure, which means that this should not excite the
sceptics anytime soon because the bottom line remains that there is no respite from the fact that
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countries with less economic power and especially the debt-holders remain at the receiving end of what
its promoters is a system of “justice”.
After all the system was meant to help the less privileged countries and not countries with rapidly thriving
economies who in the current state of affairs seem to be the chief benefactors of the existing setup.
Reports published by IMF

 Global Financial Stability Report
 World Economic Outlook
Concept Check
Q. ‘Global Financial Stability Report’ is prepared by the
(a) European Central Bank
(b) International Monetary Fund
(c) International Bank for Reconstruction and Development
(d) Organisation for Economic Cooperation and Development
Answer: B
4 World Trade Organisation

4.1 Background: The origin of WTO
 The World Trade Organization (WTO) came into being in 1995.
 One of the youngest of the international organizations, the WTO is the successor to the General
Agreement on Tariffs and Trade (GATT) established in the wake of the Second World War.
GATT
 The General Agreement on Tariffs and Trade was the first worldwide multilateral free trade
agreement.
 It was in effect from June 30, 1948 until January 1, 1995.
 It ended when it was replaced by the more robust World Trade Organization.
 So, while the WTO is still young, the multilateral trading system that was originally set up under GATT
is well over 60 years old.
 The past 60 years have seen an exceptional growth in world trade. Merchandise exports grew on
average by 6% annually. Total trade in 2000 was 22-times the level of 1950. GATT and the WTO have
helped to create a strong and prosperous trading system contributing to unprecedented growth.
4.2 How was the System Developed?

 The system was developed through a series of trade negotiations, or rounds, held under GATT.
 The GATT completed 8 rounds of multilateral trade negotiations (MTNs).
 The first rounds dealt mainly with tariff reductions, but later negotiations included other areas such
as anti-dumping and non-tariff measures.
 The last round — the 1986-94 Uruguay Round — led to the WTO’s creation.
 The negotiations did not end there. Some continued after the end of the Uruguay Round.
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 In February 1997 agreement was reached on telecommunications services, with 69 governments

agreeing to wide-ranging liberalization measures that went beyond those agreed in the Uruguay
Round.
 In the same year 40 governments successfully concluded negotiations for tariff-free trade in
information technology products, and 70 members concluded a financial services deal covering more
than 95% of trade in banking, insurance, securities and financial information.
 In 2000, new talks started on agriculture and services. These have now been incorporated into a
broader agenda launched at the fourth WTO Ministerial Conference in Doha, Qatar, in November 2001
(once in every two years, the Ministerial Conference of the WTO takes place).
 The work programme, the Doha Development Agenda (DDA), adds negotiations and other work on
non-agricultural tariffs, trade and environment, WTO rules such as anti-dumping and subsidies,
investment, competition policy, trade facilitation, transparency in government procurement,
intellectual property, and a range of issues raised by developing countries as difficulties they face in
implementing the present WTO agreements.
4.3 Objectives of WTO

The important objectives of WTO are:
 To improve the standard of living of people in the member countries.

 To ensure full employment and broad increase in effective demand.
 To enlarge production and trade of goods.
 To increase the trade of services.
 To ensure optimum utilization of world resources.
 To protect the environment.
 To accept the concept of sustainable development.
4.4 Functions of WTO

The main functions of WTO are:
 To implement rules and provisions related to trade policy review mechanism.

 To provide a platform to member countries to decide future strategies related to trade and tariff.
 To provide facilities for implementation, administration and operation of multilateral and bilateral
agreements of the world trade.
 To administer the rules and processes related to dispute settlement.
 To ensure the optimum use of world resources.
 To assist international organizations such as, IMF and IBRD for establishing coherence in Universal
Economic Policy determination.
4.5 Structure of WTO
4.5.1 Membership
Members: The WTO has 164 members, accounting for more than 95% of world trade.
4.5.2 Decision Making

 Decisions are made by the entire membership. This is typically by consensus.
 A majority vote is also possible, but it has never been used in the WTO, and was extremely rare under
the WTO’s predecessor, GATT.
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 The WTO’s agreements have been ratified in all members’ parliaments.

 The WTO’s top-level decision-making body is the Ministerial Conference which meets at least once
every two years.
 Below this is the General Council (normally ambassadors and heads of delegation in Geneva, but
sometimes officials sent from members’ capitals) which meets several times a year in the Geneva
headquarters. The General Council also meets as the Trade Policy Review Body and the Dispute
Settlement Body.
 At the next level, the Goods Council, Services Council and Intellectual Property (TRIPS) Council report
to the General Council.
 Numerous specialized committees, working groups and working parties deal with the individual
agreements and other areas such as the environment, development, membership applications and
regional trade agreements.
*Please refer to EduTap’s Current Affairs magazine to keep yourself abreast with any change in
personnel or membership of International Economic Institutions.
4.5.3 Secretariat
 The WTO Secretariat, based in Geneva, has around 640 staff and is headed by a director-general. Its
annual budget is roughly 197 million Swiss francs.
 It does not have branch offices outside Geneva. Since decisions are taken by the members themselves,
the Secretariat does not have the decision-making role that other inter secretariat, Geneva national
bureaucracies are given.
The Secretariat’s main duties are:
 To supply technical support for the various councils and committees and the ministerial conferences;
 To provide technical assistance for developing countries,
 To analyze world trade and
 To explain WTO affairs to the public and media.
 It also provides some forms of legal assistance in the dispute settlement process and advises
governments wishing to become members of the WTO.
4.5.4 Ministerial Conferences
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Note: Kazakhstan’s has offered to host the WTO’s 12th Ministerial Conference (MC12) in Nur-Sultan in
June 2021.
Note: Kindly refer EduTap’s Monthly current affairs magazine for the updates related to the Ministerial
Conference of the WTO.
4.6 WTO Agreements

 The WTO agreements cover goods, services and intellectual property.
 They spell out the principles of liberalization, and the permitted exceptions.
 They include individual countries’ commitments to lower customs tariffs and other trade barriers,
and to open and keep open services markets.
 They set procedures for settling disputes.
 They prescribe special treatment for developing countries.
 They require governments to make their trade policies transparent by notifying the WTO about laws
in force and measures adopted, and through regular reports by the secretariat on countries’ trade
policies.
 These agreements are often called the WTO’s trade rules, and the WTO is often described as “rules-
based”, a system based on rules. But it’s important to remember that the rules are actually
agreements that governments negotiated.
 The basis of the present WTO system is Uruguay Round agreements (which was the 8th-last round
of GATT).
 In fact, the agreements fall into a simple structure with six main parts: an umbrella agreement (the
Agreement Establishing the WTO); agreements for each of the three broad areas of trade that the
WTO covers (goods, services and intellectual property); dispute settlement; and reviews of
governments’ trade policies.
Let us study each one in detail:
4.6.1 Goods
 It all began with trade in goods. From 1947 to 1994, GATT was the forum for negotiating lower
customs duty rates and other trade barriers; the text of the General Agreement spelt out important
rules, particularly non-discrimination.
 Since 1995, the updated GATT has become the WTO’s umbrella agreement for trade in goods.
 It has annexes dealing with specific sectors such as agriculture and textiles, and with specific issues
such as state trading, product standards, subsidies and actions taken against dumping.
4.6.2 Services
 Banks, insurance firms, telecommunications companies, tour operators, hotel chains and transport
companies looking to do business abroad can now enjoy the same principles of freer and fairer trade
that originally only applied to trade in goods.
 These principles appear in the new General Agreement on Trade in Services (GATS).
 WTO members have also made individual commitments under GATS stating which of their services
sectors they are willing to open to foreign competition, and how open those markets are.
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4.6.3 Intellectual Property

 The WTO’s intellectual property agreement amounts to rules for trade and investment in ideas and
creativity.
 The rules state how copyrights, patents, trademarks, geographical names used to identify products,
industrial designs, integrated circuit layout-designs and undisclosed information such as trade secrets
— “intellectual property” — should be protected when trade is involved.
 The basic principles related to the Intellectual Property agreements are mentioned in “The
Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)”.
TRIPS
 The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) is an international
legal agreement between all the member nations of the World Trade Organization (WTO).
 It sets down minimum standards for the regulation by national governments of many forms of
intellectual property (IP) as applied to nationals of other WTO member nations.
 TRIPS was negotiated at the end of the Uruguay Round of the General Agreement on Tariffs and
Trade (GATT) in between 1989 and 1990 and is administered by the WTO. (TRIPS became effective
on 1 January 1995)
Geographical Indications
 Geographical Indications of Goods are defined as that aspect of industrial property which refer to
the geographical indication referring to a country or to a place situated therein as being the
country or place of origin of that product. Typically, such a name conveys an assurance of quality
and distinctiveness which is essentially attributable to the fact of its origin in that defined
geographical locality, region or country.
 Under Articles 1 (2) and 10 of the Paris Convention for the Protection of Industrial Property,
geographical indications are covered as an element of IPRs.
 They are also covered under Articles 22 to 24 of the Trade Related Aspects of Intellectual Property
Rights (TRIPS) Agreement, which was part of the Agreements concluding the Uruguay Round of
GATT negotiations.
 India, as a member of the World Trade Organization (WTO), enacted the Geographical Indications
of Goods (Registration & Protection) Act, 1999 has come into force with effect from 15th
September 2003.
4.6.4 Agreement on Subsidies and Counter-veiling Measures

Agreement on Subsidies and Counter-veiling Measures (SCM): The SCM applies to non-agricultural
products. It follows the traffic lights approach and classifies subsidies in three categories:
i) Red: Subsidies with high trade-distorting effects, such as export subsidies, and those that
favour the use of domestic over imported goods are prohibited.
ii) Green: Subsidies that are not specific to an enterprise or industry or a group of enterprises or
industries are non-actionable.
iii) Amber: Subsidies that are neither red nor green belong to the amber category. They are
actionable by the trading partners if their interests are adversely hit. The affected country
can seek remedy through the dispute-settlement procedures or go for counter-veiling duties.
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4.6.5 Agreement on Agriculture

Implications of AoA for Indian Agriculture
The repercussions of the WTO Agreement and the elimination of Quantitative Restrictions on imports
are quite alarming. The fall in the prices of agricultural goods and dumping of cheap agriculture
commodities from other countries is causing harm to the welfare of Indian farmers. Developed countries
have imposed heavy tariffs to minimize imports, whereas in India tariffs are low. Due to this, various
commodities are being dumped in India. The US is dumping 5 main farm commodities in global markets
in clear violation of WTO Agriculture rules. It is exporting corn, soybean, wheat, rice and cotton at prices
far below their production cost in an effort to wipe out global competition.
The continuation of high domestic support to agriculture in developed countries is a cause of concern
as they encourage overproduction in these countries leading to low levels of international prices of
agricultural goods. Simultaneously, the rich industrialized countries continue to subsidize farmers by
giving them direct payments which are exempt from any reductions requirement and which essentially
are cash handouts contingent on making adjustments in production. These payments are neither
affordable nor helpful in a developing country. The result is that the industrialized countries continue to
dominate world trade in agriculture.
The AoA’s prerequisite to decrease domestic support will avert the Indian govt from providing the
essential support to farmers to reimburse for shortage or overabundance caused by climatic fluctuations
in market prices or any other factors. In fact, subsidies are essential for Indian agriculture as 65% of
people are directly or indirectly dependent upon agriculture. It is no longer the question of mere
economics because the social and political implications of developments in agriculture cannot be ignored.
The domestic support provision also affects India’s food security. The Agreement exempts governmental
expenditures relating to public stockholding for food security purposes from reduction requirement if
the operation of such a programme is transparent and follows officially published objective criteria.
This automatically subjects these programmes to external scrutiny. A developing country may acquire
and release foodstuffs at administered prices; however, the difference between the international market
price and the administered price will be included in the calculation of AMS (Aggregate Measure of
Support). Therefore, the public stockholding system will be subject to reduction requirements if the
AMS exceeds the de minimis level.
In this context, at the Bali conference of December, 2013, India successfully retained its programme of
agricultural subsidy. The export commitment requirements, in turn, prevent India from providing
subsidies to industry that are necessary for it to expand its share of world export market. Curb in the
provision of subsidies will also adversely affect the future of Indian agriculture.
The decrease in custom duties & non-tariff barriers as well as guaranteed minimum market share for
imports will force Indian farmers to contend against big Transnational Corporations which have
excessive financial power resulting from their oligopolistic control over world food markets. Indian
farmers cannot contend on equivalent terms against the enormous financial & technological influence
of the transnational giants of the rich countries, particularly when custom duties and other import barriers
are reduced, and these companies are guaranteed a share of Indian market. To conclude, it is feared that
the Agreement is not favorable to India due to the following reasons:
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 The country will be compelled to import minimum 3% of the domestic demand for agricultural
products.
 The government will be forced to reduce subsidies to farmers.
 The PDS and Public Procurement System will have to be abandoned directly affecting the survival
of people below the poverty line.
4.6.6 Agreement on Sanitary and Phyto-Sanitary (SPS) Measures

SPS measures are those applied to protect human, animal or plant life from certain risks. These risks are
those arising from the entry, establishment or spread of pests, diseases and disease-carrying or diseases
causing organisms. The risks also include risks arising from additives, contaminants or toxins. Disease
causing organisms in food, beverages and foodstuffs and from risks arising from diseases carried by
animals, plants and products are also covered under this agreement.
SPS measures include all relevant laws, decrees, regulations, requirements and procedures, including end-
product criteria, processes and production methods, testing, inspection, certification and approval
procedures, quarantine treatments, provisions on relevant statistical methods, sampling procedures and
methods of risk assessment, packaging and labelling requirements directly related to food safety.
SPS measures must be based on international standards, guidelines or recommendations where they
exist. It is open to a country to adopt a level of SPS protection higher than that of the relevant
international standards, if there is a scientific justification or if it is needed by the appropriate level of
SPS protection in that country.
Members are allowed to provisionally adopt such SPS measures which, on the basis of available pertinent
information and relevant scientific evidence are the best possible measures at the current juncture,
although they fall short of the standards set by the WTO. Such provisional measures need to be reviewed
within ‘a reasonable period of time’.
4.6.7 Agreement on Anti-Dumping (ADA)

The objective of this agreement is to provide the right to the contracting parties to apply anti-dumping
measures. These are measures against imports of a product if such imports cause injury to a domestic
industry in the territory of the contracting party.
The ADA allows member-nations to apply anti-dumping measures on a unilateral basis after elaborate
investigations. If the investigations establish these three factors, the government is allowed to levy anti-
dumping duty on imports. This duty could be levied on imports either from a specific country or a group
of countries.
The ADA provides that all countervailing duties should be terminated within five years of their imposition
unless a review determines otherwise.
4.6.8 Agreement on Technical Barriers to Trade (TBT)

The objective of this agreement is to ensure that mandatory product standards should not be so applied
to countries as to cause ‘unnecessary obstacles to international trade’. It visualises that mandatory
product standards do not create such barriers if based on internationally agreed standards. It also
recognises that countries have a right to establish protection, at levels they consider appropriate
(concerning the human, animal or plant life or health of the environment), and that countries should not
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be prevented from taking such measures as are necessary to ensure that those levels of protection are
met.
Technical regulations and standards cover product characteristics, process and production characteristics,
terminology and symbols and packaging and labelling requirements as they apply to the products.
The TBT encourages countries to use international standards where appropriate, but does not require
change in the level of protection as a result of standardisation.
It recognises right of member countries to adopt technical regulations and standards as well as conformity
assessment procedures for the purpose of: (i) national security requirements, (ii) prevention of deceptive
practices, (iii) protection of human health or safety, animal or plant life or health of the environment.
Concept Check
Q. India enacted Geographical Indications of Goods (Registration and Protection) Act, 1999 in order
to comply with the obligations to
(a) ILO
(b) IMF
(c) UNCTAD
(d) WTO
Answer: D
4.7 Dispute Settlement

 The WTO’s procedure for resolving trade quarrels under the Dispute Settlement Understanding is vital
for enforcing the rules and therefore for ensuring that trade flows smoothly.
 Countries bring disputes to the WTO if they think their rights under the agreements are being
infringed.
 Judgements by specially-appointed independent experts are based on interpretations of the
agreements and individual countries’ commitments.
 The system encourages countries to settle their differences through consultation. Failing that, they
can follow a carefully mapped out, stage-by-stage procedure that includes the possibility of a ruling
by a panel of experts, and the chance to appeal the ruling on legal grounds.
 Confidence in the system is borne out by the number of cases brought to the WTO — around 300
cases in eight years since its formation compared to the 300 disputes dealt with during the entire life
of GATT (1947–94).
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Flow chart of the Dispute Settlement Process
4.8 Policy Review

 The Trade Policy Review Mechanism’s purpose is to improve transparency, to create a greater
understanding of the policies that countries are adopting, and to assess their impact.
 Many members also see the reviews as constructive feedback on their policies.
 All WTO members must undergo periodic scrutiny, each review containing reports by the country
concerned and the WTO Secretariat.
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4.9 Principles of the Trading System

 The WTO agreements are lengthy and complex because they are legal texts covering a wide range of
activities.
 They deal with: agriculture, textiles and clothing, banking, telecommunications, government
purchases, industrial standards and product safety, food sanitation regulations, intellectual property,
and much more.
 But a number of simple, fundamental principles run throughout all of these documents.
 These principles are the foundation of the multilateral trading system.
In the following section, we will have a closer look at these principles:
4.9.1 Most Favoured Nation: Treating Other People Equally

 Under the WTO agreements, countries cannot normally discriminate between their trading partners.
 If a country grants someone a special favor (such as a lower customs duty rate for one of their
products) then it must do the same for all other WTO members.
 This principle is known as most-favoured-nation (MFN) treatment.
 It is so important that it is the first article of the General Agreement on Tariffs and Trade (GATT),
which governs trade in goods.
 MFN is also a priority in the General Agreement on Trade in Services (GATS) (Article 2) and the
Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (Article 4), although in
each agreement the principle is handled slightly differently.
 Together, those three agreements cover all three main areas of trade handled by the WTO.
Exceptions
 Some exceptions are allowed.

 For example, countries can set up a free trade agreement that applies only to goods traded within
the group — discriminating against goods from outside.
 Or they can give developing countries special access to their markets.
 Or a country can raise barriers against products that are considered to be traded unfairly from
specific countries.
 And in services, countries are allowed, in limited circumstances, to discriminate.
 But the agreements only permit these exceptions under strict conditions.
In general, MFN means that every time a country lowers a trade barrier or opens up a market, it has
to do so for the same goods or services from all its trading partners — whether rich or poor, weak or
strong.
4.9.2 National Treatment: Treating Locals & Foreigners Equally

 Imported and locally-produced goods should be treated equally — at least after the foreign goods
have entered the market.
 The same should apply to foreign and domestic services, and to foreign and local trademarks,
copyrights and patents.
 This principle of “national treatment” (giving others the same treatment as one’s own nationals) is
also found in all the three main WTO agreements (Article 3 of GATT, Article 17 of GATS and Article 3
of TRIPS), although once again the principle is handled slightly differently in each of these.
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 National treatment only applies once a product, service or item of intellectual property has entered
the market.
 Therefore, charging customs duty on an import is not a violation of national treatment even if locally-
produced products are not charged an equivalent tax.
4.9.3 Freer Trade: Gradually through Negotiations

 Lowering trade barriers is one of the most obvious means of encouraging trade.
 The barriers concerned include customs duties (or tariffs) and measures such as import bans or
quotas that restrict quantities selectively.
 From time-to-time other issues such as red tape and exchange rate policies have also been discussed.
 Opening markets can be beneficial, but it also requires adjustment. The WTO agreements allow
countries to introduce changes gradually, through “progressive liberalization”.
 Developing countries are usually given longer to fulfil their obligations.
4.9.4 Predictability: Through Binding Agreements and Transparency

 Sometimes, promising not to raise a trade barrier can be as important as lowering one, because the
promise gives businesses a clearer view of their future opportunities.
 With stability and predictability, investment is encouraged, jobs are created and consumers can fully
enjoy the benefits of competition — choice and lower prices.
 The multilateral trading system is an attempt by governments to make the business environment
stable and predictable.
 In the WTO, when countries agree to open their markets for goods or services, they “bind” their
commitments.
 For goods, these bindings amount to ceilings on customs tariff rates. Sometimes countries tax imports
at rates that are lower than the bound rates. Frequently this is the case in developing countries. In
developed countries the rates actually charged and the bound rates tend to be the same.
 A country can change its bindings, but only after negotiating with its trading partners, which could
mean compensating them for loss of trade.
 One of the achievements of the Uruguay Round of multilateral trade talks was to increase the amount
of trade under binding commitments.
 In agriculture, 100% of products now have bound tariffs. The result of all this: a substantially higher
degree of market security for traders and investors.
 The system tries to improve predictability and stability in other ways as well.
 One way is to discourage the use of quotas and other measures used to set limits on quantities of
imports — administering quotas can lead to more red-tape and accusations of unfair play.
 Another is to make countries’ trade rules as clear and public (“transparent”) as possible.
 Many WTO agreements require governments to disclose their policies and practices publicly within
the country or by notifying the WTO.
 The regular surveillance of national trade policies through the Trade Policy Review Mechanism
provides a further means of encouraging transparency both domestically and at the multilateral level.
4.9.5 Promising Fair Competition

 The WTO is sometimes described as a “free trade” institution, but that is not entirely accurate.
 The system does allow tariffs and, in limited circumstances, other forms of protection.
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 More accurately, it is a system of rules dedicated to open, fair and undistorted competition.
 The rules on non-discrimination — MFN and national treatment — are designed to secure fair
conditions of trade.
 So too are those on dumping (exporting at below cost to gain market share) and subsidies.
 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.
 Many of the other WTO agreements aim to support fair competition: in agriculture, intellectual
property, services, for example. The agreement on government procurement (a “plurilateral”
agreement because it is signed by only a few WTO members) extends competition rules to purchases
by thousands of government entities in many countries.
4.10 Doha Development Agenda

 The Doha Round of world trade negotiations - also known as the Doha Development Agenda - was
launched in Doha, Qatar in November 2001.
 The talks aimed at further liberalizing trade, whilst making it easier for developing countries,
particularly Least Developed Countries (LDCs), to integrate into the WTO multilateral system.
 The Doha Round began with a ministerial-level meeting in Doha, Qatar in 2001. Subsequent ministerial
meetings took place in Cancún, Mexico (2003), and Hong Kong (2005). Related negotiations took place
in Paris, France (2005), Potsdam, Germany (2007), and Geneva, Switzerland (2004, 2006, 2008);
 Progress in negotiations stalled after the breakdown of the July 2008 negotiations over
disagreements concerning agriculture, industrial tariffs and non-tariff barriers, services, and trade
remedies.
 The most significant differences are between developed nations led by the European Union (EU), the
United States (US), and Japan and the major developing countries led and represented mainly by
India, Brazil, China, and South Africa. There is also considerable contention against and between the
EU and the US over their maintenance of agricultural subsidies—seen to operate effectively as trade
barriers.
Main Issues at Stake

 Reforming agricultural subsidies
 Ensuring that new liberalization in the global economy respects the need for sustainable economic
growth in developing countries
 Improving developing countries’ access to global markets for their exports
An important agreement with respect to India in WTO is the Agreement on Agriculture (AoA):
4.11 Agreement on Agriculture

Let us see this in a detailed manner:
 WTO’s agreement on agriculture was concluded in 1994, and was aimed to remove trade barriers and
to promote transparent market access and integration of global markets.
 Agreement on agriculture stands on 3 pillars viz. Domestic Support, Market Access, and Export
Subsidies.
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4.11.1 Domestic Support: Green Box, Blue Box, Amber Box

It refers to subsidies such as guaranteed Minimum Price or Input subsidies which are direct and product
specific. Under this, Subsidies are categorized into 3 boxes:
Green Box
 Subsidies which are not or least market distorting includes measures decoupled from output such as
income-support payments (decoupled income support), safety–net programs, payments under
environmental programs, and agricultural research and-development subsidies.
 Such as Income Support which is not product specific. Like in India farmer is supported for specific
products and separate support prices are there for rice, wheat etc. On the other hand income support
is uniformly available to farmers and crop doesn’t matter.
Blue Box
Only ‘Production limiting Subsidies’ under this are allowed. They cover payments based on acreage, yield,
or number of livestock in a base year.
Amber Box
 Those subsidies which are trade distorting and need to be curbed.

 The Amber Box contains category of domestic support that is scheduled for reduction based on a
formula called the “Aggregate Measure of Support” (AMS).
 AMS is the amount of money spent by governments on agricultural production, except for those
contained in the Blue Box, Green Box and ‘de minimis’.
4.11.2 De minimis Provision

 Under this provision developed countries are allowed to maintain trade distorting subsidies or
‘Amber box’ subsidies to level of 5% of total value of agricultural output.
 For developing countries this figure was 10%.
 India’s subsidies are growing consistently.
 This is because MSP are always revised upward whereas Market Prices have fluctuating trends.
 By this analogy India’s amber box subsidies are likely to cross 10% level allowed by de Minimis
provision.
4.11.3 Market Access

 The market access requires that tariffs fixed (like custom duties) by individual countries be cut
progressively to allow free trade.
 It also required countries to remove non-tariff barriers and convert them to Tariff duties.
4.11.4 Export Subsidy

 These can be in form of subsidy on inputs of agriculture, making export cheaper or can be other
incentives for exports such as import duty remission etc.
 These can result in dumping of highly subsidized (and cheap) products in other country.
 This can damage domestic agriculture sector of other country.
 With regard to Export Subsidy, we have a mechanism known as Special Safeguard Mechanism.
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4.12 Special Safeguard Mechanism

A Special Safeguard Mechanism (SSM) would allow developing countries to impose additional
(temporary) safeguard duties in the event of an abnormal surge in imports or the entry of unusually
cheap imports.
Trade Facilitation Agreement

 In December 2013, WTO members concluded negotiations on a Trade Facilitation Agreement at the
Bali Ministerial Conference, as part of a wider “Bali Package”
 The purpose of the new WTO Trade Facilitation Agreement is to expedite the movement, release
and clearance of goods, including goods in transit.
 Trade Facilitation Agreement (TFA) aims to harmonize various non-tariff barriers like custom
procedures or administrative hurdles in the developing & least developed countries with current
practices in developed countries.
India became the 76th member to ratify the trade facilitation agreement (TFA) of the World Trade
Organization and the agreement came into force in 2016.
What does the agreement include?
• Lowering import tariffs and agricultural subsidies: It will make it easier for developing countries to
trade with the developed world in global markets.
• Abolish hard import quotas: Developed countries would abolish hard import quotas on
agricultural products from the developing world and instead would only be allowed to charge
tariffs on amount of agricultural imports exceeding specific limits.
• Reduction in red tape at international borders: It aims to reduce red-tapism to facilitate trade by
reforming customs bureaucracies and formalities.
Concept Check
Q. In the context of which of the following do you sometimes find the terms ‘amber box, blue box
and green box’ in the news?
(a) WTO affairs
(b) SAARC affairs
(c) UNFCCC affairs
(d) India – EU negotiations on FTA
Answer: A
4.13 Evaluation of the WTO

The WTO is different from and an improvement over the GATT in the following respects:
• The WTO is more global in its membership.

• The WTO has introduced commercial activities into the multilateral trading system.
• For enforcing trade liberalisation, WTO has brought into its framework, many new areas, such as
agriculture, textiles, technology and investment;
• While the GATT had ‘contracting parties’. WTO has ‘members’ and is a legal organisation.
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• GATT provisions in case of disputes were time-consuming. GATT could levy penalties only through
unanimous decisions, which were virtually impossible. Under WTO, unanimous are no longer
desired; all disputes are to be settled within 18 months.
• WTO has one-country one-vote principle, unlike in the World Bank and IMF where the economic
strength of rich countries translates into a voting majority.
• Even if developing countries differ on specific issues, they can make a difference if even a few of
them stand firm.
• Both big and small developing countries no longer accept decisions taken behind closed door by a
group of select countries.
4.14 Achievements of WTO

In the short period the WTO has been in existence it is being credited with the following achievements:
i) Greater market orientation has become the general rule;

ii) Tariff-based protection has become the norm rather than the exception;
iii) Use of restrictive measures for BOP problems has declined markedly;
iv) Services trade has been brought into the multilateral system and many countries, as in goods,
are opening their markets for trade and investment either unilaterally or through regional or
multilateral negotiations;
v) Many UDCs have undertaken radical trade, exchange and domestic reforms which have
improved the efficiency of resource use, opened up new investment opportunities, and, thus,
promoted economic growth;
vi) Bilateralism has been, to a great extent, placed under control by the extension of WTO
provisions to services, TRIPs and TRIMs. Further, under the unified DSM, the possibility of any
country unilaterally blocking the adoption of panel decisions no longer exists;
vii) The trade policy review mechanism has created a process of continuous monitoring of trade
policy developments. Also, by promoting greater transparency, it has assisted the process of
liberalisation and reform;
viii) It has been agreed to reduce import tariffs on industrial goods, based on Swiss Formula. A
Swiss formula is a non-linear formula where tariff-cuts are proportionally higher for tariff which
are initially higher. For instance, a country which has an initial tariff of 30% on a product will
have to undertake proportionally higher cuts than a country which has an initial tariff of 20%
on the same product.
4.15 Limitations of WTO

The WTO, however, has still to make any progress or become more sensitive on the following issues:
i) The trade reform process is incomplete in many countries. For instance, some high tariffs still
remain on which negotiations are still proceeding at various levels, notably in the areas of
basic telecommunications and financial services;
ii) There appears to have been at least some reversals in the overall liberalisation process in
some developing countries. Examples are of increasing anti-dumping measures, selective
tariff increases and investment related measures. The developed countries are also blocking
the process of liberalisation by adopting many neo-protectionist measure
iii) Concerns have been raised that the combination of globalization and technological change
creates a premium on high-skill as against low-skill with growing social divisions;
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iv) The major share of the benefits of the WTO has gone to the countries of the North. The WTO
has opened up the world economy more rapidly in areas that benefit the developed world.
Where the benefits of free trade accrue primarily to the UDCs, progress has been much
slower;
v) The WTO has also not been sensitive enough to the development of non-tariff barriers to
imports from the UDCs, such as anti-dumping duties;
vi) The multilateral trade rules are increasingly becoming a codification of the policies,
perceptions, laws and regulations of the industrialised countries. The policies and rules
appropriate or advantageous to the industrialised world are getting established as common
rules to be obeyed by the developing world as well. As a result a ‘one size fits all’ approach is
increasingly getting embedded in the WTO rules and disciplines;
vii) The interests of international trade, which are primarily the interests of transnational
corporations, take precedence over local concerns and policies even if such a course exposes
the local population to serious health and security risks;
viii) The implementation-related issues are becoming a source of serious concern. These issues
cover a whole range of demand to correct while asymmetries in TRIPS, TRIMS, anti-dumping,
movement of people, etc. remain. Other issues requiring WTO attention relate to agriculture,
textiles, industrial tariffs including peak tariffs, and services. In addition, there are what are
described as Singapore issues. These relate to: (i) rules to protect investments, (ii)
competition policy, (iii) transparency in government procurement, and (iv) trade facilitation.
WTO has now become a forum for perpetual negotiations on newer and newer subjects and for using
trade rules to establish standards and enforce compliance even in non-trade areas. Everything now seems
to require the hand of WTO, be it foreign investment, environmental or labour standards, child labour,
good governance, or human rights.
However, a word of caution need to be sounded. WTO should not be expanded into a sort of world
government, covering every economic subject under the sun, and then using the threat of trade sanctions
to bring about a new world order.
4.16 Criticism
There are critics too of the WTO. It is believed that the WTO will emerge out destructive of biodiversity
and people’s livelihoods by encouraging over-exploitation of natural resources, creating pollution
through increasing transportation, habitat loss by infrastructure development, and so on by forcing
countries to:
i) relax export rules that prohibit or restrict the exploitation of forests, fisheries and minerals;
ii) encourage export policies that spread monoculture;
iii) relax import rules that control the unhindered dumping of all kinds of products, including
polluting and hazardous wastes;
iv) adapt intellectual property rights regimes; and
v) accept with few conditionalities, investment in several sectors by foreign firms and
industrialists with little regard for its ecological and social impacts.
To sum up, WTO has been in action for two and half decade now. During this time, the WTO has proved
that it is very different from its predecessor, GATT. GATT was toothless whereas WTO has teeth – its
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disputes settlement mechanism has been an outstanding success and has brought to book even mighty
US in several cases.
4.17 India and the WTO

India is a founder-member of the WTO. India has contributed significantly to the evolution of the concept
of the WTO. In turn, India is already reaping in a big way various benefits that can be directly or indirectly
associated with the WTO.
• India experienced an unprecedented boom in exports, as did the world exports in the first decade of
the 21st century. This can be attributed, in a large measure to the WTO-induced lowering of the trade
barriers.
• India has immensely benefited from the multilateral dispute settlement system that has been set up
under the WTO. Action has been initiated against such powerful economies as the USA on disputes
involving India.
• Adoption of international standards in Intellectual Property Rights protection would enhance flow
of foreign investment and technology.
• Indian laboratories engaged in research in plant varieties and seeds for tropical regions would benefit.
• Trade in textiles and agricultural products, in particular, would get a boost.
In short, the WTO has opened up new vistas in international economic relations for all the countries of
the world. In the opened up world, the stakes of all the countries have multiplied, and so has the degree
of rivalry and competitiveness. India, like any other country, would be on guard to save its interests and
promote them in a world which is swamped with multifold opportunities.
It is also argued that sovereignty has to be trimmed if one wants advantages from international
organizations. It is true that all international agreements set limits to the exercise of sovereignty of a
country. But this limit must be voluntary and beneficial and not forced (explicitly or implicitly). Further,
differences or discrepancies in the sovereignty to be enjoyed by members of the same organization
should not be accepted as unavoidable.
The US undoubtedly enjoys unrestricted sovereignty under the WTO as against the plight of many
developing countries. This was very clear when the panels on dispute settlement under the WTO gave
certain verdicts. When Super 301 of the US was subject to dispute under the WTO, the panel accepted
the explanation of the US that it will place administrative measures to ensure 'trade security' or 'legal
security'. While in the case of India when it pleaded for a similar approach in the case of dispute on TRIPS,
the panel argued that only amending the laws can satisfy the WTO's requirements.
The concern shown in India by various segments about the WTO are quite relevant and, in fact,
necessary. One of the major reasons for this state of affairs is the way in which the treaty
making/accepting provisions are stated in the Indian Constitution. While, there is confusion on this
score, by virtue of Article 253 of the Indian Constitution, the executive power of the union extends to
ratifying international treaties and agreements. No law has been made in India regarding the manner in
which the government shall sign or ratify international treaties, covenants, etc. Thus the executive of the
central government in India has the power to ratify the treaties.
This practice is in contrast to the one prevailing in a large number of developed and developing countries
where the treaties have to be ratified by the legislatures and in some cases by a two-thirds majority.
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Further, in some countries a referendum is required to ratify international agreements that their
governments enter into. The latter approach of ratification by the legislature indeed is superior to the one
we have at present in India. This provision will provide parliament and the public an opportunity to debate
on various aspects of the agreements and their implications. Thus they become willing parties to any
decision that is to be taken. The confusions, apprehensions and fears about the WTO stems from lack of
this required consensus. This situation is made worse by the extraordinary secrecy under which the
government keeps all information. There is no transparency.
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Opening up of the
Indian Economy,
Balance of
Payments
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Contents
1 Part I: Balance of Payment .....................................................................................................................4
1.1 Meaning of Balance of Payment .....................................................................................................4
1.2 Current Account ..............................................................................................................................6
1.2.1 Trade in Goods .........................................................................................................................7
1.2.2 Trade in Services ......................................................................................................................7
1.2.3 Transfer Payments ...................................................................................................................9
1.2.4 Balance on Current Account ....................................................................................................9
1.3 Capital Account .............................................................................................................................12
1.3.1 Investments ...........................................................................................................................13
1.3.2 External Borrowings...............................................................................................................14
1.3.3 External Assistance ................................................................................................................15
1.3.4 Balance on Capital Account ...................................................................................................15
1.4 Representative Balance of Payment for India ..............................................................................16
1.5 Balance of Payment Surplus & Deficit ..........................................................................................17
1.5.1 Balance of Payment Surplus ..................................................................................................17
1.5.2 Balance of Payment Deficit ....................................................................................................17
1.5.3 Balance of Payment - Achieving a Balance ............................................................................17
1.5.4 Official Reserve Sale ..............................................................................................................18
1.5.5 Autonomous & Accommodating Transactions......................................................................18
1.6 Errors & Omissions ........................................................................................................................18
2 Part II: Exchange Rate ...........................................................................................................................19
2.1 Meaning of Exchange Rate ...........................................................................................................19
2.2 Demand & Supply of Foreign Exchange ........................................................................................19
2.3 Determination of Exchange Rate ..................................................................................................19
2.3.1 Flexible Exchange Rate ..........................................................................................................20
2.3.2 Fixed Exchange Rate ..............................................................................................................24
2.3.3 Managed Floating (Managed Flexible Exchange Rate) .........................................................26
2.4 Nominal & Real Exchange Rate .....................................................................................................28
2.4.1 Nominal Exchange Rate .........................................................................................................28
2.4.2 Real Exchange Rate ................................................................................................................28
2.5 NEER & REER .................................................................................................................................29
2.5.1 Nominal Effective Exchange Rate ..........................................................................................29
2.5.2 Real Effective Exchange Rate .................................................................................................30

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3 Part III: Types of Currency ....................................................................................................................30

3.1 Hard Currency ...............................................................................................................................30
3.2 Soft Currency.................................................................................................................................31
3.3 Hot Money ....................................................................................................................................31
3.4 Heated Currency ...........................................................................................................................31
3.5 Cheap Currency .............................................................................................................................31
3.6 Dear Currency ...............................................................................................................................32
4 Part IV: Exchange Rate Management in India ......................................................................................32
4.1 The Indian Experience ...................................................................................................................32
4.2 Convertibility of Rupee .................................................................................................................33
4.2.1 Concept of Convertibility .......................................................................................................33
4.2.2 Concept of Current Account Convertibility ...........................................................................34
4.2.3 Concept of Capital Account Convertibility ............................................................................34
4.2.4 Is Indian National Rupee Convertible? ..................................................................................35
4.2.5 Advantages of a Fully Convertible Currency..........................................................................36
4.2.6 Disadvantages of a Fully Convertible Currency .....................................................................38
4.3 India's FOREX Reserves .................................................................................................................39
4.3.1 What are FOREX Reserves? ...................................................................................................39
4.3.2 RBI Act 1934 & FOREX Reserves ............................................................................................39
4.3.3 Objectives of Holding FOREX Reserves..................................................................................39
4.3.4 Components of India's FOREX Reserves ................................................................................40
World can be seen as a comity of nations that interact with each other politically, socially, culturally and
of course economically. We know that ties of trade existed between ancient civilisations of Harappa and
Mesopotamia. We know that pepper from the Malabar coast spiced up the lives of ancient Romans. And
it was the lure of trade that attracted Portuguese, Dutch, French and the British to India. With the advent
of fast and safe transport network linking different regions of the world, movement of men, money and
material intensified further. Given the myriad economic transactions that occur between a country and
the rest of the world, there is a need for systematic record keeping – a record that captures all economic
transactions. This is exactly what Balance of Payment (BoP) seeks to do. A glance at the Balance of
Payment tells us how much currency is flowing in and out of our currency.
In Part I of this chapter, we will develop an understanding of various components of Balance of Payment;
we will be looking at the Current Account and the Capital Account components of the BoP in detail.
We know that all transactions involve exchange of money. International transactions are carried out using
foreign exchange. In Part II of this chapter we will be developing an understanding of Exchange Rate – its
meaning, determinants and types.

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In Part III we will be looking at different types of currencies and finally in Part IV we will deep dive into
India’s Exchange Rate management.
By the end of this lecture, a student should be able to understand the different types of international
economic transactions and their classification; concepts of exchange rate and foreign exchange; meaning
and significance of different types of currencies and appreciate the evolution and features of India’s
exchange rate and foreign exchange management policies.
1 Part I: Balance of Payment
1.1 Meaning of Balance of Payment

The balance of payments is a systematic record of all economic transactions of residents of a country
with the rest of the world during a given period of time.
This record is so prepared as to measure the various components of a country’s external economic
transactions. Thus, the aim is to present an account of all receipts and payments on account of goods
exported, services rendered and capital received by the residents of a country, and goods imported,
services received and capital transferred by residents of the country.
Components of India’s Balance of Payment Account are as follows:

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Balance of
Payment
Current Capital Errors &

Account Account Omission
There is a new classification in which the balance of payments have been divided into three accounts —
the current account, the financial account and the capital account. This is as per the new accounting
standards specified by the International Monetary Fund (IMF) in the sixth edition of the Balance of
Payments and International Investment Position Manual (BPM6). India has also made the change but
the Reserve Bank of India continues to publish data accounting to the old classification. The most
important change is that almost all the transactions arising on account of trade in financial assets such
as bonds and equity shares are now placed in the financial account. However, RBI continues to publish
the balance of payments accounts as per the old system also, therefore the details of the new system are
not being given here. The details are given in the Balance of Payments Manual for India published by the
Reserve Bank of India in September 2010.
KEY DEFINITION
Balance of payments: The difference between the funds received by a country and those paid by a
country for all international transactions. The international transactions include the exchange of
merchandise (exports and imports), which is commonly summarized as the balance of trade, plus the
exchange of services, summarized as the balance of services, as well as any gifts or transfer payments
that do not involve the exchange of goods and services. The balance of payments, in effect, indicates
the difference between currency coming into a country and that flowing out of the country. The balance
of payments is divided into two accounts -- current account (which includes payments for imports,
exports, services, and transfers) and capital account (which includes payments for physical and financial
assets).
Concept Check
Q. The balance of payments equals
(a) The difference between household spending and income

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(b) The difference between government spending and income

(c) A measure of the value of economic transactions between residents of a country and the rest of the
world
(d) The difference between inflation and unemployment
Answer: C
Concept Check
Q. With reference to economy, the term 'Autarky' is best described by which of the following?
(a) A closed economy
(b) An open economy
(c) A floating exchange rate
(d) A fixed exchange rate
Answer: A
1.2 Current Account

The current account is a record of all trade between one nation and other nations. It includes payments
for imports and exports of both goods and services. It also includes monetary gifts or transfer payments
to and from other nations. The current account of the balance of payments is record of the flow of
payments between one country and other countries that result from: (1) the exchange of goods (exports
and imports), which is the balance of trade, (2) the exchange of services, summarized as the balance of
invisibles, and (3) any gifts or transfer payments that do not involve the exchange of goods and services,
which is unilateral transfers.

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Current
Account
Trade in Trade in Transfer

Goods Services Payments
Net Non- Gifts,

Exports of Imports of Net Factor
factor Remittances
Goods Goods Income
Income and Grants
1.2.1 Trade in Goods

Trade in goods includes exports and imports of goods
1.2.1.1 Exports of Goods

Exports of goods is sale of domestically produced goods to a foreign country. India, for example, sells a
lot of the stuff produced within our boundaries to other countries. In general, domestic producers (and
their workers) are elated with the prospect of selling their goods to foreign countries--leading to more
buyers, a higher price, and more profit.
1.2.1.2 Imports of Goods

Imports of goods refer to goods produced by the foreign sector and purchased by the domestic
economy. In other words, imports are goods purchased from other countries. India, for example, buys a
lot of the stuff produced within the boundaries of other countries.
Buying foreign goods is expenditure from our country and it becomes the income of that foreign
country. Hence, the purchase of foreign goods or imports decreases the domestic demand for goods and
services produced in our country.
Imports, together with exports, are the essence of foreign trade--goods and services that are traded
among the citizens of different nations. Imports and exports are frequently combined into a single term,
net exports (exports minus imports).
1.2.2 Trade in Services

Trade in services includes factor income and non-factor income transactions.

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1.2.2.1 Net Factor Income from Abroad

While most production within a nation's political boundaries is undertaken by resources owned by
citizens of that nation, there are exceptions. Some citizens own resources that do their production in
the foreign sector. And some resources owned by foreign citizens do their production within the political
boundaries of the domestic economy. Net factor income captures these exceptions.
Net factor income from abroad (NFIA) captures the net flow of income payments (or factor payments)
between the domestic economy and the foreign sector. It is the difference between foreign factor
payments to domestic citizens and domestic factor payments to foreign citizens. NFIA is usually quite
small. However, the two components of net foreign factor income: (1) foreign payments to domestic
citizens and (2) domestic payments to foreign citizens are more substantial. Net foreign factor income is
small because the two larger components almost cancel out.
Factor Factor
Net Factor
Income Income
Income
earned by earned by
from
Indians Foreigners
Abroad
abroad in India
1.2.2.2 Net Non-Factor Income from Abroad

Non-factor services comprise shipment, passenger and other transport services, and travel, as well as
current account transactions not separately reported (e.g., not classified as merchandise, nonfactor
services, or transfers).
Software exports are classified within invisibles under the sub-head `miscellaneous non-factor services'.
Non-factor services refer to all invisible receipts or payments not attributable to any of the conventional
`factors of production', i.e. labour (remittances from overseas migrants) and capital (income from
investments, interest payments, dividend repatriation). Thus, non-factor services include forex earnings
and expenses on account of tourism, shipping/freight and various `miscellaneous' sub-heads, under
which export of software features.
KEY DEFINITION
Factor Services: Comprises services of labour and capital, thus covering income from direct investment
abroad, interest, dividends, and property and labour income.
Net Factor Income from Abroad: The difference between factor payments received from the foreign
sector by domestic citizens and factor payments made to foreign citizens for domestic production. Net
factor income from abroad (NFIA) is the key difference between gross DOMESTIC product and gross
NATIONAL product

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Invisibles: Payments and receipts resulting from international trade in 'invisible' services instead of
'visible' goods. Invisibles include banking, franchising, insurance, interest (on foreign investments),
licensing, profit repatriation (from foreign subsidiaries), salary remittances (from nationals employed
abroad), shipping, and tourism.
Concept Check
Q. In terms of economy, the visit by foreign nationals to witness the Indian Premier League matches
in India amounted to
(a) Export of services
(b) Import of services
(c) Production of services
(d) Consumption of services
Answer: A
1.2.3 Transfer Payments

Transfers represent one-sided transactions, i.e., transactions that do not have any quid pro quo, such as
grants, gifts, and migrants’ transfers by way of remittances for family maintenance, repatriation of
savings and transfer of financial and real resources linked to change in resident status of migrants. Official
transfer receipts include grants, donations and other assistance received by the Government from
bilateral and multilateral institutions. Similar transfers by Indian Government to other countries are
recorded under official transfer payments.
1.2.4 Balance on Current Account

Current Account is in balance when receipts on current account are equal to the payments on the current
account. Current account surpluses refer to positive current account balances, meaning that a country
has more exports than imports of goods and services. A current account deficit refer to negative current
account balances and indicates that a country is importing more than it is exporting.
Current Balanced Current

Account Current Account
Surplus Account Deficit
Receipts > Receipts = Receipts <
Payments Payments Payments

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Balance on Current Account has three components:
 Balance of Trade or Trade Balance

 Balance of Invisibles
 Balance of Transfers
1.2.4.1 Balance of Trade

Balance of Trade (BOT) is the difference between the value of exports and value of imports of goods of
a country in a given period of time. Export of goods is entered as a credit item in BOT (Row (1) in Figure
1), whereas import of goods is entered as a debit item in BOT (Row (5) in Figure 1). It is also known as
Trade Balance.
BOT is said to be in balance when exports of goods are equal to the imports of goods.
Surplus BOT or Trade surplus will arise if country exports more goods than what it imports.
Whereas, Deficit BOT or Trade deficit will arise if a country imports more goods than what it exports.
1.2.4.2 Balance of Invisibles

Net Invisibles is the difference between the value of exports (Row (2) in Figure 1) and value of imports
(Row (6) in Figure 1) of invisibles of a country in a given period of time.
Invisibles include services, transfers and flows of income that take place between different countries.
Services trade includes both factor and non-factor income.
Factor income includes net international earnings on factors of production (like labour, land and capital).
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Non-factor income is net sale of service products like shipping, banking, tourism, software services, etc.
Concept Check
Q. Which of the following correctly defines ‘Invisible Trade’?
(a) Internal trade of Government with Public Institutions
(b) Trade of companies with their subsidiary companies
(c) Trade in intangible things like customer service, intellectual property etc.
(d) Trade of government with other countries
Answer: C
1.2.4.3 Balance of Transfer

This is the difference between gifts or transfers received from other nations (Row (3) in Figure 1) and
transfers sent to other nations (Row (7) in Figure 1). In includes gifts or transfers between individuals,
and perhaps more important, it includes transfers between governments.
Figure 1: Balance of Payment Account
Note: Difference between Balance of Trade & Current Account

Basis Balance of Trade (BOT) Current Account
Components Balance of trade includes only Current Account records both visible and
visible items. invisible items.
Scope It is a narrow concept as it is only It is a wider concept and it includes BOT.
a part of current account
Concept Check
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Q. With reference to Balance of Payments, which of the following constitutes/constitute the Current
Account?
(a) Balance of trade
(b) Foreign assets
(c) Balance of invisibles
(d) Only (b) and (c)
(e) Only (a) and (c)
Answer: E
1.3 Capital Account

Capital Account records all international transactions of assets. An asset is any one of the forms in which
wealth can be held, for example: money, stocks, bonds, Government debt etc. Purchase of assets is a
debit item on the capital account. If an Indian buys a UK Car Company, it enters capital account
transactions as a debit item (as foreign exchange is flowing out of India) (Row (8) in Figure 1). On the
other hand, sale of assets like sale of share of an Indian company to a Chinese customer is a credit item
on the capital account (Row (4) in Figure 1). Following figures classifies the items which are a part of
capital account transactions. These items are Foreign Direct Investments (FDIs), Foreign Institutional
Investments (FIIs), external borrowings and assistance.
Capital
Account
External External
Investments
Borrowings Assitance
Direct Portfolio ECB, Short-

Aid, Loans
Investment Investment Term Debt
FDI, Equity FII, Offshore

Capital Funds
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1.3.1 Investments
Foreign investment involves capital flows from one country to another, granting extensive ownership
stakes in domestic companies and assets. Foreign investment denotes that foreigners have an active role
in management as a part of their investment.
1.3.1.1 Direct Investments

Direct Investment is the acquisition of controlling interest in foreign firms and businesses from one
country in another country. Abbreviated FDI, foreign direct investment can also take the form of
constructing factories, structures and equipment (or any form of physical capital) in foreign soil.
Domestic Direct Investment in Foreign Sector: This is the net flow of payments used by those in the
domestic economy to purchase physical assets in other nations. (Example: Indian buys a UK car company)
Foreign Direct Investment in Domestic Sector: This is the net flow of payments used by those in the
foreign sector to purchase physical assets in the domestic economy. (Example: British telecom company
picking up stake in an Indian telecom company)
1.3.1.2 Portfolio Investments

Portfolio Investment is the acquisition of financial assets (which includes stock, bonds, deposits, and
currencies) from one country in another country. In contrast to foreign direct investment, which is the
acquisition of controlling interest in foreign firms and businesses, portfolio investment is foreign
investment into the stock markets. Most economists consider foreign direct investment more useful than
portfolio investment since the latter is generally regarded as temporal and can leave the foreign country
at the first sign of trouble.
Domestic Portfolio Investment in Foreign Sector: This is the net flow of payments used by those in the
domestic economy to purchase financial assets in other nations.
Foreign Portfolio Investment in Domestic Sector: This is the net flow of payments used by those in the
foreign sector to purchase financial assets in the domestic economy.
Concept Check
Q. Which of the following would include Foreign Direct Investment in India?
(a) Subsidiaries of foreign companies in India
(b) Majority foreign equity holding in Indian companies
(c) Companies exclusively financed by foreign companies
(d) Portfolio investment
(e) All of the above except (d)
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Answer: E
Concept Check
Q. Both Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII) are related to
investment in a country. Which one of the following statements best represents an important
difference between the two?
(a) FII helps bring better management skills and technology, while FDI only brings in capital.
(b) FII helps in increasing capital availability in general, while FDI only targets specific sectors.
(c) FDI flows only into the secondary market while FII targets primary market
(d) FII is considered to be more stable than FDI.
Answer: B
1.3.2 External Borrowings

External debt is the portion of a country's debt that was borrowed from foreign lenders, including
commercial banks, governments, or international financial institutions. These loans, including interest,
must usually be paid in the currency in which the loan was made. To earn the needed currency, the
borrowing country may sell and export goods to the lender's country.
External Commercial borrowings cover all medium/long term loans. It denotes drawls/ repayment of
loans including buyers’ credit, suppliers’ credit, floating rate notes (FRNs), commercial paper (CP),
bonds, foreign currency convertible bonds (FCCBs) issued abroad by the Indian corporates etc.
External Commercial Borrowing – Key Pointers

With the changing dynamics of economy India’s needs for foreign loans have also gone for a change.
Though, the RBI has been quite careful about higher exposure to the external loans, its overall policy
stance regarding it has been liberal. Following this stance, the external commercial borrowing (ECB)
norms were further liberalised by the RBI—by April 2020 the related policy framework was as given
below:
 All eligible borrowers to raise up to US$ 750 million per financial year under the automatic route
(with sector-wise limits being abolished).
 The list of eligible borrowers enlarged—all entities eligible to receive FDI, port trusts, units in SEZs,
SIDBI, Exim Bank and registered microfinance entities.
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 Public sector oil marketing companies can borrow up to US$ 10 billion for working capital
purposes with a minimum average maturity period of 3 years under the automatic route.
 Manufacturing companies allowed up to US$ 50 million of ECB per year with the maturity of 1
year.
 In case of ECB being raised from a foreign equity holder (and utilised for working capital, general
corporate purposes or repayment of rupee loans), the maturity period will be 5 years.
 In place of putting sectoral cap, the RBI decided to set an overall prudential limit on the ECB at 6.5
per cent of the GDP.
 The increasing preference of corporates for the ECB route may be attributed to two set of factors,
global and domestic—
o Global factors favouring the ECB: (a) Low global interest rates, and (b) Higher availability of
funds in global financial market.
o Domestic factors encouraging the ECB: (a) Liberalisation of ECBs, (b) Rationalisation of all-
in-cost of ECBs, (c) Expansion of list of eligible borrowers, (d) Removal of sector-wise
borrowing limits on ECB up to US$ 750 million, and (e) Allowing oil marketing companies to
raise up to US$ 10 billion for working capital.
1.3.3 External Assistance

External assistance by India denotes aid extended by India to other foreign Governments under various
agreements and repayment of such loans. External Assistance to India denotes multilateral and bilateral
loans received under the agreements between Government of India and other
Governments/International institutions and repayments of such loans by India.
1.3.4 Balance on Capital Account

Capital account is in balance when capital inflows (like receipt of loans from abroad, sale of assets or
shares in foreign companies) are equal to capital outflows (like repayment of loans, purchase of assets or
shares in foreign countries). Surplus in capital account arises when capital inflows are greater than
capital outflows, whereas deficit in capital account arises when capital inflows are lesser than capital
outflows.
Concept Check
Q. Which of the following constitute Capital Account?
(a) Foreign Loans
(b) Foreign Direct Investment
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(c) Portfolio Investment

Answer: D
1.4 Representative Balance of Payment for India

No. Item Million USD
1. Exports (of goods only) 150

2. Imports (of goods only) 240
3. Trade Balance [2 – 1] –90
4. (Net) Invisibles [4a + 4b + 4c] 52

a. Non-factor Services 30
b. Income –10
c. Transfers 32
5. Current Account Balance [ 3+ 4] –38
6. Capital Account Balance [6a + 6b + 6c + 6d + 6e + 6f] 41.15

a. External Assistance (net) 0.15
b. External Commercial Borrowings (net) 2
c. Short-term Debt 10
d. Banking Capital (net) of which 15
Non-resident Deposits (net) 9
e. Foreign Investments (net) of which
19
[6eA + 6eB]
A. FDI (net) 13
B. Portfolio (net) 6
f. Other Flows (net) –5
7. Errors and Omissions 3.15
8. Overall Balance [5 + 6 + 7] 0
9. Reserves Change 0
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1.5 Balance of Payment Surplus & Deficit
1.5.1 Balance of Payment Surplus

A balance of payments surplus would occur if the balance is greater than zero. This means that the
country has a net inflow of payments. More payments are coming in to the country for exports, transfers,
or investments than are going out.
1.5.2 Balance of Payment Deficit

Alternatively, a balance of payments deficit would occur if the balance is less than zero. This means that
the country has a net outflow of payments. More payments are going out of the country for imports,
transfers, or investments than are coming in.
1.5.3 Balance of Payment - Achieving a Balance

The essence of international payments is that just like an individual who spends more than her income
must finance the difference by selling assets or by borrowing, a country that has a deficit in its current
account (spending more than it receives from sales to the rest of the world) must finance it by selling
assets or by borrowing abroad. Thus, any current account deficit must be financed by a capital account
surplus, that is, a net capital inflow.
Current account + Capital account = 0
In this case, in which a country is said to be in balance of payments equilibrium, the current account deficit
is financed entirely by international lending without any reserve movements.
Balance on Current Account Vs. Balance on Capital Account:

Balance on current account and balance on capital account are interrelated.
 A deficit in the current account must be settled by a surplus on the capital account.
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 A surplus in the current account must be matched by a deficit on the capital account.
1.5.4 Official Reserve Sale

Alternatively, the country could use its reserves of foreign exchange in order to balance any deficit in its
balance of payments. The central bank sells foreign exchange when there is a deficit. This is called official
reserve sale. The decrease (increase) in official reserves is called the overall balance of payments deficit
(surplus).
The basic premise is that the monetary authorities are the ultimate financiers of any deficit in the balance
of payments (or the recipients of any surplus). We note that official reserve transactions are more
relevant under a regime of fixed exchange rates than when exchange rates are floating.
1.5.5 Autonomous & Accommodating Transactions

International economic transactions are called autonomous when transactions are made due to some
reason other than to bridge the gap in the balance of payments, that is, when they are independent of
the state of BoP. One reason could be to earn profit. These items are called ‘above the line’ items in the
BoP. The balance of payments is said to be in surplus (deficit) if autonomous receipts are greater (less)
than autonomous payments.
Accommodating transactions (termed ‘below the line’ items), on the other hand, are determined by the
gap in the balance of payments, that is, whether there is a deficit or surplus in the balance of payments.
In other words, they are determined by the net consequences of the autonomous transactions. Since
the official reserve transactions are made to bridge the gap in the BoP, they are seen as the
accommodating item in the BoP (all others being autonomous).
1.6 Errors & Omissions

It is difficult to record all international transactions accurately. Thus, we have a third element of BoP
(apart from the current and capital accounts) called errors and omissions which reflects this.
BoP Deficit Balanced BoP BoP Surplus
Overall Overall Overall

Balance < 0 Balance = 0 Balance > 0
Reserve Reserve Reserve

Change > 0 Change = 0 Change < 0
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Note: If there is a positive outcome at the end of the year, the money is automatically transferred to the
foreign exchange reserves of the economy. And if there is any negative outcome, the same foreign
exchange is drawn from the country’s forex reserves.
2 Part II: Exchange Rate

So far, we have considered the accounting of international transactions on the whole, we will now take
up a single transaction.
Let us assume that a single Indian resident wants to visit London on a vacation (an import of tourist
services). She will have to pay in pounds for her stay there. She will need to know where to obtain the
pounds and at what price. This price is known as the exchange rate. The market in which national
currencies are traded for one another is known as the foreign exchange market. The major participants
in the foreign exchange market are commercial banks, foreign exchange brokers and other authorised
dealers and monetary authorities.
2.1 Meaning of Exchange Rate

An exchange rate is the value of one nation's currency versus the currency of another nation or economic
zone. For example, how many Indian Rupees does it take to buy one dollar? As of Jan. 22, 2020, the
exchange rate is 71.12, meaning it takes Rs 71.12 to buy $1.
2.2 Demand & Supply of Foreign Exchange

People demand foreign exchange because: they want to purchase goods and services from other
countries; they want to send gifts abroad; and, they want to purchase financial assets of a certain
country. A rise in price of foreign exchange will increase the cost (in terms of rupees) of purchasing a
foreign good. This reduces demand for imports and hence demand for foreign exchange also decreases,
other things remaining constant.
Foreign currency flows into the home country due to the following reasons: exports by a country lead to
the purchase of its domestic goods and services by the foreigners; foreigners send gifts or make
transfers; and, the assets of a home country are bought by the foreigners. A rise in price of foreign
exchange will reduce the foreigner’s cost (in terms of USD) while purchasing products from India, other
things remaining constant. This increases India’s exports and hence supply for foreign exchange may
increase.
2.3 Determination of Exchange Rate

Different countries have different methods of determining their currency’s exchange rate. It can be
determined through Flexible Exchange Rate, Fixed Exchange Rate or Managed Floating Exchange Rate.
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2.3.1 Flexible Exchange Rate

A flexible exchange rate is a "hands off," non-intervening policy that allows the foreign exchange market
to adjust to equilibrium through the balance of demand and supply with no explicit government actions.
The presumption is that the resulting exchange rate generates a better outcome for international trade,
the balance of trade, and the balance of payments than what could be achieved through government
intervention.
Depreciation: Increase in exchange rate implies that the price of foreign currency (dollar) in terms of
domestic currency (rupees) has increased. This is called Depreciation of domestic currency (rupees) in
terms of foreign currency (dollars). This means that the value of rupees relative to dollar has fallen and
we need to pay more rupees in exchange for one dollar.
Note: There is another sense in which we use the term Depreciation in Economy. In domestic economy,
depreciation means an asset losing its value due to either its use, wear and tear or due to other economic
reasons. Depreciation here means wear and tear. This is also known as capital consumption.
Appreciation: Similarly, in a flexible exchange rate regime, when the price of domestic currency (rupees)
in terms of foreign currency (dollars) increases, it is called Appreciation of the domestic currency
(rupees) in terms of foreign currency (dollars). This means that the value of rupees relative to dollar has
risen and we need to pay fewer rupees in exchange for one dollar.
Example of Appreciation/Depreciation
Exchange Rate Exchange Rate

(Rs/$) on (Rs/$) on
01.01.20 31.01.20
Appreciation 70 65
Depreciation 70 75
Impact of Appreciation/Depreciation on Exports/Imports
Exports Imports
Appreciation Discouraged Encouraged
Depreciation Encouraged Discouraged
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KEY DEFINITION
Flexible Exchange Rate: An exchange rate determined through the unrestricted interaction of supply
and demand in the foreign exchange market. Also termed floating exchange rate, this is one of three
basic exchange rate policies used by domestic governments to control their exchange rates with the
goal of affecting international trade, balance of trade, and balance of payments. This policy is based on
the view that the free interplay of market forces is most likely to generate a desireable pattern of
international trade. The other two policies are fixed exchange rate and managed flexible exchange rate.
Appreciation: A more or less permanent increase in value or price. "More or less permanent" doesn't
include temporary, short-term jumps in price that are common in many markets. Appreciation is only
those price increases that reflect greater consumer satisfaction and thus value. While all sorts of stuff
can appreciate in value, some of the more common ones are real estate, works of art, corporate stock,
and money. In particular, the appreciation of a nation's money is seen by an increase in the exchange
rate caused by a growing, expanding, and healthy economy.
Depreciation: A more or less permanent decrease in value or price. "More or less permanent" doesn't
include temporary, short-term drops in price that are common in many markets. It's only those price
declines that reflect a reduction in consumer satisfaction. While all sorts of stuff can depreciate in value,
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some of the more common ones are capital, real estate, corporate stock, and money. The depreciation
of capital results from the rigors of production and affects our economy's ability to produce stuff. A
sizable portion of our annual investment is thus needed to replace depreciated capital. The depreciation
of a nation's money is seen as an increase in the exchange rate.
Steps that can be taken to control too much Depreciation

 RBI can start supplying US dollars in the market to cool down the exchange rate. Increase in supply
of US dollars will pull down the price of US dollars (FOREX Rate) in the Indian FOREX market. In
other words, depreciation of rupee against US dollar will be checked.
 The second measure which can be taken is to talk the market down. In the situation of depreciation,
there is a tendency for importers to rush in to buy dollars and exporters to hold back remitting
their earnings on the expectation that the rupee will depreciate further. This exacerbates the
demand-supply matrix for foreign currency and drives down the rupee further. The RBI can ensure
that export earnings come back to the country on time while importers should be urged not to rush
in to buy dollars in advance. Alternatively, asking the importers to hedge can be attempted though
it cannot be made mandatory. Making such statements will help lower the speculative element
which comes into the picture every time the rupee keeps falling.
 Third, the government should focus on exports and to the extent possible, especially on the tax
credit/refund part, clear the coast for exporters. SMEs (small and medium enterprises) which are
dominant in the export market have had tax refund issues and this needs to be sorted out. Also,
export finance is another problem which has been bothering exporters and impediments on this
front too need to be removed. But this will work only in the medium term and cannot deliver result
immediately because export markets tend to be relatively inelastic and are driven by demand
factors.
 RBI would have to monitor the other components of demand for dollars to ensure that there are
limits to the drawal of dollars for other purposes such as travel, investment, and education.
 Channels for external commercial borrowing should be looked at judiciously. While urging
companies to explore the market makes sense, it should be noted that un-hedged positions can
put on pressure on debt servicing. Nevertheless, in these conditions, such borrowings would be
helpful.
 Channel for considering a sovereign bond or any such scheme for getting expatriates to invest in
such bonds should be planned in advance — which may not be required if conditions stabilise.
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 Capital flows need to be monitored proactively and this is where FPIs (foreign portfolio
investments) matter. The strong inflow of FPIs has the power to rein in the rupee.
Concept Check
Q. In a floating exchange rate system:
(a) The government intervenes to influence the exchange rate
(b) The exchange rate should adjust to equate the supply and demand of the currency
(c) The Balance of Payments should always be in surplus
(d) The Balance of payments will always equal the government budget
Answer: B
Concept Check
Q. If there were a balance of payments deficit then in a floating exchange rate system:
(a) The external value of the currency would tend to fall
(b) The external value of the currency would tend to rise
(c) The injections from trade are greater than the withdrawals
(d) Aggregate demand is increasing
Answer: A
Concept Check
Q. Which one of the following is not the most likely measure the Government/RBI takes to stop the
slide of Indian rupee?
(a) Curbing imports of non-essential goods and promoting exports
(b) Encouraging Indian borrowers to issue rupee denominated Masala Bonds
(c) Easing conditions relating to external commercial borrowing
(d) Following an expansionary monetary policy
Answer: D
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2.3.2 Fixed Exchange Rate

A fixed exchange rate is an exchange rate that is established at a specific level and maintained through
government actions (usually through monetary policy actions of a central bank). To fix an exchange rate,
a government must be willing to buy and sell currency in the foreign exchange market in whatever
amounts are necessary to keep the exchange rate fixed.
Devaluation: The act of reducing the price (exchange rate) of one nation's currency in terms of other
currencies. This is usually done by a government to lower the price of the country's exports and raise the
price of foreign imports, which ultimately results in greater domestic production. A government devalues
its currency by actively selling it and buying foreign currencies through the foreign exchange market.
Revaluation: The act of increasing the price (exchange rate) of one nation's currency in terms of other
currencies. This is done by the government if it wants to raise the price of the country's exports and lower
the price of foreign imports. This is an appropriate action if the country is running an undesired trade
surplus with other countries. The procedure for revaluation is for the government to buy the nation's
currency and/or sell foreign currencies through the foreign exchange market.
Example of Devaluation/Revaluation
Exchange Rate Exchange Rate

(Rs/$) on (Rs/$) on
01.01.20 31.01.20
Devaluation 70 75
Revaluation 70 65
Impact of Devaluation/Revaluation on Exports/Imports
Exports Imports
Devaluation Encouraged Discouraged
Revaluation Discouraged Encouraged
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Fixing the currency exchange rate below the flexible exchange rate equilibrium level not only generates
a balance of trade surplus (as the relatively low exchange rate encourages exports and discourages
imports), but it can also temporarily generate a balance of payments surplus (as more payments come
in for exports than go out for imports).
Fixing the currency exchange rate above the flexible exchange rate equilibrium level not only generates
a balance of trade deficit (as the relatively high exchange rate discourages exports and encourages
imports), but it can also temporarily generate a balance of payments deficit (as fewer payments come
in for exports than go out for imports).
Note: Some economies, particularly small ones, peg their currencies to a major currency or to a basket
of currency in a fixed exchange rate—known as the pegging of currencies. At times, the peg is allowed to
glide smoothly upward or downward—a system which is known as gliding or crawling peg. Some
economies have a hard fix of a currency board. A currency board is working well in Hong Kong while the
same failed in Argentina in 2002.
Concept Check
Q. One potential problem for a country with fixed exchange rates is that
(a) a decrease in the demand for its currency can create a drain on foreign exchange reserves used to
maintain the exchange rate
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(b) the currency is probably prone to depreciation

(c) exchange rates are fixed as a result of the devaluation of the currency
(d) a current account deficit will result
(e) merchandise imports will exceed merchandise exports
Answer: A
2.3.3 Managed Floating (Managed Flexible Exchange Rate)

A managed flexible exchange rate is a combination of two other exchange rate policies -- fixed and
flexible. It recognizes the benefits of a flexible exchange rate automatically adjusting to equilibrium in
response to foreign exchange market disruptions. However, it also recognizes that the resulting exchange
rate might not always generate desired international trade patterns and that government might need
to step in to fix the rate temporarily.
A managed float exchange rate policy is much like a mother who allows her young son to play outside but
does not allow him to leave the backyard. Freely playing in the backyard is the flexible part and not leaving
the backyard is the managed/fixed part.
This policy evolved from the historical inclination of most nations to fix exchange rates, which was then
countered with the theoretical benefits of unrestricted flexible exchange rates. Nations have been prone
to fix exchange rates above equilibrium levels as a means of encouraging exports and discouraging
imports. But this strategy cannot be simultaneously undertaken by all nations and is usually detrimental
to global trade.
A flexible exchange rate policy is generally more efficient and lessens the likelihood of global trade
conflicts. However, problems can occur if exchange rates rise or fall substantially in a short period. As
such, governments step in to limit exchange rate changes, keeping them within "acceptable" bounds,
keeping them from leaving the backyard where they might run into a street and be injured by a moving
vehicle.
With a managed float, the foreign exchange markets carry on normal day-to-day activity as exports,
imports, investors, and speculators buy and sell the currencies needed to conduct their business activities.
If, however, an exchange rate looks to be rising or falling too much, moving outside the range that the
policy players deem acceptable, then they are likely to step into the fray, doing whatever buying and
selling of currency is necessary to keep the exchange within bounds.
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Suppose, for example, that the Reserve Bank of India and Government of India officials by consensus
decide that an exchange rate of Rs 70 (+/- 3) per US dollar is a fair exchange rate. If the exchange rate is
floating within this band, no action will be taken to affect it. However, if the exchange rate starts to diverge
beyond the limits in either direction, action will be taken to restore it within the band.
KEY DEFINITION
Managed Flexible Exchange Rate: A managed flexible exchange rate, what is also termed a managed
float, is an exchange rate that is generally allowed to adjust due to the interaction of supply and demand
in the foreign exchange market, but with occasional intervention by government. Most nations of the
world currently use a managed flexible exchange rate policy. With this alternative an exchange rate is
free to rise and fall, but it is subject to government control if it moves too high or too low. With managed
float, the government steps into the foreign exchange market and buys or sells whatever currency is
necessary keep the exchange rate within desired limits.
Concept Check
Q. A potential problem with free floating exchange rates is that
(a) people who practice arbitrage may gain from the losses of others
(b) uncertainty in exchange rate fluctuations may hinder international trade
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(c) exchange rates may never reach equilibrium

(d) the currency markets may become monopolized
(e) less-developed countries may issue too much currency
Answer: B
2.4 Nominal & Real Exchange Rate
2.4.1 Nominal Exchange Rate

The nominal exchange rate is defined as:
The number of units of the domestic currency that are needed to purchase a unit of a given foreign
currency.
For example, if the value of the US Dollar in terms of the INR is 70, this means that the nominal exchange
rate between the dollar and the rupee is 70. We need to give 70 rupees to buy one dollar.
It’s called nominal, because it takes into account only the numerical value of the currencies. It doesn’t
take into account the purchasing power of the currencies. There is another exchange rate called “real
exchange rate” that takes the purchasing power into account.
Concept Check
Q. The rate at which you can exchange your domestic currency with the foreign currency at any
financial institutions like banks, NBFCs etc. is known as…
(a) Real effective exchange rate
(b) Nominal effective exchange rate
(c) Real exchange rate
(d) Nominal exchange rate
Answer: D
2.4.2 Real Exchange Rate

The real exchange rate is a bit more complicated than the nominal exchange rate. While the nominal
exchange rate tells how much foreign currency can be exchanged for a unit of domestic currency, the real
exchange rate tells how much the goods and services in the domestic country can be exchanged for the
goods and services in a foreign country.
The difference between the nominal and the real exchange rate is that the real exchange rate takes into
account the domestic and foreign prices, as summarized in the following formula:
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Real exchange rate can be defined as the rate that takes into account inflation differential between the
countries. Suppose the rupee was trading at Rs 70 to a dollar at the beginning of 2019. Assuming a 10%
inflation in the Indian economy and 5% inflation in the US economy for the whole year, then this model
says the rupee should depreciate by 5% (10%-5%) to Rs 73.50 to a dollar, other things being equal.
2.5 NEER & REER
2.5.1 Nominal Effective Exchange Rate

The nominal effective exchange rate (NEER) is an unadjusted weighted average rate at which one
country's currency exchanges for a basket of multiple foreign currencies. The nominal exchange rate is
the amount of domestic currency needed to purchase foreign currency. In economics, the NEER is an
indicator of a country's international competitiveness in terms of the foreign exchange (forex) market.
Unlike the relationships in a nominal exchange rate, NEER is not determined for each currency
separately. Instead, one individual number, typically an index, expresses how a domestic currency’s value
compares against multiple foreign currencies at once.
If a domestic currency increases against a basket of other currencies inside a floating exchange rate
regime, NEER is said to appreciate. If the domestic currency falls against the basket, the NEER
depreciates.
Concept Check
Q. With reference to Nominal Effective Exchange Rate (NEER), which of the following options is not
correct?
(a) It is an indicator of a country's international competitiveness
(b) NEER is not determined for each currency separately.
(c) A rise in NEER indicates appreciation of currency
(d) It does not account for the varying levels of inflation in different countries.
Answer: E
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2.5.2 Real Effective Exchange Rate

The NEER may be adjusted to compensate for the inflation rate of the home country relative to the
inflation rate of its trading partners. The resulting figure is the real effective exchange rate (REER).
In India, Reserve Bank of India compiles NEER & REER indices.
Following Indices of Real Effective Exchange Rate (REER) and Nominal Effective Exchange Rate (NEER) of
the Indian Rupee are published by the RBI:
1. 36-Currency Export and Trade Based Weights (Base: 2004-05=100)

1.1. Trade-Based Weights
1.1.1. NEER
1.1.2. REER
1.2. Export-Based Weights
1.2.1. NEER
1.2.2. REER
2. 6-Currency Trade Based Weights
2.1. Base: 2004-05 (April-March) =100
2.1.1. NEER
2.1.2. REER
2.2. Base: 2017-18 (April-March) =100
2.2.1. NEER
2.2.2. REER
For 6-Currency index, base year 2016-17 is a moving one, which gets updated every year.
REER figures are based on Consumer Price Index (combined).
A rise in the level of index indicates appreciation of currency and vice-versa.
The indices are also a better reflection of the position of a currency in comparison with the countries in
which India has large export and trade interest.
3 Part III: Types of Currency
3.1 Hard Currency

It is the international currency in which the highest faith is shown and is needed by every economy. The
strongest currency of the world is one which has a high level of liquidity. Basically, the economy with the
highest as well as highly diversified exports that are compulsive imports for other countries (as of high-
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level technology, defence products, life saving medicines and petroleum products) will also create high
demand for its currency in the world and become the hard currency. It is always scarce. Up to the second
world war, the best hard currency was the Pound Sterling (£) of the UK, but soon it was replaced by the
US Dollar. Some of the best hard currencies of the world today are the US Dollar, the Euro (€), Japanese
Yen (¥) and the UK Sterling Pound (£).
3.2 Soft Currency

Soft currency is a currency which is hyper sensitive and fluctuates frequently. Such currencies react very
sharply to the political or the economic situation of a country. It is also known as weak currency due to
its unstable nature. Such currencies mostly exist in developing countries with relatively unstable
governments. Soft currencies cause high volatility in exchange rates as well, making them undesirable by
foreign exchange dealers. These currencies are the least preferred for international trade or holding
reserves.
3.3 Hot Money

Hot money signifies currency that quickly and regularly moves between financial markets, that ensures
investors lock in the highest available short-term interest rates. Hot money continuously shifts from
countries with low-interest rates to those with higher rates. These financial transfers affect the
exchange rate and potentially impact a country's balance of payments. Hot money can also refer to
stolen money that has been especially marked, so that it may be traced and identified.
Hot money is a term of the forex market and is a temporary name for any hard currency. Due to certain
reasons, if a hard currency is exiting an economy at a fast pace for the time, the hard currency is known
to be hot.
Foreign Portfolio Investment is often referred to as ‘hot money’ because of its tendency to flee at the
first signs of trouble in an economy or improvement in investment attractiveness elsewhere in the world.
3.4 Heated Currency

A term used in the forex market to denote the domestic currency which is under enough pressure (heat)
of depreciation due to a hard currency’s high tendency of exiting the economy (since it has become hot).
It is also known as currency under heat or under hammering.
3.5 Cheap Currency

A term first used by the economist J. M. Keynes (1930s). If a government starts re-purchasing its bonds
before their maturities (at full-maturity prices) the money which flows into the economy is known as the
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cheap currency, also called cheap money. In the banking industry, it means a period of comparatively
lower/softer interest rates regime.
3.6 Dear Currency

This term was popularised by economists in early 1930s to show the opposite of the cheap currency.
When a government issues bonds, the money which flows from the public to the government or the
money in the economy in general is called dear currency, also called as dear money. In the banking
industry, it means a period of comparatively higher/costlier interest rates regime.
Concept Check
Q. With reference to different types of currencies, which of the following option is/are correct?
(a) A hard currency is any globally traded currency that serves as a reliable and stable store of value.
(b) A soft currency is one that's value is inherently weak and not favored by investors or central banks.
(c) Hot money signifies currency that quickly and regularly moves between financial markets
(d) Term heated currency denotes the domestic currency which is under pressure of depreciation due
to a hard currency's high tendency of exiting the economy.
Answer: E
4 Part IV: Exchange Rate Management in India
4.1 The Indian Experience

 India’s exchange rate policy has evolved in line with international and domestic developments.
 Post-independence, in view of the prevailing Bretton Woods system, the Indian rupee was pegged
to the pound sterling due to its historic links with Britain. A major development was the devaluation
of the rupee by 36.5 per cent in June, 1966. With the breakdown of the Bretton Woods system, and
also the declining share of UK in India’s trade, the rupee was delinked from the pound sterling in
September 1975.
 During the period between 1975 to 1992, the exchange rate of the rupee was officially determined
by the Reserve Bank within a nominal band of plus or minus 5 per cent of the weighted basket of
currencies of India’s major trading partners.
 The Reserve Bank intervened on a day-to-day basis which resulted in wide changes in the size of
reserves. The exchange rate regime of this period can be described as an adjustable nominal peg with
a band.
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 The beginning of 1990s saw significant rise in oil prices and suspension of remittances from the Gulf
region in the wake of the Gulf crisis. This, and other domestic and international developments, led to
severe balance of payments problems in India.
 The drying up of access to commercial banks and short-term credit made financing the current
account deficit difficult.
 India’s foreign currency reserves fell rapidly from US $ 3.1 billion in August to US $ 975 million on
July 12, 1991.
 Apart from measures like sending gold abroad, curtailing non-essential imports, approaching the IMF
and multilateral and bilateral sources for loans, introducing stabilisation and structural reforms
(often referred to as Liberalisation, Privatisation & Globalisation (LPG) reforms), there was a two-
step devaluation of 18–19 per cent of the rupee on July 1 and 3, 1991.
 In March 1992, the Liberalised Exchange Rate Management System (LERMS) involving dual exchange
rates was introduced. Under this system, 40 per cent of exchange earnings had to be surrendered at
an official rate determined by the Reserve Bank and 60 per cent was to be converted at the market
determined rates.
LERMS
India announced the Liberalised Exchange Rate Mechanism System (LERMS) in the Union Budget
1992–93 and in March 1993 it was operationalised. India delinked its currency from the fixed currency
system and moved into the era of floating exchange-rate system under it. Indian form of exchange rate
is known as the ‘dual exchange rate’, one exchange rate of rupee is official and the other is market-
driven. The market-driven exchange rate shows the actual tendencies of the foreign currency demand
and supply in the economy vis-á-vis the domestic currency. It is the market-driven exchange rate which
affects the official rate and not the other way round.
 The dual rates were converged into one from March 1, 1993; this was an important step towards
current account convertibility (a concept that we will be discussing in the next section), which was
finally achieved in August 1994 by accepting Article VIII of the Articles of Agreement of the IMF.
 The exchange rate of the rupee thus became market determined, with the Reserve Bank ensuring
orderly conditions in the foreign exchange market through its sales and purchases.
4.2 Convertibility of Rupee
4.2.1 Concept of Convertibility

Convertibility of currency means when currency of a country can be freely converted into foreign
exchange at market determined rate of exchange. For example, convertibility of rupee means that those
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who have foreign exchange (e.g. US dollars, Pound Sterling etc.) can get them converted into rupees and
vice-versa at the market determined rate of exchange.
Concept Check
Q. Convertibility of rupee implies
(a) being able to convert rupee notes into gold
(b) allowing the value of rupee to be fixed by market forces
(c) freely permitting the conversion of rupee to other currencies and vice versa
(d) developing an international market for currencies in India
Answer: C
4.2.2 Concept of Current Account Convertibility

Current account convertibility means when foreign exchange (e.g. Pound Sterling, U.S.Dollar etc) received
for export of merchandise and services can be freely converted into Indian rupees and vice-versa in case
of imports.
At the beginning of the 1991 ‘LPG’ reforms (Liberalisation, Privatisation & Globalisation), the rupee was
made partially convertible for goods, services, and merchandise only. During the mid-1990s, the rupee
was fully made current account convertible (operationalised on 19 August, 1994) for all trading activities,
remittances, and invisibles.
It means that the full amount of the foreign exchange required by someone for current account
transaction purposes will be made available to him at official exchange rate and there could be an
unprohibited outflow of foreign exchange (earlier it was partially convertible). India was obliged to do so
as per Article VIII of the IMF which prohibits any exchange restrictions on current international
transactions (keep in mind that India was under pre-conditions of the IMF since 1991).
4.2.3 Concept of Capital Account Convertibility

By capital account convertibility we mean that in respect of capital flows (that is, flows of portfolio
capital, direct investment flows, flows of borrowed funds) a currency is freely convertible into foreign
exchange and vice-versa at market determined exchange rate.
After the recommendations of the S.S. Tarapore Committee (1997) on Capital Account Convertibility,
India has been moving in the direction of allowing full convertibility in capital account, but with required
precautions. India is still a country of partial convertibility in the capital account.
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Rupee continues to remain capital account non-convertible. One can still bring in foreign capital or take
out local money for these purposes, but there are ceilings imposed by the government that require
approvals. Note the following points in this regard:
1. Indian corporates are allowed full convertibility in the automatic route up to $500 million overseas
ventures (investment by Ltd. companies in foreign countries allowed) per annum.
2. Indian corporates are allowed to prepay their external commercial borrowings (ECBs) via automatic
route if the loan is above $500 million per annum.
3. Individuals are allowed to invest in foreign assets, shares, etc., up to the level of $2,50,000 per
annum.
Concept Check
Q. The Capital Account Convertibility of the Indian Rupee implies:
(a) that the Indian Rupee can be exchanged by the authorised dealers for travel
(b) that the Indian Rupee can be exchanged for any major currency for the purpose of trade in goods
and services
(c) that the Indian Rupee can be exchanged for any major currency for the purpose of trading financial
assets
Answer: C
4.2.4 Is Indian National Rupee Convertible?

Until the early 1990s (pre-reform period), anyone willing to transact in a foreign currency would need
permission from the Reserve Bank of India (RBI), regardless of the purpose. People wanting to engage in
foreign travel, foreign studies, the purchase of imported goods, or to get cash for foreign currencies
received (like with exports) were all required to go through the RBI. All such forex exchanges occurred at
pre-determined forex rates finalized by the RBI.
After liberal economic reforms were introduced in 1991, many significant developments occurred that
impacted the way forex transactions were conducted. Exporters and importers were allowed to exchange
foreign currencies for the trade of unbanned goods and services, there was easy access to forex for
studying or traveling abroad, and a relaxation on foreign business and investments with minimal (or no)
restrictions depending on the industry sectors.
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However, Indians still require regulatory approval if they want to invest an amount above a pre-
determined threshold level for the purpose of investments or purchasing assets overseas. Similarly,
incoming foreign investments in certain sectors like insurance or retail are capped at a specific
percentage and require regulatory approvals for higher limits.
As of present, the Indian rupee is a partially convertible currency. This means that although there is a lot
of freedom to exchange local and foreign currency at market rates, a few important restrictions remain
for higher amounts, and these still need approval. The regulators also intervene from time-to-time to
keep the exchange rates within permissible limits instead of keeping the INR as a completely free-floating
currency left to market dynamics. In the case of extreme volatility in rupee exchange rates, the RBI
swings into action by purchasing/selling U.S. dollars (kept as foreign reserve) to stabilize the rupee.
Full convertibility would mean the rupee exchange rate would be left to market factors without any
regulatory intervention. There may be no limit on inflow or outflow of capital for various purposes
including investments, remittances, or asset purchases/sales.
Concept Check
Q. Consider the following statements:
The Indian rupee is fully convertible:
(a) in respect of Current Account of Balance of payment
(b) in respect of Capital Account of Balance of payment
(c) into gold
Answer: A
4.2.5 Advantages of a Fully Convertible Currency

 Sign of Stable and Mature Markets: Regulators like to keep control over their territories. Free and
open entry to an enormous number of global market participants would increase the risk of losing
regulatory control due to large market size and a huge flow of capital. Opening up to a fully convertible
currency is a solid sign that a country and its markets are stable and mature enough to handle the
free and unrestricted movement of capital, which attracts investments making the economy better.
 Increased Liquidity in Financial Markets: Full capital account convertibility opens up the country’s
markets to global players including investors, businesses, and trade partners. This allows easy access
to capital for different businesses and sectors, positively impacting a nation’s economy.
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 Improved Employment and Business Opportunities: With increased participation from global
players, new businesses, strategic partnerships, and direct investments flourish. It also helps in the
creation of new employment opportunities across various industry sectors, as well as nurturing
entrepreneurship for new businesses.
 Onshore Rupee Market Development: The growing international interest in the Indian rupee is
evident from the development of offshore rupee markets in locations like Dubai, London, New York,
and Singapore. Trading of the INR is still far lower than other currencies such as the euro. In 2018, INR
contracts traded against the dollar an average of 11,666 times per day compared to 193,512 contracts
converted from Euro to USD. Making the rupee fully convertible would enable greater trades and
global flow of the Indian currency, helping national markets with improved liquidity, better regulatory
purview, and reduced dependence and risks from offshore market participants.
 Easy Access to Foreign Capital: Local businesses can benefit from easy access to foreign loans at
comparatively lower costs—lower interest rates. Indian companies currently have to take the
ADR/GDR route to list on foreign exchanges. After full convertibility, they will be able to directly raise
equity capital from overseas markets.
 Better Access to a Variety of Goods and Services: Amid current restrictions, one does not see much
variety in India for foreign goods and services. Walmart (WMT) and Tesco stores aren’t that common,
although a handful exist in partnership with local retail chains. Full convertibility will open doors for
all global players to the Indian market, making it more competitive and better for consumers and the
economy alike.
 Progress in Multiple Industry Sectors: Sectors like insurance, fertilizers, retail, etc. have restrictions
on foreign direct investments (FDIs). Full convertibility will open the doors of many big international
players to invest in these sectors, enabling much-needed reforms and bringing variety to the Indian
masses.
 Outward Investments: Fancy buying a house on the coast of Florida or buying a million-dollar yacht
in London? At present, any Indian individual or business would need permission from authorities to
do so. After full convertibility, there will be no limits on the amounts exchanged and no need for
approvals.
 Improved Financial System: The Tarapore Committee, which was tasked with assessing the full
convertibility of the rupee, has noted these benefits after full rupee convertibility, including:
 Indian businesses will be able to issue foreign currency-denominated debt to local Indian
investors.
 Indian businesses will be able to hold foreign currency deposits in local Indian banks for capital
requirements.
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 Indian banks will be able to borrow and/or lend to foreign banks in foreign currencies.
 Easy options to buy/sell gold freely and offer gold-based deposits and loans with higher (or even
uncapped) limits.
4.2.6 Disadvantages of a Fully Convertible Currency

 High Volatility: Amid a lack of suitable regulatory control and rates subject to open markets with a
large number of global market participants, high levels of volatility, depreciation, or appreciation in
forex rates may happen, challenging the country’s economy.
 Foreign Debt Burden: Businesses can easily raise foreign debt, but they are prone to the risk of high
repayments if exchange rates become unfavorable. Imagine an Indian business taking a U.S. dollar
loan at a rate of 4%, compared to one available in India at 7%. However, if the U.S. dollar appreciates
against the Indian rupee, more rupees will be needed to get the same number of dollars, making the
repayment costly.
 Effects on Balance of Trade and Exports: A rising, unregulated rupee makes Indian exports less
competitive in the international markets. Export-oriented economies like India and China prefer to
keep their exchange rates lower to retain the low-cost advantage. Once the regulations on exchange
rates go away, India risks losing its competitiveness in the international market.
 Lack of Fundamentals: Full capital account convertibility has worked well in well-regulated nations
that have a robust infrastructure in place. India’s basic challenges—a high dependence on exports,
burgeoning population, corruption, socio-economic complexities, and challenges of bureaucracy—
may lead to economic setbacks post-full rupee convertibility.
Concept Check
Q. Full convertibility of the rupee may mean:
(a) Its free float with the international currencies
(b) Its direct exchange with any other international currency at any prescribed place inside and outside
the country
(c) It acts just like any other international currency
Answer: D
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4.3 India's FOREX Reserves
4.3.1 What are FOREX Reserves?

Most countries have adopted the definition suggested by the International Monetary Fund (Balance of
Payments Manual, and Guidelines on Foreign Exchange Reserve Management, 2001); which defines forex
reserves as external assets that are readily available to and controlled by monetary authorities for direct
financing of external payments imbalances, for indirectly regulating the magnitudes of such imbalances
through intervention in exchange markets to affect the currency exchange rate, and/or for other
purposes.
4.3.2 RBI Act 1934 & FOREX Reserves

In India, the Reserve Bank of India Act 1934 contains the enabling provisions for the RBI to act as the
custodian of foreign reserves, and manage reserves with defined objectives. The powers of being the
custodian of foreign reserves is enshrined, in the first instance, in the preamble of the Act. The ‘reserves’
refer to both foreign reserves in the form of gold assets in the Banking Department and foreign securities
held by the Issue Department, and domestic reserves in the form of ‘bank reserves’. The composition of
foreign reserves is indicated, a minimum reserve system is set out, and the instruments and securities in
which the country’s reserves could be deployed are spelt out in the relevant Sections of the RBI Act.
4.3.3 Objectives of Holding FOREX Reserves

 Maintaining confidence in monetary and exchange rate policies.
 Enhancing capacity to intervene in forex markets.
 Limiting external vulnerability by maintaining foreign currency liquidity to absorb shocks during
times of crisis including national disasters or emergencies.
 Providing confidence to the markets especially credit rating agencies that external obligations can
always be met, thus reducing the overall costs at which forex resources are available to all the market
participants.
 Adding to the comfort of the market participants, by demonstrating the backing of domestic
currency by external assets.
 Forex reserves provide an import cover. Import Cover measures the number of months of imports
that can be covered with foreign exchange reserves available with the central bank of the country.
At a formal level, the objective of reserve management in India could be found in the RBI Act, where the
relevant part of the preamble reads as ‘to use the currency system to the country’s advantage and with a
view to securing monetary stability’.
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4.3.4 Components of India's FOREX Reserves

 Foreign currency assets (FCAs): The foreign currencies which are held as forex reserves include US
dollar, Euro, British pound sterling, Japanese yen and Chinese Yuan.
 Special Drawing Rights with IMF: Special drawing rights, or SDR, are an artificial currency instrument
created by the International Monetary Fund, which uses them for internal accounting purposes. The
value of the SDR is calculated from a weighted basket of major currencies, including the U.S. dollar,
the euro, Japanese yen, Chinese yuan, and British pound. SDR interest rate (SDRi) provides the basis
for calculating the interest rate charged to member countries when they borrow from the IMF and
paid to members for their remunerated creditor positions in the IMF.
 Gold reserves
 Reserve Bank of India's reserve position with the IMF: Reserve tranche is a portion of the required
quota of currency each member country must provide to the International Monetary Fund (IMF) that
can be utilized for its own purposes.
The largest component of the Foreign Exchange Reserves constitutes of foreign currency assets (FCAs).
Changes in FCAs occurs due to the selling and purchasing of foreign exchange by the Reserve Bank of
India, externally received income of the Government of India from the deployment of foreign exchange
reserves and income due to the revaluation of assets.
Concept Check
Q. Which of the following is/are treated as artificial currency?
(a) ADR
(b) GDR
(c) SDR
(d) Both (a) and (b)
(e) Both (b) and (c)
Answer: C
Concept Check
Q. Which one of the following groups of items is included in India’s foreign-exchange reserves?
(a) Foreign-currency assets, Special Drawing Rights (SDRs) and loans from foreign countries
(b) Foreign-currency assets, gold holdings of the RBI and SDRs
(c) Foreign-currency assets, loans from the World Bank and SDRs
(d) Foreign-currency assets, gold holdings of the RBI and loans from the World Bank
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Answer: B
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Export-Import
Policy

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Contents
1 EXIM Policy .............................................................................................................................................4
1.1 Introduction ....................................................................................................................................4
1.2 Pre-Reform Period (Before 1991) ...................................................................................................4
1.2.1 Import Substitution .................................................................................................................5
1.2.2 Export Promotion Strategy ......................................................................................................5
1.3 Post Reform Period (After 1991) ....................................................................................................6
1.3.1 Post Shipment Export Credit ...................................................................................................7
1.3.2 Export Promotion Capital Goods .............................................................................................7
1.3.3 Duty Drawback Facility ............................................................................................................7
1.3.4 Decanalisation .........................................................................................................................7
1.3.5 Export-Import Pass Book Scheme (1995) ................................................................................7
1.3.6 Convertibility of Rupee on Current Account and Capital Account ..........................................8
2 Foreign Trade Policy ...............................................................................................................................8
2.1 Foreign Trade Policy (2004-09) .......................................................................................................8
2.1.1 Objectives ................................................................................................................................8
2.1.2 Strategies .................................................................................................................................8
2.2 Foreign Trade Policy (2009-14) .......................................................................................................9
2.2.1 Objectives ..............................................................................................................................10
2.2.2 Strategies ...............................................................................................................................10
2.3 Foreign Trade Policy (2015-20) .....................................................................................................11
2.3.1 Highlights of Foreign Trade Policy (2015-20) ........................................................................11
2.3.2 Seventh Trade Policy Review of India at the WTO ................................................................12
2.4 Foreign Trade Policy (2021-26) .....................................................................................................13
2.4.1 Goals ......................................................................................................................................13
2.4.2 Key highlights .........................................................................................................................13
2.4.3 Significance ............................................................................................................................14

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1 EXIM Policy
1.1 Introduction
EXIM policy is a set of guidelines and instructions related to the import and export of India. Trade policy
is prepared by the Central Government (Ministry of Commerce). In general, the EXIM policy aims at
encouraging exports, enhancing export potential, facilitating imports and creating favorable balance of
payment position.
Government of India appointed the Import and Export Policy Committee headed by Mr. Mudaliar in 1962
to review India’s trade policy. The recommendations were accepted and the then Commerce Minister Mr.
V.P. Singh announced the first Export Import Policy on April 12, 1985. Initially the policy was made on a
three-year basis with the main aim of facilitating production and strengthening the economic base of
India. Currently the policy is announced for the period of five years. It is reviewed after every one year
and updated if some modifications and new schemes are required. This periodical review implies that the
policy successfully incorporates the necessary changes as per domestic and international environment.
On broader terms the general objectives of the policy are:
1. To accelerate the growth of exports.

2. To provide access to imported essential raw materials and inputs required for augmenting
production.
3. To enhance the technological strength of Indian industries, thereby improving their competitiveness
and generating employment.
4. Finally, to provide consumers with good quality products and services at competitive prices while at
the same time creating a level playing field for the domestic producers.
The discussion on EXIM policy can be best divided into two periods:
1. Pre-Reform Period (before 1991), and

2. Post-Reform Period (after 1991)
1.2 Pre-Reform Period (Before 1991)

To analyze the trade policy of India during the pre-reform period can be divided in four phases:
 Phase I (1952-53 to 1956-57)

 Phase II (1956-57 to June 1966)
 Phase III (1966-67 to 1975-76)
 Phase IV (1975-76 to 1990-91).
In the first phase, liberalization measures were announced for both imports and exports. This led to
remarkable increase in imports but exports failed to pace with imports.
In the second phase, trade policy was reformulated to be in line with the planning policies. Imports were
controlled and import substitution measures were incorporated. On the export side, robust export
promotion drive was launched through diversification of exports. Still Government failed to achieve good
results in exports. So, in order to control imports and boost exports India resorted to devaluation in 1966.
This marked the beginning of the third phase of trade policy from June 1966. The policy started showing
positive results after the Fourth Five Year Plan but this effect continued till 1975-76.
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During the fourth phase Government of India adopted import liberalization again but this time it was
done to promote export. We now give a brief of both the approaches.
1.2.1 Import Substitution

Import Substitution is substituting the imported goods with the locally produced goods in order to meet
the internal demand. After independence, import substitution was a major element of the trade policy.
As a result, India adopted an inward-looking strategy for development. This constituted the primary
objective of the policies till the mid-1970s and it was based on the Imports and Exports (controls) Act of
1947 and the Import Trade Control Order of 1955. Import substitution policy implied that incentives were
given to the firms which produced an imported item that was not produced domestically earlier.
1.2.2 Export Promotion Strategy

Export Promotion Strategy promotes only the industries those has potential for competing with foreign
products. In India a variety of measures were undertaken to promote exports.
A liberal import policy was announced for 59 priority industries which included a number of export-
oriented industries. A new import scheme was launched which enabled the registered exporters to
obtain raw materials and other components against export of specified items.
In the 1970s, several export promotion measures were put in place in the form of export incentives and
export services to generate higher exports on a sustained basis.
In 1980s export competitiveness received large attention and policies were prepared after intense
discussion. By then it became clear that production for exports cannot be separated from production for
the domestic market. Domestic industrialization is necessary to have an integrated trade policy. A major
component of the first EXIM policy was the provision of access to essential raw materials and capital
goods which resulted in technological upgradation and reduced costs. The trade policy in 1980s
continued to emphasize on licensing mechanism and high tariffs in order to isolate Indian economy from
external competition.
The major changes in policies in pre-reform period are as follows:
1.2.2.1 Duty Drawback Scheme (DDS) (1954)

This scheme was introduced in 1954 with the objective to reimburse exporters the tariffs paid on the
imported materials and the excise duties paid on domestically produces inputs which enter into export
production. In this process the application form for the drawback was simplified. In 1980-81 ‘Duty
Drawback Committee’ was formed and the scheme was made more effective through introduction of
quick payment. Under this the sanctions were given within 24 hours and actual payment within 15 days.
However, importance of duty drawback scheme has declined since 1981 due to the initiation of advance
license system which allow exporters to import duty free inputs.
1.2.2.2 Replenishment Licenses (1957)

Government launched the Import Entitlement Scheme (IES) in 1957 which aimed at helping the exporters
in procuring imported raw materials required for export production. In 1965 exporters are allowed
replenishment licenses on the production of bank certificates showing the actual proceeds from exports.
However, IES was withdrawn after devaluation of the Indian Rupee in 1966 but was soon reintroduced
in a revised form. The new name of the scheme was Import Replenishment Scheme (IRS). An IRS license

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permits the exporters to procure items that are restrictive in the import policy subject to the limits
specified.
1.2.2.3 Policy for Export/Trading Houses (1960)

According to this policy, exporters who fulfill minimum export requirements in a specific period are
granted the status of Export Houses, Trading Houses or Star Trading Houses. The benefits include the
increase in the grant of renewals, licenses been made fully transferable and allowing import of raw
materials which have limited permits or are listed under canalized items.
1.2.2.4 Free Trade Zones (1965)

In order to make Indian products competitive in the global market and give momentum to the exports,
Government set up Free Trade Zones (FTZs). In Free Trade Zones, goods can be imported, manufactured
and exported without the intervention of custom authorities. The first FTZ was set up in Kandla in 1965
and other FTZs were Santacruz (Mumbai), Falta, Noida, Cochin and Madras. Santacruz is mainly for
electronic goods but other FTZs are multi product in character.
1.2.2.5 Devaluation of Rupees (1966)

By 1960s it became quite necessary to conserve scarce foreign exchange reserves and to have sustained
increase in export earnings as India was facing severe balance of payment crisis at that time. Thus, in
order to restore the competitive potential of exports and as a solution to the Balance of Payment
problem, the value of Indian Rupee was reduced by 36.5 percent on June 6, 1966. This led to rise of 57.5
percent in the price of foreign exchange in terms of Indian Rupees.
1.2.2.6 Cash Compensatory Support (C.C.S) (1966)

It was designed to give compensation for un-rebated indirect taxes paid by exporters on inputs and
market development costs. The scope of CCS was gradually extended over the years, the proportion of
total exports eligible for CCS rose from 20 percent in 1970s to 40 percent in 1980s. Multiplicity of rates
was reduced from 17 to 7 under the new provisions of CCS in 1986. By 1991, 283 items were given grants
under CCS. However, after trade liberalization, it was felt that CCS had become expendable and was
abolished in July 1991.
1.3 Post Reform Period (After 1991)

A liberalized trade regime was started in the 1990s. This marked a remarkable turnaround from the
earlier controlled environment. The new trade policy was in line with the wider economic reforms that
were initiated in 1991. It was realized that all the policies (trade, exchange rate and industrial) should be
a part of an integrated policy framework. This will improve the efficiency and productivity of the whole
economic system. Thus, the trade policy enclosed many changes in the export incentives.
Before 1991, the foreign trade of India suffered mainly because of the strict controls also known as
‘License Raj’ regime. Government took a major step in August 1991 and moved towards reducing controls
and simplifying the procedures. It was done to create a conducive environment for trade. The focus of
the policies shifted from regulations to promotion and development of foreign trade. The objective was
to improve the competitiveness and attain a higher growth profile.
The period after 1991 is marked by the elimination of most quotas and sharp tariff cuts. The tariffs were
as high as 350 percent which were lowered in phases and reduced to 20 percent by the end of the century.
This resulted in the opening up of India economy. Duties on capital goods were also reduced to a large
extent. All this led to acceleration in trade and a far more open environment.
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Now we list some of the changes to demonstrate the remarkable shift in policies.
1.3.1 Post Shipment Export Credit

EXIM Bank introduced new scheme ‘Post Shipment Export Credit’ which was denominated in foreign
currency to enable exporters to get credit. It provided credit to Indian exporters at internationally
competitive rates of interest. The interest rates were reduced from 11 percent to 9 percent. Later on, the
scheme was reformulated to promote the exports and also a major simplification of procedures was
done. In 2004-2009 Policy, the concessional rate of interest on post-shipment that was available up to 90
days was extended for a maximum period up to 365 days.
1.3.2 Export Promotion Capital Goods

In this scheme Government provided a reduced import duty of 15 percent for the import of certain
capital goods subject to certain export obligation. Import of second-hand capital goods under the EPCG
scheme was disallowed to provide level playing field to the domestic capital goods industry. In 1994-95
the scheme was extended to service sector. In 1997 duty on capital goods was reduced to 10 percent.
The EPCG scheme allows import of capital goods at 0 percent duty for exports of agriculture and their
allied products. The threshold limit for agriculture is also reduced from Rs. 20 crore to Rs. 5 crore. In 2000-
01 import of second-hand capital goods have been permitted. In 2004 additional flexibility was introduced
for the fulfillment of export obligation. This was done to reduce the difficulties of exporters of goods and
services.
1.3.3 Duty Drawback Facility

Government of India decided to continue the Duty Drawback facility in 1992-97 for exporters who had
imported certain inputs under the Duty Exemption Scheme which was described in the earlier Exim policy.
New rates were announced w.e.f. 1 June, 1999. The new rates incorporated changes in customs duty as
well as inclusion of surcharge. The rates were again revised in 2001. Duty drawback rates were
rationalized in line with the changes in customs duties announced in the Union Budget 2001-02. All
industry rates were reduced in respect of 726 items, left unchanged for 26 items and increased for 14
items with 30 obsolete entries deleted. The changes also included introduction of new products.
1.3.4 Decanalisation
Earlier in India a large number of exports and imports were used to be canalized through the public
sector agencies. Government of India announced a trade policy on August 13, 1991 and decanalized 16
export items and 20 import items. The decanalized items included newsprint, non-ferrous metals and
natural rubber. Importantly only eight items including petroleum products, fertilizers and edible oils were
to remain canalized. Recently in 2004-09 policy import of petroleum and petro goods were also
decanalized.
1.3.5 Export-Import Pass Book Scheme (1995)

An alternative route of the Pass Book Scheme for some categories of exporters was opened up on March
31, 1995. Credit on customs duty was given for exports. In 1997, Pass Book Scheme was replaced by a
new scheme ‘Duty Entitlement Pass Book’ (DEPB) scheme. This scheme extended the coverage and also
aimed for more of transparency. In 1999-2000 the credit entitlement increased from 5 to 10 percent of
previous year’s performance. The scheme has been continued in 2004-2009 policy and has removed any
kind of uncertainty for the exporters.

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1.3.6 Convertibility of Rupee on Current Account and Capital Account

In 1991, Government of India devalued the rupee by about 18 percent against five currencies.
The Finance Minister announced the liberalized exchange rate mechanism system (LERMS) in the Budget
for 1992-93. It was a dual exchange rate under which 40 percent of foreign earnings were to be given at
official exchange rate and the rest 60 percent were to be exchanged at a market determined rate. The
foreign exchange exchanged at official rate was used to import of essential items (like crude oil,
petroleum product fertilizers etc.) and the foreign exchange converted at the market rate was used to
fund all other type of imports. Thus, LERMS commenced partial convertibility of the rupee on trade
account.
Further, the 1993-94 Budget introduced full convertibility of the rupee. This allowed foreign exchange
earners to convert 100 percent of their earnings at the market rate. Full convertibility on the current
account was announced in the Union Budget 1993-94. The objective of exchange rate system has been to
ensure that the exchange value of the rupee is realistic and can sustain a proper current account balance.
2 Foreign Trade Policy

2.1 Foreign Trade Policy (2004-09)
In 2004, the United Progressive Alliance
government adopted National Foreign Trade
Policy (NFTP), 2004-09 as a tool of export
promotion replacing the earlier Export Import
Policy (EXIM). The policy intended to encourage
exports by enhancing the competitiveness of
Indian products in the global market. This was
expected to generate employment and help in poverty alleviation.
2.1.1 Objectives
The ultimate aim of NFTP (2004-09) is to generate employment. With this end in view, it identified two
means- Increase in exports-GDP ratio and a larger emphasis on labor intensive exports. In order to meet
this objective, the NFTP 2004-09 set itself a target of, doubling India’s contribution to global trade from
0.8 percent to 1.5 percent by the end of 2009. Accordingly, this will act as an effective instrument of
growth by giving a push to employment especially in rural as well as semi-urban areas.
2.1.2 Strategies
The key strategies which were followed in NFTP (2004-09) were to unshackle the controls and create an
environment of transparency. It emphasized on simplifying the procedural formalities and lowering
down the transaction costs.
 To meet the objectives, it identified the special focus areas which need to be nurtured. This essentially
means that sectors with substantial export prospects and potential for employment growth were
identified in semi urban and rural areas as ‘Thrust Sectors’ and then specific strategies were worked
out for the same which are known as Focus Market Schemes and Focus Product Schemes. This
involves reimbursement of duty payments of up to 2.5 percent of the value of exports (FOB) to
counterbalance the high freight and transportation costs to international markets.

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 The threshold limit for the towns which were classified as ‘Towns of Export Excellence’ (TEE) was
brought down from Rs. 1000 crore to Rs. 250 crores. These selected towns basically have potential
for growth in exports. Thus, certain incentives were given to them like financial assistance under the
Market Access Initiative (MAI) scheme and entitlement in Export Promotion Capital Goods (EPCG)
scheme.
 Target Plus: A scheme to speed up growth of exports called Target Plus was introduced. In this
scheme, incentives in terms of duty-free credit were given to exporters if the value of their exports
exceeded the general target set for them. For example, if any exporter exports 20% more than the
target then he is eligible to receive duty free credit up to 5% of the value (FOB) of his incremental
exports.
 Vishesh Krishi Upaj Yojana: This new scheme also known as Special Agricultural Produce Scheme was
launched to boost the exports of fruits, vegetables, flowers and minor forest produce. Export of
these products qualified for duty free credit entitlement up to 5 percent of the value (FOB) of
exports. This entitlement can be utilised for import of a variety of agricultural inputs. This means the
exporters can import the inputs at reduced rates.
 Served from India Scheme: This scheme was intended to create a unique and impressive brand
‘Served from India’ that could be recognized all over the world. The earlier schemes with the same
motives were reformulated and revamped into this new scheme. Individual service providers who
earn foreign exchange of at least Rs. 5 lakhs were eligible for duty free credit entitlement of 10% of
the total foreign exchanged earned by them. Hotels and restaurants came under this scheme and
could avail duty free credit up to 20% and 5% respectively. They were allowed to use the entitlement
for import of food items.
On the whole, NFTP (2004-09) was able to address the issue of export promotion and through it
employment generation. As per WTO, our share of world’s merchandise trade went up from 0.83% in
2003 to 1.45 percent in 2008. Similarly, our share of world’s services rose to 2.8 percent in 2008 from
1.4 percent in 2003. On the whole, during the five-year period of 2004-2009, exports experienced a
robust growth process to reach a level of US $168 billion in 2008-09 from US $63 billion in 2003-04. With
regard to employment, studies suggest that nearly 14 million jobs were created as a result of augmented
exports in 2004-09.
However, the impact of NFTP (2004-09) was varied across states and products. While products such as
grapes in Nashik and mangoes in Malda seem to have drawn substantial benefits, spices in Orissa seem
to have not benefited at all even when it was included in the Focus Product scheme. One may argue
formulation and implementation of the policy could not carried out to optimal levels.

Owing to the global crisis of 2009, countries all over the world were affected in different degrees. On the
whole, the economic indicators like consumption, capital flows and trade have taken a hit. IMF estimated
that the global trade to decline by 11 percent in volume terms and WTO forecasted the decline to be near
about 9 percent. Though the adverse impact on India was not of same magnitude, as compared to the
other countries yet exports suffered. This was mainly due to a contraction in demand in the foreign
markets for India’s exports. It was indeed a herculean task to formulate the foreign trade policy in such
a grim economic situation.

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Thus, it was needed that strategy and policy instruments to pursue the strategy are set in such a manner
that it will catalyze the growth of exports.
2.2.1 Objectives
The main objectives of Foreign Trade Policy (2009-14) were:
 To arrest and reverse the declining trend of exports.

 To double India’s export of goods and services by 2014.
 To double India’s share in World’s merchandise trade by 2020.
 To simplify the application procedure for availing the benefits.
In general, the policy aimed at enhancing the potential to export, improving export performance,
encouraging foreign trade and earning foreign exchange. As India’s exports were affected by the global
recession, FTP (2009-14) was of great importance. The decline in exports led to the closure of many
export-oriented industries which resulted in large unemployment as well.
Targets:
 The target for exports was set at $200 Billion to be achieved by 2010-11 by having an annual export
growth of 15%.
 To come back on the high growth path and for that export growth rate target was 25% for the next
three years, i.e., 2011-14.
In order to achieve these objectives, the Government would follow a mix of policy measures including
fiscal incentives, institutional changes and diversification of export markets.
2.2.2 Strategies
 New markets were introduced under Focus Market Scheme. In total 26 markets were added, 16 are
in Latin America and 10 in Asia-Oceania.
 Incentives under Focus Market Scheme were raised from 2.5 percent to 3 percent.
 New products were added under Incentives Focus Product Scheme like engineering products, Green
Technology products and Electronic goods.
 Incentives under Focus Product Scheme were raised from 1.25 percent to 2 percent.
 Market Linked Focus Product Scheme was expanded by including a considerable number of products.
These products include pharmaceuticals, textile fabrics, rubber products and certain iron and steel
products. Benefits to these products will be given if they are exported to the specifically selected 13
markets. These are Argentina, Egypt, Kenya, Nigeria, South Africa, Tanzania, Brazil, Mexico, Ukraine,
Vietnam, Cambodia, Australia and New Zealand.
 A common form was introduced to avail benefits under Focus Market Scheme, Focus Product
Scheme, Market Linked Focus Product Scheme and Vishesh Krishi Upaj Yojana.
 Higher financial allocation for Market Development Assistance (MDA) and Market Access Initiative
(MAI) scheme was also provided.
 New areas for Towns of Export Excellence were also recognized. These include Jaipur, Srinagar and
Anantnag for handicrafts, Kanpur, Dewas and Ambur for leather products and Malihabad for
horticultural products.
 Tax Holiday for the export units were extended by one year.
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 Duty Entitlement Pass Book scheme was also extended by one year.
 To insulate the small and medium scale exporters a Directorate of Trade Remedy Measures was
announced.
 Export obligation on import of spares under Export Promotion Capital Goods Scheme has been
reduced to 50% of the normal specific export obligation.
Undoubtedly India took a number of measures to withstand the global recession through interest
subvention, reduction in taxes etc. but the neighborhood countries have applied such measures on a
much larger scale. The measures listed above are supplemented by a few more steps which are based on
the feedbacks given by specific industry associations and Federation of Indian Export Organizations (FIEO).
We know that the government cannot generate demand for exports but it can certainly help exporters
so that they grab the orders which they are losing by little margins.
Government can also emphasize upon banks to be more keyed up for exports. For instance, an Export
Development Fund should be created with a corpus equivalent to 0.5 percent of the preceding year’s
exports. The post shipment credit which is now available up to 180 days can be extended to 365 days to
ease off the financial crunch.
When the growth of exports is steadily improving on a monthly basis and has shifted from negative growth
rate to a positive one, then we may conclude that the stimulus packages from the Government of India
and Reserve Bank should be continued for some more time. Dropping of these practices should be gradual
and in line with the recovery at the global level. Thus, it should be a cautious removal.

The Foreign Trade Policy 2015-20 was announced by Minister of Commerce and Industry, Smt. Nirmala
Sitharaman on April 1, 2015. This policy has been announced at the time when several other measures
were also been undertaken by the Government of India such as ‘Make in India’ and ‘Digital India’. The
policy puts a great focus on improving the ‘Ease if Doing Business’ in India, with an emphasis on both the
manufacturing and service sectors. The policy describes the strategies related to the products and
markets needed to promote trade, develop infrastructure and enhance the overall system of trade. It
also helps to enable India to counter the external challenges and keep up the pace in line with the global
trading architecture.
The target is to double India’s share in world trade by 2020 by rationalizing the provisions given for
imports and exports and also by creating a mechanism to resolve the complaints and dispute related to
trade.
2.3.1 Highlights of Foreign Trade Policy (2015-20)

Two new schemes have been introduced for the merchandise and service sector:
 Merchandise Exports from India Scheme (MEIS) - This is designed for export of specified goods to
specified markets. It subsumes the existing schemes ‘Focus Market Scheme’, ‘Market Linked Focus
Product Scheme, Focus Market scheme, Agri-Infrastructure Incentive Scrip and Vishesh Krishi Gram
Upaj Yojana. It also revised the rates of reward to the specific notified export goods to selected
markets. These rewards are given as a percentage of foreign exchange earned (FOB).
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 Services Exports from India Scheme (SEIS): This scheme is available to the service providers who are
located in India as against the scheme of ‘Serve from India’ which give benefits to Indian Service
Providers.
In both the Schemes the duty credit scrips can be used for payment of Customs or Excise duty as well as
Service tax. There is also a welcome step and imperative boost for the Special Economic Zones as the
benefits of MEIS and SEIS has been extended to the units located in Special Economic Zones.
Export Houses – The nomenclature of Export House, Star Export House, Trading House, Star Trading
House, Premier Trading House certificate has been simplified and changed to One, Two, Three, Four and
Five Star Export House.
In addition to this there is change for the Status Holders also. The method for calculating the export
performance meant for recognition of status holder has been changed from Indian Rupees to US dollar
earnings. The export performance will also now consider only two previous years as against the previous
three years under the earlier Foreign Trade Policy.
For the purpose of Ease of Doing Business and Trade Facilitation the following proposals are made:
 Online procedure to upload digitally signed documents.

 Creation of profiles of importers and exporters so that repeated submissions are eliminated and
permanent records are maintained.
 Online facility for Terminal Excise Duty refunds has also been provided.
In order to encourage the ‘Make in India’ initiative, the export obligation have been reduced from 90
percent to 75 percent for domestic procurement under Export Promotion Capital Goods scheme. There
is higher reward being given under MEIS for the products which have high domestic content and more
value addition done in India. This will promote the domestic manufacturing industry. These flexibilities
will encourage the exporters to enhance their productive capacities. Measures have been taken in
defense and hi-tech items also. Further, e-Commerce exports of products like handloom, books,
footwear, toys and fashion garments through courier or post office would also be able to get the benefits
under MEIS. These measures will provide employment in addition to capitalize India’s strength in these
areas.
The transition to this new policy is quite smooth as the eligibility or usage of scrip and any other condition
of export of goods or rendering of services would be governed by the earlier Foreign Trade Policy. On the
whole we may appreciate new Foreign Trade Policy (2015-2020) as it emphasizes on simplification and
mergers of existing initiatives.
2.3.2 Seventh Trade Policy Review of India at the WTO

Recently, the final session of India’s seventh Trade Policy Review (TPR) concluded at the World Trade
Organization (WTO) in Geneva, Switzerland.
 The TPR is an important mechanism under the WTO’s monitoring function in which member
countries’ trade and related policies are examined by the WTO with an aim to contribute
towards improved adherence to WTO rules.
 India’s last TPR took place in 2015.
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Key Points
 Appreciation for India:
 Introduction of Goods & Services Tax in 2016.
 India’s efforts in the implementation of WTO’s Trade Facilitation Agreement.
 Role played by India in furthering “Ease of Doing Business” in the country.
 India’s improved ranking in “Trading across Borders” indicator under the Ease of Doing Business
Report.
 Trade Facilitation Agreement (TFA), aims to speed up customs procedures and make trade
easier, faster, and cheaper.
 The steps taken by India for liberalizing its Foreign Direct Investment (FDI) regime and
India’s National Intellectual Property Rights Policy, 2016.
 Concerns for India:

 India’s trade policy remained largely unchanged since the previous review.
 India continues to rely on trade policy instruments such as the tariff, export taxes, minimum
import prices, import and export restrictions, and licensing, WTO said.
 These are used to manage domestic demand and supply requirements, protect the
economy from wide domestic price fluctuations, and ensure conservation and proper
utilization of natural resources.
 As a result, frequent changes are made to tariff rates and other trade policy instruments,
which create uncertainty for traders.
 India’s Request:
 The ongoing pandemic has again brought to the fore, the importance of food and livelihood
security and urged for a permanent solution to Public Stock Holding (PSH) for food security.

 It would come into effect from 1st April 2021 for a period of five years.
2.4.1 Goals
 It will strive to make India a leader in the area of international trade with a goal to make India a USD
5 Trillion economy.
2.4.2 Key highlights

 The District Export hubs are to play a major role in the new Foreign Trade Policy.
 The policy will aim to boost exports.
 Both merchandise and services, through
 Systematically addressing domestic and overseas constraints related to the policy,
 Regulatory and operational framework for lowering transactions costs and enhancing ease of
doing business,
 Creating a low-cost operating environment through efficient,
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 Cost-effective and adequate logistical and utilities infrastructure.

 It will enhance ease of doing business.
 It will bring improvements in the operations of domestic manufacturing and services sector through
infrastructure support.
 The policy will bring changes to regulatory and operational framework and lower transactional costs.
2.4.3 Significance
 Correcting the imbalances within India: By improving operations of the domestic manufacturing and
services sector in combination with efficient infrastructure support.
 Growth and employment: By channelizing the synergies gained through merchandise and services
exports.
Foreign Trade Policy (FTP) or Export Import (EXIM) Policy of India
 Foreign trade in India is regulated by the Foreign Trade (Development and Regulation) Act, 1992
and is guided by the EXIM Policy of the Government of India.
 FTP is a set of guidelines and instructions established by the Directorate General of Foreign Trade
(DGFT) in matters related to the import and export of goods in India
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International
Economic Issues

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Table of Contents
1 Introduction............................................................................................................................................4
2 Components of International Economics ...............................................................................................4
3 Issues related to its components ...........................................................................................................4
3.1 Issues related to International trade: .............................................................................................4
3.1.1 Global Value Chains .................................................................................................................4
3.1.2 US-China Trade War – Implications and Opportunities for India ............................................6
3.1.3 Trade and Development ..........................................................................................................8
3.1.4 Impact of Covid-19 Pandemic on Globalisation ......................................................................9
3.2 Issues related to International finance .........................................................................................11
3.2.1 International climate financing..............................................................................................11
3.2.2 The financial crisis so far ........................................................................................................16
The Asian Financial Crisis................................................................................................17
The Global Financial Crisis ..............................................................................................19
3.3 Issues related to International Taxation .......................................................................................20
3.3.1 Global Corporate Tax and India .............................................................................................21
3.3.2 Double Taxation Avoidance Agreement ................................................................................22
3.3.3 Base Erosion and Profit Shifting ............................................................................................24
3.4 Issues related to international institutions ...................................................................................24
3.4.1 Issues related to WTO............................................................................................................25
Challenges Faced by the WTO ........................................................................................25
WTO Peace Clause ..........................................................................................................26
4 Miscellaneous .......................................................................................................................................28
4.1 Issues associated with oil price .....................................................................................................28
4.1.1 The Importance of Oil ............................................................................................................28
4.1.2 Negative Oil Prices .................................................................................................................29
4.1.3 Oil Diplomacy .........................................................................................................................30

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1 Introduction
Let us understand, what is international economics, its components and associated issues.
 International economics deals with the economic activities of various countries and their
consequences.
 In other words, international economics is a field concerned with economic interactions of
countries and effect of international issues on the world economic activity.
 International trade involves the exchange of goods or services and other factors of production,
such as labour and capital, across international borders.
 International finance studies the flow of financial assets or investment across borders.
International trade and finance became possible across nations only due to the emergence of
globalization.
 The Globalization can be defined as an integration of economics all over the world. It involves an
exchange of technological, economic, and political factors across nations due to advancement in
communication, transportation, and infrastructure systems.
 The scope of international economics is wide as it includes various concepts, such as globalization,
gains from trade, pattern of trade, balance of payments, and FDI. Apart from this, international
economics describes production, trade, and investment between countries.
2 Components of International Economics

 Microeconomics vs Macroeconomics
 International trade
 International finance
 International Taxation.
 World trade organization, International monetary fund, and World Bank. (International
institutions)
3 Issues related to its components
3.1 Issues related to International trade:

We shall be discussing the following issues related to this topic
1. Global Value Chain

2. US-China trade war
3. Trade and Development
4. Impact of Covid-19 Pandemic on Globalization
3.1.1 Global Value Chains

Why in news?
World bank released World Development Report titled “Trading for Development in the Age of
Global Value Chains”.
What is a Global value Chain (GVC)?
 A value chain refers to the “full range of activities that firms and workers do to bring a product
from its conception to its end use and beyond”.

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 When the value chain is distributed across different firms in different countries, it means that these
activities are divided among different countries. This phenomenon where value chain is spread
across the globe- it is called GVC.
- For example, a bike assembled in Finland with parts from Italy, Japan, and Malaysia and
exported to the Arab Republic of Egypt is a GVC.
 The global value chains today account for nearly 50 per cent of trade worldwide.
However, in the aftermath of COVID-19, there is an environment of uncertainty as utility of

GVCs has come under scrutiny.
Why are GVCs important?
 Hyper-specialization: GVCs promote hyper-specialization, which improves efficiency. By breaking

up complex production process, GVCs allow countries to
specialize in specific parts or tasks of production.
- E.g., China’s “Button Town,” where hundreds of
factories produce more than 60 percent of all buttons on
Earth.
 Productivity gains: In traditional trade, where products cross
borders only as finished products. In GVC trade, intermediate
inputs cross border, and domestic firms get access to greater
variety of higher-quality or less costly intermediate inputs
increasing productivity.
 - Studies suggest a 10 percent increase in the level of
GVC participation is estimated to increase average productivity by close to 1.6 percent.
 GVCs are vehicles for technology transfer: Unlike in traditional trade in which firms in different
countries compete, GVCs are networks of firms with common goals. GVCs involve longer-term
firm-to-firm relationships.
 This nature of GVCs makes them a particularly powerful vehicle for technology transfer and
sharing know-how along the value chain.
 Better jobs:
 Through firm-to-firm relationships, GVC play an important role in on-the-job learning, and
employer sponsored training within GVCs can be an effective mechanism for skill
development.
 GVCs promote capital-intensive production as it allows large scale production and precision of
parts. This generates quality jobs, and also there’s overall increase in jobs because of the large
boost to exports. GVCs pull workers out of less productive tasks into more productive jobs.
Concerns associated with GVCs
 Gains from GVC participation are not distributed equally across and within countries.
-Countries which are part of trade deal agreements have comparative advantage over other
countries because they have to pay less or no tariff.
 Synchronization of economic activity across countries makes domestic economies vulnerable to
external shocks.

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-Pandemic has highlighted how shut down in one element of supply chain will impact other parts
as well and lead to closure of entire operations, creating vulnerabilities for the domestic economy.
 GVCs amplify the costs of protectionism for trade and growth.
-Hyper specialization of GVC has led to loss of jobs in the domestic country, which has accentuated
the call for protectionism across the globe.
 Policy uncertainty is costlier under GVCs as foreign players are reluctant to participate until the
uncertainty is resolved.
 Environmental effects: GVCs are associated with more waste and more shipping in the aggregate,
both of which have environmental costs.
 However, GVCs can also promote improvements in production techniques. The knowledge
flows, technology transfers among countries can enable the development or quicker
application of more environmentally friendly techniques.
How can countries reap benefits from GVCs?
 Countries should exploit their comparative advantage by eliminating barriers to investment and
ensuring that labor is competitively priced, by avoiding overvalued exchange rates and restrictive
regulations.
 Promote linkages between domestic small and medium enterprises (SMEs) and GVC lead firms by
coordinating local suppliers, providing access to information about supply opportunities, and
supporting training and capacity building of SMEs.
 Improving customs and border procedures, promoting competition in transport services, improving
port structure and governance and improving information and communication technology (ICT)
connectivity— all are strategies that can reduce trade costs related to time and uncertainty.
 GVCs thrive on the flexible formation of networks of firms. Contract enforcement, stable and
predictable legal arrangements, protecting intellectual property rights, strengthening national
certification and testing capacity to ensure compliance with international standards etc.
 Developing countries need policies to spread gains from GVC participation across society. Access
to childcare for women, and training programs for youth, assistance to smallholders, such as
extension services and access to finance etc. will ensure inclusion.
 Global cooperation on the environment and working conditions. Standardized international data
will help expose poor production practices and induce firms to improve.
3.1.2 US-China Trade War – Implications and Opportunities for India

Issue
Recently a study by the UN trade and investment body has said that India has emerged as a winner amidst
the US-China trade war.
Background
 According to the World Bank's Global Economic Prospect, the global economy has slowed to its
lowest pace in three years because international trade and investment have been weaker than
expected. International trade has been severely affected by the trade war between the US and
China.

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 Over the course of 2018, the US administration started implementing a series of trade measures to
curtail imports, first targeting specific products (steel, aluminum, solar panels and washing
machines) and then specifically targeting imports from China.
 In the early summer 2018, US and China raised tariffs on about $50 billion worth of each other's
goods. This escalated further in September 2018 when the US introduced an additional 10% to cover
$200 billion worth of Chinese imports, to which China retaliated by imposing tariffs on imports from
the US worth an additional $60 billion.
 In June 2019, the US increased the tariffs further, to 25%. China responded by raising the tariffs on
a subset of products that were already subject to tariffs. In September 2019, the US imposed 15%
tariffs on a large subset of the remaining $300 billion worth of imports from China not yet subject
to tariffs.
Implications
 Sharp decline in bilateral trade:
 Higher prices for Chinese consumers, losses for US exporters and trade gains for other
countries. Of the $35 billion Chinese export losses in the US market, about $ 21 billion (or
62%) was diverted to other countries, while the remainder of $14 billion was either lost or
captured by the US producers.
 Higher prices for consumers:
 Tariffs imposed by the United States on China are economically hurting both countries and
consumers in the US and China. The analysis shows that US tariffs caused a 25% export loss,
inflicting a $35 billion blow to Chinese exports in the US market for tariffed goods in the first
half of 2019
 Trade diversion effects:
 Increased imports from countries not directly involved in the trade war.
 The trade diversion effects of the US-China tariff war for the first half of 2019 at about $21
billion, implying that the amount of net trade losses corresponds to about $14 billion.
 These trade diversion effects have brought substantial benefits for Taiwan (province of
China), Mexico, and the European Union.
 Trade diversion benefits to Korea, Canada and India were smaller but still substantial,
ranging from $0.9 billion to $1.5 billion
 The US tariffs on China resulted in India gaining $755 million in additional exports to the US
in the first half of 2019 by selling more chemicals ($243 million), metals and ore ($181
million), electrical machinery ($83 million) and various machinery ($68 million) as well as
increased exports in areas such as agri-food, furniture, office machinery, precision
instruments, textiles and apparel and transport equipment.
Opportunities
 India has an increasingly widening trade gap with China. Ongoing trade war may be an opportunity
for India to reduce it significantly.
 India can export the surplus agricultural products such as soybean to China after decrease in the
export from USA.
 India can become China’s software industry partner, as it looks to replace the US hegemony of
technology companies. India needs some strong pegs to pitch to China, and India’s software industry
is capable of graduating to a higher level.

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 Growing trade tensions between China and the US could enhance the flow of Chinese investment
towards India.
 India can explore opportunities to export the demands of goods by the US after restricted entry of
Chinese goods in the US economy. Of the $300 billion in Chinese exports that are subject to US
tariffs, only about 6% will be picked up by firms in the US, according to a report released by the UN
Conference on Trade and Development (UNCTAD). Here, India can be benefited along with other
nations.
 India may be able to increase its exports in textile, garments and gems and jewellery to US if Chinese
exports to the US slow down.
Concerns
 America has a trade deficit with every nation of the G7 grouping and that deficit has been increasing
each year. With India, the US has a trade deficit of $21.3 billion, which on the contrary is a trade
surplus (FOREX earning) for India, which is at risk due to the ongoing trade war.
 US wants duty reduction from India in Harley Davidson bikes, stents, knee implants and medical
devices and dairy and poultry products among others. India has already reduced duty on high
powered bikes to 50% from 75%. However, further pressure for duty reduction can affect the
domestic production.
 India should remain cautious of China's intention of dumping its overproduction of steel and
aluminium due to restrictions imposed by the US.
 The rising price of oil threatens to widen India's current account deficit, impacting India's
macroeconomic stability.
 India’s already struggling currency may further decline in value due to the ongoing trade war.
Conclusion
Even though it is a lengthy and time-consuming process, the settlement of disputes through
international conventions and rules is the need of the hour.
WTO dispute settlement resolution mechanism should be approached instead of unilateral decisions.
The benefit of the WTO process is that it prevents the damaging consequences of trade protectionism.
Nations can resolve their disputes through WTO instead of raising tariffs.
India can derive maximum benefits of the opportunities created by the ongoing trade war between
the US and China. However, it should remain careful and prepare for the challenges arising out of the
trade war.
3.1.3 Trade and Development

Why in news?
UNCTAD recently released an update on Trade and Development Report, 2019 titled From the Great
Lockdown to the Great Meltdown: Developing Country Debt in the Time of Covid-19.

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Issues faced by developing countries vis-à-vis trade
 High and rising developing country indebtedness: which could lead to sovereign defaults across the
developing world.
 In 2020 and 2021 alone, repayments on their public external debt are estimated to be nearly
$3.4 trillion.
 At end-2018 the total debt stocks of developing countries (external and domestic, private
and public) stood at 191 per cent of their combined GDP which is the highest ever recorded.
 This situation has been exacerbated due to the COVID-19 linked economic crisis in developing
countries due to reasons such as:
 Negative impact on their commodity and service exports, remittances etc: which bring in
foreign currencies required to meet external debt obligations.
 Capital outflows and depreciation of their currencies: which can cause steep increase in the
value of their foreign-currency denominated debt.
Suggested Strategy: A new ‘Global Debt Deal’ for developing countries with following steps-
 Step 1: Automatic temporary standstills: such as immediate and automatic stay on all creditor
enforcement actions, i.e., ability to seize assets or initiate court proceedings against any sovereign
creditor that fails to make debt service payments during the pandemic.
 It would provide macroeconomic “breathing space” for all crisis-stricken developing
countries by freeing up resources, normally dedicated to servicing external sovereign debt.
 It would also facilitate an effective response to the COVID-19 shock through increased
health and social expenditure in the immediate future and allow for post-crisis economic
recovery.
 Step 2: Debt relief and restructuring programs: to reassess longer-term developing country debt
sustainability, on a case-by-case basis.
 Step 3: Establishment of an “International Developing Country Debt Authority’ (IDCDA):
 It could be set up as an autonomous international organisation through an international
treaty between concerned states.
 It will oversee the implementation of first 2 steps and lay the institutional and regulatory
foundations for a more permanent international framework to guide sovereign debt
restructurings in future.
3.1.4 Impact of Covid-19 Pandemic on Globalisation

 Globalization refers to international trade and investment flows among economies often
enabled by technological developments. But today the globalization stands at a crossroads.
 From Brexit to protectionist policies by the USA, from western against immigrants to new snags in
the world’s path to free trade, this era of world politics is being called de-globalization today.
 The global order is regularly facing a challenge as we’ve never seen before. All multilateral
institutions in the world are today collapsing from the burden of their contradictions.
 The shock of the coronavirus to the global economy, which was already struggling, has also eroded
the possibility of increased inflows of money, goods, and people around the world.
De-Globalization Trend
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 Since the global economic crisis of 2008-09, the world was constantly moving in this direction and
stood at the turn of the current global economic turmoil. This can be understood through the
following data:
 There are several causes for the great stagnation in the globalization of goods and capital. It became
increasingly apparent that not all countries, societies, and people were benefitting equally from
globalization, and that soon began to be reflected in national and international politics.
COVID19 Pandemic and Globalization
 Disrupting global supply chains and international trade

 According to an analysis by the United Nations Department of Economic and Social Affairs (UN
DESA), the Coronavirus (COVID-19) epidemic is disrupting global supply chains and international
trade. The World Trade Organization (WTO) has estimated that in a worst-case scenario, global
trade could dip as much as 32%.
 Restricted movement of people and the pace of tourism
 During the past month, about 100 countries have closed their national border, which has
completely stopped the movement of people and the pace of tourism, which has hampered
global growth. Developed countries as well as many in the Asia Pacific economies that are highly
dependent on tourism and commodities trading will shrink.
 Job crisis and stimulus packages
 According to DESA, “millions of workers in almost all countries of the world are facing a job
crisis. Besides, various governments are considering large stimulus packages to deal with the
outbreak of coronavirus, which may further affect the global economy.”
 Import substitution
 Countries are facing difficulties in getting medical supplies; some find their manufacturing can’t
run as value chains are linked with China.
 Countries will reconfigure their economies to look at import substitution with greater clarity
now, as the perils and pitfalls of overdependence on foreign supplies become clear.
 Disillusion with the role of multilateral institutions
 Trade rules have worked best when the global economy is booming and isn’t facing a crisis.
Position of Multilateral Institutions like WTO is going to get worse because if countries need to
bring their domestic industries back, they would need space for policy flexibility and WTO will
be redundant there — for instance, on the issue of subsidies for small industries, no country
will like the WTO to be telling them what to do or what not to do.
 Indian Context
 The world is becoming fragmented every day, the challenge of reviving support for globalisation
will be bigger. This is a major problem for countries like India, which have benefited greatly
from the vigor of globalisation. Because of the free flow of information, ideas, jobs, and people
has given Indian citizens an unprecedented opportunity to prosper.
 But, now that the world scenario is changing rapidly, India’s policy-makers will have to find a
way to make the most of the new emerging opportunities in India. Because today the old global
supply chains are being disrupted and replaced by a new system of trade and investment.
Way Forward
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 The impact of the severity of coronavirus (COVID-19) on the global economy will depend primarily
on two factors: a period of restriction on people’s movement and economic activity in major
economies; and the real size and effectiveness of fiscal measures for the crisis.
 According to analysts, there is a need for a properly designed fiscal stimulus package to mitigate the
impact of the virus on the global economy, which includes prioritizing health expenditure to prevent
the spread of the virus and providing financial assistance to families affected by the epidemic.
 According to the Secretary-General for Economic and Social Affairs, all nations need some
immediate policy measures that not only work towards preventing epidemics and saving lives but
also help protect the weakest person in society from the economic crisis and maintain economic
growth and financial stability.
3.2 Issues related to International finance

We shall be discussing the following issues related to this topic
1. International Climate Financing

2. The Financial Crisis So Far
3.2.1 International climate financing

Why in News?
 Ahead of the United Nations Conference of Parties (COP24), the BASIC (Brazil, South Africa, China
and India) countries said that they would push developed countries on their commitment to
providing $100 billion annually from 2020 as climate finance.
 However, countries till now haven’t even agreed on what constitutes climate finance, which is
blocking the funding to vulnerable countries.
What is Climate Finance?
 Climate finance refers to local, national or transnational financing—drawn from public, private and
alternative sources of financing.
 It seeks to support mitigation and adaptation actions that will address climate change.
 The UNFCCC, the Kyoto Protocol and the Paris Agreement call for financial assistance from countries
with more financial resources to those that are less endowed and more vulnerable.
 It is in accordance with the principle of “common but differentiated responsibility and respective
capabilities”.
- Common but differentiated responsibilities (CBDR), principle of international environmental
law establishing that all states are responsible for addressing global environmental destruction
yet not equally responsible.
- The principle balances, on the one hand, the need for all states to take responsibility for global
environmental problems and, on the other hand, the need to recognize the wide differences
in levels of economic development between states.
Background
 Through the Cancun Agreements in 2010 developed countries committed to a goal of mobilizing
jointly USD 100 billion per year by 2020 to address the needs of developing countries.
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 The Green Climate Fund (GCF) was established in Cancun Agreement and designated it as an
operating entity of the financial mechanism.
 Under the Paris Agreement in 2015, developed countries confirmed this goal and agreed that prior
to 2025 a new collective quantified goal from a floor of USD 100 billion per year shall be set.
Need for Climate Finance
1. Globally the scale of needed investment

 The World Economic Forum projects that by 2020, about $5.7 trillion will need to be invested
annually in green infrastructure.
 The current commitment of $100 billion annually is only a small piece of the $5.7 trillion puzzle.
 Therefore, funding is needed to meet the investment needs in 2020 and beyond.
 Mitigation – Large-scale investments are required to significantly reduce emissions.
 Adaptation – Significant financial resources are needed to adapt to the adverse effects and reduce
the impacts of a changing climate.
 It is also critical to support developing countries to build resilience to worsening climate impacts
and to catalyzing private sector climate investment.
 Climate Finance is needed to transition the world’s economy to a low-carbon path, as direct
government funding is scarce in these countries.
2. The scale of needed investment in India:
 Under Paris Accord, India has planned to reduce its carbon emission intensity – emission per unit of
GDP – by 33-35%. To achieve these targets and build its renewable capacity India needs climate
finance.
 In September 2019, India announced its target to reach 450 GW of renewable energy generation
capacity by 2030, making it one of the most ambitious targets in the world.
 India’s Nationally Determined Contribution (NDC) estimates that the country will require ~INR 162.5
lakh crores (USD 2.5 trillion) from 2015 to 2030, or roughly INR 11 lakh crores (USD 170 billion) per
year for climate action as per climate policy initiative.
 India’s energy sector is one of the fastest growing in the world and has been attracting substantial
investments, meeting the country’s climate goals will require proportionate, transformative
investment increases at sectoral level.
 Strong financial support and timely policy interventions from the Government of India have played
a crucial role in accelerating the growth of the country’s renewable energy sector.
 But given current rates of penetration and the overall health of the sector combined with slowdown
created by the COVID-19 pandemic, the government will have to find new and alternative ways to
finance the transition and incentivize private sector participation to scale up investments for a
sustainable and transformational impact.
 Hence there is need of international climate finance for developing countries like India.
Principles of Climate Finance
 Polluter Pays
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 The 'polluters pays' principle is the commonly accepted practice according to which those who
produce pollution should bear the costs of managing it to prevent damage to human health or
the environment.
 This principle underpins most of the regulation of pollution affecting land, water and air
formally known as the 1992 Rio Declaration.
 It has also been applied more specifically to emissions of greenhouse gases which cause
climate change.
 Common but Differentiated Responsibility and Respective Capability (CBDR–RC)
 CBDR–RC is a principle within the United Nations Framework Convention on Climate Change
(UNFCCC).
 It acknowledges the different capabilities and differing responsibilities of individual countries
in addressing climate change.
 Predictability
 Climate finance must be predictable to ensure sustained flow of climate finance.
 It can be done through multi-year, medium-term funding cycles (3 – 5 years).
 This allows for adequate investment program to scale up country’s national adaptation and
mitigation priorities.
 Adequacy & Precaution
 In order to take precautionary measures to prevent or minimise the causes of climate change
as a stated goal under UNFCCC, the level of funding needs to be sufficient to keep a global
temperature within limits as possible.
 A better level of adequacy might be increased in the national estimates of the needed climate
funds, this will help build planned investments with respect to INDC.
Challenges
 At Global levels:
 There is a gap between national needs and climate finance under Nationally Determined
Contribution, there is need for additional international financial support.
 Least Developed Countries receive much less approved funding in per-capita terms from the
multilateral climate funds.
 The rate of approvals is time taking, due to which the drawee nation has insufficient funds to
complete its target and leads to stalling of projects.
 The uncertainties such as, the recent refusal of US to pay $2 billion of its pledge this has created
shortage of funds at available GCF.
 At National levels:
 In India the local market to climate finance is insufficiently involved in financial products that
support climate change adaptation.
 There is imminent failure in securing viability-gap funding either from governments, or
multilateral development banks.
 Projects in climate change has longer gestation period which deter financial institutions from
investing in them.
 Shortage of funds due to insufficient budget allocation are often interfered due to any excess
or additional grants which leads to stalling of green projects.
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Way Forward
 An analytical framework is necessary to combine potential climate risks with a systematic cost-
benefit analysis.
 Favorable policy and institutional actions are important for successful introduction or scaling up of
financial instruments.
 Climate finance should be equipped with non-institutional financial services such as market funds,
private etc.
Global Climate Financing

 The different mechanism of climate financing under Kyoto Protocol
 Clean Development Mechanism (CDM) – Kyoto Protocol

 CDM allows a country with an emission-reduction or emission-limitation commitment under
the Kyoto Protocol (Annex B Party- Developed country) to implement an emission-reduction
project in developing countries.
 Hypothetical E.g., of CDM: Australia takes up or finances some environment benefitting project
in India (solar power projects, wind power projects, afforestation etc.) and earns some carbon
credits (certified emission reduction credits). Now it shows these earned carbon credits to the
world and tells them how it is working towards meeting its Kyoto targets.
 Such projects can earn saleable certified emission reduction (CER) credits, each equivalent
to one tonne of CO2, which can be counted towards meeting Kyoto targets.
 In simple terms: Developed countries emit more and lose carbon credits. They provide financial
assistance to developing and least developed countries to create clean energy (solar, wind
energy etc.) and gain some carbon credits thereby meeting their Kyoto Quota (Kyoto units) of
emissions without violations.
 Suppose a developed country has a Kyoto Quota of 100 Carbon Credits, it can emit 100 tonnes
of CO2.
 Due to negligence, it emits 110 tonnes of CO2, i.e., 10 carbon credits are lost (Kyoto Quota
violation).
 Now the country has to make up for its lost carbon credits to avoid penalty.
 So, it invests some money (equal to 10 carbon credits) in developing and LDCs to build clean
energy infrastructure like solar plants, wind farms etc. and will make up for its 10 lost carbon
credits and avoid penalty.
 Joint Implementation (JI) – Kyoto Protocol

 Joint implementation is a mechanism where Advanced country implements the project in
advanced country unlike in Clean development mechanism where advanced country
implements the project in developing country.
 The mechanism known as “joint implementation,” allows a country with an emission reduction
commitment under the Kyoto Protocol (Annex B Party- Developed country) to earn emission
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reduction units (ERUs) from an emission-reduction project in another Annex B Party, each
equivalent to one tonne of CO2, which can be counted towards meeting its Kyoto target.
 Joint implementation offers Parties a flexible and cost-efficient means of fulfilling a part of
their Kyoto commitments, while the host Party benefits from foreign investment and
technology transfer.
 Different types of funds for financing
 Green Climate Fund (GCF) was established to limit or reduce greenhouse gas (GHG) emissions in
developing countries and to help vulnerable societies adapt to the unavoidable impacts of climate
change.
 Adaptation Fund (AF) was established under the Kyoto Protocol in 2001 and has committed US$
532 million to climate adaptation and resilience activities.
 Global Environment Fund (GEF)
 GEF has served as an operating entity of the financial mechanism since the Convention came
into force in 1994.
 It is a private equity fund focused on seeking long term financial returns by investments in clean
energy under climate change.
 In addition to providing guidance to the GEF and the GCF, parties have established two special
funds
 The Special Climate Change Fund (SCCF) and the Least Developed Countries Fund (LDCF).
 Both funds are managed by the GEF.
Climate Financing in India
 Intended Nationally Determined Contributions (INDCs) are nationally binding targets adopted
under UNFCCC. India has to reduce GHG emissions under this, which requires climate financing.
 National Clean Energy Fund:
 The Fund was created to promote clean energy, funded through an initial carbon tax on use of
coal by industries.
 Governed by an Inter-Ministerial Group with the Finance Secretary as the Chairman.
 Its mandate is to fund research and development of innovative clean energy technology in the
fossil and non-fossil fuel-based sectors.
 National Adaptation Fund:
 The fund was established in 2014 with a corpus of Rs. 100 crores with the aim of bridging the
gap between the need and the available funds.
 The fund is operated under Ministry of Environment, Forests and Climate Change (MoEF&CC).
 Clean Development Mechanism (CDM):
 It allows emission-reduction projects in developing countries to earn certified emission
reduction (CER) credits, each equivalent to one tonne of CO2.
 The CDM is the main source of income for the UNFCCC Adaptation Fund.
 The Adaptation Fund is financed by a 2% levy on CERs issued by the CDM.
 Internal Programmes:
 Compensatory Afforestation Fund Management and Planning Authority (CAMPA), Disaster
Management Fund etc.
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 A Climate Change Finance Unit was set up by Department of Economics in the Ministry of
Finance to advise and guide the MoEF&CC as well as to lead on global climate finance issues.
3.2.2 The financial crisis so far

 Financial crises are historically associated with the “4 deadly D’s”. Downturn, Deficit, Debt, and
Downgrades (and sometimes default). An examination of the aftermath of severe financial crises
shows deep and lasting effects on asset prices, output and employment.
 Unemployment rises and housing price declines extend out for five and six years, respectively.
Even recessions sparked by financial crises do eventually end, albeit almost invariably
accompanied by massive increases in government debt. The crises, more often than not, adversely
impact sovereign creditworthiness, as reflected in a higher risk premium. The effects, however, do
not appear to be “permanent.”
 The global nature of the crisis makes it far more difficult for many countries to grow their way out
through higher exports. The growth slowdown is amplified in world commodity markets, as many
emerging markets face steep declines in their terms of trade. If historical patterns hold, the current
lull in sovereign defaults or restructurings in emerging markets will likely to come to an end,
particularly if the recovery process in the world’s largest economies is delayed. Ecuador has
already defaulted and others are teetering on the brink.
 The Crisis has its impact across the globe because of the interconnected and interdependence
nature of the economies. The analysis of the impacts can be discerned at two levels. One is within
the economy and the other is across the economies. Now let’s understand what is financial crisis
and the way it unfolds by analyzing few crisis from the history.
What Is a Financial Crisis?
 Financial crisis is when asset prices see a steep decline in value, businesses and consumers are
unable to pay their debts, and financial institutions experience liquidity shortages.
 A financial crisis is often associated with a panic or a bank run during which investors sell off assets
or withdraw money from savings accounts because they fear that the value of those assets will
drop if they remain in a financial institution.
 Banking panics were at the genesis of several financial crises of the 19th, 20th, and 21st centuries,
many of which led to recessions or depressions.
 Stock market crashes, credit crunches, the bursting of financial bubbles, sovereign defaults, and
currency crises are all examples of financial crises.
 A financial crisis may be limited to a single country or one segment of financial services, but is
more likely to spread regionally or globally.
What Causes a Financial Crisis?
 A financial crisis may have multiple causes. Generally, a crisis can occur if institutions or assets
are overvalued, and can be exacerbated by irrational or herd-like investor behaviour.
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 For example, a rapid string of selloffs can result in lower asset prices, prompting individuals to
dump assets or make huge savings withdrawals when a bank failure is rumoured.
 Contributing factors to a financial crisis include systemic failures, unanticipated or uncontrollable

human behaviour, incentives to take too much risk, regulatory absence or failures, or contagions
that amount to a virus-like spread of problems from one institution or country to the next.
 If left unchecked, a crisis can cause an economy to go into a recession or depression. Even when
measures are taken to avert a financial crisis, they can still happen, accelerate, or deepen.
Financial Crisis Examples

 Stock Crash of 1929:
 This crash, starting on Oct. 24, 1929, saw share prices collapse after a period of wild speculation
and borrowing to buy shares. It led to the Great Depression, which was felt worldwide for over
a dozen years. Its social impact lasted far longer.
 One trigger of the crash was a drastic oversupply of commodity crops, which led to a steep
decline in prices. A wide range of regulations and market-managing tools were introduced as a
result of the crash.
 1973 OPEC Oil Crisis:
 OPEC members started an oil embargo in October 1973 targeting countries that backed Israel
in the Yom Kippur War. By the end of the embargo, a barrel of oil stood at $12, up from $3.
 Given that modern economies depend on oil, the higher prices and uncertainty led to the stock
market crash of 1973–74, when a bear market persisted from January 1973 to December 1974
and the Dow Jones Industrial Average lost 45% of its value.
 Asian Crisis of 1997–1998:
 This crisis started in July 1997 with the collapse of the Thai baht. Lacking foreign currency, the
Thai government was forced to abandon its U.S. dollar peg and let the baht float.
 The result was a huge devaluation that spread to much of East Asia, also hitting Japan, as well
as a huge rise in debt-to-GDP ratios. In its wake, the crisis led to better financial regulation and
supervision.
 The 2007-2008 Global Financial Crisis:
 This financial crisis was the worst economic disaster since the Stock Market Crash of 1929. It
started with a subprime mortgage lending crisis in 2007 and expanded into a global banking
crisis with the failure of investment bank Lehman Brothers in September 2008.
 Huge bailouts and other measures meant to limit the spread of the damage failed and the global
economy fell into recession.
Now let’s understand few of the important financial crisis in detail.
The Asian Financial Crisis

 In 1997–1998, Asia experienced its worst financial crisis of the 20th century. A period of
exceptional economic growth and substantial capital inflow in the mid-1990s was punctuated by
a crisis which engulfed economies including Indonesia, the Republic of Korea, and Thailand.
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 The problems began in Thailand in June 1997. Foreign money flooded into the country and fueled
speculative markets in real estate and stocks and heavy domestic consumption that contributed
to a massive current account deficit. Thailand tried to defend the value of its currency but was
forced to allow it to float in July and its value plummeted.
 In the following weeks, the contagion spread to Malaysia and the Philippines, to Indonesia and the
Republic of Korea over the next months, and eventually around the world to Brazil and the Russian
Federation, and to the United States (US) through the near collapse of Long-Term Capital
Management, then the world’s largest hedge fund.
Causes of the Asian Financial Crisis

1. Economic strategy of export led growth: The crisis was rooted in several threads of industrial,
financial, and monetary phenomena. In general, many of these relate to the economic strategy of
export led growth that had been adopted across developing East Asian economies in the years
leading up to the crisis.
2. Lax government regulations: The export led growth strategy involves close government co-
operation with manufacturers of export products, including subsidies, favorable financial deals,
and a currency peg to the U.S. dollar to ensure an exchange rate favorable to exporters.
3. Risky Adventure: The above strategies benefited the growing industries of East Asia, it also
involved some risks, which are
 Explicit and implicit government guarantees to bail out domestic industries and banks.
 Cozy relationships between East Asian conglomerates, financial institutions, and regulators, and
 Deluge of foreign financial inflows with little attention to potential risks, all contributed to a
massive moral hazard in East Asian economies, encouraging major investment in marginal, and
potentially unsound projects.
4. The crack that caused the collapse:
 What is Plaza accord?
 The Plaza Accord was a 1985 agreement among the G-5 nations—France, Germany, the United
States, the United Kingdom, and Japan—to manipulate exchange rates by depreciating the U.S.
dollar relative to the Japanese yen and the German Deutsche mark.
 The intention of the Plaza Accord was to correct trade imbalances between the U.S. and
Germany and the U.S. and Japan, but it only corrected the trade balance with the former.
 Why was the accord reversed?

 With the reversal of Plaza Accord in 1995, the governments of the U.S., Germany, and Japan
agreed to coordinate to let the U.S. dollar appreciate relative to the yen and the Deutsche Mark.
 The impacts of the reversal
 This also meant the appreciation of East Asian currencies that were pegged to the U.S. dollar,
which led to major financial pressures accumulating in these economies as Japanese and
German exports became more and more competitive with other East Asian exports.
 Exports slumped and corporate profits declined. East Asian governments and connected
financial institutions found it increasingly difficult to borrow in U.S. dollars to subsidize their
domestic industries and also maintain their currency pegs.
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 These pressures came to a head in 1997 as one after another they abandoned their pegs and
devalued their currencies, which led to the crisis.
The Global Financial Crisis

 The global financial crisis (GFC) refers to the period of extreme stress in global financial markets
and banking systems between mid-2007 and early 2009.
 During the GFC, a downturn in the US housing market was a catalyst for a financial crisis that spread
from the United States to the rest of the world through linkages in the global financial system.
 Many banks around the world incurred large losses and relied on government support to avoid
bankruptcy.
 Millions of people lost their jobs as the major advanced economies experienced their deepest
recessions since the Great Depression in the 1930s.
 Recovery from the crisis was also much slower than past recessions that were not associated with
a financial crisis.
Main Causes of the GFC

1. Excessive risk-taking in a favourable macroeconomic environment
 In the years leading up to the GFC, economic conditions in the United States and other countries
were favourable. Economic growth was strong and stable, and rates of inflation, unemployment
and interest were relatively low. In this environment, house prices grew strongly.
 Expectations that house prices would continue to rise led households, in the United States
especially, to borrow imprudently to purchase and build houses.
 A similar expectation on house prices also led property developers and households in European
countries (such as Iceland, Ireland, Spain and some countries in Eastern Europe) to borrow
excessively.
 Many of the mortgage loans, especially in the United States, were for amounts close to (or even
above) the purchase price of a house.
 A large share of such risky borrowing was done by investors seeking to make short-term profits by
‘flipping’ houses and by ‘subprime’ borrowers (who have higher default risks, mainly because their
income and wealth are relatively low and/or they have missed loan repayments in the past).
2. Increased borrowing by banks and investors

 In the lead up to the GFC, banks and other investors in the United States and abroad borrowed
increasing amounts to expand their lending and purchase MBS products. Borrowing money to
purchase an asset (known as an increase in leverage) magnifies potential profits but also magnifies
potential losses. As a result, when house prices began to fall, banks and investors incurred large
losses because they had borrowed so much.
 Additionally, banks and some investors increasingly borrowed money for very short periods,
including overnight, to purchase assets that could not be sold quickly. Consequently, they became
increasingly reliant on lenders – which included other banks – extending new loans as existing
short-term loans were repaid.
3. Regulation and policy errors
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 Regulation of subprime lending and MBS products was too lax. In particular, there was insufficient
regulation of the institutions that created and sold the complex and opaque MBS to investors. Not
only were many individual borrowers provided with loans so large that they were unlikely to be
able to repay them, but fraud was increasingly common – such as overstating a borrower's income
and over-promising investors on the safety of the MBS products they were being sold.
 In addition, as the crisis unfolded, many central banks and governments did not fully recognise the
extent to which bad loans had been extended during the boom and the many ways in which
mortgage losses were spreading through the financial system.
Impact of the Crisis

The international financial crisis originated in the sub-prime mortgage crisis. This would have remained
as a purely mortgage market crisis but for the fact that these sub-prime mortgages were securitized and
packaged into products that were rated as investments grade.
 As a result, it started affecting a host of institutions which had invested in these products. These
institutions were not confined to US alone. Financial institutions in Europe and to a much lesser
extent in East Asia had such assets on their books.
 There was mutual distrust among the financial institutions which led to freezing up of several
markets including the overnight inter-bank market.
Global Impact
The crisis rapidly spread into a global economic shock, resulting in several bank failures. Economies
worldwide slowed during this period since credit tightened and international trade declined. Housing
markets suffered and unemployment soared, resulting in evictions and foreclosures. Several businesses
failed.
 Indeed, from 2010 through 2014, multiple European countries—including Ireland, Greece,
Portugal and Cyprus—defaulted on their national debts, forcing the European Union to provide
them with “bailout” loans and other cash investments.
 These countries were also compelled to implement “austerity” measures—such as tax increases
and cuts to social benefit programs (including healthcare and retirement programs)—to repay
their debts.
 The impacts of the crisis on the financial and real sectors of the economy were also not uniform
across the countries.
- While some economies that were structurally strong were able to better withstand the crisis,
others had to be bailed out with extensive and multiple stimulus packages to overcome the
adverse effects on the domestic economies.
- The consensus opinion was that countries that curtailed the use of risky assets and encouraged
domestic investment and savings were less affected by the crisis.
- The countries that did not adequately penalize risky behaviour and those that had high rates
of consumption were more severely affected.
3.3 Issues related to International Taxation

Let’s discuss the following issues related to the topic
1. Global Corporate Tax And India

2. Double Taxation Avoidance Agreement.
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3. Base Erosion And Profit Shifting
3.3.1 Global Corporate Tax and India

Why in News?
Recently, the Finance Ministers of the G7 advanced economies secured a landmark deal on taxing
multinational companies by fixing a Global Minimum Corporate Tax Rate (GMCTR)
The decision would be placed before the G20 countries, a group of developing and developed nations, in
July 2021.
Global Minimum Corporate Tax Rate (GMCTR)
 Corporation tax: It is a direct tax imposed on the net income or profit that enterprises make from
their businesses.
 The G7 Finance Ministers have called for a global minimum corporation tax rate of at least 15%.
Need of GMCTR:
 Low Tax Jurisdictions: MNCs follow the system of locating the headquarters wherever the tax is the
lowest so that the company ends up paying the tax at a much lower rate. Therefore, the smaller
countries such as Ireland were at advantage but the bigger countries lost out on tax revenues.
 G7 countries have announced a minimum 15% tax rate on all MNCs irrespective of whichever
place they are so that the advantage of country shifting does not remain.
 There GMCTR must be fixed to avoid countries undercutting each other.
 To Bring Uniformity: GMCTR will end a decades-long race to the bottom in which countries have
competed to attract corporate giants with ultra-low tax rates and exemptions. And it will bring
uniformity in corporate taxation worldwide.
 Multilayering by MNCs for Profits: Digital giants such as Apple, Alphabet and Facebook, as well as
many other major corporations typically rely on complex webs of subsidiaries to hoover profits out
of major markets into low-tax countries such as Ireland or Caribbean nations such as the British Virgin
Islands or the Bahamas, or to central American nations such as Panama.
GMCTR and India

 Bringing Equality: In the Indian context, the GMCTR will bring equality to those people maybe
operating in India but not located in India and therefore not paying any taxes.
 Attract Investments: India is likely to benefit from the global minimum 15% corporate tax rate pact
as the effective domestic tax rate (other than in Special Economic Zones) is above the threshold.
 In all probability the concessional Indian tax regime would still work, and India would continue
to attract investments.
 India at Advantage: Due to India’s tax rates too, it will be in an advantageous position because Indian
tax rates have come at a position where India can afford to give concessions to big companies and
yet not fall down at the international tax rates.
 Challenge: Although the 15% GMCTR will not affect the current investments in India, setting up more
SEZs or giving incentives to companies to invest in India will be a challenge.
Challenges Associated
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 Bringing Global Consensus: Bringing all the major nations on the same page, especially since the
pact impinges on the right of the sovereign to decide a nation’s tax policy.
 A global minimum rate would essentially take away a tool that countries use to push policies
that suit them.
 Issues to Smaller Countries: Countries like Ireland, which has a tax rate of 12.5%, has come out
against the global minimum tax, arguing that it would be disruptive to its economic model.
 Issues to Developing Countries: IMF and World Bank data suggest that developing countries with
less ability to offer mega stimulus packages may experience a longer economic hangover than
developed nations.
 Considering the countries like Bangladesh which do not have too many advantages to offer
besides a Special Economic Zone, this decision of G7 countries might not be very conducive.
 Tackling Tax Evasion: A lower tax rate is a tool the countries can use to alternatively push economic
activity. Also, a global minimum tax rate will do little to tackle tax evasion.
 Rigidity in Rules: Once an international commitment has been made for 15%, it will be very difficult
for the national governments to say who stays on 15% and who doesn’t. It will introduce a rigidity in
the rules which might not be as favorable for countries’ economies.
Way Forward
 Effective Implementation: The idea of fixing a GMCTR is good but it needs to be ensured that the
way it is implemented is transparent so it doesn’t involve people looking for leverage for different
loopholes.
 Proper Coordination: There should be appropriate coordination between the application of the new
international tax rules including the Digital Services Taxes. Any final agreement could have major
repercussions for low-tax countries and tax havens.
 Way Ahead for India: Once this deal comes through, India shall be at an advantageous position at
the G20 summit to negotiate its double taxation avoidance agreements.
 India shall take the opportunity that will be provided by this agreement as India’s double tax
avoidance agreements have not been signed by many countries in the west with which India
has been negotiating for years.
Conclusion
 This initiative of the G7 countries is a welcome move to address the different challenges that many
countries are facing.
 Putting in place a global corporate tax at the minimum slab fixed by the G7 will majorly impact the
developing economies.
3.3.2 Double Taxation Avoidance Agreement

Double Taxation Avoidance Agreements (DTAA) is a treaty signed between two or more countries and is
applicable in cases where a taxpayer residing in one country has to earn his/her income from another
country. India has signed Double Taxation Avoidance Agreements or DTAAs with 88 countries, out of
which 85 have become effective.
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What Is DTAA?
 Double Taxation Avoidance Agreements is a treaty signed between two countries, which, through
the elimination of international double taxation, promotes the exchange of goods, services, and
investment of capital between the two countries.
 This implies that there are consented tax rates and jurisdiction on specified kinds of incomes arising
in one country to a tax resident of another nation. The taxpayers in these 88 countries can avoid
being taxed twice for the same income.
 Double taxation is an issue related to the taxation of income that crosses boundaries. DTAA can
either cover all types of income or can target a specific type of income depending upon the types of
businesses/holdings of citizens of one country in another. The following categories are covered
under the Double Taxation Avoidance Agreements (DTAA):
 services
 salary
 property
 capital gains
 savings/fixed deposit accounts
Why DTAA are needed?

1) There will be no double taxation on the investor.
2) To ensure the availability of exchange of information between the countries.
3) Ensure that there is no tax evasion.
Outcomes
1) There will be clarity on taxation front.
2) It will promote bilateral investment.
3) It provides clarity on investment.
4) It promotes Global trade.
Benefits of Double Taxation Avoidance Agreements

 Sections 90 and 91 under the Income Tax Act 1961 offers specific relief to taxpayers to avoid double
taxation. Section 90 deals with those provisions involving taxpayers who have paid tax to another
country with which India has a DTAA.
Section 91 is for those countries with which India does not have a DTAA. In effect, India provides
relief to both types of taxpayers.
 Some of the major benefits of Double Taxation Avoidance Agreements (DTAA) are mentioned below:
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 The countries under the DTAA are provided relief from double taxation. Relief on double
taxation is provided by the exemption of incomes earned abroad from tax in the resident
country or by providing credit to the extent taxes that have been already been paid abroad.
 In some cases, the DTAA also provide concessional rates of tax.
 DTAA can become an incentive for even legitimate investors to route investments through
low-tax regimes to sidestep taxation. This leads to a loss of tax revenue for the country.
 DTAA also provides tax certainty to the various investors and businesses of both the countries
through the clear allocation of taxing rights between the contracting states by Agreement.
3.3.3 Base Erosion and Profit Shifting

Context: The government has ratified the international agreement to curb base erosion and profits
shifting (BEPS)– Multilateral Convention to Implement Tax Treaty Related Measures, a bid to stop
companies from moving their profits out of the country and depriving the government of tax revenue.
Background:
BEPS is of major significance for developing countries due to their heavy reliance on corporate income
tax, particularly from multinational enterprises. Estimates since 2013 conservatively indicate annual
losses of anywhere from 4 to10 per cent of global corporate income tax revenues, or $100-$240 billion
annually.
About the Multilateral Convention to Implement Tax Treaty Related Measures to
Prevent Base Erosion and Profit Shifting:
 The Convention is an outcome of the OECD / G20 BEPS Project to tackle base erosion and profit
shifting through tax planning strategies that exploit gaps and mismatches in tax rules to artificially
shift profits to low or no-tax locations where there is little or no economic activity, resulting in little
or no overall corporate tax being paid.
 The Convention implements two minimum standards relating to prevention of treaty abuse and
dispute resolution through Mutual Agreement Procedure.
 The Convention will not function in the same way as an Amending Protocol to a single existing treaty,
which would directly amend the text of the Covered Tax Agreements. Instead, it will be applied
alongside existing tax treaties, modifying their application in order to implement the BEPS measures.
 The Convention ensures consistency and certainty in the implementation of the BEPS Project in a
multilateral context. The Convention also provides flexibility to exclude a specific tax treaty and to
opt out of provisions or parts of provisions through making of reservations.
 A list of Covered Tax Agreements as well as a list of reservations and options chosen by a country
are required to be made at the time of signature or when depositing the instrument of ratification.
3.4 Issues related to international institutions

Note: The static nature of the topic has already been covered in the topic of international institutions,
kindly refer to the chapter for the detailed information.
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3.4.1 Issues related to WTO
Challenges Faced by the WTO
The World Trade Organization (WTO) has been the cornerstone of the multilateral rules-based global
trading system since its inception in 1995.
However, even before the Covid-19 pandemic, all three of the organization’s functions were facing
challenges. The functions are
1. Providing a negotiation forum to liberalize trade and establish new rules,
2. Monitoring trade policies, and
3. Resolving disputes between its 164 members.
Moreover, with trade tensions increasingly politicized and Covid-19 creating huge economic challenges,
a modernized and fully functioning WTO is more essential than ever.
Issues Related to WTO
 China’s State Capitalism: The nature of China’s economic system, combined with the size and
growth of its economy, has created tensions in the global trading system.
 China’s state-owned enterprises present a major challenge to the free-market global trading
system.
 Backed by a thicket of subsidies and industrial policies, a domestic market that restricts
foreign competition in strategic sectors, and aided by generous state lending, China’s
private firms have been propelled into the global market and
 Now vie with U.S. and European firms for leadership in cutting-edge technologies,
including robotics, artificial intelligence, biotechnology, and telecommunications.
 However, a critical part of the problem is that the rulebook of the WTO is inadequate for
addressing the challenges that China presents in respect of intellectual property, state-
owned enterprises and industrial subsidies.
 Institutional Issues: The Appellate Body’s operations have effectively been suspended since
December 2019, as the US’s blocking of appointments has left the body without a quorum of
adjudicators needed to hear appeals.
 Lack of Transparency: There is a problem in WTO negotiations as there is no agreed definition of
what constitutes a developed or developing country at the WTO.
 Members can currently self-designate as developing countries to receive ‘special and
differential treatment’ – a practice that is the subject of much contention.
 E-commerce & Digital Trade: While the global trade landscape has changed significantly over the
past 25 years, WTO rules have not kept pace.
 In 1998, realizing that e-commerce would play a growing role in the global economy, WTO
members established a WTO e-commerce moratorium to examine all trade-related issues
relating to global electronic commerce.
 Recently, however, the moratorium has been called into question by developing countries
because of its implications for collecting revenue.
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 Moreover, as the Covid-19 pandemic accelerates the shift to e-commerce, rules to regulate
online trade will be more important than ever. But in contrast to trade in goods and services,
few international rules govern cross-border e-commerce.
 Agriculture and Development: The WTO Agreement on Agriculture, which came into force in 1995,
was an important milestone.
 Agreement on Agriculture targets reform of subsidies and high trade barriers, which distort
agricultural trade.
-Ex: Before the inception of WTO, Advanced economies like USA and Europe heavily
subsidized the agriculture production which was barrier to free trade. The subsidized goods
are cheaper than unsubsidized goods, threatening the global free trade
 However, agreement on agriculture is facing issues due to food security and development
requirements for developing countries like India.
-The rigid rules of WTO have not taken into consideration the difficulties of developing
countries like India, where subsidies have exceeded the de- minimis level. But India is
subsidizing it for food security needs and not for export purpose.
 Lack of WTO initiative towards climate change.
Way Forward
 New Set of Rules: Modernizing the WTO will necessitate the development of a new set of rules for
dealing with digital trade and e-commerce.
 WTO members will also have to deal more effectively with China’s trade policies and
practices, including how to better handle state-owned enterprises and industrial subsidies.
 Environmental Sustainability: Given the pressing issues around climate change, increased efforts to
align trade and environmental sustainability could help to both tackle climate change and
reinvigorate the WTO.
 Trade and the WTO have key roles to play in efforts to achieve the UN Sustainable
Development Goals (SDGs) and the Paris Agreement climate goals.
 For example, at the Buenos Aires Ministerial Conference in 2017, a coalition of 12 WTO
members led by New Zealand called on the WTO ‘to achieve ambitious and effective
disciplines on inefficient fossil fuel subsidies that encourage wasteful consumption’.
 Categorization: The WTO also needs to come up with better measures to categorize the countries
as developing and developed.
 Dispute settlement: Streamlining of the appointments to the appellate body is need of the hour so
that dispute settlement mechanism is not hindered by any one country.
 Adaptability: The organization needs to adapt to the changing ecosystem and frame the rules
accordingly. Ex: Coming up with rule-based order for E-commerce, which is the future of global trade.
Conclusion
In future, WTO members will have to strike a balance between moving forward with negotiations on 21 st-
century issues and keeping sight of the unresolved ‘old trade issues’ such as agriculture and development.
WTO Peace Clause

Why in news?
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India has invoked the peace clause of WTO for exceeding the ceiling on support it can offer farmers for
rice, marking the first time any country that has used this clause.
 India informed WTO that the value of its rice production was $43.67 billion in 2018-19 and it gave
subsidies worth $5 billion which is 11.46% of the value of production.
 However, the Agreement on Agriculture (AoA) under WTO has a limit pegged at 10% for developing
countries, which is a de-minimis level.
 De minimis level is minimal amount of domestic support that is allowed even though they
distort trade.
 Hence, India used peace clause and reasoned that:
 The government does not undertake exports on a commercial basis from public stockholdings.
 Further, the stocks under the programme are acquired and released in order to meet the
domestic food security needs of India's poor and vulnerable population, and not to impede
commercial trade or food security of others.
What is Peace Clause?
 After Uruguay Rounds of WTO in 1994, the Agreement on Agriculture came into existence which
provided guidance on domestic support commitments and general disciplines on domestic support.
 Under the agreement, to limit trade distorting support measures, members agreed to curb
their policies by quantifying and gradually reducing all domestic support measures through
the Aggregate Measurement of Support (AMS) or Amber box.
 Further, this subsidy should not exceed 10% de minimis level for developing countries
and 5% for developed countries.
 Also, an important provision of the AoA was the Due Restraint or ‘Peace Clause’ under Article
13, which temporarily shielded countries providing domestic support measures in
accordance with the AoA provisions from being challenged at the WTO.
• The peace clause protects a developing country’s food procurement programmes against action from
WTO members in case subsidy ceilings are breached.
Issue with Peace Clause
 The term ‘peace clause’ has been a cause of disquiet ever since India dug in its heels on the issue of
domestic food security in the World Trade Organization (WTO) negotiations of 2013, leading to a
deadlock.
 Should the WTO have a say in India’s policy of buying food grain at a fixed price from farmers and
supplying it below cost to the poor? India thinks not, but developed nations disagree.
 After the developing and emerging nations clashed on the issue in 2013, they cobbled together a
temporary ‘peace clause’ in Bali.
 The ‘peace clause’ said that no country would be legally barred from food security programmes even
if the subsidy breached the limits specified in the WTO agreement on agriculture. This ‘peace clause’
was expected to be in force for four years until 2017, by which time the protagonists hoped to find a
permanent solution to the problem.
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 India’s worry is that if the clause expires before a permanent solution is in place, food security
programmes and policies to protect farmers, such as Minimum Support Prices, would come under
siege.
 The limited window offered by the Western powers for the peace clause was seen by India as
insufficient assurance. The clause also requires full disclosure of MSPs and annual procurement for
food security programmes, which the Government fears would leave India open to questioning by
other countries on domestic matters.
 The developed nations see India as a huge market for food grains and other products, but their
produce is rendered uncompetitive when the government is willing to subsidise farmers, purchase
their produce for a minimum support price and then sell it at a loss through the public distribution
system and other channels.
 Later, the Nairobi Ministerial Conference of the WTO held in December 2015 reaffirmed, with
consensus, the Interim Peace Clause would remain in force until a permanent solution is agreed and
adopted.
4 Miscellaneous
4.1 Issues associated with oil price

4.1.1 The Importance of Oil
• From the middle of twentieth century onwards, crude oil has become one of the main indicators of
economic activity worldwide, due to its outstanding importance in the supply of the world's energy
demands. Nowadays, the importance of crude oil as the main source of energy has waned somewhat,
due to the appearance of alternative forms of energy (such as wind, water, and solar power).
• A large body of research suggests that oil price fluctuations have considerable consequences on
economic activity. Ex:
• An oil price increase should be considered good news in oil exporting countries and bad news in oil
importing countries, the reverse should be expected when the oil price decreases. The transmission
mechanisms through which oil prices have an impact on real economic activity include both supply
and demand channels.
• The supply side effects are related to the fact that crude oil is a basic input to production, and
consequently an increase in oil price leads to a rise in production costs that induces firms to lower
output.
• Oil prices changes also entail demand-side effects on consumption and investment. Consumption is
affected indirectly through its positive relation with disposable income.
Economic Growth and Oil Price Trends

Oil has always been an indicator for economic stability in modern times, much due to the World’s high
dependence on oil products. Furthermore, the price of oil is of critical importance to today's world
economy, given that oil is the largest internationally traded good, both in volume and value terms
(creating what some analysts have called a "hydrocarbon economy").
In addition, the prices of energy intensive goods and services are linked to energy prices, of which oil
makes up the single most important share. Finally, the price of oil is linked to some extent to the price of
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other fuels (even though oil is not fully substitutable for natural gas, coal, and electricity, particularly in
the transportation sector).
For these reasons, abrupt changes in the price of oil have wide-ranging ramifications for both oil producing
and consuming countries. Thus, the prevailing view among economists is that there is a strong
relationship between the growth rate of the world and oil-price changes.
4.1.2 Negative Oil Prices

US oil markets created history on 22nd April 2020 when prices of West Texas Intermediate (WTI) crude
fell to “minus” $40.32 a barrel in New York which is lowest crude oil price ever known.
How global oil prices are determined?
• Crude oil prices like any other commodity are determined by global supply and demand.
• Growing economies are engines which generate demand for oil in general and especially for
transporting goods and materials from producers to consumers.
• On the other hand, supply of crude oil in majorly controlled by a selected countries or groupings such
as OPEC (Organization of the Petroleum Exporting Countries).
• Historically, the OPEC (led by Saudi Arabia) used to work as a cartel and fix prices in a favourable band.
It could bring down prices by increasing oil production and raise prices by cutting production.
• In the recent past, the OPEC has been working with 10 other countries (including Russia), as OPEC+,
to fix the global prices and supply.
• Thus, the stability of oil prices and its seamless operations depends on
 Predictability of the global demand of oil.
 The ability of the oil-producing countries to act in consort for maintenance of supplies.
How did oil price go in negative territory?

• The plunge in the negative territory can be attributed to both supply and demand factors:
 Supply factor: The breakdown of the OPEC+ agreement between Russia and Saudi Arabia
meant the production of oil kept increasing unchecked and subsequently lowering prices.
 Demand factor: Shutting down of travel routes and global lockdown due to Covid-19 has
drastically decreased the demand for oil which has compounded the problem.
• The continuous supply of oil accompanied with the huge demand slump has created a situation where
there is a worldwide shortage of storage space for oil. Trains and ships, which were typically used to
transport oil, are being used up just for storing oil.
• In the above background, the historic event unfolded in following manner:
 The fall in prices was triggered by the expiry of May futures contracts for US West Texas
Intermediate (WTI) crude.
 A futures contract is a standard contract to buy or sell a specific commodity of
standardized quality at a certain date in the future.
 For example, if oil producers want to sell oil in the future, they can lock in their desired
price by selling a futures contract today. Alternatively, if consumers need to buy crude
oil in the future, they can guarantee the price they will pay at a future date by buying
a futures contract.
 Each contract trades for a month and May contract were due to expire on 23rd April 2020.
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 Investors holding May contracts didn’t want to take delivery of the oil and incur storage
costs.
 Oil producers on the other hand wanted to get rid of their oil even at unbelievably low prices
instead of choosing the other option — shutting production, which would have been costlier
to restart when compared to the marginal loss on May sales.
 Ultimately, for both — the holders of the delivery contract and the oil producers — it was less
costly to pay $40 a barrel and get rid of the oil instead of storing it (buyers) or stopping
production (producers).
4.1.3 Oil Diplomacy

Oil Diplomacy or Petroleum Politics has been an important aspect in the geopolitics of the Middle East
since the early 20th century. But with the advent of alternative sources of fuel and concerns regarding
climate change, the balance of powers regarding Oil Diplomacy is likely to change in the 21st century.
What is oil diplomacy?

• Oil became an important commodity during the later stages of the Industrial Revolution in the early
20th century.
• When modern warfare evolved to accommodate the growing demand for petroleum, it became an
important aspect in diplomacy.
• Thus, oil plays a key role in geopolitics as nations around the world seek to secure oil supplies through
trade, diplomacy, armed conquest or any other method it sees fit to employ.
• Usually, the country that has the largest number of oil reserves can virtually dictate any terms it sees
fit. Such petrol-rich nations can also initiate international conflicts, which is termed as Petro-
aggression.
• -Ex: An example of this is the Iraqi invasion of Iran and the Gulf War of 1990-1991.
Politics on Alternative Resources

• It has been argued that the political interests of environmental advocates, agricultural businesses,
energy security advocates and automakers, are all aligned for the increased production of ethanol.
• The reason can vary from climate change apprehensions to geopolitical necessities. In additional
alternate fuels such as ethanol’s are far cheaper to produce and safe for the environment as they can
reduce greenhouse gases by 80%.
• From around 2015 onwards, there was increasing discussion about whether the geopolitics of oil and
gas would be replaced by the geopolitics of renewable energy resources and critical materials for
renewable energy technologies.
• Some experts are of the opinion that compared to the geopolitics of fossil fuels, renewable energy
may cause more small-scale conflicts but reduce the risk of large inter-state conflicts.
Conclusion
Oil Diplomacy can have macroeconomic implications on account of the inflow and outflow of petroleum
money. This gives oil producing nations an undue advantage when it comes to exerting their influence on
the world stage.
But the rise in alternative fuels has the potential to render Oil Diplomacy Obsolete as former oil producing
countries are expected to lose their power, while the positions of former fossil fuel importers and
countries rich in renewable energy resources is expected to strengthen.
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Multiculturalism

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Contents
1 Multiculturalism Meaning ......................................................................................................................4
1.1 Definitions .......................................................................................................................................4
1.2 Examples .........................................................................................................................................4
2 Theories of Multiculturalism ..................................................................................................................5
2.1 The Melting Pot Theory ..................................................................................................................5
2.2 The Salad Bowl Theory ....................................................................................................................5
3 Characteristics of a Multicultural Society ..............................................................................................6
4 Models of Multiculturalism ....................................................................................................................7
4.1 Liberal Multiculturalism ..................................................................................................................7
4.2 Pluralist Multiculturalism ................................................................................................................7
4.3 Cosmopolitan Multiculturalism ......................................................................................................7
5 Advantages of Multiculturalism .............................................................................................................8
6 Disadvantages of Multiculturalism.........................................................................................................8
7 Multiculturalism in India ........................................................................................................................8
7.1 Historical Background .....................................................................................................................9
7.2 Multicultural Aspect of Constitution of India .................................................................................9
7.3 Problems posed by Multiculturalism ............................................................................................10
7.4 Multiculturalism and States ..........................................................................................................11
8 Diversified aspects of Multiculturalism in India ...................................................................................11
8.1 Regionalism in The Indian Context ...............................................................................................12
8.2 Religion- The Most Contentious Aspect of Multiculturalism........................................................13
8.2.1 Minority Rights and Nation Building .....................................................................................13
8.2.2 Communalism ........................................................................................................................14
8.2.2.1 Introduction ....................................................................................................................14
8.2.2.2 What is Communalism?..................................................................................................14
8.2.2.3 Factors Responsible for The Growth of Communalism in India.....................................14
8.2.2.4 Communal Riots .............................................................................................................15
8.2.2.5 Conclusion ......................................................................................................................16
8.2.3 Secularism ..............................................................................................................................17
8.2.3.1 Meaning of Secularism ...................................................................................................17
8.2.3.2 Difference Between Western Concept of Secularism and Indian Secularism ...............17
8.2.3.3 Distinctive Features of Indian Secularism ......................................................................18

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1 Multiculturalism Meaning
 The term multiculturalism is used to describe a society in which different cultures can coexist. It
signifies attempts to balance diversity against cohesion. Multiculturalism not only recognizes cultural
diversity, but also advocates that such differences should be respected and publicly affirmed.
 It maintains respect for cultural differences and does not favor assimilation of minority culture into
the dominant one. Instead of seeking a melting pot in which minority groups assimilate into the
majority culture, multiculturalism uses metaphors like salad bowl or glorious mosaic where the
minorities can maintain their distinctiveness.
 From the multiculturalism perspective, the public policy should not aim for standardization of cultural
forms or any type of uniformity or homogeneity, but instead, heterogeneity should be maintained.
 It is important to know culture and identity from which the idea of multiculturalism flows. In a macro
sense, culture is the way of life for people, their values, beliefs and practices. Culture, thus,
encompasses tradition, religion, language, moral principles and social norms. The concept of culture
is central to multiculturalism. Identity is a sense of unique and separate selfhood and sees individuals
embedded in a particular culture or social context. Identity may be multiple like gender, religion,
ethnicity etc. Identity is equated with difference as awareness of difference further magnifies an
individual’s sense of identity.
 Multiculturalism is not restricted to claims of culture and identity alone, instead, it is also a matter of
political power and economic interest since it involves demands to rectify political and economic
disadvantages suffered by people due to their membership of a marginalized group.
1.1 Definitions
 “With racial and ethnic diversity increasing across the nation as a result of increased immigration,
educational leaders were keen to embrace multiculturalism.”— Diane Ravitch
1.2 Examples
1) Canada: This country officially adopted multiculturalism in 1971. It is based on the principle of ius
solis or (the right of citizenship by birth). Further, the Multiculturalism Act of 1988 gives all members
of Canadian society the freedom to preserve and share cultural heritages, and encourages protection
and enhancement of their ancestral languages. It also asks all federal agencies to promote practices
ensuring equal employment opportunities and advancement therein.
2) Australia: It sees itself as a country of immigrants. Multiculturalism, in this nation too is based on the
right of citizenship by birth. Easy access to the naturalization process and citizenship for immigrants
has been established long ago. The government believes multiculturalism to have strengthened the
Australian society.
Concept Check
Q. Cultural diversity is important because our country, workplaces, and schools increasingly consist of
various _____, _____, and _____ groups.
A. clubs, organizations, hip

B. non-cultural, racial, and sports
C. farmers, leaders, elite
D. cultural, racial, ethnic
E. none of the above

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Answer- D
2 Theories of Multiculturalism
In sociology, multiculturalism describes the manner in which a given society deals with cultural diversity.
Based on the underlying assumption that members of often very different cultures can coexist peacefully,
multiculturalism expresses the view that society is enriched by preserving, respecting, and even
encouraging cultural diversity. In the area of political philosophy, multiculturalism refers to the ways in
which societies choose to formulate and implement official policies dealing with the equitable treatment
of different cultures. Various theories have been developed for multiculturalism.
The two primary theories or models of multiculturalism as the manner in which different cultures are
integrated into a single society are best defined by the metaphors commonly used to describe them—the
“melting pot” and the “salad bowl” theories
2.1 The Melting Pot Theory

 Melt Together: Theory assumes that various immigrant groups
will tend to “melt together,” abandoning their individual cultures
and eventually becoming fully assimilated into the predominant
society.
 American Example: Typically used to describe the assimilation of
immigrants into the United States, the melting pot theory is often
illustrated by the metaphor of a foundry’s smelting pots in which
the elements iron and carbon are melted together to create a
single, stronger metal—steel.
 In 1782, French-American immigrant J. Hector St. John de Crevecoeur wrote that in America,
“individuals of all nations are melted into a new race of men, whose labors and posterity will one
day cause great changes in the world.”
Criticism: The melting pot model has been criticized for reducing diversity, causing people to lose their
traditions, and for having to be enforced through governmental policy. For example, the U.S. Indian
Reorganization Act of 1934 forced the assimilation of nearly 350,000 Indigenous peoples into American
society without any regard for the diversity of their heritages and lifestyles.
2.2 The Salad Bowl Theory

 A more liberal theory of multiculturalism than the
melting pot: The salad bowl theory describes a
heterogeneous society in which people coexist but retain
at least some of the unique characteristics of their
traditional culture.
 Like a salad’s ingredients: Different cultures are brought
together, but rather than coalescing into a single
homogeneous culture, retain their own distinct flavors.
 Example: In the United States, New York City, with its many unique ethnic communities like “Little
India,” “Little Odessa,” and “Chinatown” is considered an example of a salad bowl society.

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 Unity in Diversity: The salad bowl theory asserts that it is not necessary for people to give up their
cultural heritage in order to be considered members of the dominant society. For example, African
Americans do not need to stop observing Kwanzaa rather than Christmas in order to be considered
“Americans.”
Criticism: On the negative side, the cultural differences encouraged by the salad bowl model can divide a
society resulting in prejudice and discrimination. In addition, critics point to a 2007 study conducted by
American political scientist Robert Putnam showing that people living in salad bowl multicultural
communities were less likely to vote or volunteer for community improvement projects.
3 Characteristics of a Multicultural Society

1) Diversity: Multicultural societies are characterized by people of different races, ethnicities, and
nationalities living together in the same community. In multicultural communities, people retain, pass
down, celebrate, and share their unique cultural ways of life, languages, art, traditions, and behaviors.
2) Instilling the values among children: The characteristics of multiculturalism often spread into the
community’s public schools, where curricula are crafted to introduce young people to the qualities
and benefits of cultural diversity.
 Though sometimes criticized as a form of “political correctness,” educational systems in
multicultural societies stress the histories and traditions of minorities in classrooms and textbooks.
 A 2018 study conducted by the Pew Research Center found that the “post-millennial” generation
of people ages 6 to 21 are the most diverse generation in American society.
Examples: Far from an exclusively American phenomenon, examples of multiculturalism are found
worldwide.
 In Argentina, for example, newspaper articles, and radio and television programs are commonly
presented in English, German, Italian, French, or Portuguese, as well as the country’s native
Spanish. Indeed, Argentina’s constitution promotes immigration by recognizing the right of
individuals to retain multiple citizenships from other countries.
 Canada’s Multiculturalism: As a key element of the country’s society, Canada adopted
multiculturalism as official policy during the premiership of Pierre Trudeau in the 1970s and 1980s.
In addition, the Canadian constitution, along with laws such as the Canadian Multiculturalism Act
and the Broadcasting Act of 1991, recognize the importance of multicultural diversity. According
to the Canadian Library and Archives, over 200,000 people—representing at least 26 different
ethnocultural groups—immigrate to Canada every year.
Concept Check
Q. Language, dress, stories, food, music and dance are part of everyone's _____
A. Culture
B. Government
C. Education system
D. Social interaction
E. None of the above
Answer- A

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4 Models of Multiculturalism
 Ayelet Shachar gives two types of multiculturalism – strong and weak. Strong multiculturalism is
centred on group identity and group rights and it gives rights to the group over its members. The
central problem for strong multiculturalists is injustice among different groups. In contrast, weak
multiculturalism focuses on intra-group complexities and accommodation. The main focus is on how
to harmonise individual rights with group rights.
 According to Andrew Heywood, there are three main models of multiculturalism:
 Liberal
 Pluralist
 Cosmopolitan
4.1 Liberal Multiculturalism

1) Freedom and toleration: These are two hallmarks of liberalism. Toleration is a willingness to allow
existence and expression of rival views.
2) Liberalism: gives an individual the right to choose his/her beliefs, cultural practices and way of life.
However, toleration extends to values, views and social practices that are compatible with autonomy
and personal freedom.
3) Emphasis on Individual freedom: Practices such as forced marriages and female circumcision will not
be endorsed by liberal multiculturalists as they are against individual freedom.
4) Will Kymlicka’s Theory on Liberal Multiculturalism: It is one of the most important theory, as he
combines the liberal values of equality and autonomy with the value of cultural membership.
4.2 Pluralist Multiculturalism

1) Value Pluralism- Central theme: This theory of cultural diversity is based on value pluralism, an idea
that there are many values which are equally correct and fundamental although they may be in
contradiction to each other.
2) Views of Isaiah Berlin: He is one of the main proponents of the idea of value pluralism. In his view,
liberal views like personal freedom and democracy have no greater moral authority than their rival
beliefs. This results in live and let live type of multiculturalism.
 However, Berlin was of the view that value pluralism can exist only within a society that respects
individual freedom. Hence, he could not prove how liberal and illiberal cultures could coexist in
the same society.
3) Views of Bhikhu Parekh: He has also given his views on pluralist multiculturalism. He argues that
multiculturalism is neither a political doctrine nor a philosophical school. Instead, it is a perspective
on the way of viewing human life.
4.3 Cosmopolitan Multiculturalism

1) It celebrates diversity as each culture can learn from the other and prospects for self-development
are offered by a world of wider cultural opportunities and lifestyle choices.
2) It endorses exploration of different cultural options from an individual’s perspective.
3) Cosmopolitan multiculturalism embraces the idea of multiple identity and hybridity.
4) It is argued that irrespective of their different cultural origins, people share the same planet and are
facing similar experiences and challenges. Hence, global consciousness and the idea of
cosmopolitanism is a running thread in this type of multiculturalism.

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5 Advantages of Multiculturalism
1) Adaptability: A person living in a multi-cultural society is easily adaptable to new situations. In these
societies, every individual develops a sense of understanding to people who may have completely
different set of beliefs and sometimes controversial beliefs. When a person is used to an ever-
changing society, changes in other fields of life such as work and education are easily adopted.
2) Open Mindedness: The concept of racism substantially reduces when living in a multi-cultural
society. The core issues of racism are due to following the ideologies of the ancestors without
understanding the real situation. Once a person starts living amongst different cultures, the person
would automatically understand why people behave in certain ways.
3) Supportive Environment: Living in a single belief system would mean that doing anything different
would go against the system. There are several cultures that strongly believe that homosexuality is a
sin and people who are homosexual are abandoned by their community. When living in a multi-
cultural society, a community that does not have the same belief system would help in
understanding and supporting the abandoned individual.
4) Fascinating: One thing about the global village is that everything they do is interesting. The various
counters are a bouquet of what the world is like. The carnivals, food festivals and celebrations are
always fun and entertaining and learning.
5) Culture of Food: The major advantage of living in a multi-cultural society is that one can taste
different cuisines without travelling. The Biryani, Thai green curry, shawarma, shepherd’s pie Turkish
grill at the global village where all an amazing encounter.
6 Disadvantages of Multiculturalism
1) Disappearance of culture: When multiple cultures live together the chances of adapting other
convenient cultures highly increase which may result in erasing an entire culture. The Khmer culture
of Cambodia adopted Theravada Buddhism over years erasing the existence of Khmer.
2) Increase of hatred: When two controversial cultures exist in the same area the chances of abuse,
threats and violence is high. The communities may try to prove one another wrong or one above the
other leading to power issues and increase in hatred such as the religion in Israel between Palestinian
and Jewish causing several causalities.
3) Host society may be affected: The culture of the host society is considerably diluted by
multiculturalism. The immigrants may or may not work for the benefit of the host society which may
be a threat to the host society.
4) Offence: If the cultures one lives in is not completely understood, the chances of offending someone
is high. In certain cultures, women should not be touched by a male apart from their husband. When
a person that greets with a hug would be an offender if he does not understand how the other culture
behaves.
7 Multiculturalism in India
Multicultural concerns have long informed India’s history and traditions, constitution and political
arrangements. Much of the writings on Indian history, culture and politics are marked by some kind of
multicultural concern. The central question in any discussion of multiculturalism in contemporary India is
how a vast, multi-ethnic country – in terms of religion, language, community, caste and tribe – has

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survived as a state in conditions of underdevelopment, mass poverty, illiteracy and extreme regional
disparities.
7.1 Historical Background

1) India - A Cradle of Civilization: India is the second most populous country (population now over a
billion) after China, and socially and culturally the most diverse in the world. Formed over many
thousands of years as a country of immigrants who brought their own cultures and traditions, India’s
diversity is proverbial.
2) India - Abode of Different religions: Although predominantly inhabited by “Hindus” (over 82 per cent)
who are regionally rooted, plural in beliefs and practices, and divided by castes and languages, India’s
population also includes a large proportion of Muslims (about 12 per cent), Sikhs, Buddhists,
Christians and Jains.
3) The diversity is coupled with enormous cultural diversity: It is based on factors like language, caste,
and ethnicity. There are 114 spoken languages in this country, of these 22 were spoken by more than
one million people. The state lists 630 communities as Scheduled Tribes. There is diversity even
among these groups and many of the identified communities are said to be internally heterogeneous,
comprising several smaller different tribes.
4) The Multi-Religious and Multicultural Character of the Indian Society: It is deeply rooted in history
from the pre-independence period. The Independence movement against a colonial regime sought
to unite the nation through its culturally diverse people together towards a nationalist goal.
5) India - Theatre of Multiple Languages: It is the home of some hundred languages and dialects and,
so far, eighteen languages have been “officially” recognized and placed under the Eighth Schedule of
the Indian Constitution. There are, however, sizeable sections of the population, most notably in
the North-East, who are a majority in their locality but whose first language is not yet “officially”
recognized. Most of the states have some dominant ethno-linguistic and ethno-religious groups
(Punjab, Jammu and Kashmir, North-East), although within each of them there are religious and
linguistic minorities.
6) Quest for National Identity: Freedom movement was a struggle for acquiring a national identity. It
sought to unify the groups belonging to various religious and cultural groups within a nationalist
fold. During the course of the nationalist struggle many culturally diverse groups were jointly and
gradually consolidated on a nationalist platform.
7) Fight for Identity: India’s social and cultural landscape is dotted with various movements towards
statehood rooted in identity searches for communities. There are such movements as Harit Pradesh
in western Uttar Pradesh, Vindhyachal in Madhya Pradesh, Telengana in Andhra Pradesh, Vidarbha
in Maharashtra, Kodagu in Karnataka, Gorkhaland and Kamtapuri in West Bengal, and Bodoland in
Assam.
7.2 Multicultural Aspect of Constitution of India

1. The Indian Constitution can be said to be a multicultural document in the International Journal on
Multicultural Societies (IJMS), sense of providing for political and institutional measures for the
recognition and accommodation of the country’s diversity.
2. Fundamental Rights: The Indian Constitution makes the conservation and cultivation of such rights
the fundamental rights of every citizen of India.
 Article 29 (1): says that any section of the citizens of India having a distinct language, script or
culture of its own shall have the fundamental right to conserve the same.

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 This means that if a cultural minority wants to preserve its own language and culture, the state
cannot by law impose on it any other culture belonging to the local majority. Both religious and
linguistic minorities are protected by this provision. The constitution also defines a positive,
directional role for the state in this respect.
 Article 29 (2): forbids any discrimination against any citizen on the basis of religion, race, caste
or language in the matter of admission into educational institutions maintained or aided by the
state.
 As far as the institutional means of protection and cultivation of minority culture is concerned,
Articles 29 (1) and 30 (1) stipulate that minorities can establish and administer educational
institutions of their own choice, and the state cannot compel them to attend institutions not to
their liking. The Supreme Court, in a series of judgments over the years, has expanded the scope
of those provisions.
3. Instruction in Mother Tongue (350 A): The constitution directs every state (federal unit) to provide
adequate facilities for instruction in the mother-tongue at the primary stage of education of
children belonging to linguistic minority groups, and empowers the President to issue proper
direction to any state (Article 350 A).
4. Unity in Diversity- Theme of Constitution: When India attained independence in 1947, the political
leadership and the framers of the Constitution kept this diversity in view while deliberating a
framework that would provide for an amalgamated yet culturally a diverse nation-state that is
based on the principle of unity in diversity.
7.3 Problems posed by Multiculturalism

India’s experiment with creating political unity out of unequal and diverse social order has not been
without problems. Multiculturalism poses various problems like,
1. Entrenchment of Identities: In the post-independence period the identities of language, religion,

caste and tribe have been used and appealed increasingly for the mobilization of political support so
much so that these diversities have acquired a sharp political presence and have become instruments
of adversarial politic.
2. Myopic Vision of Indians: It is pointed out that Indians see themselves first and foremost as members
of a caste, tribe, village, and religion. These community identities constitute people’s self-
understanding and shape their social and political choices.
3. Ever-going Conflicts: Even after so many years of independence, social and political conflicts around
the issues of religion, caste and tribe-based community identities have not diminished. On the other
hand, social conflicts have increased and so have incidents of communal violence.
 There is a demand for caste census and caste-based Khap Panchayats are active in some states. All
these pose tremendous challenges to our polity and society.
4. In the Indian context: Bhargava has identified three problems with multiculturalism in so far as
identity is concerned.
 Overemphasis on identity may be exclusive in the sense of excluding people or “others” from an
essential identity.
 Encouragement of culture particularity deepens divisions and undermines the “common
foundation for a viable society”.
 It may result in curbing individual freedom by advocating “aggressive community power over
individual freedom”, and thus corroding the values of liberal democracy.
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7.4 Multiculturalism and States

1. Strong federal character: The strength and viability of the Indian federation in accommodating
diversity is illustrated by the creation of three new states – Chhattisgarh (carved out of Madhya
Pradesh), Jharkhand (carved out of Bihar), and Uttaranchal (carved out of Uttar Pradesh).
2. Masterstroke - State’s Creation: The formation of states on the basis of language was a pledge and
a demand of the anti-colonial nationalist movements. The Indian National Congress (INC), as the main
party of independence, from the beginning of the 1900s began to encourage the idea of linguistic
states to obtain a better deal for ethnic groups, and officially endorsed the demand as early as 1920
when it reorganized its units on the basis of linguistic regional boundaries.
 The INC’s cultivation of support for ethnic groups also strengthened its bases. The essence of the
nationalist pledge in this respect was to reorganize the Indian State after independence on the
basis of linguistic reorganization of the country’s territory.
 This encouragement led to an awakening among various nationalities and ethnic groups of the
desire for self-rule and identity prior to independence. Many of the post-independence
movements for statehood had their origins in this pre-independence phase. The statehood
movements thus enjoy some kind of prior legitimacy.
 In the beginning (1950) there were twenty-seven states of differential status and powers, which
were reduced by the first major territorial reorganisation in 1956 to fourteen with equal powers
and functions.
3. Formation of States: The first state created in recognition of the linguistic principle in the post-
independence period was Andhra Pradesh (Telegu language, 1953), and that after its legendary
leader Sri Ramalu’s fast unto death. This prompted the Government of India to form the States
Reorganization Commission in 1953 and, on the basis of its recommendations, to pass the famous
States Reorganization Act of 1956.
4. Ethno-regional or linguistic Basis of formation: The basis in the first major reorganization of states
in 1956 was strongly linguistic: federal units were created to corresponded largely with linguistic
boundaries. Since 1956, the formation of new federal units in India has remained more or less a
continuous process. The basis for state creation has been ethno-regional or linguistic.
 In the 1950s and 1960s, the linguistic factor played the most determining role with the sole
exception of the creation of Punjab (1966) in which it was combined with religion. In the 1970s,
India’s north-east (now comprising seven federal units) became the area of major state
reorganization, giving birth to three new states as political recognition of tribal identity.
8 Diversified aspects of Multiculturalism in India

 Ascriptive Identity: Community identity is based on birth and ‘belonging’ rather than on some form
of acquired qualifications or ‘accomplishment’. It is what we ‘are’ rather than what we have
‘become’. We don’t have to do anything to be born into a community – in fact, no one has any choice
about which family or community or country they are born into. These kinds of identities are called
‘ascriptive’ – that is, they are determined by the accidents of birth and do not involve any choice on
the part of the individuals concerned. It is an odd fact of social life that people feel a deep sense of
security and satisfaction in belonging to communities in which their membership is entirely
accidental.
 Fostering Animosity: Each side in the conflict thinks of the other side as a hated enemy, and there is
a tendency to exaggerate the virtues of one’s own side as well as the vices of the other side. Thus,
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when two nations are at war, patriots in each nation see the other as the enemy aggressor; each side
believes that God and truth are on their side. In the heat of the moment, it is very hard for people on
either side to see that they are constructing matching but reversed mirror images of each other.
The Manifestation of ascriptive identities turning into major issues is seen in the form of Regionalism and
Religion which are discussed below.
8.1 Regionalism in The Indian Context

 Tracing the roots: Regionalism in India is rooted in India’s diversity of languages, cultures, tribes,
and religions. It is also encouraged by the geographical concentration of these identity markers in
particular regions, and fueled by a sense of regional deprivation. Indian federalism has been a means
of accommodating these regional sentiments.
 Colonial Framework: After Independence, initially the Indian state continued with the British-Indian
arrangement dividing India into large provinces, also called ‘presidencies’. (Madras, Bombay, and
Calcutta were the three major presidencies; incidentally, all three cities after which the presidencies
were named have changed their names recently).
 Nature of Provinces: These were large multi-ethnic and multilingual provincial states
constituting the major political-administrative units of a semi-federal state called the Union of
India. For example, the old Bombay State (continuation of the Bombay Presidency) was a
multilingual state of Marathi, Gujarati, Kannada and Konkani speaking people. Similarly, the
Madras State was constituted by Tamil, Telugu, Kannada and Malayalam speaking people.
 In addition to the presidencies and provinces directly administered by the British Indian
government, there were also a large number of princely states and principalities all over India.
The larger princely states included Mysore, Kashmir, and Baroda. But soon after the adoption of
the Constitution, all these units of the colonial era had to be reorganised into ethno-linguistic
States within the Indian union in response to strong popular agitations.
 Language coupled with regional and tribal identity – and not religion – has therefore provided the
most powerful instrument for the formation of ethnonational identity in India. However, this does
not mean that all linguistic communities have got statehood.
 Recent Instances: For instance, in the creation of three new states in 2000, namely Chhattisgarh,
Uttaranchal and Jharkhand, language did not play a prominent role. Rather, a combination of
ethnicity based on tribal identity, language, regional deprivation and ecology provided the basis for
intense regionalism resulting in statehood. Currently there are 28 States (federal units) and 8 Union
territories (centrally administered) within the Indian nation-state.
 Respecting regional sentiments is not just a matter of creating States: This has to be backed up with
an institutional structure that ensures their viability as relatively autonomous units within a larger
federal structure. In India this is done by Constitutional provisions defining the powers of the States
and the Centre. There are lists of ‘subjects’ or areas of governance which are the exclusive
responsibility of either State or Centre, along with a ‘Concurrent List’ of areas where both are allowed
to operate.
 Vicious Cycle of Inequality: As private investment (both foreign and Indian) is given a greater role in
economic development; considerations of regional equity get diluted. This happens because private
investors generally want to invest in already developed States where the infrastructure and other
facilities are better.
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 Need of Proactive Role of Government: Unlike private industry, the government can give some
consideration to regional equity (and other social goals) rather than just seek to maximize profits. So
left to itself, the market economy tends to increase the gap between developed and backward
regions. Fresh public initiatives will be needed to reverse current trends.
8.2 Religion- The Most Contentious Aspect of Multiculturalism

 Perhaps the most contentious of all aspects of cultural diversity are issues relating to religious
communities and religion-based identities. These issues may be broadly divided into two related
groups - the secularism and communalism set and the minority–majority set. Questions of secularism
and communalism are about the state’s relationship to religion and to political groupings that
invoke religion as their primary identity. Questions about minorities and majorities involve decisions
on how the state is to treat different religious, ethnic or other communities that are unequal in terms
of numbers and/or power (including social, economic and political power).
8.2.1 Minority Rights and Nation Building

 In Indian nationalism, the dominant trend was marked by an inclusive and democratic vision. Inclusive
because it recognised diversity and plurality. Democratic because it sought to do away with
discrimination and exclusion and bring forth a just and equitable society.
 The term ‘people’ has not been seen in exclusive terms, as referring to any specific group defined by
religion, ethnicity, race or caste.
 However, for a strong and democratic nation, special constitutional provisions are required to ensure
the rights of all groups and those of minority groups in particular. When minority is used without
qualification, it generally implies a relatively small but also disadvantaged group.
 The sociological sense of minority also implies that the members of the minority form a collectivity –
that is, they have a strong sense of group solidarity, a feeling of togetherness and belonging.
 This is linked to disadvantage because the experience of being subjected to prejudice and
discrimination usually heightens feelings of intra-group loyalty and interests.
 However, it is possible to have anomalous instances where a minority group is disadvantaged in one
sense but not in another. For example, religious minorities like the Parsis or Sikhs may be relatively
well-off economically. But they may still be disadvantaged in a cultural sense because of their small
numbers relative to the overwhelming majority of Hindus.
 Religious or cultural minorities need special protection because of the demographic dominance of
the majority.
 In democratic politics, it is always possible to convert a numerical majority into political power
through elections. This means that religious or cultural minorities – regardless of their economic or
social position – are politically vulnerable.
 They must face the risk that the majority community will capture political power and use the state
machinery to suppress their religious or cultural institutions, ultimately forcing them to abandon
their distinctive identity.
 In the long years of struggle against British colonialism, Indian nationalists understood the imperative
need to recognize and respect India’s diversity. Indeed ‘unity in diversity’ became a short hand to
capture the plural and diverse nature of Indian society.
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 The makers of the Indian Constitution were aware that a strong and united nation could be built only
when all sections of people had the freedom to practice their religion, and to develop their culture
and language.
 One of the many contentious issues that formed the backdrop of the ethnic conflict in Sri Lanka was
the imposition of Sinhalese as a national language. Likewise, any forcible imposition of a language
or religion on any group of people in India weakens national unity which is based upon a recognition
of differences.
 Indian nationalism recognizes this, and the Indian Constitution affirms this. Finally, it is useful to note
that minorities exist everywhere, not just in India. In most nation-states, there tend to be a dominant
social group whether cultural, ethnic, racial or religious. Nowhere in the world is there a nation-
state consisting exclusively of a single homogenous cultural group.
 Even where this was almost true (as in countries like Iceland, Sweden or South Korea), modern
capitalism, colonialism and large-scale migration have brought in a plurality of groups. Even the
smallest state will have minorities, whether in religious, ethnic, linguistic or racial terms.
8.2.2 Communalism
8.2.2.1 Introduction
The term communalism has its roots in the term commune or community which means a group of people
who swear allegiance to one’s own community, religion or ethnic group than the society at large. Further,
to elaborate, in sociological lexicon the concept of communalism can be seen as a form of collective
outburst of one community against the other. To understand the social phenomenon of communalism, it
is pertinent to understand the very nature of it.
8.2.2.2 What is Communalism?

It is basically an ideology which consists of three elements: -
1. A belief that people who follow the same religion have common secular interests i.e. they have same
political, economic and social interests. So, here socio- political communalities arises.
2. A notion that, in a multi-religious society like India, these common secular interests of one religion
are dissimilar and divergent from the interests of the follower of another religion.
3. The interests of the follower of the different religion or of different ‘communities’ are seen to be
completely incompatible, antagonist and hostile.
Communalism is political trade in religion. It is an ideology on which communal politics is based and
communal violence are conjectural consequences of communal ideology. Various factors are involved for
the growth of communalism.
8.2.2.3 Factors Responsible for The Growth of Communalism in India
British Policy of Divide and Rule
1) Genesis of Communalism: In the pre-independence period, the British used the policy of Divide and
Rule to weaken the nationalist aspirations by creating a cleavage between the Hindus and Muslims,
favoring one community against the other in terms of services and opportunities. It resulted in
communal tensions between the two groups and therefore, it is considered that the Hindu-Muslim
disunity took shape during the continuation of British Rule in India. In this regard, clear demarcation
was made by many historians between the ancient period of Indian history and the medieval.
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2) Seed of Communalism: Prominent among them was British historian James Mill of the early
nineteenth century. They endorsed that since ancient India was ruled by Hindu rulers, it was a period
of growth and prosperity against the continuous decay of the medieval period under the Muslim
rulers. This readily suggests that the basic character of polity in India is defined by religion which relied
on the beliefs that Indian society and culture had reached ideal heights in the ancient period. On the
contrary, Muslim communalism harped upon the glory of the Muslim rulers. Such distorted texts of
Indian history significantly contributed to the rise of communalism.
3) Growth of Communalism: During the national movement, a strong Hindu religious element was
introduced in nationalist thought. The orientalist writings which glorified the Hindu religion and period
in history became the basis for the propagation of nationalist ideas and pride for the motherland. In
the process the Muslim were seen as alien.
Role of Society
Society plays a very important role in genesis of communalism. It is important to note that Indian society
was never homogenous throughout history. It was highly diverse- culturally, religiously, caste-wise and
linguistically. But there was hardly any tension between these groups. The reasons that can be taken into
consideration for this disharmony are: The British divisive policies, competitive nature of colonial rule,
political and social structure and backwardness of colonial society with stunted economic growth.
Other factors
1. Rumors and distorted News - Rumors and distorted news publicized by media which disseminates
false information to the public.
2. Politics of appeasement - political parties resorted to the politics of appeasement whereby sanctions
were used to appease different ethnic, religious, cultural groups for votes.
3. Vote bank politics - The vote bank politics greatly followed tactics of appeasement by provisioning
services and opportunities to a few sections of the population against the other sections.
8.2.2.4 Communal Riots

Having discussed the concept of communalism, the other concept which needs discussion is “Communal
Riot”, which is a collective manifestation of religious feelings and sentiments against the others. A
communal riot, in general refers to a collective violent manifestation of one’s identity, ideas and beliefs,
etc. in relation to other religious community for the realization of certain interests. These differences are
sometimes openly manifested and sometimes hidden but presented in a subtle way. It is, most often, a
consequence of the spread of communal ideology. Many examples of communal riot could be cited in the
Indian context.
Infamous among them are the following

1. Partition of India, 1947: After partition, millions of populations were forced to move from both sides
of the border. Hindus in Pakistan and Muslims in India were killed in masses, women were raped, and
many children lost their parents. There was hatred everywhere, violence didn’t see anything except
bloodshed. Later, it turned in the problem of refugees and their rehabilitation became one of the
biggest challenges for independent India.
2. Anti-Sikh riots, 1984: This is one of the bloodsheds in India, where Sikhs in large number were
massacred by anti- Sikh mob. This massacre took place in response to the assassination of Prime
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Minister Indira Gandhi by his own Sikh body Guard in response to her actions authorizing the military
operation.
3. Ethnic cleansing of Kashmiri Hindu Pundits in 1989: Kashmir is known as the heaven of India and was
known for its Kashmiryat, i.e., the reflection of love, peace and harmony through brotherhood and
unity of Hindu, Muslims and other communities living together.
 But the brotherhood saw a serious blow due to Extremist Islamic terrorism in the Kashmir valley,
which led to mass killing and large-scale exodus of Kashmiri Pundits from the valley to the various
regions and corners of the India, giving them the status of refugee in their own country.
 Since then, the valley is under the grip of communal violence and the ongoing unrest has become
a problem for the development of the people.
4. Babri masjid demolition in Ayodhya, 1992: According to Hindu mythology, Ayodhaya is birth place of
Lord Rama and therefore it is sacred place for Hindu religion. But in medieval period Mughal general
Mir Baqi, built a mosque, named after Mughal ruler Babur. There were disputes since then and riots
also took place.
5. Muzaffarnagar violence, 2013: The cause of this ethnic clash between Jat and Muslim community is
very much disputed and has many versions. According to few, it was started after some suspicious
post on Social media platform Facebook. According to some, it was escalated after the eve teasing
case in Shamli, Uttar Pradesh. Let the reasons be unknown, but what matters is, the nature and scale
of loss to the country with respect to human resource and peace.
8.2.2.5 Conclusion
Communal violence is common now days throughout the world. They are known by various alternative
names,
As in China: The communal violence in Xinjiang province is called ethnic violence. Communal violence and
riots have also been called non-State conflict, violent civil or minorities unrest, mass racial violence, social
or inter-communal violence and ethno-religious violence.
Myanmar: Violence between Buddhists and the Muslim Rohingya, inhabit Rakhine state (formerly Arakan
province) which stretches along most of Myanmar’s coast up to the Bay of Bengal and borders the
Chittagong province of Bangladesh, erupted in 2013. Such violence in neighbouring countries like
Myanmar, Bangladesh, and Pakistan causes violence in retaliation in India also. It also catalyses the
problem of refuges, as in case of Pakistani Hindus, etc.
Sri Lanka: Sri Lanka is also facing international critics and United Nations related to ethnic clashes and
action of government against minority Tamilians, which has direct bearing on India and Sri Lanka relations
and India’s internal security.
Increasing diversity, due to influx of populations from all corners of world in western countries like USA,
UK, Canada, Australia, etc. is posing the challenge of ethnic clashes and violence in their respective
societies.
Communalism can be combated with the help of globalisation as a tool. In the globalised world, all
countries are becoming integrated and dependent on each other. Movement of people from one place to
other is becoming very easy, in such conditions to avoid such potential violence, governments are already
promoting cultural exchanges through shows, programs, heritage walk, cultural visit by students and
parliamentarians. Promoting learning of each other’s local language for easy exchange of ideas. With
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respect to this, US President Barak Obama’s message on Diwali festival can be seen as an active step to
promote cultural mingling and living peacefully. If all the countries cooperate with each other, they can
face and solve even the deadliest challenge of terrorism and groups like Al-Qaeda, ISIS, etc.
8.2.3 Secularism
8.2.3.1 Meaning of Secularism

Secularism is a principle which advocates the separation of religion from politics. It is the principle of
separation of government institutions and persons mandated to represent the state from religious
institutions and religious dignitaries. Thus, religion should be separate from aspects of state and
governance. Secularism is a normative doctrine which seeks to realize a secular society that is, one devoid
of either inter-religious domination or the intra-religious domination. It promotes freedom within
religions and equality between, as well as, within religions. It also includes separation between the state
and religion. In fact, the nature and extent of separation may take different forms, depending upon the
specific values it is meant to promote and the way in which these values are spelt out.
8.2.3.2 Difference Between Western Concept of Secularism and Indian Secularism

Western secularism Indian secularism
Interpretation of Separation of state and religion as Equal protection by the state to
Definition mutual exclusion, it means both are all religions. It reflects certain
mutually exclusive in their own spheres meanings. First secular state to
of operation. be one that protects all religions,
but does not favor one at the
cost of other and does not adopt
any religion as state religion
Interpretation of Rights Interpreted liberty as liberty of individual The idea of inter-religious
and freedom as freedom of the individual equality is at the core of Indian
and equality as equality between secularism. Equal focus has been
individuals. There is little scope for given on the inter-religious and
community-based rights or minority- the intra-religious equality. It not
based rights. only deals with the religious
freedom of the individuals but
with the minority communities
also.
Focus on Intra-religion There is a mechanism for the intra- It promotes state sponsored
or Inter-religion religion equality in the western notion reforms in the religious sphere
of secularism, not of inter-religion on equal footing.
equality thus state maintains an arm’s
length distance from religion in all
matters
Historical reason West adopted this model due to the two Indian secularism allows for
behind adoption of reasons it was more or less homogenous principled state intervention in
Secularism society in comparison to India so they all religions. Such intervention
naturally focus on the intra-religious betrays disrespect to some
domination and strict separation of the aspects of every religion. The
state from the church is emphasized to secular state does not have to
realize the individual freedom. treat each aspect of every
religion with equal respect. It
allows equal disrespect for some
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aspects of organized religions.

Example practicing social evils as
essential part of religion
In the context of India, it is sometimes argued that the concept of secularism has been imported from the
west. But it is clear from the above differences that in the west, strict church and state separation is the
main area of focus; while in India peaceful co-existence of all religions is the focus.
Constitutional Provisions Regarding Secularism in India

In India, freedom of religion is a Fundamental Right and is guaranteed through the following provisions:
 Article 25: guarantees freedom of conscience and free profession, practice and propagation of
religion.
 Article 26: Every religious denomination has the freedom to manage its religious affairs.
 Article 27: Freedom from payment of taxes for promotion of any particular religion.
 Article 28: Freedom as to attendance at religious instruction or religious worship in certain
educational institutions.
Other Constitutional safeguards regarding religion include the following:
 Article 15: Prohibition of discrimination on grounds of religion, race, caste, sex or place of birth.
 Article 16: Equality of opportunity in matters of public employment and no citizens shall be
ineligible for employment on grounds only of religion, race, caste, sex, descent, place of birth.
 Article 29: Protection of distinct language, script or culture of minorities
 Article 30: Rights of all minorities, whether based on religion or language, to establish and
administer educational institutions of their choice.
 The Preamble of India states that India is a secular country (added after 42nd Amendment Act,
1976)
8.2.3.3 Distinctive Features of Indian Secularism

 Roots of Indian Secularism: The Indian idea and practice of secularism, though was inspired by its
western origins yet, was firmly rooted in India’s own unique socio-historical circumstances- i.e. the
remarkable religious diversity in contrast to the mono-religious nature of western societies, the
freedom struggle which advocated an equal support & equal respect for all religions, upon the fact
that the practice of one’s religion was not seen as antithetical to practice of democracy but as one
which would strengthen it in the long run.
 Sarva Dharma Sambhava: The Indian conception of secularism thus recognized the deeply religious
nature of Indian society & infused the principle of equality within the practice of religion.
 Secularism was turned into a non-negotiable basic feature of constitution & the term itself was
reinvented to allow intervention of state into religious matters when it was being done to promote
not only inter religious equality (i.e., equal rights for all citizens irrespective of their religious
preferences, along with added protection for religious minorities) but also intra religious equality
(by ensuring that one sect of a religion does not dominate over other).
 State Intervention in religion: The desirability of state intervention into religious matters has been
upheld under the Indian conception of secularism to give space to progressive voices within every
religion and to allow disagreement with some aspects of religions.
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 For example, the abolition of untouchability, sati, dowry, the amendment of Hindu marriage &
inheritance laws & the demand for establishing the uniform civil code etc. can be seen as an
application of this concept.
 At the same time, the Indian ideal of secularism clearly cautions against allowing religion to
interfere in state matters, thereby disallowing mobilizing the electorate on religious lines for
winning elections on one hand while strictly spelling out that the Indian nation-state shall have no
state religion.
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Demographic
Trends

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Contents
1 Introduction ............................................................................................................................................4
2 Size, Growth and Structure ....................................................................................................................4
2.1 Size ..................................................................................................................................................4
2.2 Growth of Population .....................................................................................................................4
2.2.1 Phases of growth .....................................................................................................................5
2.2.2 Demographic Transition ..........................................................................................................5
2.3 Population Structure .......................................................................................................................6
3 Population Composition .........................................................................................................................6
3.1 Rural – Urban Composition .............................................................................................................6
3.2 Linguistic Composition ....................................................................................................................7
3.3 Religious Composition.....................................................................................................................7
3.4 Age Structure ..................................................................................................................................8
3.5 Sex Composition..............................................................................................................................9
3.6 Literacy Rate in India 1951- 2011 ...................................................................................................9
3.7 Composition of Working Population.............................................................................................10
4 Demography .........................................................................................................................................11
4.1 Malthus’s theory of population growth........................................................................................11
4.2 Neo Malthusian theory .................................................................................................................14
5 Population Growth and Economic Development ................................................................................14
5.1 Positive aspects of Population Growth on Economic Development ............................................15
5.2 Negative aspects of Population Growth on Economic Development ..........................................15
6 Population Policy of India .....................................................................................................................16
6.1 Evolution of India’s Population Policies ........................................................................................16
6.2 The National Population Policy, 2000 (NPP 2000) ........................................................................17
7 Important Issues ...................................................................................................................................20
7.1 Demographic Dividend..................................................................................................................20
7.1.1 Demographic Dividend: Definition ........................................................................................20
7.1.2 Demographic Dividend in India .............................................................................................20
7.1.3 Advantages Associated with Demographic Dividend ............................................................20
7.1.4 Challenges Associated with Demographic Dividend .............................................................21
7.1.5 What needs to be done? .......................................................................................................21
7.1.6 Way Forward..........................................................................................................................22
7.2 Is there a need for India to take urgent & coercive measures to curb population growth? . Error!
Bookmark not defined.

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7.3 Skewed Gender Ratio ....................................................................................................................22

7.3.1 Reasons for Skewed Sex Ratio ...............................................................................................23
7.3.2 Issues Related to Lower Sex Ratio at Birth ............................................................................23
7.3.3 Challenges Involved ...............................................................................................................23
7.3.4 Way Forward..........................................................................................................................24
1 Introduction
India, like many other countries, has come a long way from the initial days of evolution under
conditions of high mortality due to famines, accidents, illness, infections and war, when relatively high
levels of fertility was essential for species survival. Over the years, better equipped in dealing with
diseases and vagaries of nature, it has witnessed significant increase in life expectancy along with
steep fall in mortality.
Confronted with Malthusian growth, changing social mores and spurred by government interventions,
the population did respond to steps to reduce fertility, but the continued increase in number of
women in reproductive age has led to high number of births each year. Consequently, in the world of
seven billion people, India along with China already occupies a place in the Billionaire club and is likely
to overtake China by 2025.
2 Size, Growth and Structure

2.1 Size
 The second most populous country on earth
India accounts for more than 17 per cent of world population with meagre 2.4 per cent of the world
surface area. In contrast, the USA accounts for 7.2 percent of the surface area with only 4.5 percent
of the world population
 The state wise population distribution
As per the recent census 2011 indicates that UP continues to be the most populous state with about
200 million people (16 per cent of total population).
States of Maharashtra and Bihar (9 per cent of the total population each) have made the transition to
more than 100 million population categories. Twenty States and Union Territories now have a
population of over ten million. On the other extreme, there are five States and Union Territories in
the country that are yet to reach the one million mark.
 Decadal Growth rate
Decadal growth rate of population in India between 2001-2011 was 17.64%. It decreased from 21.54%
during 1991-2001. 2001-2011 decade for the first time (except 1911-1921) has added lesser number
of people than the previous decade. The annual growth rate of India’s population is 1.64 per cent
(2011).
2.2 Growth of Population

 Definition: Growth of population is the change in the number of people living in a particular area
between two points of time. Its rate is expressed in percentage.
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 Components of Population growth: It has two components namely; natural and induced. While the
natural growth is analyzed by assessing the crude birth and death rates, the induced components are
explained by the volume of inward and outward movement of people in any given area. The decadal
and annual growth rates of population in India are both very high and steadily decreasing over time.
There exist various phases of growth.
2.2.1 Phases of growth

The growth rate of population in India over the last one century has been caused by annual birth rate and
death rate and rate of migration and thereby shows different trends. There are four distinct phases of
growth identified within this period:
1. Phase I (1901-1921): The period from 1901-1921 is referred to as a period of stagnant or stationary
phase of growth of India’s population, since in this period growth rate was very low, even recording
a negative growth rate during 1911-1921. Both the birth rate and death rate were high keeping the
rate of increase low. Poor health and medical services, illiteracy of people at large and inefficient
distribution system of food and other basic necessities were largely responsible for a high birth and
death rates in this period.
2. Phase II (1921- 1951): The decades 1921-1951 are referred to as the period of steady population
growth. An overall improvement in health and sanitation throughout the country brought down the
mortality rate. At the same time better transport and communication system improved distribution
system. The crude birth rate remained high in this period leading to higher growth rate than the
previous phase. This is impressive at the backdrop of Great Economic Depression, 1920s and World
War II.
3. Phase III (1951-1981): The decades 1951-1981 are referred to as the period of population explosion
in India, which was caused by a rapid fall in the mortality rate but a high fertility rate of population in
the country. The average annual growth rate was as high as 2.2 per cent. It is in this period, after the
Independence, that developmental activities were introduced through a centralised planning process
and economy started showing up, ensuring the improvement of living condition of people at large.
Consequently, there was a high natural increase and higher growth rate. Besides, increased
international migration bringing in Tibetans, Bangladeshis, Nepalese and even people from Pakistan
contributed to the high growth rate.
4. Phase IV (Post 1981): In the post 1981 till present, the growth rate of country’s population though
remained high, has started slowing down gradually. A downward trend of crude birth rate is held
responsible for such a population growth. This was, in turn, affected by an increase in the mean age
at marriage, improved quality of life particularly education of females in the country etc.
2.2.2 Demographic Transition

 India at present, is at stage three of the four stage model of demographic transition. Transition from
Third stage to fourth stage indicates stable population with high mortality and fertility to stable
population with low mortality and fertility, with some of the states/UT’s already into stage four. The
four stages are namely,
 Stage 1: Less developed countries, high birth rate, high number of deaths due to preventable
causes, stable population
 Stage 2: Death rates fall due to improved public health but high fertility due to limited access to
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 Stage 3: Birth rate also falls; population continues to grow due to large number of people in
reproductive age group
 Stage 4: Stable population but at a level higher than the initial, low birth & death rates, high social
& economic development
2.3 Population Structure

 Population Pyramids represent complex changes in age structure of the population. In developed
countries, the shape is almost cylindrical instead of a pyramid because of the high life expectancy, low
fertility and relatively low population in reproductive age group. In these countries, advantages of
stable population are challenged by higher dependency ratio since the working age population is less.
 In contrast to the above, population of most of the developing countries including India consists of
large proportions of children and persons in reproductive age group. For now, and the near future,
population projections for India augur well since it will have a large segment of population in the
working age group, with considerably decreased dependency ratio putting it in a position to reap
demographic dividend.
Definition of Population Pyramid

 The population pyramid represents the breakdown of the population by gender and age at a given
point in time. It consists of two histograms, one for each gender (by convention, men on the left
and women on the right) where the numbers are shown horizontally and the ages vertically.
 The numbers by gender and by age depend on interactions between fertility, mortality and
migrations. The shape of the pyramid and its variations over the years depend above all on the
variations in fertility.
3 Population Composition
3.1 Rural – Urban Composition
 Life Expectancy at birth in India – 70 years as per world Bank Data.
 As per Census 2011, 68.8% population resided in rural areas.
 The states like Bihar and Sikkim have very high percentage of rural population.
 The states of Goa and Maharashtra have only little over half of their total population residing in
villages.
 The Union Territories, on the other hand, have smaller proportion of rural population, except Dadra
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 Urban population in India is less (31.16 percent) but growing very fast due to increasing economic
development and rural – urban migration.
 The rural-urban migration is conspicuous in the case of urban areas along the main road links and
railroads in the North Indian Plains, the industrial areas around Kolkata, Mumbai, Bengaluru –
Mysuru, Madurai – Coimbatore, Ahmedabad – Surat, Delhi – Kanpur and Ludhiana – Jalandhar.
 In the agriculturally stagnant parts of the middle and lower Ganga Plains, Telangana, non-irrigated
Western Rajasthan, remote hilly, tribal areas of northeast, along the flood prone areas of Peninsular
India and along eastern part of Madhya Pradesh, the degree of urbanisation has remained low.
3.2 Linguistic Composition

 India has over 150 spoken languages with more than 500 dialects. There are 22 scheduled languages
identified by
the
government.
 The speakers
of major Indian
languages
belong to four
language
families, which
have their sub-
families and
branches or
groups. The list
of four
language
families is
given below.
 Among the
scheduled languages, the speakers of Hindi have the highest percentage.
 The smallest language groups are Sanskrit, Bodo and Manipuri speakers (2011). However, it is noticed
that the linguistic regions in the country do not have a sharp and distinct boundary, rather they
gradually merge and overlap in their respective frontier zones.
3.3 Religious Composition

 The spatial distribution of religious communities in the country shows that there are certain states
and districts having large numerical strength of one religion, while the same may be very negligibly
represented in other states.
 Hindus are distributed as a major group in many states (ranging from 70 - 90 per cent and above)
except the districts of states along Indo- Bangladesh border, Indo-Pak border, Jammu & Kashmir, Hill
States of North-East and in scattered areas of Deccan Plateau and Ganga Plain.
 Muslims, the largest religious minority, are concentrated in Jammu & Kashmir, certain districts of
West Bengal and Kerala, many districts of Uttar Pradesh, in and around Delhi and in Lakshadweep.
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 The Christian population is distributed mostly in rural areas along the Western coast around Goa,
Kerala and also in the hill states of Meghalaya, Mizoram, Nagaland, Chotanagpur area and Hills of
Manipur.
 Sikhs are mostly concentrated in relatively small area of the country, particularly in Punjab, Haryana
and Delhi.
 Jains have major concentration in the urban areas of Rajasthan, Gujarat and Maharashtra, while the
Buddhists are concentrated mostly in Maharashtra. The other areas of Buddhist majority are Sikkim,
Arunachal Pradesh, Ladakh, Tripura, and Lahaul and Spiti in Himachal Pradesh.
 The other religions of India include Zoroastrians, tribal and other indigenous faiths and beliefs. These
groups are concentrated in small pockets scattered throughout the country.
3.4 Age Structure

 According to Census 2011, the share of adolescents i.e., up to the age group of 10-19 years is about
20.9 per cent (2011), among which male adolescents constitute 52.7 per cent and female adolescents
constitute 47.3 per cent.
 Moreover, share of people in the working age (between 15 and 59 years) is more than 60%.
 This large share of young and economically productive people in the population can be very helpful
for the economy. This is known as Demographic Dividend; the concept is discussed in detail later in
the document.
 The adolescent population is regarded as the youthful population having high economic and social
potentials, but at the same time they are quite vulnerable if not guided properly.
 There are many challenges for the society as far as these adolescents are concerned, some of which
are
 lower age at marriage,
 illiteracy – particularly female illiteracy,
 school dropouts,
 low intake of nutrients,
 high rate of maternal mortality of adolescent mothers,
 high rate of HIV and AIDS infections,
 physical and mental disability or retardedness,
 drug abuse and alcoholism,
 juvenile delinquency and commitment of crimes, etc.
 The government of India realizing the potential of the youths of the country, came up with National
Youth Policy, 2014 to channelize their energy in nation building.
National Youth Policy, 2014

 The National Youth Policy (NYP–2014) was launched in February 2014.
 The NYP–2014 has defined ‘youth’ as persons in the age group of 15–29 years.
 It proposes a holistic ‘vision’ for the youth of India: “To empower the youth of the country to achieve
their full potential, and through them enable India to find its rightful place in the community of
nations”.
 In order to achieve this Vision, all stakeholders must work towards meeting 5 key objectives:
1. Create a productive workforce.
o Education

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o Entrepreneurship
o Employment & Skill Development
2. Develop a strong and healthy generation.
o Adolescent and reproductive health.
o Promotion of sports.
o Control on drug abuse.
3. Instill social values & promote community service.
o Promotion of social values.
o Community Engagement.
4. Facilitate participation and civic engagement.
o Youth Engagement.
o Participation in governance.
5. Support youth at risk & create equitable opportunity for all.
o Inclusion
o Social Justice
3.5 Sex Composition

 National Ratio in Census 2011 = 940 (improved
from 933 in 2001 census).
 States/UTs having highest Sex Ratios: Kerala –
1084, Puducherry – 1038 [* UT having highest sex
ratio], Tamil Nadu – 995.
 States/UTs having Lowest Sex Ratios: Daman and
Diu – 618, Dadra and Nagar Haveli – 775,
Chandigarh-818, Haryana – 877 [* State having
lowest sex ratio].
 Child Sex Ratio (sex ratio in age group 0-6 years):
914 (declined from 927 in 2001).
 Declining child sex ratio in India indicates that the
sex ratio of India may further decline in future.
3.6 Literacy Rate in India 1951- 2011

 Literacy Rate of India: 74.04%
 Male Literacy Rate of India: 82.14%
 Female Literacy Rate of India: 65.4%
 States/UTs having Highest Literacy Rates in
India: Kerala – 93.91%, Lakshadweep -92.28
%, Mizoram – 91.58%
 States/UTs having Lowest Literacy Rates in
India: Bihar – 63.82%, Arunachal Pradesh –
66.9 %, Rajasthan – 67%.
 Kerala has the highest Female Literacy rate
(91.98%). Mizoram ranks second.
 Rajasthan has the lowest Female Literacy
rate (52.66%). Bihar ranks second.

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 Lakshadweep has the highest Male Literacy rate (around 96%). Kerala ranks second.
 Bihar has the lowest male Literacy rate (73.39%). Arunachal ranks second.
3.7 Composition of Working Population

 Types of workers: The population of India according to their economic status is divided into three
groups, namely; main workers, marginal workers and non-workers.
 Labour Force of the country: The main and marginal workers and non workers who are seeking
employment are included in the labour force of the country.
 High Unemployment Rate: It is observed that in India, the proportion of workers (both main and
marginal) is only 37.5 per cent (Periodic Labour Force Survey 2018-19) leaving a vast majority of about
60 per cent as non-workers.
 High dependent Population: This indicates an economic status in which there is a larger proportion
of dependent population, further indicating possible existence of large number of unemployed or
under employed people.
 Analysis of working population in Different States/ Union territories: The proportion of working
population, of the states and Union Territories show a moderate variation from about 39.6 per cent
in Goa to about 49.9 per cent in Daman and Diu.
 The states with larger percentages of workers are Himachal Pradesh, Sikkim, Chhattisgarh,
Andhra Pradesh, Karnataka, Arunachal Pradesh, Nagaland, Manipur and Meghalaya.
 Among the Union Territories, Dadra and Nagar Haveli and Daman and Diu have higher
participation rate.
 Work Participation Rate: It is understood that, in the context of a country like India, the work
participation rate tends to be higher in the areas of lower levels of economic development since large
number of manual workers are needed to perform the subsistence or near subsistence economic
activities.
 The occupational composition of India’s population: It indicates engagement of an individual in
farming, manufacturing, trade, services or any kind of professional activities. The data reveals there
is large proportion of primary sector workers compared to secondary and tertiary sectors.
 About 54.6 per cent of total working population are cultivators and agricultural labourers,
whereas only 3.8% of workers are engaged in household industries and 41.6 % are other workers
including non-household industries, trade, commerce, construction and repair and other services.
 Gender Components of Work-Force: As far as the occupation of country’s male and female
population is concerned, male workers out-number female workers in all the three sectors.
 The number of female workers is relatively high in primary sector, though in recent years there
has been some improvement in work participation of women in secondary and tertiary sectors.
 Shift from Agriculture to other sectors: It is important to note that the proportion of workers in
agricultural sector in India has shown a decline over the last few decades (58.2% in 2001 to 54.6% in
2011). Consequently, the participation rate in secondary and tertiary sector has registered an
increase.
 This indicates a shift of dependence of workers from farm-based occupations to non-farm-based
ones, indicating a sectoral shift in the economy of the country.
 The states like Himachal Pradesh and Nagaland have very large shares of cultivators. On the other
hand, states like Bihar, Andhra Pradesh, Chhattisgarh, Odisha, Jharkhand, West Bengal and
Madhya Pradesh have higher proportion of agricultural labourers.
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 The highly urbanized areas like Delhi, Chandigarh and Puducherry have a very large proportion of
workers being engaged in other services.
 This indicates not only availability of limited farming land, but also large scale urbanisation and
industrialization requiring more workers in non-farm sectors.
Concept Check
Q. The Decadal population growth rate has declined from 21.54% in 1999-2000 to ____ % during 2001-
11.
A. 17.64
B. 21.22
C. 13.59
D. 11.45
E. None of the above
Answer: A
The Decadal population growth rate has declined from 21.54% in 1999-2000 to 17.64 % during 2001-
11.
4 Demography
 Demography is the systematic study of population. The term is of Greek origin and is composed of the
two words, demos (people) and graphein (describe), implying the description of people.
 Demography studies the trends and processes associated with population including – changes in
population size; patterns of births, deaths, and migration; and the structure and composition of the
population, such as the relative proportions of women, men and different age groups.
 There are different varieties of demography, including formal demography which is a largely
quantitative field, and social demography which focuses on the social, economic or political aspects
of populations.
Among the most famous theories of demography is the one associated with the English political economist
Thomas Robert Malthus (1766-1834).
4.1 Malthus’s theory of population growth

 The Malthusian Theory of Population is the theory of exponential population and arithmetic food
supply growth. The theory was proposed by Thomas Robert Malthus. He believed that a balance
between population growth and food supply can be established through preventive and positive
checks.
 In his Essay on the Principle of Population (1798) Malthus argued that because of the strong
attraction of the two sexes, the population could increase by multiples, doubling every twenty-five
years. He contended that the population would eventually grow so large that food production would
be insufficient.
Postulates of the Theory
1. Food is necessary to the life of man and, therefore, exercises a strong check on population. In other
words, population is necessarily limited by the means of subsistence (i.e., food).
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2. Population increases faster than food

production. Whereas population increases in
geometric progression, food production
increases in arithmetic progression.
3. Population always increases when the means of
subsistence increase, unless prevented by
some powerful checks.
4. There are two types of checks which can keep
population on a level with the means of
subsistence. They are the preventive and a
positive check.
Assumptions of Malthus
Malthus based his above arguments on man’s two basic characteristics essential to the maintenance of
life:
1. The need for food, and
2. The passion between sexes.
It was the second which led people to marry at a relatively early age and would result in such a large
number of births that the population would double itself in few years if unchecked by misery and vice.
Malthus referred to two classes of checks which kept population down:

1. Positive means:
 Positive checks exercise their influence on the growth of population by increasing the death rate.
They are applied by nature. The positive checks to population are various and include every cause,
whether arising from vice or misery, floods, tsunami, etc. which in any degree contributes to shorten
the natural duration of human life.
2. Negative means:
 Malthus explicitly demanded artificial means of birth control and suggested as an alternative that
the birth rate be decreased through preventive measures such as late marriage (postponing
marriage until later age), moral restraint, and chastity (abstinence).
Analysis of Malthusian theory
 According to Malthus, preventive checks are always in operation in a civilized society, for positive
checks are crude. Malthus appealed to his countrymen to adopt preventive checks in order to avoid
vice or misery resulting from the positive checks.
 He contended that without such restraints the world would face widespread hunger, poverty and
misery.
 The ‘positive’ and ‘preventive’ checks which occur in the human population to prevent excessive
growth relate to practices affecting mortality and fertility respectively.
 Malthus saw the tension between population and resources as a major cause of the misery of much
of humanity.
 Malthus argued that positive and preventive checks are inversely related to each other. In other
words, where positive checks are very effective, the preventive checks are relatively less effective
and vice versa.
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Criticism
Malthus’s views have been widely challenged on many grounds. The main criticisms about his theory
are as under:
1. The validity of Arithmetic and Geometric ratio: It is argued that the population has rarely grown
in geometrical proportion and means of production have rarely multiplied in arithmetic progression.
Population growth is not always in geometric series. Based on the historical data, the population
does not get doubled in 25 years.
2. Overemphasis on Positive check: Malthus overemphasized the ‘positive’ checks and did not
visualize the role of ‘preventive’ checks like contraceptives and family planning. Neo-Malthusists
argued for the adoption of birth control within marriage. Human inventions in the fields of birth
control, health and nutrition, and agriculture have helped to a great extent to strike a balance
between human reproduction and food supply.
3. Neglect of technology: Malthus was also severely criticized for ignoring the role of changing
technology and the consequent transformation in the socio-economic set-up of society.
 He did not fully appreciate the extent to which improved agricultural technology and crop
fertilization could sustain a large population.
 Neo-Malthusians agree that there are absolute limits on food supply, energy and other
resources. Furthermore, they suggest that the problem is intensified by the disproportionate
consumption of such resources by so-called developed (industrialized) actions. This formulation
has been challenged by other researchers.
4. Dilution of the core arguments:
 Both the positive checks of hunger and disease referred to by Malthus do not operate today,
except the terrible disaster sometimes caused by Tsunami, Katrina, Rita, and floods or rains in
desert areas like Banner and Jaisalmer in August 2006.
 But the catastrophe of this nature in any part of the world is immediately rushed to the affected
place from surplus areas all over the world. A marked decline in the death rate even in the
developing countries is a significant factor in the context of the population spurt.
5. Pessimistic view: One of the principal weaknesses of Malthus’ thought has been that he neglected
the manpower aspect in population growth. He was a pessimist and dreaded every increase in
population. He forgot, according to Cannan, that “a baby comes to the world not only with a
mouth and a stomach, but also with a pair of hands.”
 This implies that an increase in population means an increase in manpower which may tend to
increase not only agricultural but also industrial production and thus makes the country rich by
an equitable distribution of wealth and income.
 As rightly pointed out by Seligman “The problem of population is not merely one of mere size
but of efficient production and equitable distribution.” Thus, the increase in population may be
necessary.
6. False notion of causality Principle: Moreover, natural calamities referred to above have occurred
in under--populated areas also and thus there was no causal relationship between positive checks
and overpopulation.
7. False understanding of biological forces: Malthus also failed to realize even the biological
limitations that a population cannot grow beyond certain limits.
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8. Malthus a False Prophet: The Malthusian theory is not applicable to countries for which this was
propounded. In western European countries, the bogey and pessimism of Malthus have been
overcome. His prophecy that misery will stalk these countries if they fail to check the growth of
the population through preventive checks has been proved wrong by a decline in birth rate,
adequacy of food supply, and increase in agricultural and industrial production. Thus, Malthus has
proved to be a false prophet.
Considering the criticisms natural questions arises in one’s mind whether Malthusian theory is of any
use today? let’s discuss this is the subsequent section.
Is Malthusian Theory Valid Today?

 Though the gloomy conclusions of Malthus have not turned out to be true due to several factors
which have made their appearance only in recent times, yet the essentials of the theory have not
been demolished. He said that unless preventive checks were exercised, positive checks would
operate. This is true even today. The Malthusian theory fully applies in India, discussed below in
Box.
 India at present is in that unenviable position which Malthus feared. We have the highest birth-rate
and the highest death-rate in the world. Grinding poverty, ever-recurring epidemics, famine and
communal quarrels are the order of the day. We are deficient in food supply.
 Standard of living is incredibly low in India. Who can say that Malthus was not a true prophet, if not
for his country, at any rate for the Asiatic countries like India, Pakistan and China? No wonder that
intense family planning drive is on in India at present, which is discussed later in the document.
4.2 Neo Malthusian theory

 The term neo-Malthusianism was first used in 1877 by Dr. Samuel Van Houten, one of the vice-
presidents of the Malthusian League.
 Neo-Malthusianism refers to the belief that population control through the use of contraception is
essential for the survival of the earth’s human population. It rests on the observation that resources
are limited, and that growing populations could rapidly outstrip the provision of resources including
land and food.
 Today, Neo-Malthusian’s advocate birth control (Preventive Checks) as the most practical means of
limiting population growth in contrast to Malthusian belief of positive checks, where floods, natural
catastrophe, epidemic will reduce the population.
The impact of population growth on economic development and other way is crucial for the nation. Let’s
understand the relationship in brief in the subsequent section.
5 Population Growth and Economic Development

 Population is very closely linked to the economic development of a society - The quantity, quality,
structure, distribution, and movement of a population can help or hinder the rate of economic
development.
 Scenario of Developed Country - A developed country with low population density and a low
percentage of employable people needs an increase in population in order to keep up with economic
development.
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 Scenario of underdeveloped Country - For an underdeveloped country with high population density
and a high percentage of employable people, any increase in population will be detrimental to its
economy.
 Views of Adam Smith: The consequences of population growth on economic development have
attracted the attention of economist ever since Adam Smith wrote in his “Wealth of Nations”.
 Adam Smith wrote, “The annual labour of every nation is the fund which originally supplies it with
all the necessaries and conveniences of life which it annually consumes, and which consist always
either in the immediate produce of that labour, or in what is purchased with that produce from
other nations.”
5.1 Positive aspects of Population Growth on Economic Development

 Increasing population would add to an increase in working population and active participants in the
process of economic growth and development.
 Growing population results in growing market which further leads to increase in utilization of goods
and services.
 Business activity would be spurred because of the above and as a consequence, more income and
employment will be created in the process.
5.2 Negative aspects of Population Growth on Economic Development

 If the rate of growth of population exceeds the rate of production, economic development is
hampered.
 Society with limited stock of capital- labour to be substituted for capital-Production function exhibit
the law of diminishing returns.
 (Coale-Hoover thesis) adverse effects of population growth on savings and capital formation through
the following effects (especially in Indian context)
o Age-dependency effect*
o Capital- shallowing effect**
o Investment diversion effect***
* Age dependency Ratio

 The age dependency ratio expresses the relationship between three age groups within a population:
ages 0-15, 16-64 and 65-plus. Higher values indicate a greater level of age-related dependency in the
population.
 As per the definition used by the U.S. Bureau of Labor Statistics, the "dependent population" is
defined as people ages 0-15 and 65-plus, while the "working age population" is defined as people
between ages 16 and 64.
 There are three types of age dependency ratio.
 The youth dependency ratio is the population ages 0-15 divided by the population ages 16-64. The
formula the same is
-The formula for the youth dependency ratio is: ([Population ages 0-15] ÷ [Population ages 16-
64]) × 100
 The old-age dependency ratio is the population ages 65-plus divided by the population ages 16-
64.
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-The old-age dependency ratio is calculated as: ([Population ages 65-plus] ÷ [Population ages 16-
64]) × 100
 The total age dependency ratio is the sum of the youth and old-age ratios.
-The total dependency ratio is calculated as: (([Population ages 0-15] + [Population ages 65-plus])
÷ [Population ages 16-64]) × 100
** Capital-shallowing effect
 If capital input grows slower than the growth in labour input, then the amount of capital per worker
declines. This is known as capital shallowing.
 On the other hand, economists use the term capital deepening to describe an increase in the amount
of capital per worker in the economy.
*** Investment Diversion effect

 The concept of the investment diversion is originated by Kindleberger (1966). It defines the investment
diversion effect as increased direct investment in certain countries and diminished direct investment
in others within the region as rearrangement of the production facilities.
 The effect is observed in Indian context because of trade agreements. Recently India backed out of
regional comprehensive economic partnership (RCEP), losing large share of investment and profits.
6 Population Policy of India

 Introduction: The status of the economy determines the appropriate level of population. Population
policy must be developed according to the following guidelines:
 It must be based on the society's economic development
 Since economy and population are closely related, they must both be worked on at the same
time; and
 Both the quantity and quality of life of the population must also be worked on at the same
time.
 Dealing with the relationship between population and the economic development of a society
properly can bring about rapid improvement in the economic development and standard of living
of that society.
6.1 Evolution of India’s Population Policies

Even before independence, attempts were made to come up with recommendations and solutions to
India’s burgeoning population problem. The efforts both pre- and post-independence are mentioned
below.
 Radha Kamal Mukherjee Committee (1940): In 1940, the Indian National Congress appointed a
committee headed by a social scientist Radha Kamal Mukherjee to suggest solutions to arrest the
population which has started increasing rapidly after 1921. The committee recommended self-control,
generating awareness of cheap and safe birth control measures, discouraging polygamy, among
others, as measures to bring down the rate of population growth.
 Bhore Committee: The Health Survey and Development committee under Sir Joseph Bhore
recommended ‘deliberate limitation of family’ as a measure to control the population growth. This
committee was set up in 1943 and submitted its report in 1946.
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 India became one of the first developing countries to come up with a state-sponsored family planning
programme in the 1950s.
 A population policy committee was established in 1952. However, the policies framed in the early
fifties were largely arbitrary and so unsuccessful.
 In 1956, a Central Family Planning Board was set up and its focus was on sterilisation.
 In 1976, GOI announced the first National Population Policy. Some of the measures to check the
population growth as part of this policy include:
 Increased the minimum legal marriageable age for boys and girls to 21 and 18 respectively.
 Providing monetary incentives for employing birth control.
 Improving women’s literacy levels through formal and informal channels.
 Population was made a criterion in deciding the quantum of central assistance to states.
 Using the different forms of media to popularise family welfare programmes.
 Introducing population education into the formal education system.
 In 1977, after the Emergency ended, the new government discarded the use of force in family
planning and the family planning programme was renamed as the family welfare programme.
 The National Health Policy was adopted in 1983 which emphasised ‘securing the small family norm
through voluntary efforts and moving towards the goal of population stabilization’.
 A Committee on Population was appointed in 1991 which submitted its report in 1993 in which it
recommended the formulation of a National Population Policy to take ‘a long-term holistic view of
development, population growth, and environmental protection’ and to ‘suggest policies and
guidelines [for] formulation of programmes’ and ‘a monitoring mechanism with short- medium- and
long-term perspectives and goals’.
 Accordingly, an Expert Group headed by Dr. MS Swaminathan was set up to create the draft national
population policy.
 The National Population Policy finally came into force in 2000, which is discussed below.
6.2 The National Population Policy, 2000 (NPP 2000)

 The National Population Policy, 2000 affirms the commitment of government towards voluntary and
informed choice and consent of citizens while availing reproductive health care services, and
continuation of the target free approach in administering family planning services.
 The NPP 2000 provides a policy framework for advancing goals and prioritizing strategies during the
next decade, to meet the reproductive and child health needs of the people of India, and to achieve
net replacement levels (TFR) by 2010.
 The immediate objective of the NPP 2000 is to address the unmet needs for contraception, health
care infrastructure, and health personnel, and to provide integrated service delivery for basic
reproductive and child health care.
 The medium-term objective is to bring the TFR (Total fertility level) to replacement levels by 2010,
through vigorous implementation of inter-sectoral operational strategies.
 The long-term objective is to achieve a stable population by 2045, at a level consistent with the
requirements of sustainable economic growth, social development, and environmental protection.
 Details of the policy: Twelve strategic themes were identified, which must be simultaneously pursued
in "stand alone" or inter-sectoral programmes in order to achieve the national socio-demographic
goals for 2010. They are:
1. Decentralised Planning and Programme Implementation
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The 73rd and 74th Constitutional Amendments Act, 1992, made health, family welfare, and
education a responsibility of village panchayats. The Panchayati raj institutions are an important
means of furthering decentralised planning and programme implementation in the context of the
NPP 2000.
2. Convergence of Service Delivery at Village Levels
In order to reach household levels, a one-stop, integrated and coordinated service delivery should
be provided at village levels, for basic reproductive and child health services.
3. Empowering Women for Improved Health and Nutrition
Programmes for Safe Motherhood, Universal Immunisation, Child Survival and Oral Rehydration
have been combined into an Integrated Reproductive and Child Health Programme, which also
includes promoting management of STIs and RTIs.
4. Child Health and Survival
Child survival interventions i.e., universal immunisation, control of childhood diarrhoeas with oral
rehydration therapies, management of acute respiratory infections, and massive doses of Vitamin
A and food supplements have all helped to reduce infant and child mortality and morbidity.
5. Meeting the Unmet Needs for Family Welfare Services
In both rural and urban areas there continue to be unmet needs for contraceptives, supplies and
equipment for integrated service delivery, mobility of health providers and patients, and
comprehensive information.
6. Under-Served Population Groups
 Urban Slums
 Tribal Communities, Hill Area Populations and Displaced and Migrant Populations
 Adolescents
 Increased Participation of Men in Planned Parenthood
These groups are targeted Specifically and taken care in better manner.
7. Diverse Health Care Providers
Given the large unmet need for reproductive and child health services, and inadequacies in health
care infrastructure. It is imperative to increase the numbers and diversify the categories of health
care providers.
8. Collaboration with and Commitments from Non-Government Organisations and the Private
Sector
 Where government interventions or capacities are insufficient, and the participation of the
private sector unviable, focused service delivery by NGOs may effectively complement
government efforts.
 Triggered by rising incomes and institutional finance, private health care has grown
significantly, with an impressive pool of expertise and management skills, and currently
accounts for nearly 75 percent of health care expenditures.
9. Mainstreaming Indian Systems of Medicine and Homeopathy
Utilisation of ISMH (Indian System of Medicine and Homeopathy) in basic reproductive and child
health care will expand the pool of effective health care providers, optimize utilisation of locally
based remedies and promote low-cost health care.
10. Contraceptive Technology and Research on Reproductive and Child Health
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The International Institute of Population Sciences, and the population research centres which have
been set up to pursue applied research in population related matters, need to be revitalised and
strengthened.
11. Providing for the Older Population
The Ministry of Social Justice and Empowerment has adopted in January 1999 a National Policy
on Older Persons. It has become important to build in geriatric health concerns in the population
policy.
12. Information, Education, and Communication
Information, education and communication (IEC) of family welfare messages must be clear,
focused and disseminated everywhere, including the remote corners of the country, and in local
dialects.
Result
 The National Family Planning Programme of the Ministry of Health & Family Welfare is guided by the
tenets of the National Population Policy 2000 and oversees its implementation.
 Under this program the service delivery data is triangulated and further the program is regularly
reviewed through annual review meetings, supportive supervision visits, common review missions etc.
 As a result of the Government’s efforts, the successes achieved are enumerated below:
 The Total Fertility Rate (TFR) has declined from 2.9 in 2005 to 2.2 in 2017 (Sample Registration
System).
 25 out of 37 States/UTs have already achieved replacement level fertility of 2.1 or less.
 The Decadal growth rate has declined from 21.54% in 1999-2000 to 17.64 % during 2001-11.
 The Crude Birth Rate (CBR) has declined from 23.8 to 20.2 from 2005 to 2017 (SRS).
 The Teenage birth rate has halved from 16 % (National Family Health Survey III) to 8 % (NFHS IV).
Note: Kindly refer to latest Schemes and Reports for the Census details of India and other latest
information regarding the population trends of India.
Concept Check
Q.1) How many strategic themes were identified regarding National Population Policy 2000?
A. 12
B. 8
C. 15
D. 10
E. 18
Answer: A
As part of National Population Policy 2000 implementation, 12 strategic themes were identified, which
must be simultaneously pursued in "stand alone" or inter-sectoral programmes in order to achieve the
national socio-demographic goals.
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7 Important Issues
7.1 Demographic Dividend
7.1.1 Demographic Dividend: Definition

Demographic dividend refers to the growth in an economy that is the result of a change in the age
structure of a country’s population. The change in age structure is typically brought on by a decline in
fertility and mortality rates.
 The demographic advantage or ‘dividend’ to be derived from the age structure of the population is
due to the fact that India is (and will remain for some time) one of the youngest countries in the
world. A third of India’s population was below 15 years of age in 2000.
 According to United Nations Population Fund (UNFPA), demographic dividend means, "the economic
growth potential that can result from shifts in a population’s age structure, mainly when the share of
the working-age population (15 to 64) is larger than the non-working-age share of the population (14
and younger, and 65 and older)".
7.1.2 Demographic Dividend in India

 India has 62.5% of its population in the age group of 15-59 years which is ever increasing and will be
at the peak around 2036 when it will reach approximately 65%.
 These population parameters indicate an availability of demographic dividend in India, which started
in 2005-06 and will last till 2055-56.
 According to Economic Survey 2018-19, India’s Demographic Dividend will peak around 2041, when
the share of working-age, i.e., 20-59 years, population is expected to hit 59%.
 India- Youngest population in the World: India has one of the youngest populations in an aging world.
By 2020, the median age in India will be just 28, compared to 37 in China and the US, 45 in Western
Europe, and 49 in Japan.
 Bulge in Working - age Population: Since 2018, India’s working-age population (people between 15
and 64 years of age) has grown larger than the dependent population — children aged 14 or below as
well as people above 65 years of age. This bulge in the working-age population is going to last till 2055,
or 37 years from its beginning. This transition happens largely because of a decrease in the total
fertility rate (TFR, which is the number of births per woman) after the increase in life expectancy gets
stabilised.
 A study on demographic dividend in India by United Nations Population Fund (UNFPA) throws up
two interesting facts.
 The window of demographic dividend opportunity in India is available for five decades from 2005-
06 to 2055-56, longer than any other country in the world.
 This demographic dividend window is available at different times in different states because of
differential behaviour of the population parameters.
7.1.3 Advantages Associated with Demographic Dividend

 Better economic growth – Better economic growth brought about by increased economic activities
due to higher working age population and lower dependent population. It will be channelized in
following ways:
 Increased Labour Force that enhances the productivity of the economy.
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 Increased fiscal space created by the demographic dividend to divert resources from spending on
children to investing in physical and human infrastructure.
 Rise in women’s workforce that naturally accompanies a decline in fertility, and which can be a
new source of growth.
 Increase in savings rate, as the working age also happens to be the prime period for saving.
 A massive shift towards a middle-class society, that is, the rise of aspirational class.
 Rapid industrialisation and urbanisation because of higher number of employment seeking
population that would force higher economic activities.
 Empirical Evidence - Demographic dividend has historically contributed up to 15 % of the overall
growth in advanced economies.
 Japan was among the first major economies to experience rapid growth because of changing
population structure.
 The country’s demographic-dividend phase lasted from 1964 to 2004.
 Rise in workforce - With more than 65% of working age population, India will rise as an economic
superpower, supplying more than half of Asia’s potential workforce over the coming decades.
 Effective policy making - Fine-tuning the planning and implementation of schemes and programmes
by factoring in population dynamics is likely to yield greater socio-economic impact and larger benefits
for people.
7.1.4 Challenges Associated with Demographic Dividend

 Asymmetric demography - The growth in the working-age ratio is likely to be concentrated in some
of India’s poorest states and the demographic dividend will be fully realized only if India is able to
create gainful employment opportunities for this working-age population.
 Lack of skills - Most of the new jobs that will be created in the future will be highly skilled and lack of
skill in Indian workforce is a major challenge. India may not be able to take advantage of the
opportunities, due to a low human capital base and lack of skills.
 Low human development parameters - India ranks 131 out of 189 countries in UNDP’s Human
Development Index, which is alarming. Therefore, health and education parameters need to be
improved substantially to make the Indian workforce efficient and skilled.
 Informal nature of economy - It is another hurdle in reaping the benefits of demographic transition
in India.
 Jobless growth - There is mounting concern that future growth could turn out to be jobless due to de-
industrialization, de-globalization, the fourth industrial revolution and technological progress. As per
the NSSO Periodic Labour Force Survey 2017-18, India’s labour force participation rate for the age-
group 15-59 years is around 53%, that is, around half of the working age population is jobless.
7.1.5 What needs to be done?

 Building human capital - Investing in people through healthcare, quality education, jobs and skills
helps build human capital, which is key to supporting economic growth, ending extreme poverty, and
creating a more inclusive society.
 Skill development to increase employability of young population. India’s labour force needs to be
empowered with the right skills for the modern economy. Government has established the
National Skill Development Corporation (NSDC) with the overall target of skilling/ up skilling 500
million people in India by 2022.
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 Education - Enhancing educational levels by properly investing in primary, secondary and higher
education. India, which has almost 41% of population below the age of 20 years, can reap the
demographic dividend only with a better education system. Also, academic-industry collaboration
is necessary to synchronise modern industry demands and learning levels in academics.
 Establishment of Higher Education Finance Agency (HEFA) is a welcome step in this direction.
 Health - Improvement in healthcare infrastructure would ensure higher number of productive days
for young labour force, thus increasing the productivity of the economy.
 Success of schemes like Ayushman Bharat and National Health Protection scheme (NHPS) is
necessary. Also, nutrition level in women and children needs special care with effective
implementation of Integrated Child Development (ICDS) programme.
 Job Creation - The nation needs to create ten million jobs per year to absorb the addition of young
people into the workforce. Promoting businesses’ interests and entrepreneurship would help in
job creation to provide employment to the large labour force.
 India’s improved ranking in the World Bank’s Ease of Doing Business Index is a good sign.
 Schemes like Start-up India and Make in India, if implemented properly, would bring the
desired result in the near future.
 Urbanization - The large young and working population in the years to come will migrate to urban
areas within their own and other States, leading to rapid and large-scale increase in urban population.
How these migrating people can have access to basic amenities, health and social services in urban
areas need to be the focus of urban policy planning.
 Schemes such as Smart City Mission and AMRUT needs to be effectively and carefully
implemented.
7.1.6 Way Forward

India is on the right side of demographic transition that provides golden opportunity for its rapid socio-
economic development, if policymakers align the developmental policies with this demographic shift. To
reap the demographic dividend, proper investment in human capital is needed by focusing on education,
skill development and healthcare facilities. This demographic transition also brings complex challenges
with it. If the increased workforce is not sufficiently skilled, educated and provided gainful employment,
we would be facing demographic disaster instead. By learning from global approaches from countries such
as Japan and Korea and designing solutions considering the domestic complexities, we would be able to
reap the benefits of demographic dividend.
7.2 Skewed Gender Ratio

Sample Registration System (SRS) Statistical report (2018) which measures the global population
projection, highlighted that fertility rate has been declining in India for some time now. The report
estimated that India’s Total Fertility Rate (TFR) was around 2.2 in the year 2018, which is close to the
replacement rate of 2.1. This clearly marks the success of government measures to bring population
control.
However, on flip side the SRS report highlights the declining sex ratio at birth in India that has further got
reduced from 906 in 2011 to 899 in 2018. The United Nations Population Fund (UNFPA) State of World
Population 2020 held that sex ratio at birth in India is lower than all the countries in the world except
China.
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Therefore, along with stabling of population, government and society needs to address the declining sex
ratio and subsequently gender discrimination.
7.2.1 Reasons for Skewed Sex Ratio

 Gender Bias: According to information from the UNFPA, reasons for female infanticide include anti-
female bias, as women are often seen as subservient to men, who often employ positions of power.
 Son-Preference: Parents believe they will be better taken care of in their old age by men, as men are
perceived as the principal wage earners of the family. Hence, they prefer Son.
 Social Evil-Dowry: Parents of girls are usually expected to pay a dowry, which could be a massive
expense, avoided by raising males.
 Counter Effect of Rise in Income: Contrary to popular perception, India’s sex ratio at birth declined
even as per capita income increased nearly 10 times over the last 65 years, according to an India Spend
analysis of government data.
 This could be because of rising income, which results in increased literacy, makes it easier for
families to access sex-selective procedures.
7.2.2 Issues Related to Lower Sex Ratio at Birth

 Gender-imbalance: Prof. Amartya Kumar Sen, in his world-famous article “Missing Women‟ has
statistically proved that during the last century, 100 million women have been missing in south Asia.
 This is due to discrimination leading to death, experienced by them from womb to tomb in their
life cycles.
 An adverse child sex ratio is also reflected in the distorted gender makeup of the entire population.
 According to World Bank, in 2031, India will have 936 females per 1,000 males, lower than the sex
ratio in 1951 of 946 females per 1,000 males.
 Distortion in the Marriage System: Adverse ratio results in a gross imbalance in the number of men
and women and its inevitable impact on marriage systems as well as other harms to women.
 In India, some villages in Haryana and Punjab have such poor sex ratios that men “import” brides
from other States. This is often accompanied by the exploitation of these brides.
 There are concerns that skewed sex ratios lead to more violence against both men and women, as
well as human-trafficking.
7.2.3 Challenges Involved

 Regressive Mindset: There is considerable son preference in all states, except possibly in Kerala and
Chhattisgarh. This son’s preference is derived from a regressive mindset. E.g.: People associate girls
with dowry.
 Misuse of Technology: Cheaper technology like ultrasound helps in sex selection.
 Failure in Implementation of Law: The Prenatal Conception and Prenatal Determination Act (PC-
PNDT), 1994 which punishes healthcare professionals for telling expectant parents the sex of a child
with imprisonment and hefty fines, has failed to control the sex selection.
 Reports found major gaps in the training of personnel implementing PC-PNDT. Poor training meant
that they were unable to prepare strong cases against violators to secure convictions.
 Illiteracy: Illiterate women in the reproductive age group of 15-49 years have higher fertility than
literate women.
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7.2.4 Way Forward

 Bringing Behavioral Change: Increasing female education and economic prosperity helps to improve
the ratio. In this pursuit, the government’s Beti-Bachao Beti-Padhao Campaign has achieved
remarkable success in bringing behavioral change in the society.
 Sensitizing Youth: There is an urgent need to reach young people for reproductive health education
and services as well as to cultivate gender equity norms.
 Regarding above target, the services of Accredited Social Health Activist (ASHA) can be leveraged,
especially in rural areas.
 Stringent Enforcement of Law: India must implement the Pre-Conception and Pre-Natal Diagnostic
Techniques (PCPNDT) Act, 1994 more stringently and dedicate more resources to fighting the
preference for boys.
 In this context, the Drugs Technical Advisory Board decision to include ultrasound machines in the
Drugs and Cosmetics Act, is a step in the right direction.
Although India has created several impressive goals to reduce its population growth rates, India and the
rest of the world has a long way to go to achieve meaningful population policy which are not only based
on quantitative control but qualitative control as well.
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Urbanisation and
Migration

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Contents
What is Urbanization? ............................................................................................................................5
1.1 Important Definitions (from Census 2011) .....................................................................................5
1.1.1 Municipal Law classification of urban areas ............................................................................6
1.2 Urbanization and Associated Phenomenon ...................................................................................6
1.2.1 Urban Agglomeration (UA) ......................................................................................................6
1.2.2 Out Growths (OG) ....................................................................................................................6
1.2.3 Over-Urbanization ...................................................................................................................7
1.2.4 Sub-Urbanization .....................................................................................................................7
1.2.5 Urban Renewal ........................................................................................................................7
1.2.6 Gentrification ...........................................................................................................................7
1.2.7 Megapolitan Development ......................................................................................................7
1.3 Classification of Process of Urbanisation ........................................................................................8
1.4 Impact of urbanization in the rural areas .......................................................................................8
1.5 Significance of Urbanization in India ..............................................................................................9
1.6 Urbanisation Trends in the Developing Countries..........................................................................9
1.7 Urbanisation Trends in India .........................................................................................................10
1.7.1 Specific Reasons of Urbanization in India since Independence ............................................10
1.8 Problems Associated with Urbanisation .......................................................................................11
1.8.1 Urbanization and Health ........................................................................................................11
1.8.2 Urbanization and Education ..................................................................................................12
1.8.3 Urbanization and Sanitation ..................................................................................................12
1.8.4 Urbanization and Safe Drinking Water ..................................................................................12
1.8.5 Urbanization and Housing Problem.......................................................................................13
1.8.6 Urbanization and Pollution ....................................................................................................13
1.8.7 Urbanization and Poverty ......................................................................................................13
1.8.8 Urbanization and Unemployment .........................................................................................14
1.8.9 Urbanization and Transport Issues ........................................................................................14
1.8.10 Urbanization and Urban Administration ...............................................................................14
1.8.11 Urban Crimes .........................................................................................................................15
1.8.12 Urbanization and Calamities..................................................................................................15
1.8.13 Mental health Issues ..............................................................................................................15
1.9 Government Initiatives .................................................................................................................15
1.10 Way Forward .................................................................................................................................16

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1.10.1 Improved Governance ...........................................................................................................16

1.10.2 Financing ................................................................................................................................17
1.10.3 Planning .................................................................................................................................17
1.10.4 Local capacity building ...........................................................................................................17
1.10.5 Affordable housing ................................................................................................................18
1.10.6 Sustainable Urban Development ...........................................................................................18
Migration ..............................................................................................................................................19
2.1 Forms of Migration .......................................................................................................................19
2.1.1 Immigration and Emigration..................................................................................................19
2.1.2 In migration and Outmigration ..............................................................................................19
2.1.3 Typology based on time.........................................................................................................20
2.1.4 Forms of Internal Migration in India......................................................................................20
2.2 Characteristics of Migration..........................................................................................................20
2.3 Reasons For Migration ..................................................................................................................21
2.3.1 Economic factors ...................................................................................................................21
2.3.2 Socio-Cultural Factors ............................................................................................................22
2.3.3 Political factors ......................................................................................................................22
2.3.4 Environmental factors ...........................................................................................................23
2.4 Consequences of Migration ..........................................................................................................23
2.4.1 Economic Consequence .........................................................................................................23
2.4.2 Demographic Consequences .................................................................................................24
2.4.3 Social and Psychological Consequences ................................................................................24
2.5 Migration and Inequality...............................................................................................................25
2.6 COVID-19 induced Migration Crisis in India ..................................................................................26
2.7 India’s Internal Migration .............................................................................................................26
2.8 Issues faced by internal migrant labour in India...........................................................................27
2.8.1 Poor implementation of protections under the Inter-State Migrant Workmen Act, 1979
(ISMW Act) ...........................................................................................................................................27
2.8.2 Lack of portability of benefits ................................................................................................27
2.8.3 Lack of affordable housing and basic amenities in urban areas ...........................................27
2.9 Measures taken by the government to aid migrants ...................................................................28
2.9.1 Transport ...............................................................................................................................28
2.9.2 Food distribution ...................................................................................................................28
2.9.3 Housing ..................................................................................................................................28
2.9.4 Financial aid ...........................................................................................................................28

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2.10 Directions by the Supreme Court..................................................................................................28

2.11 Government schemes ...................................................................................................................29
What is Urbanization?
Urbanization (or the growth of urban settlement), is the process of becoming urban, moving to cities,
changing from agriculture to other pursuits common to cities, such as trade, manufacturing, industry and
management, and corresponding changes of behavior patterns.
An increase in the size of towns and cities leading to growth of urban population is the most significant
dimension of urbanization. In ancient times there have been great many cities such as Rome or Baghdad,
but ever since industrialization and increasing industrial production, cities have grown phenomenally and
now urbanization is very much part of our contemporary life.
Urbanization in India was mainly a post-independence phenomenon, due to adoption of mixed system
of economy by the country, which gave rise to the development of private sector. It has been taking place
at an increasingly fast rate in India. The following table shows the increase in urban population from Pre-
independence till date
GLOBAL URBAN POPULATION

As per World Urbanization Prospects, 2018 revised: The urban population of the world has grown
rapidly from 751 million in 1950 to 4.2 billion in 2018. The report notes that future increase in the size
of World's urban population is expected to be highly concentrated in just a few countries. India, China
and Nigeria will account for 35% of the projected growth of world's urban population between 2018
and 2050.Today, the most urbanized regions include Northern America (with 82% of its population
living in urban areas in 2018), Latin America and the Caribbean (81%), Europe (74%) and Oceania (68%).
The level of urbanization in Asia is now approximating 50%. In contrast, Africa remains mostly rural,
with 43% of its population living in urban areas.
1.1 Important Definitions (from Census 2011)

Urban area
1. All places with a municipality, corporation, cantonment board or notified town area committee, etc.
2. All other places which satisfied the following criteria:
 A minimum population of 5,000;
 At least 75 per cent of the male main working population engaged in non-agricultural pursuits;
 A density of population of at least 400 persons per sq. km.

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Statutory town
 All places with criterion (1) above are called statutory towns.
 These towns are notified under law by the concerned State/UT Government and have local bodies like
municipal corporations, municipalities, municipal committees, etc., irrespective of their demographic
characteristics as reckoned on 31st December 2009.
Census town
 Places which satisfy criterion (2) above are referred to as census towns or non-municipal towns.
1.1.1 Municipal Law classification of urban areas

In India, the Municipal Law classification of urban areas is different to that of the Census. The categories
according to the Municipal Laws are as follows:
1. The Municipal Corporation having population about 3 lakhs;

2. Municipal Council with 1 to 3 lakh population and
3. Nagar Panchayats having 5000 – 10,000 population
Concept Check
Q. Urbanization is best defined as
a) People moving from rural areas to urban areas
b) The growth in the population of urban areas as a result of several factors
c) The increase in the proportion of people living in urban areas
d) People moving from urban areas to rural areas
Answer: C
1.2 Urbanization and Associated Phenomenon
1.2.1 Urban Agglomeration (UA)

A town together with its outgrowth(s) is treated as an integrated urban area and is designated as “Urban
agglomeration”. It constitutes:
I. A city or a town with a continuous outgrowth, the outgrowth being outside the statutory limit but
falling within the boundaries of the adjoining village or villages; or
II. Two or more adjoining towns with their outgrowth, if any, as in (i) above; or
III. A city and one or more adjoining towns with or without outgrowth all of which form a continuous
spread.
Ex: Greater Mumbai, Delhi and Kolkata.
1.2.2 Out Growths (OG)

 An Out Growth (OG) is a viable unit such as a village or a hamlet or an enumeration block made up of
such village or hamlet and clearly identifiable in terms of its boundaries and location.
 Some of the examples are railway colony, university campus, port area, military camps, etc., which
have come up near a statutory town outside its statutory limits but within the revenue limits of a
village or villages contiguous to the town.
 While determining the outgrowth of a town, it has been ensured that it possesses the urban features
in terms of infrastructure and amenities such as pucca roads, electricity, taps, drainage system for

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disposal of waste water etc. educational institutions, post offices, medical facilities, banks etc. and
physically contiguous with the core town of the UA.
1.2.3 Over-Urbanization
Over-urbanization is a phenomenon wherein the level of urbanization surpasses the level of
industrialization. In an over urbanized area, population growth outstrips its job market and the capacity
of its infrastructure. This phenomenon can also be referred as Urbanisation without Industrialisation. E.g.,
Mumbai, Kolkata, and Delhi are some of the over urbanized cities.
1.2.4 Sub-Urbanization
It is closely related to over-urbanization of a city. Over a period of time, people from the Over Urbanized
area start moving towards the fringe area around the cities. Such areas around the cities gradually start
developing as an urban area. This phenomenon is known as Sub Urbanisation.
1.2.5 Urban Renewal

 Urban renewal is a continuous process of remodelling urban areas by means of rehabilitation and
conservation as well as redevelopment.
 In urban renewal, the emphasis is given on those parts of the city which have fallen below current
standards of public acceptability.
 They are commonly found to be in the residential part of the inner city and also in the central parts
of the inner city, face problems of inadequate housing, environmental deprivation, social malaise
and the presence of non-conforming uses.
 The central business city part faces problems of traffic congestion and obsolescence of building and
obsolesce of building and sites.
1.2.6 Gentrification
 It means change in the social character of neighbourhood as a result of professional higher income
groups seeking residence in central city location.
 Gentrification is socially important in attracting some middle to high income residents back to central
areas.
 Gentrification is so to say selective in nature not only in terms of population to attract but also of the
conditions under which it occur.
 In the USA, most of the major cities are now experiencing varying levels of gentrification in their
central area neighbourhoods. In Britain, the process has occurred in a few cities namely Bristol and
London.
1.2.7 Megapolitan Development

 One of the most important facets of urbanization in the developed countries is the growth of cities
not in terms of population but in terms of area.
 Here the cities expand physically and the same number of people will be living in the cities but at
low densities.
 The examples of megapolitan type of development are characteristics of Atlantic Sea board of USA,
and in Japan it has appeared naturally and, in the Netherlands, it has appeared by design and planning.
 The United States megapolis extends over 600 miles from Boston to Washington D.C., the Tokaido
megapolis extends from Tokyo, Yakohoma to Osaka-Kobe-Kyoto and the Ransted megapolis comprises

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of three major cities of Amsterdam, Rotterdam and The Hague. This process has also started in
developing countries.
1.3 Classification of Process of Urbanisation

One of the eminent demographers Kingsley Davis classified the process of urbanization into three stages.
1. The Stage-I is the initial stage, characterized by traditional rural society with predominance in
agriculture and dispersed pattern of settlement.
2. The Stage-II is where proportion of urban population gradually increases from 25% to 40%, 50%, 60%
and so on. This is otherwise called as the stage of acceleration where basic restructuring of the
economy and investments in social overhead capitals including transport, communication take place.
3. The Stage-III is known as the terminal stage, where urban population exceeds 70% or more. According
to Davis, at this stage, the level of urbanization remains more or less same or constant.
It is important to understand the force of urbanization through its impact and significance which is
discussed below.
1.4 Impact of urbanization in the rural areas

1. Rural to Urban Migration - In India, urbanization along with westernization and modernization has
furthered the process of rapid social change both in the rural and in the urban areas. One of the
important impact of urbanisation is the rural to urban migration.
2. Migration – Continuous Process - Migration has become a continuous process affecting the social,
economic and cultural lives of the villagers widely.
3. Rao’s analysis - Rao (1974) distinguishes three different situations of urbanization impact in the rural
areas.
A. In the villages from where large number of people migrate to the far-off cities, urban employment
becomes a symbol of higher social prestige.
B. Villages, which are located near the towns, receive influx of immigrant workers and face the
problems of housing, marketing and social ordering.
C. Lastly, in the process of the growth of metropolitan cities some villages become the rural-pockets
in the city areas. Hence the villagers directly participate in the economic, political, social and
cultural life of the city.
4. Caste component - Srinivas pointed out that urbanisation in southern India has a caste component
and that, it was the Brahmin who first left the village for the towns and took advantage of western
education and modern professions. At the same time as they retained their ancestral lands they
continued to be at the top of the rural socio-economic hierarchy. Again, in the urban areas they had
a near monopoly of all non-manual posts. However, the anti-Brahmin movement and the economic
depression of the nineteen thirties led to the migration of Brahmins from the south and rural areas to
metropolitan cities.
5. Flow of urban money into rural areas - As a result of migration there has been a flow of urban money
into the rural areas. Emigrants regularly send money to their native villages. Such money facilitates
the dependents to clear off loans, build houses and educate children.
6. Diffusion of fashion from urban areas - The urban centers of India have become the centres of
national and international linkages. At present, many cultural traits are diffused from cities to the
rural areas. For example, dress patterns like pants, shirts, ties, skirts, jeans etc. diffuse from cities to
the rural areas. Besides these, new thoughts, ideologies are also diffused from the cities to the rural

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areas due to increase in communication via radio, television, newspaper, computer, the Internet and
telephone.
7. Ripple effect of urbanization - At present, along with the whole gamut of occupational diversification,
spread of literacy, education, mass communication etc., continuity between rural and urban areas
has increased.
8. Commercialization of agriculture - The large-scale commercialization of agriculture has also been
facilitated by the process of urbanisation. Similarly, agricultural requirements for machinery have
generated the growth of manufacturing units in urban areas. Many modern techniques of agricultural
development and many of the institutional frameworks for rural development also generate from the
urban centres.
1.5 Significance of Urbanization in India

1. Major Contributor to Economy: As in most countries, India's urban areas make a major contribution
to the country's economy.
2. Hub of innovation and technology: Indian cities contribute to about 2/3 of the economic output, host
a growing share of the population and are the main recipients of FDI and the originators of innovation
and technology and over the next two decades are projected to have an increase of population from
282 million to 590 million people.
3. New Opportunities: India's towns and cities have expanded rapidly as increasing numbers migrate
to towns and cities in search of economic opportunity.
4. Rise of economic powerhouses: According to the 2011 census, there are 53 cities in India with a
population of a million or more; by 2031, that number will rise to 87. Some of these metropolitan
areas will become major economic powerhouses that have higher GDP than the current GDP of
countries such as Israel, Portugal and the UAE.
5. Opportunity to experiment for sustainable development: Cities provide major opportunities for
sustainable development, given that they have large numbers of people in a small area, and offer
significant economies of scale which provide jobs, housing and services.
1.6 Urbanisation Trends in the Developing Countries

Some of the trends of urbanization in developing countries are as follows:
1. Urbanization in the developed countries is higher as compared to the developing countries - As per
UN statistics, the percentage of population residing in the urban areas of developed countries is
79.1%, while that of less developed countries is 46.8%.
2. Higher urbanization in Asian region - The urbanization in the Asian region is found to be slightly higher
than the African region. However, in both the region, urbanization is comparatively lower than those
of Europe and USA.
3. Urbanization takes place without much industrialization and strong economic base - Lack of
industrialization led urbanization has resulted in growth of unorganized sector which is characterized
by lower wage rate and poor service condition which affect the quality of life of urban population.
4. Unplanned urbanization in developing countries – It has led to growth of urban slum areas
characterized by low quality housing, poor sanitation, access to unsafe drinking water, etc. The current
pattern of urbanization in developing countries is alarming if viewed from a historical, spatial and
cross-country perspective. The unplanned urbanization greatly concerns most of the government in
these countries.

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1.7 Urbanisation Trends in India

1. British era – It witnessed de-industrialization and de-urbanization due to their thrust to Industrial
revolution in Europe only.
2. Post-Independence era - Urbanization in India began to accelerate after independence, due to the
country's adoption of a mixed economy, which gave rise to the development of the private sector.
3. Rise in urbanization figure - Population residing in urban areas in India, according to 1901 census, was
11.4% and according to 2011 census it reached the mark of 31.16% that is nearly 40 crores.
Having understood the trend of urbanization in India, the natural question of reasons of urbanization
arises, which are discussed below.
1.7.1 Specific Reasons of Urbanization in India since Independence

1. Industrialization - The creation of PSU by the government and dawn of the Industrial Revolution in
India along with the Industrial townships are built to house employees close to the factories and
manufacturing plants at which they work. After the success of the pioneering industrial township like
Tata’s Steel Town of Jamshedpur, Bhilai, Bokaro, Rourkela etc. urbanization had happened in India.
Rural-urban migration had happened in search of better economic opportunities.
2. Creation of new capital cities – This acted as the administrative towns like Chandigarh, Gandhinagar,
Bhubaneshwar etc. and the capital city of north eastern states like Agartala, Kohima etc.
3. Government Policies - Eleventh five-year plan that aimed at urbanisation for the economic
development of India.
4. Economic opportunities – This is just one reason people move into cities.
5. Special Economic Zones – This dot the landscape of India. Each of these zones is focused on a
particular sector such as IT, apparel and fashion, or petroleum and petrochemical industries. These
SEZs act as a nucleus of urban areas.
6. Liberation measure of 1991 - Urbanization in India is mainly due to liberalization of its economy after
the 1990s, which gave rise to the development of the private sector.
7. There are several factors at play that have led to the urbanization in India –
a) Population growth
b) Migration
Urbanization has created multiple problems in the country. One needs to understand the reasons behind
such problems, which are discussed below.
Concept Check
Q. Cities often spread out over the surrounding areas. The is called_________
a) Urban Spread
b) Urban Growth
c) Urban Sprawl
d) Urban Overflow
Answer: C
Having understood the Indian scenario in particular, there is need to understand the problems associated
with urbanization, which is the trend across most of the developing countries.
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1.8 Problems Associated with Urbanisation
1.8.1 Urbanization and Health

The World Summit on sustainable development identified health as an integral component of
sustainable development and called for a more efficient, equitable, accessible and appropriate health
care system for the population that rely on them.
1. Slums- Hub of health-related issues: Urban areas, particularly the slums are exposed to many types
of health problems because of unhealthy environment and poor living conditions.
 Overcrowded and congested housing in the urban slum areas expose the slum dwellers to high
rates of infectious diseases such as pneumonia, tuberculosis and diarrhea.
 Besides, the overcrowding combined with poor sanitary conditions and inadequate waste
disposal creates conditions favorable to spread of infectious diseases.
2. Children and Women- At greater risk: People in general and children in particular are susceptible to
diseases when they are born and brought up in an environment characterized by overcrowding, poor
hygiene, excessive noise and lack of space for recreation and study.
 Moreover, like the children, women and particularly pregnant women are vulnerable to
environmental contaminants.
 Pregnant women’s exposure to filthy environment increases the risk of abortion, birth defects,
fetal growth and perinatal death.
 Many studies have shown that exposing pregnant women to carbon monoxide can damage the
health of the fetus.
3. Common Diseases in Slum: Among the general population in the slum of the cities, some of the
diseases found occurring are HIV/ AIDS, tuberculosis, yellow fever and dengue.
 According to Trivedi, Sareen and Dhyani (2008) the range of disorders and deviances associated
with urbanization is enormous and includes psychoses, depression, sociopathy, substance abuse,
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alcoholism, crime, delinquency, etc. such negative impact often results in unreasonable means
which may result in communal violence.
4. Observations of WHO: It has rightly remarked that “while urban living continues to offer many
opportunities, including potential access to better health care, today’s urban environments can
concentrate health risks and introduce new hazards,”
1.8.2 Urbanization and Education

1. Affordability of Education- Problem: Although access to education is not a problem in urban areas,
however, affordability is a problem particularly for the urban poor. Education for urban poor is still a
luxury, particularly as far as the quality and higher education are concerned.
2. Concern of Education in Urban slums: Though Urbanization has boosted higher education in
metropolis and cities. However, education in the urban slum areas is still a concern.
3. Pressure on Educational Institutes: The migration of rural population to urban and semi-urban areas
has put tremendous pressure on educational infrastructure and manpower in urban areas.
4. Child Labour: Despite free education, children of urban poor families are found to be engaged in
income earning activities.
1.8.3 Urbanization and Sanitation

1. Poor Sanitation Infrastructure facilities: The urban sanitation is a big problem as the provision of
sanitation infrastructure is falling short of the growing population in urban areas.
2. State of Sanitation: Customarily, sanitation means safe disposal of waste. It is estimated that 40
million people reside in slum without adequate sanitation.
3. Absence of the drainage system: The drainage system in many unorganized slums either do not exist
and if existing are in a bad shape and in bits resulting in blockage of waste water. The open drainage
passing through the slum colonies deeply affect the health of the people.
4. Urban Garbage disposal: It is one of the critical garbage managements which has always remained a
major challenge before the municipal areas and administration. In mega cities, urban people in general
and children in particular suffer from many urban environment related health problems because of
exposure to unhygienic garbage disposal.
1.8.4 Urbanization and Safe Drinking Water

1. Safe water Supply in Urban areas- A challenge: Securing a safe water supply in urban areas is an
increasing problem in most of the urban areas of developing countries. Most of the urban areas do
not have adequate access to safe and reliable supply of drinking water.
2. Inaccessibility of safe drinking waters - The United Nations recognizes access to clean drinking water
as a human right, but it remains out of reach of millions of people.
 According to UN statistics, some 400 million people in Africa live in urban areas but as of 2008, 55
million of them lacked access to clean drinking water.
 According to Stockholm International Water Institute, global effort to improve access to drinking
water has been hindered by rapid urbanization.
3. Water – Breeding ground for disease - It has been remarked that bad water kills more people than
HIV, malaria and wars together affecting the lives of families and the economic development of many
countries around this world. The breakage in the water pipe sometimes leads to the contamination
of drinking water sources. This has resulted in outbreak of waterborne diseases. The water shortage
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during summer and water contamination during the rainy season is problems which need to be
tackled.
4. Poor management and distribution of water - Although the percentage of households having access
to safe drinking water is higher in urban areas as compared to rural areas, yet the poor management
and distribution of water has resulted in unequal access to safe drinking water.
1.8.5 Urbanization and Housing Problem

1. Growth of Urban Slums: One of the key challenges of urbanization is to provide healthy housing to
urban population. However, the rising urban population has created serious housing problem, thus,
leading to growth of urban slum featured with poor housing.
2. Slum and Squatter Settlement: Excessive urbanization has created manifold problems such as the
haphazard growth of unauthorized housing colonies and slum and squatter settlements has become
a well know phenomenon in the metropolitan cities like Delhi, Mumbai, Kolkata, Ahmadabad, etc. The
unauthorized and squatter housing is astoundingly high in low income and lower middle-income
countries. The underdeveloped countries are unable to provide healthy housing to its urban
population particularly migrating from rural to urban areas.
1.8.6 Urbanization and Pollution

1. Pollution – A Major threat: Urbanization and pollution have become the most common phenomenon
in mega cities. The growing numbers of vehicles and slums have escalated the urban pollution
problems in big cities.
2. Emission of Dangerous Gases: Car, factories and burning wastes also emit dangerous gases that affect
the air quality in the cities. Dangerous gases like carbon dioxide and nitrogen oxides cause respiratory
diseases, has long effect on physical environment and human health.
3. Indoor Air Pollution: Besides the outdoor pollution caused by vehicles and factories, the indoor air
pollution is caused by the use of fuel store and fire woods, etc. by slum population has increased the
risk of chronic obstructive pulmonary disease and acute respiratory infections in childhood. It is one
of the most important causes of deaths among children below five-year age in India.
1.8.7 Urbanization and Poverty

1. Poverty- An outgrowth of Urbanization: It is remarked that the most widely observed and acutely felt
urban problem in developing countries is the large number of poor and unemployed people in the
cities.
 According to ILO one third of the world’s urban population approximately 400 million people
were living in poverty.
 It has also noted that poverty-related problems such as overcrowding, hunger, disease, crime
and malnutrition are increasingly prevalent in cities of many countries both developing as well as
developed.
 Eradication of poverty from urban areas was a major challenge before the government. Thus,
urban poor constitute nearly 20 percent of urban population. Thus, unplanned urbanization has
escalated the size of urban poverty
2. Urbanization of Poverty: Economic development and urbanization are closely correlated. For
example, in India, cities contribute 55 percent to country’s GDP. Therefore, for India, urbanization is
considered an important component of economic growth.
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 However, on the other hand, it is interesting to note that the ratio of urban poverty in some of the
mega cities is even higher than the rural poverty which is termed as “Urbanization of Poverty”.
 This urban poverty is a responsible factor for several problems in urban areas such as housing and
shelter, water, sanitation, health education, social security and livelihood.
3. Sustainable Cities- Humongous Challenge: It has been rightly remarked that with growing poverty
and slums, Indian cities are grappling the challenges of making the cities sustainable i.e., inclusive,
productive, efficient and manageable.
1.8.8 Urbanization and Unemployment

1. Employment – Challenge for the government: Generating employment for the increasing number of
urban populations is a challenge for the government. The urban underemployment and casual
employment are another problem which has resulted in poor quality of living among the urban poor.
2. Observations of ILO: The ILO has remarked that most urban unemployment in developing countries
takes the form of underemployment, in which people are obliged to undertake any available economic
activity, however, productive and unproductive, because these are no social-safety nets and no
alternatives in the form of unemployment insurance or job training in the formal sector.
 In sub-Saharan Africa, the urban informal sector is estimated to employ more than 60 percent of
the urban labour force at extremely low incomes.
 In Latin America and the Caribbean, 83 percent of all new jobs created between 1990-93 were in
the informal sector, the bulk of these jobs are poorly remunerated, unsafe and of low productivity.
The large majority of Latin America’s urban poor work in the informal sector.
1.8.9 Urbanization and Transport Issues

1. Transportation- A Crucial Component: Transport is one of the factors which influences the rate and
pattern of urbanization in a globalized world. Urban transport planning requires road layout, traffic
lights and vehicle passages.
 Another problem of urban transport is the number of accidents and causalities because of rash
driving. In fact, most of governments do not have urban transport policy.
2. Under capacity of the roads: The number of vehicles plying in the cities is not in consonance with the
capacity of city road. Another aspect of transport problem is the provision of public transport and its
poor interface with the private transport.
1.8.10 Urbanization and Urban Administration

1. Unbridled urbanization can pose surmountable challenge before the administration and municipal
governance.
2. Problem for the authorities: Problems will arise as how to organize new administrative structure and
manpower development, how to prevent uncontrolled expansion, how to organize transport and
communication system, how to finance public services, prepare master plans etc.
 Prioritizing the needs amidst socio-political pressure is a challenge before the district
administration.
 Besides civic problems, the urban administration has to tackle other problems which population
brings forth such as people resentments and disregarding rules and regulations, spoil public and
private property and showing utter disregard for the rights and feelings of fellow citizens.
 Other issues like illegal migration, trafficking, etc. can pose problems for urban administration
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1.8.11 Urban Crimes

 Increase in crimes - The problem of crimes increases with the increase in urbanisation. In fact, the
increasing trend in urban crimes tends to upset peace and tranquility of the cities and make them
insecure to live in mainly for the women. Violent urban crimes such as rape, murder, kidnapping,
robbery is more prominent in the northern-central parts of the nation. Even the economic crimes such
as theft, cheating, breach of trust are concentrated in the north- central region.
1.8.12 Urbanization and Calamities

 Urban centers- A ticking Bomb: Urban centers, with their high population density and unplanned
structures, are vulnerable to highly damaging natural and anthropogenic calamities and hazards.
 Even low intensity extreme events (like heavy rainfall, low magnitude earthquake etc.) can result
in large human and economic losses because of high exposure to risk and absence of disaster-
oriented planning.
 Urban centers are also very prone to man-made disasters like gas leaks, building collapse, urban
floods or stampede etc.
1.8.13 Mental health Issues

1. At Macro - Social group level: Changes related to urbanization are thought to contribute to social
disintegration and disorganization. These macro factors contribute to social disparities which affect
individuals by creating perceived insecurity. Perceived insecurity can be due to problems with the
physical environment, such as issues with personal safety, or problems with the social environment.
2. Increased stress: Stress is a common individual psychological stress or that accompanies urbanization
and is thought to be due to perceived insecurity.
The Government of India realizing the gravity of urbanization, has come up with many initiatives to tackle
the problems arising out of urbanization and channelize it for the growth of a country. Various
Government initiatives are discussed below.
1.9 Government Initiatives

The Ministry of Urban Development (MoUD), Ministry of Housing and Urban Poverty Alleviation
(MoHUPA) and the Town and Country Planning Organization (TCPO) will facilitate and support the
nationwide urban and regional development planning. These organizations place their efforts on spatial
planning for the improvement of the entire country.
1. Pradhan Mantri Awas Yojana - Housing for All (HFA) (Urban Mission) was launched in June 2015 to
provide housing to all in urban areas by 2022.
2. Atal Mission for Rejuvenation and Urban Transformation (AMRUT)- launched with the objective to
provide hard infrastructure for universal coverage of piped drinking water, sewerage and green spaces
and parks. AMRUT also incentivizes governance reforms in the cities.
3. Developing Smart Cities-Launched in June 2015, Smart Cities Mission aims at driving economic growth
and improving the quality of life through area-based development and city-level smart solutions. The
mission would convert 100 existing cities into smart cities
4. Swachh Bharat Mission (Urban)-Launched on 2nd October 2014, Swachh Bharat Mission (SBM)
(Urban) is the key mission driving the campaign to make our cities clean.
 The mission aims to eliminate open defecation in all statutory towns by 2nd October 2019. It also
proposes to eradicate manual scavenging, introduce modern and scientific solid waste
management, induce behavioral change with respect to healthy sanitation practices and generate
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awareness for sanitation and its link to public health, augment the capacity of ULBs and create an
enabling environment for the private sector in waste management.
5. Deen Dayal Antodaya Yojana– National Urban Livelihood Mission (DAY – NULM)-aims at creating
opportunities for skill development leading to market-based employment and helping the poor to set
up self-employment ventures. This Mission’s interventions are implemented through five key
components:
a) Social Mobilization and Institutional Development (SMID)
b) Self-Employment Programmes (SEPs)
c) Employment through Skill, Training & Placement (EST&P)
d) Shelter for Urban Homeless (SUH) and
e) Support to Urban Street Vendors (SUSV).
6. National Heritage City Development & Augmentation Yojana (HRIDAY) Mission - This was launched
in January 2015 with an aim to rejuvenate the heritage cities, with special attention to others issues
such as sanitation, tourism, and livelihood. The Mission is targeted for completion by November 2018.
The HRIDAY mission will be concluded in 12 heritage cities as per the Detailed Project Reports.
7. Urban transport - All the interventions in the urban transport by the Ministry of Urban Development
such as Bus Rapid Transit System (BRTS), urban transit infrastructure or financing of metro rail projects
etc. are carried out as per the provisions of National Urban Transport Policy, 2006.
8. Pooled Finance Development Fund Scheme - The Central Government launched the Pooled Finance
Development Fund (PFDF) Scheme to provide credit enhancement to ULBs to access market
borrowings based on their credit worthiness through State-Level-Pooled Finance Mechanism.
 The broad objectives of this scheme are to facilitate development of bankable urban infrastructure
projects; to facilitate Urban Local Bodies to access capital and financial markets for investment in
critical municipal infrastructure, to reduce the cost of borrowing to local bodies and to facilitate
development of Municipal Bond Market.
9. North Eastern Region Urban Development Programme (NERUDP) - The North Eastern Region Urban
Development Programme (NERUDP) Phase-I is being implemented by the Ministry of Urban
Development (MoUD) with the financial assistance from Asian Development Bank (ADB).
 It covers capital cities of 5 North Eastern States viz. Agartala (Tripura), Aizawl (Mizoram), Gangtok
(Sikkim), and Kohima (Nagaland). The project covers priority urban services viz.
(a) Water Supply,
(b) Sewerage and Sanitation, and
(c) Solid Waste Management.
1.10 Way Forward

India needs to work on several areas to manage its unplanned urbanization: Inclusive cities, funding,
planning, capacity building and low-income housing. A political process must also be started where the
urban issues are debated with evolution of meaningful solutions:
1.10.1 Improved Governance

Governance forms an integral part of Urbanization. Governance is the weakest and most crucial link which
needs to be repaired to bring about the urban transformation so urgently needed in India. Financing the
large sums required to meet the investment needs of urban infrastructure is crucially dependent on the
reform of institutions and the capacity of those who run the institutions for service delivery and revenue
generation.
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It is seen that large expenditures on Indian cities and towns have to be combined with better governance
structures, strong political and administrative will to collect taxes and user charges, and improved capacity
to deliver. Cities must be empowered, financially strengthened, and efficiently governed to respond to
the needs of their citizens and to contribute to the growth momentum. Following are the areas where
governance needs to be improved further:
1. Strengthening Municipalities: The municipal entities need to be strengthened as local governments

with ‛own’ sources of revenue, predictable formula-based transfers from state governments, and
other transfers from the Government of India and state governments to help them discharge the
larger responsibilities assigned to them by the 74th Constitutional Amendment.
 Improved tax revenues combined with rational user charges will enable cities to leverage their
own resources to incur debt and also access new forms of financing through public private
partnership (PPP).
 NITI Aayog’s suggestions are also on the same line, A well-run ULBs should have the power to raise
financial resources including through municipal bonds. Indian cities also need to overhaul their
municipal staffing and introduce appropriate skills to achieve administrative efficiency
2. Creation of Waste to Energy plants: To speed up the process of cleaning up municipal solid waste,
NITI Aayog suggests the creation of an authority at the Centre to spread the use of Waste to Energy
plants. Such an authority may be called Waste to Energy Corporation of India (WECI) and placed under
the Ministry of Urban Development.
 WECI may set up world class Waste to Energy plants through PPP across the country. It can play a
key role in fast-tracking coverage of waste to energy plants across 100 smart cities by 2019.
1.10.2 Financing
Devolution has to be supported by more reforms in urban financing that will reduce cities’ dependence
on the Centre and the states and unleash internal revenue sources.
 Consistent with most international examples, there are several sources of funding that Indian cities
could tap into, to a far greater extent than today, which are Monetizing land assets; higher collection
of property taxes, user charges that reflect costs; debt and public-private partnerships (PPPs); and
central/state government funding.
 However, internal funding alone will not be enough, even in large cities. A portion has to come from
the central and state governments
1.10.3 Planning
 India needs to make urban planning a central, respected function, investing in skilled people, and
innovative urban form. This can be done through a “cascaded” planning structure in which large cities
have 40-year and 20-year plans at the metropolitan level that are binding on municipal development
plans.
 Central to planning in any city is the optimal allocation of space, especially land use and Floor Area
Ratio (FAR) planning. Both should focus on linking public transportation with zoning for affordable
houses for low-income groups. These plans need to be detailed, comprehensive, and enforceable.
1.10.4 Local capacity building

 A real step-up in the capabilities and expertise of urban local bodies will be critical to devolution and
improvement of service delivery. Reforms will have to address the development of professional
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managers for urban management functions, who are in short supply and will be required in large
numbers.
 New innovative approaches will have to be explored to tap into the expertise available in the private
and social sectors. India needs to build technical and managerial depth in its city administrations. Like
Indian Civil Services, an equivalent cadre for cities can be created, as well as allow for lateral entry of
private-sector executives.
1.10.5 Affordable housing

Bridge the gap between Price and affordability: Affordable housing is a particularly critical concern for
low-income groups—in the absence of a viable model that caters to their needs, India can meet the
challenge through a set of policies and incentives that will bridge the gap between price and affordability.
 This will enable a sustainable and economically viable affordable housing model for both government
housing agencies and as well as private developers. India also needs to encourage rental housing as
an option particularly for the poorest of the poor, who may not be able to afford a home even with
these incentives.
1.10.6 Sustainable Urban Development

1. The report of the World Commission on Environment and Development (WCED): It envisaged that
sustainable development has now assumed a broader significance as a process of change in which the
use of resources, the direction of investments, the orientation of technological development and
institutional changes must all contribute to enhancing the quality of human life, today as well as
tomorrow, within the carrying capacity of supporting economic systems.
 It broadly emphasizes on the establishment of a condition of ecological and economic stability
that is sustainable far into the future.
 WCED declared that “all human beings have the fundamental right to an environment adequate
for their health and well-being. There has to be sustainable development which will be durable
and beneficial to the present and future generation.” Sustainable Urban Development must be
the aim of all developing countries.
2. The United Nations Environment Programme and its partners have been persuading the nations of
the short and long-term benefits to be gained from the sound environmental management of natural
resources.
3. The UNCHS (United Nations Conference on Human Settlement) defined sustainable city is a city
“where achievements in social, economic and physical development are made to last”.
4. Importance of Sustainable Development: Sustainable urban development is important because
urban areas now a day contribute significantly to the Gross Domestic Product. They contribute
increasingly to export and is a rich place for capital formation.
 A Sustainable city has lasting supply of the natural resources on which its development depends
and a lasting security from environmental hazards which may threaten development
achievements.
 Cities offer quality education and health care; arts and science; technology and innovation and
transport and communication.
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Migration
In layman’s language, the word ‘migration’ refers to the movements of the people from one place to
another.
 Definition: According to Demographic Dictionary, “migration is a form of geographical mobility or

spatial mobility between one geographical unit and another, generally involving a change in residence
from the place of origin or place of departure to the place of destination or place of arrival, for a
considerable period of time.”
 Migration- In the social sense: It refers to the physical transition of an individual or a group from one
society to another. This transition usually involves abandoning one social-setting and entering another
and different one.
 Constitutional Provisions for migration: The Constitution of India guarantees freedom of movement
for all citizens.
 The foundational principles of free migration are enshrined in clauses (d) and (e) of Article 19(1)
of the Constitution, which guarantee all citizens the right to move freely throughout the territory
of India and reside and settle in any part of the territory of India.
 Article 15 prohibits discrimination on the basis of place of birth, among other grounds, while
Article 16 guarantees equality of opportunity for all citizens in matters of public employment, and
in particular prohibits the denial of access to public employment on the grounds of place of birth
or residence.
There are various forms of migration emerging from the definition which are discussed below.
2.1 Forms of Migration

1. People may move within a country between different states or between different districts of the same
state or they may move between different countries. Therefore, different terms are used for internal
and external migration.
2. Internal migration refers to migration from one place to another with a country, while external
migration or international migration refers to migration from one country to another.
2.1.1 Immigration and Emigration

‘Immigration’ refers to migration into a country from another country and ‘emigration’ refers to migration
out of the country. These terms are used only in connection with international migration.
 For example, migrants leaving India to settle down in the United States or Canada are immigrants to
the United States or Canada and emigrants from India.
2.1.2 In migration and Outmigration

1. These are used only in connection with internal migration. ‘In migration’ refers to migration into a
particular area while ‘outmigration’ refers to movements out of a particular area. Thus, migrants who
come from Bihar or Uttar Pradesh to Punjab are considered to be in migrants for Punjab and
outmigrants for Bihar and Uttar Pradesh.
2. The term ‘in migration’ is used with reference to the area of destination of the migrants and the term
‘outmigration’ is used with reference to the area of origin or place of departure of the migrant.
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2.1.3 Typology based on time

 It classifies migration into long range migration and short range or seasonal migration. When a move
is made for a longer period, it is called long range migration. However, when there is permanent shift
of population from one region to another, it is known as permanent migration.
 But when people shift to the sites of temporary work and residence for some or several months, it is
known as periodic or seasonal migration. For example, during peak agricultural season excess labour
is required, and people from the neighbouring areas go to these places for seasonal work.
 Apart from these two important types, migration could be voluntary or involuntary or forced, brain
drain (migration of young skilled persons) and migration of refugees and displaced persons.
2.1.4 Forms of Internal Migration in India

1. Census- Source of Information on migration for India: India, as a whole and its different parts
information is obtained through the use of the Census. Indian census gives information regarding
migration streams made from ‘birth place’ statistics from 1872 onwards.
 However, in 1961, the birth place was classified as rural or urban, and put into four categories of
space migration
a) Within the district of enumeration,
b) Outside the district but within the state of enumeration,
c) Outside the state of enumeration, i.e., inter-state, and
d) Outside India.
 The 1971 Census defined these statistics by including a question on place of last residence, and
1981 Census included a question on reasons for migration.
2. Classification of Migrants: In India, the migrants are classified into four migration streams, namely,
I. Rural to Rural,
II. Rural to Urban,
III. Urban to Urban and
IV. Urban to Rural.
 Rural to rural migration has formed the dominant migration stream since 1961. There have been
substantial increases in the proportion of rural to urban, and urban to urban migration with the
passage of time.
 Another important point is that the proportion of the females is much higher in rural-to-rural
migration, while in the other three streams the proportion of the males is comparatively much
higher. This is simply because the females change their residence on getting married, and new
places could be in the neighbouring districts.
 However, there have been substantial increases in the proportion of rural to urban and urban to
urban migration with the passage of time, the increase being much more during the decades of
1970s, 1980s and 1990s than of the 1960s.
Analysis of forms of migration reveals an interesting characteristic of migration, which are discussed
below.
2.2 Characteristics of Migration

1. Age Selectivity of migrants: An important characteristic is the age selectivity of the migrants.
Generally, young people are more mobile. Most migration studies, especially in developing countries,
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have found that rural-urban migrants are predominantly young adults and relatively better educated
than those who remain at the place of origin.
 It is obvious that migration for employment takes place mostly at the young adult ages. Also, a
major part of the female migration consequential to marriage occurs at the young adult ages.
 Thus, people have a tendency to move when they are between their teens and their mid-thirties
(15-35 years) than at other ages.
2. Chain Migration: Another important characteristic is that the migrants have a tendency to move to
those places where they have contracts and where the previous migrants serve as links for the new
migrants, and this chain is thus formed in the process, and is usually called chain migration.
 Various studies show that people do not blindly go to a new place. They usually have kinship
chains and networks of relatives and friends who help them in different ways. In some cases, the
migrants not only tend to have the same destination but also tend to have the same occupation.
 For example, in certain hotels in Jaipur almost all the workers belong to one particular sub-region
of Kumaon. The agricultural labourers in Punjab and Haryana are mainly from Bihar and Eastern
Uttar Pradesh.
It is essential to understand the reasons for migration, discussed in subsequent section, which will provide
holistic understanding of the topic.
2.3 Reasons For Migration

The important factors which cause migration or which motivate people to move may broadly be classified
into four categories: economic factors, socio-cultural factors, and political factors and environmental
factors.
2.3.1 Economic factors

The most important economic factors that motivate migration may be termed as ‘Push Factors’ and ‘Pull
Factors’. In other words, it is to see whether people migrate because of the compelling circumstances at
the place of origin which pushed them out, or whether they are lured by the attractive conditions in the
new place.
a) Push Factors
The push factors are those that compel or force a person, due to various reasons, to leave that place
and go to some other place. For example, adverse economic conditions caused by poverty, low
productivity, unemployment, exhaustion of natural resources, lack of basic infrastructural facilities
like healthcare, education, etc. and natural calamities may compel people to leave their native place
in search of better economic opportunities.
 Low agricultural productivity - The main push factor causing the worker to leave agriculture is the
lower levels of income, as income in agriculture is generally lower than the other sectors of the
economy.
 Increase in population - Due to rapid increase in population, the per capita availability of cultivable
land has declined, and the numbers of the unemployed and the underemployed in the rural areas
have significantly increased with the result that the rural people are being pushed to the urban
areas.
 Lack of alternative source of income - The non-availability of alternative sources of income in the
rural area is also another factor for migration.
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 Age old practices related to division of property - In addition to this, the existence of the joint
family system and laws of inheritance, which do not permit the division of property, may also cause
many young men to migrate to cities in search of jobs. Even sub division of holdings leads to
migration, as the holdings become too small to support a family.
b) Pull Factors
Pull factors refer to those factors which attract the migrants to an area, such as, opportunities for
better employment, availability of regular work, higher wages, better working conditions and better
amenities of life, etc.
 Higher standard of living – People migrate from rural to urban area for better employment
opportunities, higher wages and better amenities of life, variety of occupations to choose from
and the possibility of attaining higher standard of living.
 Cultural and entertainment activities - Sometimes the migrants are also attracted to cities in
search of better cultural and entertainment activities or bright city lights.
c) Push Back Factors
In India, and in some other developing countries also, another important factor which plays crucial
role in migration is ‘push back factor’.
 In India, the urban labour force is sizeable, and the urban unemployment rates are high, and there
also exist pool of underemployed persons.
 All these factors act in combination as deterrents to the fresh flow of migration from the rural to
urban areas. He calls this as a ‘push back factor’.
 He further adds that if new employment opportunities are created in the urban areas, the first
persons to offer themselves for employment are the marginally employed already residing in those
areas, unless of course special skills are required.
2.3.2 Socio-Cultural Factors

Besides push and pull factors, social and cultural factors also play an important role in migration.
 Family conflicts - Sometimes family conflicts also cause migration. This can be seen much in rural
areas where system of joint families prevails.
 Improved communication facilities - such as, transportation, impact of the radio and the
television, the cinema, the urban-oriented education and resultant change in attitudes and values
also promote migration.
 Marriage: It is an important social factor for migration. As observed by Census 2001, in case of
intra-state migrant’s majority of the migration is from one rural area to another, due to marriage
in case of females.
2.3.3 Political factors

They either encourage or discourage migration. For instance, in our country, the adoption of the jobs
for ‘sons of the soil policy’ by the State governments will certainly affect the migration from other
states.
 The rise of Shiv-Sena in Bombay, with its hatred for the migrants and the occasional eruption of
violence in the name of local parochial patriotism, is a significant phenomenon. Even in Calcutta,
the Bengali-Marwari conflict will have far-reaching implications. And now Assam and Tamil Nadu
are other such examples.
 Thus, the political attitudes and outlook of the people also influence migration to a great extent.
There have also been migrations from Kashmir and Punjab because of the terrorist activities.
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2.3.4 Environmental factors

 There are migrants who are forced to move from rural to urban areas as a result of an
environmental disaster that might have destroyed their homes and farms.
 People are also forced to migrate from their traditional habitats due to gradual deterioration of
changing environmental conditions.
Having understood the reasons for migration, one needs to understand the consequences of migration
which are discussed below.
2.4 Consequences of Migration

Migration is a response to the uneven distribution of opportunities over space. People tend to move from
place of low opportunity and low safety to the place of higher opportunity and better safety. This, in turn,
creates both benefits and problems for the areas, people migrate from and migrate to. Consequences can
be observed in economic, social, psychological, environmental, political and demographic terms.
However, some of the important consequences discussed in this unit are economic, demographic, social
and psychological. These consequences are both positive as well as negative. Some of these affect the
place of departure while others influence the place of destination.
2.4.1 Economic Consequence

Impact on Source and destination regions
1. Widens the development disparity: There is a view that migration negatively affects the emigrating
region and favours the immigrating region, and that migration would widen the development disparity
between the regions, because of the drain of the resourceful persons from the relatively
underdeveloped region to the more developed region.
 But the exodus of the more enterprising members of a community cannot be considered a loss, if
there is lack of alternative opportunities in the emigrating areas. As long as migration draws upon
the surplus labour, it would help the emigrating region. It will have adverse effects only if human
resources are drained away at the cost of the development of the region.
2. Rise in per capita income: Another important point is that when migration draws away the
unemployed or underemployed, it would enable the remaining population of the region to improve
their living conditions as this would enable the remaining population to increase the per capita
consumption, since the total number of mouths to be fed into is reduced as a result of emigration.
3. Remittances benefit the Source region: A major benefit for the source region is the remittance sent
by migrants. Remittances from the international migrants are one of the major sources of foreign
exchange.
 Remittances in the 80s were mainly driven by the economic prosperity in the oil exporting
countries. The policies of liberalization during the 90s led to a lot of Indian information technology
professionals migrating to the US for better opportunities, thus leading to an increase in
remittances.
 The amount of remittances sent by the internal migrants is very meager as compared to
international migrants, but it plays an important role in the growth of economy of the source area.
 Remittances are mainly used for food, repayment of debts, treatment, marriages, children’s
education, agricultural inputs, construction of houses, etc.
 For thousands of the poor villages of Bihar, Uttar Pradesh, Orissa, Andhra Pradesh, Himachal
Pradesh, etc. internal remittance works as life blood for their economy.
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 Migration from rural areas of Eastern Uttar Pradesh, Bihar, Madhya Pradesh and Orissa to the
rural areas of Punjab, Haryana, and Western Uttar Pradesh accounted for the success of their
green revolution strategy for agricultural development.
 Besides this, unregulated migration to the metropolitan cities of India has caused overcrowding.
Development of slums in industrially developed states such as Maharashtra, Gujarat, Karnataka,
Tamil Nadu and Delhi are a negative consequence of unregulated migration within the country.
Impact on migrants
Job mismatch, labour market discrimination, unemployment and poor household income, poverty,
precarious work conditions, occupation, industry, and property ownership are areas of concern for the
migrant population.
Employment discrimination can result in differences in access to particular occupations and can also lead
to differences in pay between those employed in the same occupation.
2.4.2 Demographic Consequences

Impact on Source and Destination Regions
Imbalance in age and sex Composition: Migration leads to the redistribution of the population within a
country. Rural urban migration is one of the important factors contributing to the population growth of
cities. Age and skill selective out migration from the rural area have adverse effect on the rural
demographic structure.
 However, high out migration from Uttarakhand, Rajasthan, Madhya Pradesh and Eastern Maharashtra
have brought serious imbalances in age and sex composition in these states. Similar imbalances are
also brought in the recipient’s states.
 Cause of imbalance in sex ratio in the place of origin and destination of the migrants: Migration of
the unmarried males of young working age results in imbalances in sex ratio.
 The absence of many young men from the villages increases the proportion of other groups, such
as, women, children and old people. This tends to reduce the birth rate in the rural areas.
 Further the separation of the rural male migrants from their wives for long durations also tends to
reduce the birth rate.
2.4.3 Social and Psychological Consequences

Impact on Source and destination regions
Migrants act as agents of social change: The new ideas related to new technologies, family planning,
girl’s education, etc. get diffused from urban to rural areas through them. Migration leads to intermixing
of people from diverse cultures.
 It has positive contribution such as evolution of composite culture and breaking through the narrow
considerations and widens up the mental horizon of the people at large.
Impact on migrants
1. Transmission of Urban life: Those migrants who return occasionally or remain in direct or indirect
contact with the households of their origin are also likely to transmit some new ideas back to the areas
of origin.
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 There is technological change to the dynamism of the return migrants, who bring money as well
as knowledge and experience of different production techniques, and this may lead to
mechanization and commercialization of agricultural activity.
 Ex- A number of ex-servicemen, on retirement go back to their native areas and promote such
practices in the villages.
2. Attitudinal change among Migrants: Contact with the urban and different cultures also brings
attitudinal change in the migrants, and helps them to develop more modern orientation, including
even the consumerist culture in their own areas.
3. Negative Consequences: Migration also has serious negative consequences such as anonymity, which
creates social vacuum and sense of dejection among individuals. Continued feeling of dejection may
motivate people to fall in the trap of anti-social activities like crime and drug abuse.
4. Impact on Women: Migration (even excluding the marriage migration) affects the status of women
directly or indirectly.
 In the rural areas, male selective out migration leaving their wives behind puts extra physical as
well mental pressure on the women.
 Migration of ‘women’ either for education or employment enhances their autonomy and role in
the economy but also increases their vulnerability.
2.5 Migration and Inequality

1. Inequality -Reason for migration: The major cause of rural-urban migration is the inequality among
the people, based on the interpersonal and inter-household inequality within and between villages.
 The inequalities within sending areas are also crucial in generating migration - more unequal
villages send more migrants.
2. Vicious cycle of Inequality: Migrants come from the most productive age groups and as a result,
unequal power structures within villages go unchallenged. Migrants from wealthier backgrounds also
do better. These facts ensure that migration enhances inequality.
3. Migration’s impact on inequality: Based on the range of different types of migration, and the varied
economic, social, cultural and political contexts within which migration occurs, it is difficult to draw
any overarching conclusions about its impact on inequality.
4. Definition of inequality: Inequality needs to be defined in broader terms than simply income or
wealth. Inequality, like poverty, is multi-dimensional, and can be measured at individual, household,
regional and international levels.
 There are socio-cultural dimensions to inequality, as well as inequalities in access to power. All
aspects of inequality are highly gendered.
 In other terms inequality is the role played by a variety of political, economic and social-cultural
institutions, since these are often crucial to the ways in which wealth, power and opportunity are
distributed within societies.
5. Inequality is clearly a major driver of migration: Indeed, international migration is a powerful symbol
of global inequality, whether in terms of wages, labour market opportunities or lifestyles.
 Millions of workers and their families move each year across borders and continents, seeking to
reduce what they see as the gap between their own position and that of people in other, wealthier,
places.
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 It is not just inequality between sending and receiving areas that promotes migration. Inequality
within sending areas can also generate migration, since more unequal villages tend to produce
more migrants than less unequal villages.
6. Advantages of Migration: Migration brought more than simply money, in the form of remittances; it
also brought with it ‘cultural capital’ and social prestige. In turn, remittances were also fed into other
areas of life, with a wider impact on political, social and economic power.
 The conspicuous consumption of foreign goods, while being the principal differentiation in the
village between migrant and non-migrant households also.
Migrant workers faced surmountable challenges during the pandemic induced lockdown, which is
discussed in details below.
2.6 COVID-19 induced Migration Crisis in India

1. India has been in lock down since March 25, 2020. During this time, the activities of production and
supply of goods and services are on the lower side of growth.
2. The lock down has severely impacted migrants, several of whom lost their jobs due to shutting of
industries and were stranded outside their native places wanting to get back.
3. As per the 2011 census, there were 21 crore rural-rural migrants which formed 54% of classifiable
internal migration. Rural-urban and urban-urban movement accounted for around 8 crore migrants
each. There were around 3 crore urban-rural migrants (7% of classifiable internal migration).
4. Another way to classify migration is: (i) intra-state, and (ii) inter-state. In 2011, intra-state movement
accounted for almost 88% of all internal migration (39.6 crore persons). According to the 2011 Census,
there were 5.4 crore inter-state migrants. As of 2011, Uttar Pradesh and Bihar were the largest source
of inter-state migrants while Maharashtra and Delhi were the largest receiver states.
2.7 India’s Internal Migration

1. Huge Numbers: India has an estimated 600 million migrants. In other words, roughly half of India is
living in a place where it wasn’t born.
2. Intra-State Migration: An estimated 400 million Indians “migrate” within the district they live in. The
next 140 million migrate from one district to another but within the same state.
3. Inter-State Migration: And only about 60 million — that is, just 10% of all internal migrants — move
from one state to another.
4. Rural Migration: The most dominant form of migration is from rural-to-rural areas. Only about 20%
of the total migration (600 million) is from rural to urban areas.
5. Urban Migration: 20% of the total migration is from one urban area to another urban area. As such,
urban migration (rural to urban as well as urban to urban) accounts for 40% of the total migration.
6. Potential for increase in future: As India adopts a strategy of rapid urbanisation — for example, by
building so-called smart cities and essentially using cities as centres of economic growth — levels of
internal migration will increase further.
7. COVID-19 induced Shock: It is estimated that close to 60 million moved back to their “source” rural
areas in the wake of pandemic-induced lockdowns. That number is roughly six-times the official
estimates. That estimate also gives a measure of the sense of labour shock that India’s economy faced
as migrants moved back. 200 million were broadly affected by the Covid disruption.
8. The worst-hit were “vulnerable circular migrants”. These are people who are “vulnerable” because
of their weak position in the job market and “circular” migrants because even though they work in
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urban settings, they continue to have a foothold in the rural areas. Such migrants work in construction
sites or small factories or as rickshaw pullers in the city but when such employment avenues
dwindle, they go back to their rural setting. They constitute 75% of the informal economy outside
agriculture — most shocks, be it demonetisation or GST or the pandemic disruption, tend to rob them
of their livelihood.
2.8 Issues faced by internal migrant labour in India
2.8.1 Poor implementation of protections under the Inter-State Migrant Workmen Act, 1979
(ISMW Act)
1. The ISMW Act provides certain protections for inter-state migrant workers. Labour contractors
recruiting migrants are required to:
I. Be licensed,
II. Register migrant workers with the government authorities, and
III. Arrange for the worker to be issued a passbook recording their identity.
2. Guidelines regarding wages and protections (including accommodation, free medical facilities,
protective clothing) to be provided by the contractor are also outlined in the law.
3. In December 2011, a report by the Standing Committee on Labour observed that registration of
workers under the ISMW Act was low and implementation of protections outlined in the Act was
poor.
4. The report concluded that the Central government had not made any concrete and fruitful efforts to
ensure that contractors and employers mandatorily register the workers employed with them
enabling access to benefits under the Act.
2.8.2 Lack of portability of benefits

1. Migrants registered to claim access to benefits at one location lose access upon migration to a
different location.
2. This is especially true of access to entitlements under the PDS.
3. Ration card required to access benefits under the PDS is issued by state governments and is not
portable across states. This system excludes inter-state migrants from the PDS unless they surrender
their card from the home state and get a new one from the host state.
2.8.3 Lack of affordable housing and basic amenities in urban areas

1. The proportion of migrants in urban population is 47%. In 2015, the Ministry of Housing and Urban
Affairs identified migrants in urban areas as the largest population needing housing in cities.
2. The Prime Minister Awaas Yojana (PMAY) is a central government scheme to help the economically
weaker section and low-income group access housing.
3. Assistance under the scheme includes: i) slum rehabilitation, ii) subsidized credit for home loans, iii)
subsidies up to Rs 1.5 lakh to either construct a new house or enhance existing houses on their own
and iv) increasing availability of affordable housing units in partnership with the private sector.
4. Since housing is a state subject, there is variation in approach of States towards affordable housing.
Steps taken by the government with regard to migrant labour during the lockdown are discussed below.
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2.9 Measures taken by the government to aid migrants
2.9.1 Transport
 The central government authorized states to use the State Disaster Response Fund to provide
accommodation to traveling migrants.
 States were advised to set up relief camps along highways with medical facilities to ensure people
stay in these camps while the lock down is in place.
 The Ministry of Home Affairs allowed states to co-ordinate individually to transport migrants using
buses.
 The Indian Railways resumed passenger movement with Shramik Special trains to facilitate
movement of migrants stranded outside their home state.
2.9.2 Food distribution

 The Ministry of Health and Family Affairs directed state governments to operate relief camps for
migrant workers with arrangements for food, sanitation and medical services.
 Under the 2nd Tranche of Atma-Nirbhar Bharat Abhiyaan, the finance minister announced that free
food grains would be provided to migrant workers who do not have a ration card for two months.
 The finance minister also announced that One Nation One Ration card will be implemented by March
2021, to provide portable benefits under the PDS.
2.9.3 Housing
 The Aatma Nirbhar Bharat Abhiyaan also launched a scheme for Affordable Rental Housing
Complexes for Migrant Workers and Urban Poor to provide affordable rental housing units under
PMAY.
 The scheme proposes to use existing housing stock under the Jawaharlal Nehru National Urban
Housing Mission (JnNURM) as well as incentivise public and private agencies to construct new
affordable units for rent.
 Further, additional funds have been allocated for the credit linked subsidy scheme under PMAY for
middle income group.
2.9.4 Financial aid

 Some state governments (like Bihar, Rajasthan and Madhya Pradesh) announced one-time cash
transfers for returning migrant workers.
 Example: UP government announced provision of maintenance allowance of Rs 1,000 for returning
migrants.
2.10 Directions by the Supreme Court

 The Court issued an order to the central and state governments to submit a response detailing all
measures taken by the respective governments for migrant labourers.
 The Court provided interim directions to the central and state/UT governments for ensuring relief to
the migrant workers:
I. No train or bus fare should be charged to migrant workers,
II. Free food should be provided to stranded migrants by the concerned State/UT government and
this information should be publicised,
III. States should simplify and speed-up the process of registration of migrants for transport and those
registered should be provided transportation at the earliest and
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IV. The state receiving migrants should provide last-mile transport, health screening and other
facilities free of cost.
2.11 Government schemes

Government rolled schemes to tackle the migrant crisis during lockdown namely,
1. Affordable Rental Housing Complexes (ARHCs) under the PMAY (Urban)

2. Garib Kalyan Rojgar Abhiyan (GKRA)
3. One Nation, One Ration Card
Note: Kindly refer to latest Schemes Section for detailed information regarding the above schemes.
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Gender Issues

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Contents
1 Part I: Understanding Gender Inequality ...............................................................................................5
1.1 Gender Equality...............................................................................................................................5
1.2 Gender Inequality ...........................................................................................................................5
1.2.1 Types of Gender Inequality......................................................................................................5
1.2.2 Harmful Effects of Gender Inequality ......................................................................................6
2 Part II: Gender Issues in India .................................................................................................................6
2.1 Joint Family System .........................................................................................................................6
2.1.1 Characteristics of Joint family system .....................................................................................6
2.1.2 Impact of Joint Family on Women ...........................................................................................7
2.2 Domestic Violence ..........................................................................................................................8
2.2.1 Forms of Domestic Violence ....................................................................................................8
2.2.2 Effects of Domestic Violence ...................................................................................................9
2.2.3 Causes of Domestic Violence ...................................................................................................9
2.2.4 Measures for tackling Domestic Violence .............................................................................10
2.3 Dowry Demand .............................................................................................................................11
2.3.1 Dowry Deaths ........................................................................................................................11
2.3.2 Prohibition of Dowry System .................................................................................................11
2.4 Migration .......................................................................................................................................12
2.4.1 Reasons for Migration ...........................................................................................................12
2.4.2 Challenges faced by Women Migrants ..................................................................................13
2.5 Sexual Violence against Women in India ......................................................................................14
2.5.1 Causes of rising sexual crime in India ....................................................................................14
2.5.2 The Way Forward...................................................................................................................14
2.6 Women at Workplace ...................................................................................................................15
2.6.1 Providing safe environment and preventing violence against women in the workplace .....16
3 Part III: Measures against Gender Inequality in India ..........................................................................17
3.1 Constitutional Safeguards against Gender Inequality ..................................................................17
3.2 Legal Safeguards against Gender Inequality .................................................................................18
3.3 Government Schemes for Women Empowerment ......................................................................19
4 Part IV: Census 2011 Data ....................................................................................................................20
4.1 Population Figures ........................................................................................................................21
4.2 Sex Ratio ........................................................................................................................................21
4.3 Child Sex Ratio...............................................................................................................................21

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4.4 Literates.........................................................................................................................................21
4.5 Literacy Rates ................................................................................................................................22
4.6 Workers .........................................................................................................................................22
4.7 Work Participation Rate ................................................................................................................23
5 Part V: Measures of Gender Inequality ................................................................................................23
5.1 Global Gender Gap Index ..............................................................................................................23
5.2 Gender Inequality Index................................................................................................................23
5.3 Gender Parity Index ......................................................................................................................24
5.4 SDG Gender Index .........................................................................................................................24
6 Part VI: Other Contemporary Gender Issues .......................................................................................25
6.1 Task Force on Age of Marriage for Women ..................................................................................25
6.1.1 Background ............................................................................................................................25
6.1.2 Minimum Age versus Majority ..............................................................................................25
6.1.3 Why is the law being relooked at? ........................................................................................25
6.1.4 Upholding the Constitution ...................................................................................................25
6.2 Representation of Women in Parliament .....................................................................................26
6.2.1 Status of Women in Indian Politics:.......................................................................................26
6.2.2 Arguments for Women Reservation in Parliament ...............................................................26
6.2.3 Women’s Reservation Bill ......................................................................................................27
6.2.4 Arguments against Women Reservation in Parliament ........................................................27
6.2.5 Way Ahead .............................................................................................................................27
6.3 Permanent Commission to Women Officers in the Army ............................................................27
6.3.1 Why such an order? ...............................................................................................................28
6.3.2 Women in Army: Background of the case .............................................................................28
6.3.3 Arguments Rejected by the Supreme Court..........................................................................28
6.3.4 Arguments by the Government .............................................................................................28
6.3.5 Implications of the Judgement ..............................................................................................29
6.4 Women in Indian Agriculture ........................................................................................................29
6.4.1 Role ........................................................................................................................................29
6.4.2 Status .....................................................................................................................................30
6.4.3 Reasons for Emerging Trend of Feminization of Agriculture ................................................30
6.4.4 Issues Faced by Women in Indian Agriculture ......................................................................30
6.4.5 Steps Taken by the Government ...........................................................................................31
6.4.6 Way Forward..........................................................................................................................31

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6.5 Gender Dimensions of the Covid-19 Pandemic ............................................................................31

6.5.1 Introduction ...........................................................................................................................31
6.5.2 Indian Women’s vulnerability to COVID-19’s impacts: Livelihood and Job Security ............32
6.5.3 Social Inequities .....................................................................................................................32
6.5.4 Health.....................................................................................................................................32
6.5.5 Other Aspects ........................................................................................................................33
6.5.6 Policy response- Way Forward ..............................................................................................33
1 Part I: Understanding Gender Inequality

In this part we will look at the meanings of terms gender equality and gender inequality. We will also be
looking at the different types of gender inequalities that exist in a society and their harmful effects.
1.1 Gender Equality

Gender equality refers to the equal rights,
responsibilities and opportunities of women and
men and girls and boys.
Gender equality implies that the interests, needs

and priorities of both, women and men are taken
into consideration, recognizing the diversity of
different groups women and men (for example:
women belonging to ethnic minorities, lesbian
women or women with disabilities).
Gender equality is both, a human rights principle and a precondition for sustainable, people-centered
development.
1.2 Gender Inequality

Inequality is when some people or things are
privileged over others. So, it follows that gender
inequality is when one gender is privileged over
others. It means treating people unequally because
of their gender.
1.2.1 Types of Gender Inequality

1. Ideological: The idea that one gender is better
than others.
2. Economic: Paying people of one gender more than others.
3. Legal: Laws that treat one gender in a more privileged fashion.
4. Opportunity related: Giving more opportunities to people of one gender.
5. Emotional: Talking disparagingly about people of a certain gender compared to others.
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1.2.2 Harmful Effects of Gender Inequality

1. Social effects: Gender inequality has, unfortunately, shaped many of our societies and traditions.
2. Loss of talent: When we nurture the talents of one gender more than others, our talent pool is
diminished.
3. Confidence issues: Treating people of a certain gender disparagingly can harm their confidence.
4. Emotional: Discriminating against people of one gender can cause great sadness and stress.
5. Economic: Discrimination can cause one gender to be – overall – richer than others.
2 Part II: Gender Issues in India

Joint family system, domestic violence, dowry, migration, urbanisation, sexual violence and workplace
experience are some of the pressing gender issues in India. In this part, we will be discussing each of these
issues in detail.
Concept Check
Which part of the Constitution of India explicitly talks about renouncing ‘practices derogatory to the
dignity of women’?
(a) Preamble
(b) Fundamental Rights
(c) Directive Principles of State Policy
(d) Fundamental Duties
Answer: D
Issues faced by women in India
2.1 Joint Family System

The family in India does not consist only of husband, wife and their children but also of uncles, aunts and
cousins and grandsons. This system is called joint family or extended family system.
2.1.1 Characteristics of Joint family system

I. Joint family has the following features:
1. Large in Size
2. Joint Property
3. Common Kitchen
4. Common Residence
5. Common Worship
6. Similar rights and obligations
7. Close blood ties
8. Absolute power of the head
9. Co-operation
10. Socialistic Ideals.
II. According to Ram Ahuja, important characteristics of joint families are as follows:
1. Joint family has an authoritarian structure, that is, the power mostly rests with the patriarch or
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2. In a joint family, individual interests are always less important than the family interests, that is
to say that family always comes first whenever required.
3. Status of the members in the family is determined by their age and relationship to the rest of
family. This is very much hierarchical in nature.
4. In a joint family, the conjugal relationships (relationship between a married couple) are always
subordinate to the filial (relationship between parents and children) and the fraternal
relationships (relations between brothers).
5. The family functions on the principle of joint responsibility.
6. All the members get equal attention as per their age and positions in the family.
7. The authority in the family between men and men, men and women, women and women are
determined by the principle of seniority.
Having understood the definition and characteristics of joint family System, it is important to understand
the impact of such system on women.
2.1.2 Impact of Joint Family on Women

1. Woman in Nuclear family Vis-à-vis Joint Family: A comparison of women in nuclear households with
those still living in joint families revealed that the former enjoys greater decision-making power,
greater freedom of movement outside the house premises and greater participation in jobs.
 Women in joint households not only had less decision-making power but they also needed the
permission of other family members more often to execute even routine household activities.
2. Women’s autonomy: In joint families, women’s autonomy is differentiated by economic status, caste
and household location.
 Women in richer joint households have more autonomy in intra-household decision-making but
less freedom of movement outside the home.
 For women in poorer joint households, it is just the opposite: they have greater freedom of
movement outside the home but less autonomy in intra-household decision-making.
 Geographic location of the household affects women’s autonomy: women in joint households in
northern India have less autonomy compared to their counterparts in southern India.
Interestingly, in the south, the effects of family structure on women’s autonomy are weaker.
 Additionally, it has been seen that for lower caste women, and women in north Indian states,
women’s freedom to seek health benefits and to visit health centres for themselves and their
children, is highly curtailed.
3. Autonomy within the family: Also, within joint family structures, not all women in the family have
the same level of autonomy.
 The autonomy enjoyed by daughters-in-law and mothers-in-law may be very different, and
further, the level of autonomy a daughter-in-law has in the home may depend on whether she has
a repressive or supportive mother-in-law.
4. Employment opportunity for Women: Women from upper caste groups are more likely to reside in
a joint family system than those from disadvantaged groups.
 The higher social status associated with being upper caste acts as an inhibitor for ‘allowing’
women to leave the house for paid work
 Domestic duties including childcare might be keeping many Indian women from working but living
with the in-laws does not mean that women are more able to take up jobs, new research indicates.

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 On the contrary, women who live in joint families are significantly less likely to participate in the
labour market.
5. Nature of Employment: Non-farm employment rates for women from joint families lag substantially
behind those for women in nuclear households.
 Such work typically involves leaving the house and working among people other than one’s family,
and the rates of non-farm employment are lower for women from joint families in all education
categories, narrowing only for tertiary education levels.
6. Dropout from employment: According to more recent data from the National Family Health Survey
and the National Sample Survey Office, the presence of children aged 0-5 is a strong predictor of
dropping out of paid work.
 The primary reason that women engaged in “domestic duties" (including childcare) gave to NSSO
surveyors in 2011-12 for not being part of the workforce was that there was no one else to carry
out their domestic duties.
Let’s look at the manifestation of major problem faced by women in the form of Domestic violence in the
family Setup.
2.2 Domestic Violence

Domestic violence, or intimate partner violence (IPV) as it is sometimes called, is a worldwide problem.
Domestic violence in India is endemic. Around 70% of women in India are victims of domestic violence,
according to a former Union minister for Women and Child Development. This all occurs despite the fact
that women in India are legally protected from domestic abuse under the Protection of Women from
Domestic Violence Act 2005, which is discussed later in the document.
2.2.1 Forms of Domestic Violence

1. Physical violence involves the use of physical force
against another. Examples include hitting, shoving,
grabbing, biting, restraining, shaking, choking,
burning, forcing drug/alcohol use, and assault with a
weapon, etc. Physical violence may or may not result
in an injury that requires medical attention.
2. Sexual violence involves the violation of an
individual’s bodily integrity (sexual assault), including
coercing sexual contact, rape, and prostitution, as
well as any unwelcome sexual behavior (sexual harassment), including treating someone in a sexually
demeaning manner or any other conduct of a sexual nature, whether physical, verbal, or non-verbal.
 Sexual abuse also includes behavior which limits reproductive rights, such as preventing use of
contractive methods and forcing abortion.
3. Psychological abuse is often characterized as intimidation, threats of harm, and isolation. Examples
include instilling fear in an intimate partner through threatening behavior, such as damaging property
or abusing pets, constant supervision, or controlling what the victim does and who they talk to.
 Spiritual abuse may be included as a type of psychological abuse. It involves the misuse of spiritual
or religious beliefs to manipulate or exert power and control over an intimate partner (i.e., using
scripture to justify abuse or rearing the children in a faith or religious practice the partner has not
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4. Emotional abuse involves undermining an individual’s sense of self-worth. Examples of emotional

abuse include constant criticism, name-calling, embarrassing, mocking, humiliating, and treating like
a servant.
5. Economic abuse involves making or attempting to make the victim financially dependent on the
abuser. Examples of economic abuse include preventing or forbidding an intimate partner from
working or gaining and education, controlling the financial resources, and withholding access to
economic resources.
Now, Let’s understand the effects of domestic violence on different stakeholders.
2.2.2 Effects of Domestic Violence

1. Effects on the victim
a) Death, illness, injury and disability — domestic and family violence is the leading cause of death,
illness and disability for women aged under 45.
b) Emotional and psychological trauma — the devastating impact on an individual’s physical, mental
and emotional health including depression, shame, anger and suicide.
c) Homelessness — many homelessness say domestic and family violence is an issue.
d) Use of alcohol and other drugs to deal with the pain.
e) Physical health injuries and problems, which may not get medically treated.
2. Effects on the family
a) Violence and the threat of violence at home creates fear and can destroy family environments and
lead to the break-up of families
b) Frequent moving to avoid the abuser
c) Regular household conflict
d) Child protection or police involvement
3. Effects on the community
a) Children growing up without learning about positive and respectful relationships
b) Abusers going to prison
c) Higher rates of alcohol and other drug use, and mental health problems
4. Effects on Children
Studies show that living with domestic violence can cause physical and emotional harm to children
and young people in the following ways:
Manifestation: Ongoing anxiety and depression, emotional distress, eating and sleeping disturbances,
find it hard to manage stress, low self-esteem, be aggressive towards friends and school mates, feel
guilt or blame themselves for the violence, have trouble forming positive relationships, develop
phobias and insomnia, use bullying behavior or become a target of bullying, difficulty in
concentrating, find it hard to solve problems, have less empathy and caring for others etc.
2.2.3 Causes of Domestic Violence

Just as domestic violence is a multifaceted problem in India, the causes are also multifarious. Some of
them are discussed below.
1. Strong link between domestic violence and dowry demands: Domestic violence often happens in
India as a result of dowry demands. There are strong links between domestic violence and dowry, a
cultural practice deeply rooted in many Indian communities, which is the money, goods, or property
the woman/woman’s family brings to a marriage to now come under the ownership of the husband.

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2. Patriarchy: There are three main aspects of the patriarchal household structure in India that affect
women’s agency:
a) Marriage,
b) Active discrimination by means of abuse (marital or extramarital), and
c) Diminished women’s agency through limited economic opportunity through stifled opportunity
for independence.
In all these dimensions, there is a clear relationship between strong patriarchal familial structures and
limited capabilities and agency for women, which are strongly correlated with causal factors for
domestic violence such as gender disparities in nutritional deprivation and a lack of women’s role in
reproductive decisions.
3. Hesitancy among women to report: There is widespread hesitation amongst most Indian women
who experience domestic violence to report or prosecute against such crimes.
 A major reason for this reluctance is the patriarchal structure that is the framework for the vast
majority of households in India and the misconception that it is almost always the woman’s fault
for provoking domestic abuse that such abuse occurs.
 The results of this hesitancy to report cases is clear, as reported data overwhelmingly tends to
underestimate actual prevalence of occurrences of domestic violence.
4. Domestic violence is often not handled as a legitimate crime or complaint: It is considered more of
a private or family matter. Caste, class, religious bias and race also determine whether action is to be
taken or not. Other factors responsible for domestic violence include socio-economic class,
educational level, and family structure beyond the patriarchal framework.
Concept Check
Q. What are the characteristics of a patriarchal system?
(a) Women dominance, women identification, women centeredness and obsession with control.
(b) Male dominance, male identification, male centeredness and obsession with control.
(c) Obsession with money, need to control all women, includes only men and includes only military.
(d) Cultural dominance, oppression of women, oppression of the elderly and male identification.
Answer: B
Having understood the causes of violence, one needs to understand the ways of tackling them and curb
such a menace in the Society.
2.2.4 Measures for tackling Domestic Violence

Protection of Women from Domestic Violence Act 2005: The Domestic Violence Act of 2005 provides
victims of abuse with a means for practical remedy through prosecution.
 Domestic violence is currently defined in India under Section 3 of this Act. This Act prescribes
stringent punishment for domestic violence.
 However, the Domestic Violence Act of 2005 has been reportedly used against men in some cases,
though the vast majority of cases involve abuse of a woman. The Delhi High Court clarified that
the Act could also be used to prosecute women.
Impact of the Act: Despite this law in force, most of the women continue to suffer domestic violence in
silence may be because the women in India are expected to idealize the character of Sita and Savitri.
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 Though, there is no harm in this but when it comes to unnecessary subjugation and crime against
women, they have to take upon themselves to raise the voice.
 However, in some cases where women have taken the mantle, the Indian judicial system has
failed them. On the top of that, there are some crimes which are still not covered under any of the
Indian law, like marital rape.
2.3 Dowry Demand

In Indian subcontinent, dowry is the payment in cash or some kind of gifts given to a bridegroom's family
along with the bride. The dowry system is thought to put great financial burden on the bride's family.
Historical records suggest that dowry in ancient India was insignificant, and daughters had inheritance
rights, which by custom were exercised at the time of her marriage. However, dowry has become a
prevalent practice in India's modern era.
Dowry has become a social menace in modern India, because due to its practice women are subjected to
many types of atrocity and harassment, the most brutal and inhumane of which is ‘dowry death.’ Dowry
demand and its inadequate satisfaction is one of the most prominent reasons for domestic violence. Let
us briefly discuss the dynamics of dowry deaths.
2.3.1 Dowry Deaths

These are deaths of young women who are murdered or driven to suicide by continuous harassment
and torture by husbands and in-laws in an effort to extort an increased dowry. Dowry deaths are found
in many countries, but India reports the highest total number of dowry deaths. Dowry death is considered
as one of the many categories of violence against women, alongside rape, bride burning, eve teasing, and
acid throwing. Dowry deaths in India are not limited to Hindus or any specific religion. The ratio of dowry
deaths is about the same as the ratio of population in India by religions.
2.3.2 Prohibition of Dowry System

1. The Dowry Prohibition Act, 1961: The payment of a dowry has been prohibited under The Dowry
Prohibition Act, 1961 in Indian civil law and subsequently by Sections 304B and 498A of the Indian
Penal Code (IPC).
 The Dowry Prohibition Act 1961, prohibits the request, payment or acceptance of a dowry, "as
consideration for the marriage", where "dowry" is defined as a gift demanded or given as a
precondition for a marriage.
 Gifts given without a precondition are not considered dowry, and are legal. Asking or giving of
dowry can be punished by an imprisonment of up to six months, or a fine. It replaced several pieces
of anti-dowry legislation that had been enacted by various Indian states. Murder and suicide under
compulsion are addressed by India's criminal penal code.
2. Domestic violence protection officer: Under the Protection of Women from Domestic Violence Act
2005 (PWDVA), a woman can put a stop to the dowry harassment by approaching a domestic violence
protection officer.
3. Combating violence against women: Reports of incidents of dowry deaths have attracted public
interest and sparked a global activist movement seeking to end the practice. Of this activist
community, the United Nations (UN) has played a pivotal role in combating violence against women,
including dowry deaths.
4. Role of The United Nations: United Nations has been an advocate for women's rights since its
inception in 1945, explicitly stating so in its Charter’s Preamble,
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a) The Universal Declaration of Human Rights (adopted in 1948),

b) The International Covenant on Civil and Political Rights (adopted in 1966),
c) The International Covenant on Economic, Social and Cultural Rights (also adopted in 1966) (these
three documents are known collectively as the ‘International Bill of Rights’) and
d) The Convention on the Elimination of All Forms of Discrimination Against Women (CEDAW) (2012).
The United Nations Children's Fund (UNICEF), though predominately focused on improving the quality of
education available to children globally, has also taken a proactive stance against dowry death.
Let’s look at the issue which has caught the attention of entire world amidst the pandemic and this is
common phenomenon since ages.
2.4 Migration
Human migration is the movement by people from one place to another with the intention of settling
temporarily or permanently in the new location. The movement is typically over long distances and from
one country to another, but internal migration is also possible.
In gender studies, the term “Feminization of Migration” has been proposed for a suggested "gendered
patterns" in migration, meaning that there is a trend of a higher percentage of women among voluntary
migrants. The term is mostly applied to an increase of migrant domestic workers to industrialized
countries, especially those working as nannies.
A more recent time the shift in migration patterns relates to an increase in the migration of single women
and partnered women who migrate without their families. Due to stipulations present within contract-
based employment, worker families are prevented from permanently settling and as a result, women are
migrating alone.
2.4.1 Reasons for Migration

The factors which motivate migration may be called as push and pull factors.
1. Pull factors: The pull factors are those which attract an individual to migrate. Examples: employment
opportunity, education, housing facilities etc.
2. Push factors: The push factors which motivate migration are poverty, indebtedness, social outcaste,
unemployment, natural calamities etc. Which compete people to move out.
3. Social factors: The number of deserted women is on the increase which leads to an increase in the
migration of these women in search of livelihood.
 According to All India data, a higher percentage of women migrate from rural - rural destinations
compared to rural – urban destinations.
 The male migrants are dependent on female earnings till they find work. The social customs,
tradition, induce people to migrate from one place to another. Inter caste marriage is an example.
They are either socially outcastes or disliked the fellow villagers and relatives.
4. Patriarchal Society: Gender relations and hierarchies within the family context affect the migration of
women because it is usually within the family that female subordination to male authority plays itself
out.
 The family both defines and assigns the roles of women, which determine their relative
motivation and incentive to migrate, and controls the distribution of resources and information
that can support, discourage, or prevent migration.
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Concept Check
Q. Which among the following can be classified as a pull factor for migration of females from one
location to another?
(a) Poverty
(b) Indebtedness
(c) Social Outcaste
(d) Education
(e) Natural Calamities
Answer: D
2.4.2 Challenges faced by Women Migrants

1. Discrimination faced by women: Studies of immigrant women argue that women more often than
men are denied full incorporation; that is, the full civil, political, and social rights and responsibilities
that normally come with membership in a society.
2. Stereotype Barrier: Women may have different experiences than men because they are frequently
segregated into traditional "female" occupations, such as domestic work, childcare, or garment
manufacturing.
 Even highly skilled immigrant workers may have different experiences based on their gender. The
gender hierarchies that affect all women in general also handicap immigrant women in particular,
influencing job opportunities, work environment, and wages vis-a-vis their male counterparts.
3. Vulnerability of women: The existing push and pull factors operating hand in hand with increasing
barriers to migration (which are not related to labor demand) are only fostering an increase in irregular
migration exposing migrant workers, especially women, to exploitative working conditions and
denying them access to legal and social protection.
4. Conditions overseas: Working in a country away from their homes, women are subjected to various
forms of discrimination, exploitation and abuse. Sometimes they are not given their due salary,
which is another form of bonded labor and slavery.
 Forced by domestic economic conditions, women are sometimes forced to migrate in search of
employment avenues. As a result, sometimes they have to work in highly insecure and disturbed
areas, threatening not only their livelihood but their very life.
 For example, in a recent instance Indian nurses working in Iraq were abducted for weeks,
triggering national outrage.
5. Xenophobia: It leads many in receiving countries to view migrant women workers as aliens: as
inferiors– culturally and socially;
 Without rights, or an ability to obtain redress; with ignorance– about the worker’s culture;
 As commodities, and therefore, subject to different standards of treatment in general – there is
widespread reporting of migrant workers being ill-treated, starved, locked up and so on; because
of different ways of relating to women arising out of religion and culture– making female workers
more vulnerable to exploitation and sexual abuse.
Concept Check
Q. A dislike of or prejudice against people from other countries is known as
(a) Ethnocentrism
(b) Xenophobia
(c) Xenophilia
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(d) Aporophobia
(e) Chauvinism
Answer: B
2.5 Sexual Violence against Women in India

As per National Crime Record Bureau (NCRB) data, Crimes Against Women showed an increase of 7.3%
in 2019 from 2018. On an average, 88 cases of crimes against women were recorded per day. Some of
the important trends in these regards are:
 Majority of cases under crime against women under IPC were registered under cruelty by husband or
his relatives (30.9%), kidnapping & abduction of women and rape.
 In the number of cases of rape of women belonging to SCs, Rajasthan topped the list, followed by
Uttar Pradesh and Madhya Pradesh.
Thus, Violence against women is as serious a cause of death and incapacity among women of
reproductive age as cancer, and a greater cause of ill health than traffic accidents and malaria combined.
There are various causes for this deadly disease as discussed below
2.5.1 Causes of rising sexual crime in India

1. Low status of women: The biggest issue is women's overall lower status in Indian society. The
patriarchal nature of Indian society has deprived women of equal rights. It also has led to other social
malice’s like female feticide, Dowry and Preference for son.
2. Lack of public safety: Women generally aren't protected outside their homes. Indian authorities say
that the country's public places can be unsafe for women. Many streets are poorly lit, and there's a
lack of women's toilets. For e.g., Delhi gang rape took place in public place.
3. Acceptance of domestic violence: National family-health survey reports that a sizeable percentage of
women blame themselves for beatings by their husbands. “When a boy grows up seeing his father
assault his mother, he starts to accept such a behavior and repeats it,”. This is being normalized and
it is also accepted by women.
4. A sluggish court system: India's court system is painfully slow, in part because of a shortage of judges.
The country has about 15 judges for every 1 million people, while China has 159. Along with inefficient
judicial system, the conviction rate of rape cases is very poor.
5. Few female police personnel: Studies show that women are more likely to report sex crimes if female
police officers are available. India has historically had a much lower percentage of female police
officers than other Asian countries.
6. Blaming provocative clothing: In a 1996 survey of judges in India, 68 percent of the respondents said
that provocative clothing is an invitation to rape. This perception among the learned people is
percolating to the masses.
2.5.2 The Way Forward

1. Generating more awareness about Women’s Safety: Both societal norms for behavior and the built
environment affect a woman’s safety in public spaces. Knowledge of women’s issues might begin to
make a shift in the way women are treated and respected in the society.
2. Built environment – A medium of change: The behavior and attitudes of the society cannot be
transformed overnight, but the built environment can be controlled and can be used as a medium for
change.
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 As a beginning we can start with creating favorable urban infrastructure, like proper lighting on
the public places, safe and secure urban transportation, installing CCTV cameras at places thought
to be prone to sexual violence etc.
3. Faster resolution of cases: Setting up of specially designed courts (Fast Track Courts) for trying cases
of violence against women. These courts could be mandated to finalize the case within a stipulated
time frame.
4. Need for Sensitization of Police System: Setting up of all women police stations and recruiting of more
policewomen. However, in the light of instances where members of women police force were
themselves harassed, raped or even murdered, there is greater need for reforming and sensitizing the
police system as such.
5. Moral Overhauling of the Masses: If we take account of all these women and then collectively see the
scenario of sexual crimes against women, it can be easily seen that stringent laws alone cannot do
much.
 What really needs to be done is the moral overhauling of the minds of the masses by means of
education and awareness.
 Strong and stringent laws are definitely necessary as the existing laws have proved to be inefficient
in ensuring swift justice and appropriate punishment to the guilty. But the actual need of the hour
is a revolutionary change in the mindsets and conscience of Indian men so that they stop seeing
women as objects of sexual pleasure.
6. Involvement of community Members: Further research needs to be done while engaging various
community organizations, municipal authorities, police departments and other important
stakeholders.
 Workshops need to be organized and future women’s safety audits need to be designed and led
by community members. This would help form crucial links between the community and decision-
making organizations.
No change can be achieved without creating a dialogue between the users and the designers of the space.
Active participation is the only way to bring about a revolution in the way cities and spaces are
conceived and created for residents. This takes us to the next important issue of Women at Workplace.
2.6 Women at Workplace

Women in the workforce earning wages or a salary are part
of a modern phenomenon, one that developed at the same
time as the growth of paid employment for men, but women
have been challenged by inequality in the workforce. Until
modern times, legal and cultural practices, combined with
the inertia of longstanding religious and educational
conventions, restricted women's entry and participation in
the workforce.
Workplace violence against women is understood to include physical assault, threatening behavior,
bullying, verbal abuse, and various forms of harassment. Workplace violence usually occurs in a
workplace setting; however, it may also occur outside of the work setting. Violence may be perpetrated
by a colleague or supervisor, a client or customer. When gender is incorporated in analyses of workplace
violence, important issues emerge. These include:
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1. Women have difficulty in labeling their experiences as violence and harassment;

2. Women are over-represented in low paid, low status and precarious jobs;
3. Occupational health and safety research has often viewed women’s work as safe work;
4. Men are more likely to be the perpetrators of violence against women in the workplace (although
women also perpetrate violence against other women);
2.6.1 Providing safe environment and preventing violence against women in the workplace
Developments that have taken place in India with regard to providing safe environment for women at
workplace are discussed in brief.
1. Vishaka judgment (Vishaka guidelines):

a) The guidelines date back to 1997 when the Supreme Court laid them down while passing judgment
in a public interest litigation filed by Vishaka and other women’s rights groups over the infamous
Bhanwari Devi gang rape case.
b) Bhanwari Devi, a social worker from Rajasthan had in 1992 prevented the marriage of a one-year-
old girl, inviting wrath of the villagers. The gang rape was allegedly an act of revenge.
c) Hearing the PIL, the apex court took note of the fact that the civil and penal laws of the time did
not adequately provide for specific protection of women from sexual harassment at workplaces,
and made it legally binding for employers to observe some guidelines to ensure prevention of
sexual harassment of women.
d) Prohibition, prevention, redressal — these were the three key obligations that were imposed on
institutions as the guidelines defined sexual harassment at workplaces.
e) The Supreme Court said every organization must set up an internal complaints committee or ICC
to look into matters of sexual harassment of women at the workplace.
f) What constitutes sexual harassment at workplace?
 Physical contact and advances
 A demand or request for sexual favors
 Sexually coloured remarks
 Showing pornography
 Any other unwelcome physical, verbal or non-verbal conduct of sexual nature
2. The sexual Harassment of Women at Workplace (Prevention, Prohibition, and redressal) Act, 2013
a) Prevention of Sexual Harassment of Women at Workplace is a legislative act in India that seeks to
protect women from sexual harassment at their place of work. It was passed by the Indian
Parliament in 2013.
b) This statute superseded the Vishakha Guidelines for prevention of sexual harassment introduced
by the Supreme Court of India.
c) The law contains legal requirement that any workplace with more than 10 employees need to
implement it. It also contains strict measures against the employers who fail to comply with its
provisions.
d) However, it was reported by the International Labour Organization in a study (conducted by ILO in
early 2014) that, very few Indian employers were compliant to this statute. In specific terms, over
90% of Indian businesses are unable to comply with the new law.
e) Even as employee awareness campaigns and training workshops are under way in companies both
big and small, the number of reported harassment cases has gone up. Thus, there are
implementation gaps with must be overcome.
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3. Innovative Step: Central government has launched an online complaint management system called
“Sexual Harassment Electronic-Box (SHe-Box)’ for registering complaints related to sexual
harassment at workplace.
Conclusion
The daily reporting in various newspapers and data is speaking for itself. It is confirming that everyday
women are dealing with harassment from mild to extreme forms on our streets, workplaces, public
transportation, and even in homes. How long will this menace go on for? What are we supposed to do
about it?
With limited options in our hands, and with time fast flying us by, the onus is on us to wake up and do
whatever it takes. About 50% of India’s registered voters are women, the power of whom together
needs to demand a tougher India, yet an India that is sensitive to women. Women’s issues need to be
pushed in every lobby until the leaders have no choice but to yield and take a hold on the crisis that looms
across every street and every corner of India today.
This is the time we own up to ourselves. We stand by each other, tall and proud, brave and unfazed. This
is the time we own up to India. No more Harassment. We want what we deserve - for us and for our
daughters – a safer India for women.
Having understood the various pressing issues faced by women, let’s look at the various measures
undertaken by the government to address them since independence.
3 Part III: Measures against Gender Inequality in India

Right from the inception of the Constitution of India, policymakers in India have been aware of the problem
of gender inequality in India. Accordingly, various legal and developmental measures have been taken
from time to time to ameliorate the situation.
3.1 Constitutional Safeguards against Gender Inequality

1. Article 14 -Equality before law for women
2. Article 15 (1) - The State not to discriminate against any citizen on grounds only of religion, race,
caste, sex, place of birth or any of them.
3. Article 15 (3)- The State to make any special provision in favour of women and children.
4. Article 16- Equality of opportunity for all citizens in matters relating to employment or appointment
to any office under the State
5. Article 39(a)- The State to direct its policy towards securing for men and women equally the right to
an adequate means of livelihood and Article 39(d)- equal pay for equal work for both men and
women
6. Article 39 A- To promote justice, on a basis of equal opportunity and to provide free legal aid by
suitable legislation or scheme or in any other way to ensure that opportunities for securing justice are
not denied to any citizen by reason of economic or other disabilities
7. Article 42- The State to make provision for securing just and humane conditions of work and for
maternity relief
8. Article 46- The State to promote with special care the educational and economic interests of the
weaker sections of the people and to protect them from social injustice and all forms of exploitation
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9. Article 47- The State to raise the level of nutrition and the standard of living of its people
10. Article 51(A) (e) -To promote harmony and the spirit of common brotherhood amongst all the people
of India and to renounce practices derogatory to the dignity of women
11. Article 243 D (3) -Not less than one-third (including the number of seats reserved for women
belonging to the Scheduled Castes and the Scheduled Tribes) of the total number of seats to be filled
by direct election in every Panchayat to be reserved for women and such seats to be allotted by
rotation to different constituencies in a Panchayat
12. Article 243 D (4)- Not less than one- third of the total number of offices of Chairpersons in the
Panchayats at each level to be reserved for women
13. Article 243 T (3)- Not less than one-third (including the number of seats reserved for women
belonging to the Scheduled Castes and the Scheduled Tribes) of the total number of seats to be filled
by direct election in every Municipality to be reserved for women and such seats to be allotted by
rotation to different constituencies in a Municipality
14. Article 243 T (4)- Reservation of offices of Chairpersons in Municipalities for the Scheduled Castes,
the Scheduled Tribes and women in such manner as the legislature of a State may by law provide
Concept Check
Q. Which of the following Articles of the Constitution of India provides for ‘equality of opportunity
for all citizens in matters relating to employment or appointment to any office under the State’?
(a) Article 14
(b) Article 15
(c) Article 16
(d) Article 17
(e) Article 19
Answer: C
3.2 Legal Safeguards against Gender Inequality

Government of India has been administering various special laws relating to women such as:
1. ‘The Protection of Women from Domestic Violence Act, 2005’: The Domestic Violence Act of 2005
provides victims of abuse with a means for practical remedy through prosecution. Domestic violence
is currently defined in India under Section 3 of this Act. This Act prescribes stringent punishment for
domestic violence.
2. ‘The Dowry Prohibition Act, 1961’: The payment of a dowry has been prohibited under The Dowry
Prohibition Act, 1961 in Indian civil law and subsequently by Sections 304B and 498A of the Indian
Penal Code (IPC).
 The Dowry Prohibition Act 1961, prohibits the request, payment or acceptance of a dowry, "as
consideration for the marriage", where "dowry" is defined as a gift demanded or given as a
precondition for a marriage.
 Gifts given without a precondition are not considered dowry, and are legal. Asking or giving of
dowry can be punished by an imprisonment of up to six months, or a fine. It replaced several
pieces of anti-dowry legislation that had been enacted by various Indian states. Murder and
suicide under compulsion are addressed by India's criminal penal code.
3. ‘The Indecent Representation of Women (Prohibition) Act, 1986’: The Indecent Representation of
Women (Prohibition) Act (IRWA), 1986, seeks to “prohibit indecent representation of women through
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advertisements or in publications, writings, paintings, figures or in any other manner and for matters
connected therewith or incidental thereto.”
 The Act penalises persons involved in the publication, distribution and packaging of such
material.
 It, however, allows the publication of such material for scientific and learning purposes, and
representation of ancient monuments carrying such imagery.
4. ‘The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013’:
The Indian Parliament passed a new law with the goal of more effectively protecting women from
sexual violence in India.
 It came in the form of the Criminal Law (Amendment) Act, 2013, which further amends the Indian
Penal Code, the Code of Criminal Procedure of 1973, the Indian Evidence Act of 1872, and the
Protection of Children from Sexual Offences Act, 2012.
 The law makes stalking, voyeurism, acid attacks and forcibly disrobing a woman explicit crime for
the first time, provides capital punishment for rapes leading to death, and raises to 20 years from
10, the minimum sentence for gang rape and rapes committed by a police officer.
 However, the new law doesn’t address marital rape, rape committed by the armed forces or rape
against men.
3.3 Government Schemes for Women Empowerment

The Ministry of Women and Child Development is implementing various schemes for empowerment of
women across the country under the Centrally Sponsored Umbrella scheme ‘Mission for Empowerment
and Protection for Women’. The details of major schemes are:
1. Mahila Shakti Kendra scheme empowers rural

women through community participation by
involvement of Student Volunteers. The scheme is
envisaged to work at various levels and at the
national and state level technical support to the
respective government on issues related to women is
provided.
2. Swadhar Greh scheme targets the women victims of unfortunate circumstances who are in need of
institutional support for rehabilitation so that they could
lead their life with dignity.
3. Ujjawala is a comprehensive scheme to combat

trafficking with the objective to prevent trafficking of
women and children for commercial sexual

exploitation, to facilitate rescue victims and
placing them in safe custody, to provide
rehabilitation services by providing basic
amenities/needs, to facilitate reintegration of
victims into the family and society, to facilitate
repatriation of cross border victims.
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4. Working Women Hostel aims at providing safe and affordable accommodation to working women.
These hostels have Day care facility for the
children of inmates too. The Ministry provides
financial support for establishing such hostels
by NGOs or State Governments.
5. Beti Bachao Beti Padhao (BBBP) scheme is a tri-ministerial initiative of Ministries of Women and Child
Development, Health & Family Welfare and Human Resource Development with a focus on awareness
and advocacy campaign for changing mindsets, multi-sectoral action in select districts, enabling girls'
education and effective enforcement of Pre-Conception & Pre Natal-Diagnostic Techniques
(PC&PNDT) Act.
 The specific objectives of the scheme include preventing gender biased sex selective elimination;
ensuring survival and protection of the girl child and ensuring education and participation of the
girl child.
6. Women Helpline – The Scheme is being implemented since
1st April, 2015 to provide 24 hours emergency and non-
emergency response to women affected by violence
through referral and information about women related
government schemes/programmes across the country
through a single uniform number (181).
Concept Check
Q. With reference to Government of India’s schemes for empowerment of women, which of the
following options is not correct?
(a) Mahila Shakti Kendra scheme empowers rural women through community participation by
involvement of Student Volunteers
(b) Ujjawala is a comprehensive scheme to combat trafficking with the objective to prevent trafficking
of women and children for commercial sexual exploitation
(c) Swadhar Greh scheme targets the women victims of unfortunate circumstances who are in need of
institutional support for rehabilitation
(d) Mahila Police Volunteers Scheme is implemented by the Ministry of Women and Child Development
in collaboration with the Ministry of Home Affairs
Answer: E
4 Part IV: Census 2011 Data

Census 2011 is a rich source of information on status of females in the Indian society. In this part, we will
be looking at the highlights related to sex ratio, child sex ratio, number of literates, literacy rates, female
workers and female work participation rate in India.
Note: This data, even though it dates back to Census 2011, is important for the Exam. As and when fresh
Census data is available, it will be updated here as well as covered in the Current Affairs section.
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4.1 Population Figures

As per Census 2011, India’s population is 121.06 Cr with 48.5% female population. The average annual
growth rate of population has declined from 1.95 in 2001 to 1.63 in 2011. During this period, similar
pattern is observed for females (1.99 to 1.68) and for males (1.92 to 1.58)
4.2 Sex Ratio

 The Sex Ratio in the country which was 933 in 2001 has increased by 10 points to 943 in 2011. In
rural areas the sex ratio has increased from 946 to 949. The corresponding increase in urban areas
has been of 29 points from 900 to 929.
 Kerala has recorded the highest sex ratio in respect of Total population (1084), Rural population
(1078) and Urban population (1091).
 The lowest sex ratio in rural areas has been recorded in Chandigarh (690). The corresponding value in
urban areas has been seen in Daman & Diu (551).
 Seven States namely Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Bihar, Jharkhand,
Chhattisgarh, Maharashtra, and one Union Territory (UT) Lakshadweep show fall in the sex ratio in
rural areas. Two UTs, namely, Daman & Diu and Dadra & Nagar Haveli have shown a similar trend in
urban areas.
4.3 Child Sex Ratio

 Census 2011 marks a considerable fall in child sex ratio (0-6 years) from 927 to 919 (-8 points) during
2001-2011. This is the lowest sex ratio since 1961.
 In rural areas, the fall has been to the tune of 11 points (934 to 923) and in urban areas, the decline
has been to an extent of 1 point (906 to 905) over the last decade.
 Delhi (814) has recorded the lowest and Chhattisgarh (977) the highest child sex ratio in rural areas.
Haryana (832) has recorded the lowest and Puducherry (975) the highest child sex ratio in urban
areas.
Concept Check
Q. As per Census 2011, which of the following statements is not correct with respect to ‘Child Sex
Ratio’ in India?
(a) India has recorded the lowest child sex ratio since 2011.
(b) Child sex ratio is lower in urban areas than rural areas.
(c) Haryana has recorded the lowest child sex ratio in rural areas.
(d) Puducherry has recorded the highest child sex ratio in urban areas.
(e) Chhattisgarh has recorded the highest child sex ratio in rural areas.
Answer: C
4.4 Literates
 Female literates numbered 328.8 million (43.1% of the total literates).
 The highest number of female literates in rural areas are returned in Uttar Pradesh (33.5 million),
while the lowest are returned in Lakshadweep (5,339).
 In urban areas, the lowest number of female literates are returned in Lakshadweep (19,191) and the
highest number in Maharashtra (18.2 million).
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Concept Check
Q. As per Census 2011, the highest number of female literates in urban areas have been recorded
from which of the following Indian states?
(a) Kerala
(b) Tamil Nadu
(c) Karnataka
(d) Maharashtra
(e) Uttar Pradesh
Answer: D
4.5 Literacy Rates

 The female literacy rate works out to 64.6 per cent (Rural - 57.9 percent; Urban - 79.1 percent).
 The highest female literacy rate in rural areas is returned in Kerala (90.8 percent), while the lowest is
returned in Rajasthan (45.8 percent).
 In urban areas, the lowest female literacy rate is returned in Jammu & Kashmir (69.0 percent) and
the highest in Mizoram (97.3 percent).
 The female literacy rate has increased significantly by 10.9 percentage points in the last decade
(Rural - 11.8 percentage points and Urban - 6.2 percentage points). On the other hand, male literacy
rate increased only by 5.6 points (Rural - 6.5 percentage points and Urban - 2.5 percentage points).
 It is significant to note that the gap in literacy rate among males and females has reduced from 21.6
in 2001 to 16.3 in 2011 (Rural - from 24.6 in 2001 to 19.3 in 2011 and Urban from 13.4 in 2011 to 9.7
in 2011).
Concept Check
Q. As per Census 2011, which of the following statements regarding literacy rate in India are correct?
(a) Between the period 2001-2011, female literacy rate increased more than the male literacy rate.
(b) Between the period 2001-2011, female literacy rate in rural areas increased more than that in urban
areas.
(c) Female literacy rate in urban areas is higher than that in rural areas.
Answer: D
4.6 Workers
 As per Census 2011, the total number of workers (who have worked for at least one day during the
reference year) in India, is 481.7 million. Of this, 331.9 million workers are males and 149.9 million
are females.
 The workers have registered a growth of 19.8 per cent, which is marginally higher than the overall
population growth rate of 17.7 percent during the decade. Male workers grew by 20.7 percent and
female workers by 17.8 percent.
 348.6 million workers are in the rural areas and 133.1 million, are in the urban areas. The female
workers in rural and urban areas are 121.8 and 28.0 million respectively.
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4.7 Work Participation Rate

 The Work Participation Rate (WPR) for the country works out to 39.8 per cent. This is marginally higher
than the corresponding WPR of 39.1 percent in Census 2001. The WPR for males has increased to
53.3 percent in 2011 in comparison to 51.7 percent in Census 2001. The female WPR has reduced
marginally to 25.5 per cent in 2011 from 25.6 per cent in Census 2001.
 Himachal Pradesh (51.9 percent) ranks first in WPR for total workers as well as female workers (44.8
per cent). The lowest WPR have been reported from Lakshadweep (29.1 percent).
 The lowest female WPR has been reported from NCT of Delhi (10.6 percent). The highest male WPR
has been reported in Daman & Diu (71.5 percent) and lowest in Lakshadweep (46.2 percent).
 The percentage of main workers among the male workers is 82.3 per cent and female workers 59.6
percent. The percentage of male main workers has reduced from 87.3 percent to 82.3 percent in
Census 2011. On the other hand, the percentage of female main workers has increased from 57.3
percent to 59.6 percent in Census 2011.
Concept Check
Q. As per Census 2011, female work participation rate in India stood at
(a) 24.6 percent
(b) 25.5 percent
(c) 26.5 percent
(d) 25.6 percent
(e) 26.6 percent
Answer: B
5 Part V: Measures of Gender Inequality

5.1 Global Gender Gap Index
 It is published by the World Economic Forum (WEF).
 The WEF published its first gender gap index in 2006.
 The Global Gender Gap Index benchmarks countries on their progress towards gender parity in four
dimensions:
1. Economic Participation and Opportunity,
2. Educational Attainment,
3. Health and Survival and
4. Political Empowerment
 Over the Index, the highest possible score is 1 (equality) and the lowest possible score is 0
(inequality).
5.2 Gender Inequality Index

 It is part of the Human Development Report that is published by the United Nations Development
Programme (UNDP).
 GII presents a composite measure of gender inequality using three dimensions:
1. Health
2. Empowerment
3. Labour market.
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 The GII ranges between 0 and 1. Higher GII values indicate higher inequalities between women and
men and thus higher loss to human development. There is no country with perfect gender equality.
All countries suffer some loss in achievements in key aspects of human development when gender
inequality is taken into account.
Concept Check
Q. Gender Inequality Index published by the United Nations Development Programme (UNDP)
presents a composite measure of gender inequality using which of the following dimensions?
(a) Health
(b) Empowerment
(c) Labour Market
Answer: D
5.3 Gender Parity Index

1. GPI is a socioeconomic index usually designed to measure the relative access to education of males
and females. This index is released by UNESCO.
2. In its simplest form, it is calculated as the quotient of the number of females by the number of males
enrolled in a given stage of education (primary, secondary, etc.).
3. A GPI equal to one signifies equality between males and females. A GPI less than one is an indication
that gender parity favors males while a GPI greater than one indicates gender parity that favors
females.
4. GPI is released by the United Nations Educational, Scientific and Cultural Organization (UNESCO) as
a part of its Global Education Monitoring Report.
Concept Check
Q. With reference to the Gender Parity Index (GPI), which of the following statements is not correct?
(a) It is calculated as the quotient of the number of females by the number of males enrolled in a given
stage of education.
(b) A GPI equal to one signifies equality between males and females.
(c) It is released by UNICEF as a part of its Global Education Monitoring Report.
Answer: C
5.4 SDG Gender Index

1. Origin of the index: In 2018, in response to the urgent need for tools to support data-driven analysis
and to hold governments accountable for gender equality in the context of the Sustainable
Development Goals (SDGs), Equal Measures 2030 (EM2030) and partners launched the pilot SDG
Gender Index.
2. The 2019 SDG Gender Index: It measures the state of gender equality aligned to 14 of the 17
Sustainable Development Goals (SDGs) in 129 countries and 51 issues ranging from health, gender-
based violence, climate change, decent work and others.
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 The 2019 SDG Gender Index provides a snapshot of where the world stands, right now, linked to
the vision of gender equality set forth by the 2030 Agenda.
3. The index is an outcome of the joint effort of regional and global organizations including African
Women’s Development and Communication Network, Asian-Pacific Resource and Research Centre
for Women, Bill and Melinda Gates Foundation, and International Women’s Health Coalition.
Having understood the struggle of women since ages, various indicators of measuring their progress. Now
let’s delve deeper into the major contemporary issues, which will provide holistic understanding of their
status.
6 Part VI: Other Contemporary Gender Issues

6.1 Task Force on Age of Marriage for Women
The task force set up to take a re-look at the age of marriage for women has submitted its report to the
Prime Minister’s Office and the Ministry of Women and Child Development.
6.1.1 Background
 PM in his Independence -Day speech last year (2020) spoke about a panel formed to decide on the
“right age of marriage” for women.
 The minimum age of marriage, especially for women, has been a contentious issue.
 The law evolved in the face of much resistance from religious and social conservatives.
 Currently, the law prescribes that the minimum age of marriage is 21 years and 18 years for men and
women respectively.
6.1.2 Minimum Age versus Majority

 The minimum age of marriage is distinct from the age of majority which is gender-neutral.
 An individual attains the age of majority at 18 as per the Indian Majority Act, 1875.
 The law prescribes a minimum age of marriage to essentially outlaw child marriages and prevents
the abuse of minors.
6.1.3 Why is the law being relooked at?

 Despite laws mandating minimum age and criminalizing sexual intercourse with a minor, child
marriages are very prevalent in the country.
 From bringing in gender-neutrality to reduce the risks of early pregnancy among women, there are
many arguments in favour of increasing the minimum age of marriage of women.
 Early pregnancy is associated with increased child mortality rates and affects the health of the
mother.
6.1.4 Upholding the Constitution

1. Petitioners had challenged the law on the grounds of discrimination: It is argued that Articles 14 and
21 of the Constitution, which guarantee the right to equality and the right to live with dignity, were
violated by having different legal ages for men and women to marry.
2. Two significant Supreme Court rulings can act as precedents to support the petitioner’s claim.
a) In 2014, in the ‘NALSA v Union of India’ case, the Supreme Court, while recognizing transgenders
as the third gender, said that justice is delivered with the “assumption that humans have equal
value and should, therefore, be treated as equal, as well as by equal laws”.
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b) In 2019, in ‘Joseph Shine v Union of India’, the Supreme Court decriminalized adultery, and said
that “a law that treats women differently based on gender stereotypes is an affront to women’s
dignity”.
6.2 Representation of Women in Parliament
6.2.1 Status of Women in Indian Politics:

1. As per the 2017 Women in Politics Map Report released by the Inter-Parliamentary Union (IPU) and
UN Women, India ranks 148 globally in terms of representation of women in executive government
and parliament.
2. Women’s representation has steadily increased in the Lok Sabha. In the first-ever election, only 5%
of the House consisted of women. Now, that has increased to 14%.
3. Women representation at State level: As on October 2016, out of the 4,118 Members of Legislative
Assemblies (MLAs) across the country, only 9% are women, according to the Economic Survey.
4. The highest percentage of women legislators come from Bihar, Haryana and Rajasthan (14%).
5. Women reservation at local level: The 73rd and 74th amendments to the Constitution in 1993 made
it mandatory to earmark 33% of all positions in Panchayati Raj Institutions for women. This has shown
positive results as follows:
 According to the Economic Survey, as of December 2017, there are 13.72 lakh elected women
representatives in Panchayati Raj Institutions. This constitutes 44.2% of total elected
representatives at the Panchayat level.
 Women Sarpanch’s also accounted for 43% of total Gram Panchayats (GPs) across the country,
exhibiting active leadership of women in local government.
6.2.2 Arguments for Women Reservation in Parliament

1. Constitutional rights: Although equality of the sexes is enshrined in the Constitution, it is not the
reality. Therefore, vigorous affirmative action is required to improve the condition of women.
2. Redistribution of resources: Political reservation has increased redistribution of resources in favour
of the groups which benefit from reservation.
3. Previous experience: A study about the effect of reservation for women in panchayats shows that
women elected under the reservation policy invest more in the public goods closely linked to
women’s concerns. For example, in Rajasthan and West Bengal, for instance, increased female
political representation in local bodies led to more investment in drinking water and roads.
4. Gender equality: A 2008 study, reveals that a sizeable proportion of women representatives perceive
an enhancement in their self-esteem, confidence and decision-making ability.
5. B.R. Ambedkar said that “political power is the key to all social progress”: For example, women in
villages with a head council position reserved for women are more likely to report crimes to the police.
6. Historical injustice: Proportion of women in the Lok Sabha has seen only a meagre increase since
independence from 4.5% in the first Lok Sabha to the current 14% in the 17th Lok Sabha. Therefore,
there is a need to undertake some positive discrimination for increasing the women participation in
Indian politics.
7. Recording effect: Increase in the responsiveness of the official towards the pleas of disadvantaged
groups. For example, greater police responsiveness towards crimes against women in constituencies
where women were part of the political leadership.
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8. To break the Vicious cycle: Socio-economic disadvantages lead to reduced opportunities for women
to participate in the political process, leading to weakened representation which, in turn, retards the
process of addressing socio-economic disadvantages.
6.2.3 Women’s Reservation Bill

1. A.k.a Constitution (108th Amendment) Bill, 2008: It is pending in the parliament.
2. It aims to reserve one-third of all seats for women in the Lok Sabha and the state legislative
assemblies.
3. The bill says that the allocation of reserved seats shall be determined by such authority as prescribed
by Parliament and that the reserved seats may be allotted by rotation to different constituencies in
the state or union territory.
4. It also provides for reservation of seats for women to cease to exist 15 years after the
commencement of this Amendment Act.
5. This will be a Constitutional Amendment under Article 368 and will need the ratification of half of the
state legislatures before coming into force.
6.2.4 Arguments against Women Reservation in Parliament

1. Unequal status: It may perpetuate inequality of women since they would not be perceived to be
competing on merit.
2. Restricts choice: Reservation of seats restricts choice of voters to only women candidates.
3. Rotation of reserved constituencies in every election may reduce the incentive for an MP to work for
his constituency as he may be ineligible to seek re-election from that constituency.
4. A study by Ministry of Panchayati Raj recommended that rotation of constituencies should be
discontinued at the panchayat level because almost 85% women were first timers and only 15%
women could get re-elected because the seats, they were elected from were de-reserved.
5. Also, the first timer women representatives may not be able to perform the work with high
efficiency.
6. It could lead to election of “proxies” or relatives of male candidates.
6.2.5 Way Ahead

1. The rotation of seats can be done over a period of 3-4 election cycles to enable women
representatives of a particular constituency to develop administrative expertise during that period.
2. The women reservation may be extended in the first instance for 15 years then reviewed to decide
whether it should be continued.
3. While consensus for reservation of women in parliament and State legislature is being built, the
political parties can provide for reservation for candidates within the parties.
4. Other options like Dual member constituencies may be considered, where some constituencies shall
have two candidates, one being a woman.
5. The advantages of Dual member constituency are it does not decrease the democratic choice for
voters, does not discriminate against male candidates and might make it easier for political
representatives to cater to large constituencies.
6.3 Permanent Commission to Women Officers in the Army

The Ministry of Defence (MoD) has issued the formal Government Sanction Letter for grant of Permanent
Commission (PC) to women officers in the Army.
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6.3.1 Why such an order?

 The order follows a Supreme Court verdict that directed the government that women Army officers
be granted PC and command postings in all services other than combat.
 Following this, Army Chief had said it was an enabling one and gives a lot of clarity on how to move
forward.
 He had stated that the same procedure for male SSC officers will be followed for women to give PC.
6.3.2 Women in Army: Background of the case

Beginning of the journey: The induction of women officers in the Army started in 1992. They were
commissioned for a period of five years in certain chosen streams such as Army Education Corps, Corps
of Signals, Intelligence Corps, and Corps of Engineers.
1. Women Special Entry Scheme (WSES): Recruits under the Women Special Entry Scheme (WSES) had
a shorter pre-commission training period than their male counterparts who were commissioned
under the Short Service Commission (SSC) scheme.
 In 2006, the WSES scheme was replaced with the SSC scheme, which was extended to women
officers. They were commissioned for a period of 10 years, extendable up to 14 years.
2. Evolution: Serving WSES officers were given the option to move to the new SSC scheme or to continue
under the erstwhile WSES.
 They were to be, however, restricted to roles in streams specified earlier — which excluded
combat arms such as infantry and armored corps.
6.3.3 Arguments Rejected by the Supreme Court

1. Violation of Equality: The Supreme Court rejected arguments against a greater role for women
officers, saying this violated equality under the law.
2. No Option of Command Appointment: They were being kept out of command posts on the reasoning
that the largely rural rank and a file will have problems with women as commanding officers. The
biological argument was also rejected as disturbing.
 While male SSC officers could opt for permanent commission at the end of 10 years of service, this
option was not available to women officers.
 They were, thus, kept out of any command appointment, and could not qualify for a government
pension, which starts only after 20 years of service as an officer.
3. Justice being done: The first batch of women officers under the new scheme entered the Army in
2008.
6.3.4 Arguments by the Government

The Centre had mentioned several reasons behind the differential treatment of women officers.
1. Permanent Commission Status: It had proposed that women officers with up to 14 years of service
would be granted a permanent commission, while those above 14 years would be permitted to serve
for up to 20 years and retire with pension without being considered for permanent commission.
 It also stated that those with more than 20 years of service would immediately be released with
pension
 This order did not grant permanent commission to women with over 14 years of service, and hence
discriminatory.
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 Furthermore, the 2019 order granted permanent commission only for staff appointments and not
command appointments.
2. Hindrance of accepting Women as Officers: The centre justified this by stating that that the units in
Army are composed entirely of male soldiers, who are mostly from rural backgrounds and thus, are
not mentally prepared to accept women officers in the command of units.
 It also stated that the lower physical capacity of women officers would be a challenge for them
to command units wherein officers are expected to lead the men from the front and need to be
in prime physical condition to undertake combat tasks.
3. Disputes along the border and Internal Security: The government also stated that the adverse
conditions, including two unsettled borders and internal security situations in the northeast and
Jammu and Kashmir, have a major bearing on the employment of women officers in light of their
physiological limitations.
4. Biological Argument: Also, it had stated that the isolation and hardships would eat into their resolve
and that they have to heed to the call of pregnancy, childbirth and family.
5. Risk of being taken as Prisoner of war: The government also argued that women ran the risk of
capture by the enemy and being taken as prisoners of war.
6.3.5 Implications of the Judgement

1. Doing away with Discrimination: The SC did away with all discrimination on the basis of years of
service for grant of PC in 10 streams of combat support arms and services, bringing them on a par
with male officers.
2. Opens the vistas of Opportunities: It has also removed the restriction of women officers only being
allowed to serve in staff appointments, which is the most significant and far-reaching aspect of the
judgment.
 It means that women officers will be eligible to the tenancy of all the command appointments, at
par with male officers, which would open avenues for further promotions to higher ranks for
them.
3. Spirit of Equality: It also means that in junior ranks and career courses, women officers would be
attending the same training courses and tenanting critical appointments, which are necessary for
higher promotions.
6.4 Women in Indian Agriculture

The recent farmers’ protests have cast a spotlight on a traditionally overlooked group of female farmers.
6.4.1 Role
Women in Indian agriculture perform numerous labor-intensive jobs such as weeding, picking,
separation of seeds from fibre, keeping of livestock and its other associated activities like milking, etc.
Mainly rural women are engaged in agricultural activities in three different ways:
1. Paid Labourers.
2. Cultivator doing labour on their own land.
3. Managers of certain aspects of agricultural production by way of labour supervision and the
participation in post-harvest operations
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6.4.2 Status
As per Agriculture Census 2015-16, female operational holdings increased to 14.0 percent in 2015-16
against 12.8 percent in 2010-11. This indicates rising participation of females in management and/or
operation of agricultural holdings in the country, also termed as feminization of agriculture.
 The proportion of operated area managed by female operational holders has also increased to 11.8
percent in 2015-16 against 10.4 percent in 2010-11.
 According to the Food and Agriculture Organization, women constitute a third of India’s agricultural
labour force and contribute 55-66% to farm production.
 According to non-profit Oxfam, around 80 percent of farm work in India – including sowing,
winnowing, harvesting, and other labor-intensive processes and non-mechanized farm occupations –
is undertaken by women
6.4.3 Reasons for Emerging Trend of Feminization of Agriculture

1. Rural to urban migration of male members: With male out-migration, women have additionally taken
on the role of providing for their households on a daily basis, since remittances are irregular. This
means that they now have to take care of their own farming and also work as agricultural wage
labourers.
2. Cheap and easily available agriculture labour: Women are more willing to accept low-paid irregular
work, are easy to hire and fire, are thought to be docile and hardworking, and certain jobs are typified
as women’s work such as picking tea.
3. Agrarian distress: It has led to a shift of male members to non-farm activities and pushed female
members to perform agricultural and allied activities.
6.4.4 Issues Faced by Women in Indian Agriculture

1. Low land and asset ownership: Women involved in agriculture still lag behind in terms of land and
asset ownership, even when acting as primary cultivators. This is largely due to patriarchal social
norms and limited awareness about their property rights. Women are also not recognized as farmers
in Indian policies.
 Lack of entitlement to land (and other assets such as machinery, livestock etc.) is a severe
impediment to women cultivators. Land titles are often demanded as security for credit, basis for
entitlement of agriculture-related schemes etc.
2. Wage gap: Women in general are offered lower wages for agriculture labour, especially in informal
and private sector.
3. Lack of supportive infrastructure: Technological interventions and infrastructural facilities in
agriculture, in general, are not designed with women farmers in mind.
4. Absence of decision-making power: Enhanced responsibility has not translated into decision-making
powers over important issues such as crop selection, division of duties, marketing etc.
5. Limited to drudgery work: Mechanization of agriculture has resulted in confinement of women to
labour intensive and menial roles such as winnowing, harvesting, sowing seeds and rearing livestock.
6. Illiteracy- An Impediment: Women workers in agriculture suffer from high illiteracy rate and drop-out
of schools and have little awareness about the existing schemes, benefits, rights, etc. As a result of
this female population engaged in agriculture has poor economic as well social growth.
7. Low representation in administrative bodies: Women have no representation in agricultural
marketing committees and other similar bodies.
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6.4.5 Steps Taken by the Government

 Mahila Kisan Sashaktikaran Pariyojana (MKSP): The Department of Rural Development, Ministry of
Rural Development is implementing MKSP to empower women in agriculture by making systematic
investments to enhance their participation and productivity, as also to create and sustain their
agriculture-based livelihoods.
 ICAR-Central Institute for Women in Agriculture (ICAR-CIWA): It is a first of its kind institution in India
that is exclusively devoted to gender related research in agriculture.
 Additional support in existing schemes: The Department of Agriculture Cooperation and Farmers
Welfare is also providing additional support and assistance to female farmers, over and above the
male farmers under various Schemes namely Agri-Clinic & Agri-Business Centre (ACABC), Integrated
Schemes of Agricultural Marketing (ISAM), Sub-Mission of Agricultural Mechanization (SMAM) and
National Food Security Mission (NFSM).
6.4.6 Way Forward

1. Enhancing representation of women in decision making bodies: Women must be involved in
decision-making bodies that have the potential to introduce structural changes in agricultural sector.
2. Agricultural education be made gender sensitive and research, development, extension and services
be engendered to give due recognition to the multiple roles played by women agriculturists.
3. Technological advancements in designing tools can play an important role in making farm equipment
easy to use for women.
4. Promoting women SHGs: Women Self Help Groups can be proactively engaged in value addition of
Agri produce at village level.
 In addition, beekeeping, fishery, poultry, animal husbandry have major scope for women
farmers and women centric schemes in these sectors can be promoted in consultation with the
representatives of women farmers.
5. Prioritizing women in accessing credit on soft terms from banks and other financial institutions for
acquisition of land, assets and agricultural inputs.
6. Awareness generation among women regarding their inheritance rights coupled with access to
judicial relief and redress, removing discrimination through legal reforms, and providing legal aid,
assistance and counseling.
7. Skill development training needs to be delivered to women farmers to train them in areas of field
operations, organic farming etc.
8. Policy emphasis must be to recognize the work of female farmers and grant equal pay to them.
6.5 Gender Dimensions of the Covid-19 Pandemic

COVID-19 Lockdown and social-distancing norms are likely to have an outsized impact on women.
6.5.1 Introduction
1. The COVID-19 outbreak is impacting societies around the world in an unprecedented manner.
However, not everyone, in every place, will be affected in the same way.
2. Experiences from previous pandemics show that women can be especially active actors for change,
while they can also experience the effects of the crisis in different (and often more negative) ways.
3. Gender gaps in outcomes across endowments (health & education), agency and economic opportunity
persist across countries. Impact of the COVID-19 pandemic will be amplified by those pre-existing
gender differences.
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4. For the most part, the negative impacts can be expected to exacerbate (i.e., more individuals are
affected) and deepen (i.e., the conditions/disadvantages of some individuals worsen).
6.5.2 Indian Women’s vulnerability to COVID-19’s impacts: Livelihood and Job Security
1. Huge loss to the Indian Economy: Oxfam India estimates the economic loss from women losing their
jobs during the pandemic at about $216 billion, around 8% of the GDP. This clouds women’s already
poor economic outlook.
2. Disproportionate impact on the informal sector: According to the ILO, 81% of Indian women work
in the informal economy. The informal sector is the worst hit by the coronavirus-imposed economic
slowdown. The economic costs of the lockdown may be disproportionately borne by women in the
end.
3. Setback for Self-Help groups: The need for social distancing has also temporarily disrupted the
functioning of self-help groups (SHGs) that have been credited with improving women’s well-being
and empowerment.
4. Feminization of Poverty: Many women are at risk of a permanent exit from the labour market. The
end result will be the feminization of income poverty. Research from the World Bank suggests the
pandemic will drive more than 12 million Indians into poverty. Women are likely to be over-
represented among the new poor.
6.5.3 Social Inequities

1. Further developing the inequalities: The impact of the virus is also exacerbating India’s deep-rooted
social inequities. An unsafe environment in many places and the burden of domestic responsibilities
have kept many women away from work.
2. Domestic Violence: There has been a more than two-fold rise in complaints of domestic violence
since the lockdown. The UNFPA (United Nations Population Fund) warns that the pandemic could
reduce world progress against gender-based violence by one-third.
3. Migrant Women: Many of the millions of migrant workers forced to flee from cities towards their
rural homes with little notice were women. They have safety concerns, with travel a risk for many.
4. COVID-19 is shifting other household dynamics, too.
 Domestic responsibilities that women bear, like cooking and cleaning, have escalated.
 As women in Indian families tend to eat last and the least, financial strain and food shortages affect
women’s nutrition more than men. Gender inequality in food security will increase further
following the loss of employment income.
6.5.4 Health
1. High Out-of-Pocket Expenditure for Women: Women may face specific constraints to access health
services. According to government data, 55% of women report not using public health services. Out-
of-pocket health expenditures are higher for women than for men in most developing countries.
2. Interruption of Key services: They include maternal health, vaccination, sexual and reproductive
health etc. get interrupted during public health emergencies, with negative consequences for women.
3. Exposure to infection through work and care: In India, women are at higher risk of contracting the
virus because they are overrepresented in the health-care sector including as part of the frontline
health staff (e.g., nurses, community health workers, birth attendants).
4. Nutrition: With the schools shut down, children’s education is likely to suffer, along with an increase
in malnourishment due to disruption of mid- day meal.
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 The situation will worsen for girls as they are more dependent on the mid-day meal programs
given the gendered nature of nutrition provision in households with limited resources.
6.5.5 Other Aspects

1. The Additional Burden of Care: One of the primary reasons that women leave the workforce or do
not enter it in the first place is their unpaid caregiving responsibilities at home.
 Longstanding patriarchal social norms and cultural expectations have put the burden of caring for
children, the elderly, and the household on Indian women.
2. Social Distancing and digital education: Girls’ education will be disadvantaged - as only 29% of
Internet users in India are female, and there’s a tendency for families with limited means to give
preference to boys for schooling.
6.5.6 Policy response- Way Forward

The pandemic calls for greater consultations between the Ministry of Finance and the Women and Child
Ministry to understand the differential impacts of COVID-19 on women and effective policy measures to
address them. Some immediate steps that the government may adopt include:
1. Support to women facing domestic violence: To help women file complain and seek help, the National
Commission for Women has launched an emergency WhatsApp number in addition to online
complaint links and emails.
 But governments must ensure adequate facilities and social distancing in shelter homes to ensure
that women are able to file complaints against abusers fearlessly.
2. Extend MGNREGS to urban areas to help the urban poor: Given the large-scale unemployment in
urban areas and the hardships of the large number of migrant workers who are still in urban centres,
MGNREGS should be extended to the urban areas to create jobs for the urban poor.
 This will be especially beneficial for a large number of women, particularly domestic workers,
who will fail to find employment as middle-class women stay at home and focus on unpaid care
work.
3. Expand the ambit of MGNREGS to include handicrafts/folk arts: Women play an important role in
preserving handicrafts and art but have been completely left out of the relief package. Without
government support, these crafts may be lost forever.
 For instance, an artisan can teach her skill to children under MGNREGS. Including crafts and folk
arts under MGNREGS will achieve the twin objectives of providing income support to poor
women and preserving Indian handicrafts and arts.
4. Support to Women’s SHGs: To revive women’s SHGs, the government should support industries like
the food processing sector and textiles and garments sector (another sector where women account
for the bulk of the workers) which are the main buyers of SHG products.
 The announcement of expanding the limit of collateral-free lending to Women’s Self-Help Groups
(SHGs) from Rs 10 lakhs to Rs 20 lakhs is another welcome step but the main problem before
SHGs is demand shortage.
5. Special provisions for pregnant and nursing mothers: Government’s COVID-19 relief package had no
special provisions for pregnant and lactating mothers who are enduring immense hardship under the
lockdown.
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 Under the Maternity Benefit Programme, pregnant women and lactating mothers already receive
a cash transfer of Rs 6000 in three instalments. The government could enhance this amount and
provide special rations for pregnant and lactating women.
 Some states like Jharkhand have started a 24/7 maternity/pregnancy helpline to help access
necessary medical assistance during the lockdown. This initiative should be implemented at the
national level.
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Social Justice: Positive

Discrimination in
Favour of the Under
Privileged

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Contents
1 Part I: Understanding Social Inequality ................................................................................................................ 5
1.1 Social Inequality ............................................................................................................................................ 6

1.2 Prejudice, Stereotype & Discrimination ........................................................ Error! Bookmark not defined.
1.3 Importance of Social Justice .......................................................................... Error! Bookmark not defined.
2 Part II: Historically Marginalised Sections of Indian Society................................................................................. 7
2.1 Caste System in India .................................................................................................................................... 7

2.2 Untouchability .............................................................................................................................................. 8
2.3 Adivasi Struggle ............................................................................................................................................ 9
2.4 Other Backward Classes .............................................................................................................................10
3 Measures for Social Justice in India ....................................................................................................................12
3.1 State and Non-state Initiatives addressing Caste & Tribe Discrimination..................................................12
3.2 Indian Constitution & Social Justice ...........................................................................................................13
3.3 Fifth and Sixth Schedule of the Indian Constitution: ..................................................................................16
3.3.1 Fifth Schedule .....................................................................................................................................16
3.3.2 Sixth Schedule .....................................................................................................................................17
3.4 Legislative Enactment .................................................................................................................................18
3.4.1 Forest Rights Act, 2006 .......................................................................................................................19
3.4.2 Panchayats (Extension to Scheduled Areas) Act (PESA), 1996 ...........................................................21
3.4.3 National Commission for Backward Classes .......................................................................................22
3.5 Schemes for SCs, STs & OBCs......................................................................................................................22
3.5.1 Scheduled Caste (SCs) .........................................................................................................................22
3.5.2 Scheduled Tribes.................................................................................................................................23
3.5.3 Other Backward Classes......................................................................................................................24
3.6 Welfare of Persons with Disability..............................................................................................................25
3.6.1 Differently-abled Population Statistics in India ..................................................................................25
3.6.2 Provision of Welfare of Persons with Disabilities ...............................................................................25
4 Contemporary Issues Related to Social Justice ..................................................................................................26
4.1 Constitutional (127th) Amendment Bill, 2021............................................................................................26

4.1.1 Background .........................................................................................................................................26
4.1.2 Need of 127th Constitution Amendment Bill .....................................................................................26
4.1.3 Main Provisions of the Bill ..................................................................... Error! Bookmark not defined.
4.1.4 Significance ............................................................................................ Error! Bookmark not defined.
4.1.5 Conclusion ............................................................................................. Error! Bookmark not defined.
4.2 Should 50% Ceiling Limit on Reservation be reconsidered? ......................................................................27
4.2.1 Debate: The 50% Cap..........................................................................................................................27

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4.2.2 A case for Maratha Reservation .........................................................................................................27

4.2.3 Challenges to the Maratha quota .......................................................................................................27
4.2.4 What is the Indra Sawhney Case? ......................................................................................................27
4.2.5 What did the verdict say? ...................................................................................................................27
4.2.6 Precedents set by the judgment.........................................................................................................28
4.2.7 How does the Maratha reservation relate to the Indra Sawhney case? .............. Error! Bookmark not
defined.
4.2.8 Have any other states breached the 50% ceiling before? ..................... Error! Bookmark not defined.
4.2.9 How does the Ninth Schedule come to the picture?..........................................................................28
4.3 What is the Role of Centre in State’s Reservation Decisions?....................... Error! Bookmark not defined.
4.3.1 Issue over 69% ....................................................................................... Error! Bookmark not defined.
4.3.2 Indira Sawhney Case .............................................................................. Error! Bookmark not defined.
4.3.3 What did the Centre say in the TN case? .............................................. Error! Bookmark not defined.
4.3.4 Identifying SEBC ..................................................................................... Error! Bookmark not defined.
4.3.5 A case for TN .......................................................................................... Error! Bookmark not defined.
4.4 Sub-categorization of OBCs ........................................................................................................................28
4.4.1 Who are OBCs? ...................................................................................................................................28
4.4.2 Background: The Mandal Commission ...............................................................................................29
4.4.3 Idea of sub-categorization ..................................................................................................................29
4.4.4 What is the need for sub-categorization and tentative recommendations of the committee? ........29
4.4.5 Potential Recommendations ..............................................................................................................30
4.4.6 What are the challenges in its implementation? ...............................................................................30
4.4.7 What more can be done to ensure equitability of benefits? ................ Error! Bookmark not defined.
4.4.8 Related Issue: Sub-categorisation of Scheduled Castes and Scheduled Tribes.... Error! Bookmark not
defined.
4.5 Horizontal & Vertical Quotas ......................................................................................................................30
4.5.1 What are vertical and horizontal reservations? .................................................................................30
4.5.2 How are the two categories of quotas applied together? .................................................................30
4.5.3 What was the Saurav Yadav case about? ...........................................................................................31
4.5.4 What did the court decide? ................................................................................................................31
4.5.5 What was the government’s argument? ............................................................................................31
4.5.6 What was the court’s reasoning? .......................................................................................................31
4.6 Caste Census and Associated Issues ...........................................................................................................31
4.6.1 The issue .............................................................................................................................................32
4.6.2 Caste details as a part of the census ..................................................................................................32
4.6.3 Issues with caste in the census ...........................................................................................................32
4.6.4 How have caste details been collected so far?...................................................................................32

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4.6.5 What about SECC 2011? .....................................................................................................................32

4.6.6 Legal imperative for a caste count .....................................................................................................32
4.6.7 Caste data for reservations.................................................................................................................33
4.7 Job Reservations and Promotion Quotas not a Fundamental Right ..........................................................33
4.7.1 Background .........................................................................................................................................33
4.7.2 More about the Judgement ................................................................................................................33
4.7.3 Analysis of the Judgement ..................................................................................................................33
4.7.4 Conclusion ..........................................................................................................................................34
4.8 Reservation in Scheduled Areas .................................................................... Error! Bookmark not defined.
4.8.1 Details .................................................................................................... Error! Bookmark not defined.
4.8.2 Fifth Schedule of the Indian Constitution .............................................. Error! Bookmark not defined.
4.8.3 Constitutional Provisions regarding Reservation .................................. Error! Bookmark not defined.
4.8.4 Reservation in the Indian Context ......................................................... Error! Bookmark not defined.
4.8.5 Judicial pronouncements regarding Reservation .................................. Error! Bookmark not defined.
4.9 National Council for Transgender Persons .................................................................................................34
4.9.1 About Transgender .............................................................................................................................34
4.9.2 Functions ............................................................................................................................................35
4.9.3 Concerns .............................................................................................................................................35
4.9.4 Conclusion ..........................................................................................................................................35
4.9.5 Other Provisions to Protect the Community ......................................................................................35
4.9.6 State Level Initiatives ..........................................................................................................................35
1 Part I: Understanding Social Inequality

What is the basis of social inequality? What is social stratification? What is the key distinction between
prejudice, stereotype and discrimination? Why is social justice important? These are some of the important
questions that we will try to answer in this part.

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1.1 Social Inequality

In every society, some people have a greater share of valued resources – money, property, education,
health, and power – than others. These social resources can be divided into three forms of capital
Often, these three forms of

capital overlap and one can be
Economic In the form of material assets
converted into the other. For capital and income
example, a person from a well-
off family (economic capital) Cultural Such as educational
can afford expensive higher capital qualifications and status
education, and so can acquire
cultural or educational capital.
Someone with influential
Social In the form of networks of
relatives and friends (social capital contacts and social associations
capital) may – through access
to good advice, recommendations or information – manage to get a well-paid job.
Patterns of unequal access to social resources are commonly called social inequality. Some social
inequality reflects innate differences between individuals for example, their varying abilities and efforts.
Someone may be endowed with exceptional intelligence or talent, or may have worked very hard to
achieve their wealth and status. However, by and large, social inequality is not the outcome of innate or
‘natural’ differences between people, but is produced by the society in which they live.
Term social stratification refers to a system by which categories of people in a society are ranked in a
hierarchy. This hierarchy then shapes people’s identity and experiences, their relations with others, as
well as their access to resources and opportunities.
Concept Check
Q. A category of people who share a common position in a hierarchy are commonly known as a
(a) social class
(b) social stratification
(c) status
(d) class array
(e) caste system
Answer: A

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2 Part II: Historically Marginalised Sections of Indian Society
2.1 Caste System in India

1. The Caste System - Distinct Indian social
institution: It legitimises and enforces practices
of discrimination against people born into
particular castes. These practices of
discrimination are humiliating, exclusionary
and exploitative.
2. Classification of Caste system: Historically, the
caste system classified people by their
occupation and status. Every caste was
associated with an occupation, which meant
that persons born into a particular caste were
also ‘born into’ the occupation associated with
their caste – they had no choice.
3. Hierarchy of Caste: Moreover, and perhaps more importantly, each caste also had a specific place in
the hierarchy of social status, so that, roughly speaking, not only were occupational categories ranked
by social status, but there could be a further ranking within each broad occupational category.
4. In strict scriptural terms: Social and Economic status were supposed to be sharply separated.
-For example, the ritually highest caste – the Brahmins – were not supposed to amass wealth, and
were subordinated to the secular power of kings and rulers belonging to the Kshatriya castes. On the
other hand, despite having the highest secular status and power, the king was subordinated to the
Brahmin in the ritual-religious sphere.
 However, in actual historical practice economic and social status tended to coincide. There was
thus a fairly close correlation between social (i.e., caste) status and economic status – the ‘high’
castes were almost invariably of high economic status, while the ‘low’ castes were almost always
of low economic status.
5. Link between Caste and Occupation: In modern times, and particularly since the nineteenth century,
the link between caste and occupation has become much less rigid.
 Ritual-religious prohibitions on occupational change are not easily imposed today, and it is easier
than before to change one’s occupation. Moreover, compared to a hundred or fifty years ago, the
correlation between caste and economic status is also weaker – rich and poor people are to be
found in every caste.
 But this is the key point – the caste-class correlation is still remarkably stable at the macro level.
As the system has become less rigid, the distinctions between castes of broadly similar social and
economic status have weakened. Yet, between different socio-economic groupings, the
distinctions continue to be maintained.
6. Inequalities Persist: Although things have certainly changed, they have not changed much at the
macro level – it is still true that the privileged (and high economic status) sections of society tend to
be overwhelmingly ‘upper’ caste while the disadvantaged (and low economic status) sections are
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2.2 Untouchability
1. Phenomenon of ‘Untouchability’: It is an extreme and
particularly vicious aspect of the caste system that prescribes
stringent social sanctions against members of castes located
at the bottom of the purity-pollution scale.
 Strictly speaking, the ‘untouchable’ castes are outside the
caste hierarchy – they are considered to be so ‘impure’
that their mere touch severely pollutes members of all
other castes, bringing terrible punishment for the former
and forcing the latter to perform elaborate purification
rituals.
 In fact, notions of ‘distance pollution’ existed in many regions of India (particularly in the south)
such that even the mere presence or the shadow of an ‘untouchable’ person is considered
polluting.
 Despite the limited literal meaning of the word, the institution of ‘untouchability’ refers not just
to the avoidance or prohibition of physical contact but to a much broader set of social sanctions.
2. Dimensions of Untouchability: It is important to emphasise that the three main dimensions of
untouchability – namely, exclusion, humiliation-subordination and exploitation – are all equally
important in defining the phenomenon.
3. Experience of Dalits: Although other (i.e., ‘touchable’) low castes are also subjected to subordination
and exploitation to some degree, they do not suffer the extreme forms of exclusion reserved for
‘untouchables.’
 Dalits experience forms of exclusion that are unique and not practiced against other groups – for
instance, being prohibited from sharing drinking water sources or participating in collective
religious worship, social ceremonies and festivals.
 At the same time, untouchability may also involve forced inclusion in a subordinated role, suchas
being compelled to play the drums at a religious event.
4. Manifestation of Untouchability: The performance of publicly visible acts of (self-)humiliation and
subordination is an important part of the practice of untouchability.
 Common instances include the imposition of gestures of deference (such as taking off headgear,
carrying footwear in the hand, standing with bowed head, not wearing clean or ‘bright’ clothes,
and so on) as well as routinised abuse and humiliation.
 Moreover, untouchability is almost always associated with economic exploitation of various
kinds, most commonly through the imposition of forced, unpaid (or under-paid) labour, or the
confiscation of property.
 Finally, untouchability is a pan-Indian phenomenon, although its specific forms and intensity vary
considerably across regions and socio-historical contexts.
5. Addressing the Injustice: The so-called ‘untouchables’ have been referred to collectively by many
names over the centuries. Whatever the specific etymology of these names, they are all derogatory
and carry a strongly pejorative charge. In fact, many of them continue to be used as forms of abuse
even today, although their use is now a criminal offence.
 Mahatma Gandhi had popularised the term ‘Harijan’ (literally, children of God) in the 1930s to
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 However, the ex-untouchable communities and their leaders have coined another term, ‘Dalit’,
which is now the generally accepted term for referring to these groups. In Indian languages, the
term Dalit literally means ‘downtrodden’ and conveys the sense of an oppressed people.
 Though it was neither coined by Dr. Ambedkar nor frequently used by him, the term certainly
resonates with his philosophy and the movement for empowerment that he led. It received wide
currency during the caste riots in Mumbai in the early 1970s.
 The Dalit Panthers, a radical group that emerged in western India during that time, used the term
to assert their identity as part of their struggle for rights and dignity.
Concept Check
Q. Which of the following is/are the principal characteristics of caste system in India?
(a) Hierarchy
(b) Endogamy
(c) Hereditary status and occupation
(d) Concept of pollution
Answer: E
Having understood the brutal form of social practices against the Dalits, lets now understand the injustice
meted out to Adivasis.
2.3 Adivasi Struggle

1. Introduction: Like the Scheduled Castes, the Scheduled Tribes are social groups recognised by the
Indian Constitution as specially marked by poverty, powerlessness and social stigma. The jana or
tribes were believed to be ‘people of the forest’ whose distinctive habitat in the hill and forest areas
shaped their economic, social and political attributes.
2. Infiltration of their Habitation: In the case of adivasis, the movement of populations from one area
to another further complicates the picture. Today, barring the North-Eastern states, there are no
areas of the country that are inhabited exclusively by tribal people; there are only areas of tribal
concentration.
 Since the middle of the nineteenth century, non-tribals have moved into the tribal districts of
central India, while tribal people from the same districts have migrated to plantations, mines,
factories and other places of employment.
3. Poor Standard of living: In the areas where tribal populations are concentrated, their economic and
social conditions are usually much worse than those of non-tribals. The impoverished and exploited
circumstances under which adivasis live can be traced historically to the pattern of accelerated
resource extraction started by the colonial British government and continued by the government of
independent India.
4. Snatching the rights of Adivasis: From the late nineteenth century onwards, the colonial government
reserved most forest tracts for its own use, severing the rights that Adivasis had long exercised to
use the forest for gathering produce and for shifting cultivation.
 Forests were now to be protected for maximising timber production. With this policy, the
mainstay of their livelihoods was taken away from Adivasis, rendering their lives poorer and
more insecure.

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Denied access to forests and land for cultivation, Adivasis were forced to either use the forests
illegally (and be harassed and prosecuted as ‘encroachers and thieves) or migrate in search of
wage labour.
5. Loss of Identity: Like the term Dalit, the term Adivasi connotes political awareness and the assertion
of rights. Literally meaning ‘original inhabitants’, the term was coined in the 1930s as part of the
struggle against the intrusion by the colonial government and outside settlers and moneylenders.
 Being Adivasi is about shared experiences of the loss of forests, the alienation of land, repeated
displacements since Independence in the name of ‘development projects’ and much more.
 In spite of the heavy odds against them and in the face of their marginalization many tribal groups
have been waging struggles against outsiders (called ‘dikus’) and the state.
6. Achievements of Adivasis: In post-Independence India, the most
significant achievements of Adivasi movements include the
attainment of statehood for Jharkhand and Chattisgarh, which
were originally part of Bihar and Madhya Pradesh respectively. In
this respect Adivasis and their struggles are different from the Dalit
struggle because, unlike Dalits, Adivasis were concentrated in
contiguous areas and could demand states of their own.
Concept Check
Q. With reference to tribal population in India, which of the following statements is not correct?
(a) Tribal population of the country is predominantly concentrated in rural areas.
(b) Decadal growth rate of tribal population in India has been greater than the growth rate of the overall
population.
(c) As per Census 2011, sex ratio among Scheduled Tribes is higher than the sex ratio in the overall
population.
(d) There are no Scheduled Tribes notified in the states of Punjab and Haryana.
Answer: E
The concept of social justice is incomplete without understanding the Story of OBCs. In this section let’s
demystify them and learn their struggle.
2.4 Other Backward Classes

1. Introduction: Untouchability was the most visible and comprehensive form of social discrimination.
However, there were a large group of castes that were of low status and were also subjected to
varying levels of discrimination short of untouchability. These were the service and artisanal castes
who occupied the lower rungs of the caste hierarchy.
2. The Constitution of India recognises the possibility that there may be groups other than the
Scheduled Tribes and Scheduled Castes who suffer from social disadvantages. These groups – which
need not be based on caste alone, but generally are identified by caste – were described as the
‘socially and educationally backward classes.’ This is the constitutional basis of the popular term
‘Other Backward Classes’ (OBCs), which is in common use today.
3. Definition of OBC: Like the category of the ‘tribe’, the OBCs are defined negatively, by what they are
not. They are neither part of the ‘forward’ castes at the upper end of the status spectrum, nor of the
Dalits at the lower end.
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 But since caste has entered all the major Indian religions and is not confined to Hinduism alone,
there are also members of other religions who belong to the backward castes and share the same
traditional occupational identification and similar or worse socio-economic status.
 For these reasons, the OBCs are a much more diverse group than the Dalits or adivasis.
4. The First Backward Classes Commission: The first government of independent India under
Jawaharlal Nehru appointed a commission to look into measures for the welfare of the OBCs. The
First Backward Classes Commission headed by Kaka Kalelkar submitted its report in 1953. But the
political climate at the time led to the report being sidelined.
 From the mid-fifties, the OBC issue became a regional affair pursued at the state rather than the
central level.
5. Struggle of OBC’s: The southern states had a long history of backward caste political agitation that
had started in the early twentieth century. Because of these powerful social movements, policies to
address the problems of the OBCs were in place long before they were discussed in most northern
states. The OBC issue returned to the central level in the late 1970s after the Emergency when the
Janata Party came to power.
6. The Second Backward Classes Commission headed by B.P. Mandal was appointed at this time.
However, it was only in 1990, when the central government decided to implement the ten-year old
Mandal Commission report, that the OBC issue became a major one in national politics.
7. The Politicisation of the OBCs: Since the 1990s we have seen the resurgence of lower caste
movements in north India, among both the OBCs and Dalits. The politicisation of the OBCs allows
them to convert their large numbers – recent surveys show that they are about 41% of the national
population – into political influence.
 This was not possible at the national level before, as shown by the sidelining of the Kalelkar
Commission report, and the neglect of the Mandal Commission report.
8. Disparity within OBCs: The large disparities between the upper OBCs (who are largely landed castes
and enjoy dominance in rural society in many regions of India) and the lower OBCs (who are very poor
and disadvantaged, and are often not very different from Dalits in socio-economic terms) make this
a difficult political category to work with.
 However, the OBCs are severely under-represented in all spheres except landholding and
political representation (they have a large number of MLAs and MPs). Although the upper OBCs
are dominant in the rural sector, the situation of urban OBCs is much worse, being much closer
to that of the Scheduled Castes and Tribes than to the upper castes.
Concept Check
Q. With reference to ‘Other Backward Classes’ (OBCs) in India, which of statements is/are correct?
(a) Common territory is a feature of OBCs.
(b) Geographical isolation is a problem faced by OBCs.
(c) OBCs were historically treated as untouchables.
Answer: E
Now that we have developed an understanding of social inequality and see how prevalent it has been in
the Indian society, it is time to turn our gaze towards the measures taken for promoting social justice in
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India. In next part, we will look at the various constitutional, statutory and developmental measures
taken by the State for the upliftment of the marginalised sections of the Indian society.
3 Measures for Social Justice in India
3.1 State and Non-state Initiatives addressing Caste & Tribe Discrimination
1. Background: The Indian state has had special programmes for the Scheduled Tribes and Scheduled
Castes since freedom struggle.
 The ‘Schedules’ listing the castes and tribes recognised as deserving of special treatment because
of the massive discrimination practiced against them were drawn up in 1935, by the British Indian
government. After Independence, the same policies have been continued and many new ones
added.
 Among the most significant additions is the extension of special programmes to the Other
Backward Classes (OBCs) since the early 1990s.
2. Affirmative Action by the state: The most important state initiative attempting to compensate for
past and present caste discrimination is the one popularly known as ‘reservations’.
 This involves the setting aside of some places or ‘seats’ for members of the Scheduled Castes and
Tribes in different spheres of public life. These include reservation of seats in the State and Central
legislatures (i.e., state assemblies, Lok Sabha and Rajya Sabha); reservation of jobs in government
service across all departments and public sector companies; and reservation of seats in
 The proportion of reserved seats is equal to the percentage share of the Scheduled Castes and
Tribes in the total population. But for the OBCs this proportion is decided differently.
 The same principle is extended to other developmental programmes of the government, some
of which are exclusively for the Scheduled Castes or Tribes, while others give them preference.
3. Measures against Caste Discrimination: In addition to reservations, there have been a number of
laws passed to end, prohibit and punish caste discrimination, especially untouchability.
 One of the earliest such laws was the Caste Disabilities Removal Act of 1850, which disallowed
the curtailment of rights of citizens due solely to change of religion or caste.
 The most recent such law was the Constitution Amendment (Ninety Third Amendment) Act of
2005, which became law on 23rd January 2006. Coincidentally, both the 1850 law and the 2006
amendment related to education.
 The 93rd Amendment is for introducing reservation for the Other Backward Classes in
institutions of higher education, while the 1850 Act was used to allow entry of Dalits to
government schools.
 In between, there have been numerous laws, of which the important ones are, of course, the
Constitution of India itself, passed in 1950; and the Scheduled Castes and Scheduled Tribes
(Prevention of Atrocities) Act of 1989.
 The Constitution abolished untouchability (Article 17) and introduced the reservation provisions
mentioned above.
 The 1989 Prevention of Atrocities Act revised and strengthened the legal provisions punishing
acts of violence or humiliation against Dalits and adivasis. The fact that legislation was passed
repeatedly on this subject is proof of the fact that the law alone cannot end a social practice.
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4. Agents of Social Change: State action alone cannot ensure social change. In any case, no social group
howsoever weak or oppressed is only a victim.
 Human beings are always capable of organising and acting on their own – often against very
heavy odds – to struggle for justice and dignity.
 Dalits too have been increasingly active on the political, agitational, and cultural fronts.
 From the pre-Independence struggles and movements launched by people like Jyotiba Phule,
Iyotheedas, Periyar, Ambedkar and others to contemporary political organisations like the
Bahujan Samaj Party in Uttar Pradesh or the Dalit Sangharsh Samiti of Karnataka, Dalit political
assertion has come a long way.
Concept Check
Q. Which of the following constitution amendment act ‘empowered the state to make special
provisions for the socially and educationally backward classes or the Scheduled Castes or the
Scheduled Tribes in educational institutions including private educational institutions (whether aided
or unaided by the state), except the minority educational institutions?
(a) Ninety First Amendment Act, 2003
(b) Ninety Second Amendment Act, 2003
(c) Ninety Third Amendment Act, 2005
(d) Ninety Sixth Amendment Act, 2011
(e) Ninety Seventh Amendment Act, 2011
Answer: C
3.2 Indian Constitution & Social Justice

Spirit of The Constitution of India: It aims at the establishment of a just and equitable social order. It
has established the supremacy of law. It is itself a fundamental law. The Constitution is full of ideal of
liberty, equality and social justice.
 The Constitution of Independent India made provisions for positive discrimination in favour of the
Scheduled Castes and Scheduled Tribes (SCs & STs) which constituted about 23% of the divided India’s
population.
 The Constitution of India prescribes protection and safeguards for the Scheduled Castes (SCs) and
Scheduled Tribes (STs) and Other Backward Classes (OBCs) with the object of removing their social
disabilities and promoting their varied interests.
 The main safeguards are: abolition of untouchability, protection from social injustice and various
forms of exploitation, throwing open religious institutions of public character to all sections, removal
of restrictions on access to shops, restaurants, wells, tanks, and roads, giving them right of admission
to educational institutions and receiving grants out of state funds, permitting the state to make
reservation for them in services, giving them special representation in the Lok Sabha and the State
Vidhan Sabhas, setting up separate departments and advisory councils to promote their welfare and
safeguard their interests, prohibition of forced labour, and making special provision for the
administration and control of the scheduled areas.
 The constitution indeed guaranteed the fundamental right of equality of all citizens before the law
but it also categorically laid down that nothing in the constitution “shall prevent the State from
making any special provision for the advancement of any socially and educationally backward classes
of citizens or for the Schedules Castes and the Scheduled Tribes”.
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 A number of specific provisions have been incorporated in the Constitution, safeguarding specifically
the social, economic, educational and political rights of the Scheduled Castes and Scheduled Tribes.
I. Fundamental Rights
1. Article 14 guarantees to every person the right not to be denied equality, before the law or equal
protection of laws.
2. Article 15 – Prohibition of discrimination on grounds of religion, race, caste, sex, place of birth.
3. Article 15 (4) – Empowers the State to make special provision for the advancement of any socially
and educationally backward classes of citizens or for Scheduled Castes and Scheduled Tribes.
4. Article 15 (6) is added to provide reservations to economically weaker sections for admission to
educational institutions including private educational institutions, whether aided or unaided by
the State, other than the minority educational institutions referred to in clause (1) of Article 30.
The amendment aims to provide reservation to those who do not fall in 15 (5) and 15(4)
(effectively, SCs, STs and OBCs).
5. Article 16 – Equality of opportunity in matter of public employment but special provision for
Scheduled Castes and Scheduled Tribes.
6. Article 16 (4) – Empowers the State to make any provisions for reservation in appointment of post
in favour of any backward class of citizens which in the opinion of the State is not adequately
represented in the services under the State.
7. Article 16 (4A):
 77th Constitutional Amendment Act, 1995: The Indra Sawhney (1992) verdict of Supreme
Court had held there would be reservation only in initial appointments and not promotions.
But the government through this amendment introduced Article 16(4A) to the Constitution,
empowering the state to make provisions for reservation in matters of promotion to SC/ST
employees if the state feels they are not adequately represented.
8. Article 16 (4B):
 91st Constitutional Amendment Act, 2000: It introduced Article 16(4B), which says unfilled
SC/ST quota of a particular year, when carried forward to the next year, will be treated
separately and not clubbed with the regular vacancies of that year. While the Supreme Court
in the Indra Sawhney Case capped the reservation quota at 50%, the government by this
amendment ensured that 50% ceiling for these carried forward unfilled posts does not apply.
9. Article 16 (6) is added to provide reservations to people from economically weaker sections in
government posts.
10. Article 17 – “Untouchability” is abolished and its practice in any form is forbidden. The
enforcement of any disability arising out of “untouchability” shall be an offence punishable in
accordance with law.
11. Article 19 (6) authorizes the State to impose reasonable restrictions on the fundamental rights
guaranteed by clauses (d) (e) and (f) of Article 19 for the protection of interests of any Scheduled
Tribes.
12. Article 23 – Protection of traffic in human beings and forced labour relevant to instances of bonded
labour among Scheduled Castes and Scheduled Tribes. In pursuance of this Article, Parliament has
enacted the Bonded Labour System (Abolition) Act, 1976.
13. Article 24 which prohibits employment of Children below the age of 14 years in any factory or
mine or in any other hazardous activity is also significant for Scheduled Tribes as a substantial
portion of child labour engaged in these jobs belong to Scheduled Tribes.
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14. Article 25 – Freedom of conscience and profession, practice and propagation of religion – entry
into temples of Hindu religious institutions of a public character.
15. Article 29 – Protection of interests of minorities religion, race, caste, language, no bar to admission
in educational institutions.
16. Article 35 – Legislation to give effect to the provisions relating to fundamental rights.
II. Directive Principles of State Policy

1. Article 38 – The State shall strive to promote the welfare of the people by securing and protecting
as effectively as it may a social order in which justice, social, economic and political, shall inform
all the institutions of the national life. The State shall, in particular, strive to minimize the
inequalities in income, and endeavor to eliminate inequalities in status, facilities and
opportunities, not only amongst individuals but also amongst groups of people residing in different
areas or engaged in different vocations
2. Article 39a: That the citizen, men and women equally, have the right to an adequate means of
livelihood.
3. Article 41: The State shall, within the limits of its economic capacity and development, make
effective provision for securing the right to work, to education and to public assistance in cases of
unemployment, old age, sickness and disablement, and in other cases of undeserved want.
4. Article 43: The State shall endeavour to secure, by suitable legislation or economic organization
or in any other way, to all workers agricultural, industrial or otherwise, work, a living wage,
conditions of work ensuring a decent standard of life and full enjoyment of leisure and social and
cultural opportunities and, in particular, the State shall endeavour to promote cottage industries
on an individual or co-operative basis in rural areas
5. Article 46 of the Directive Principles enjoins the State to take special care in promoting the
educational and economic interests of the weaker sections of the people and in particular the
Scheduled Castes and Scheduled Tribes and protect them from social injustice.
III. Other Constitutional Provisions
1. Article 243 (D) – Reservation of seats for Scheduled Castes and Scheduled Tribes in panchayats.
 Under Part IX of the Constitution relating to the Panchayats and Part IXA of the Constitution
relating to the Municipalities, reservation for Scheduled Castes and Scheduled Tribes in local
bodies has been envisaged and provided.
2. Article 244 – Administration of Scheduled areas and tribal areas and control of the union over the
administration of Scheduled areas and the welfare of the Scheduled Tribes.
3. Article 325 – Prohibition against disenfranchisement in elections based on one’s religion, race,
caste or sex.
4. Article 330 – Provides for reservation of seats for Scheduled Castes and Scheduled Tribes in the
Lok Sabha.
5. Article 332 – Provides for reservation of seats for Scheduled Castes and Scheduled Tribes in the
State Vidhan Sabhas (Legislative Assemblies).
6. Article 335 provides that the claims of the members of the Scheduled Castes and the Scheduled
Tribes shall be taken into consideration, consistently with the maintenance of efficiency of
administration, in the making of appointments to services and posts in connection with the affairs
of the Union or of a State.
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7. Article 338 – The Amended Article 338 provides for establishment of a National commission for
the Scheduled Caste.
8. Article 338 (A) added by the Constitution 89th Amendment, 2003 provides for the establishment
of a National commission for the Scheduled Tribes.
9. Article 339 – The President may at any time and shall, at the expiration of ten years from the
commencement of this Constitution by order appoint a Commission to report on the
administration of the Scheduled Areas and the welfare of this Scheduled Tribes in the States
10. Article 341 and 342 – List of Scheduled Castes and Scheduled Tribes.
11. Article 366 (25) defined scheduled tribes as "such tribes or tribal communities or parts of or groups
within such tribes or tribal communities as are deemed under Article 342 to be Scheduled Tribes
for the purposes of this constitution".
Concept Check
Q. Which article is related to equality before law in Indian Constitution?
(a) Article 13
(b) Article 14
(c) Article 15
(d) Article 16
Answer: B
Concept Check
Q. Article 17 of Indian Constitution deals with
(a) Abolition of Titles
(b) Abolition of Untouchability
(c) Prohibition of discrimination
(d) Protection of life and personal liberty
Answer: B
3.3 Fifth and Sixth Schedule of the Indian Constitution:

The basic thrust of the Fifth and Sixth Schedule of the constitution is the protection of cultural
distinctiveness of Tribals.
It also provides protection to the tribals on account of their economic disadvantages so that they could
maintain their tribal identity without any coercion or exploitation.
3.3.1 Fifth Schedule

In the Article 244(1) of the Constitution, expression Scheduled Areas means such areas as the President
may by order declare to be Scheduled Areas.
The criteria followed for declaring an area as Scheduled Area are
 preponderance of tribal population;
 compactness and reasonable size of the area;
 under-developed nature of the area; and
 marked disparity in economic standard of the people.
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These criteria are not spelt out in the Constitution of India but have become well established.
Special Provisions
1. The Governor of each State having Scheduled Areas (SA) shall annually, or whenever so required by
the President, make a report to the President regarding the administration of Scheduled Areas in
that State.
2. The Union Government shall have executive powers to give directions to the States as to the
administration of the Scheduled Areas.
3. Para 4 of the Fifth Schedule provides for establishment of a Tribes Advisory Council (TAC) in any State
having Scheduled Areas. If the President so directs, there will be established a TAC in a State having
Scheduled tribes but not Scheduled Areas therein, consisting of not more than twenty members of
whom, three-fourths shall be the representatives of the Scheduled Tribes in the Legislative Assembly
of the State. If the number of representatives of the STs in the Legislative Assembly of the State is less
than the number of seats in the TAC to be filled by such representatives, the remaining seats shall be
filled by other members of those Tribes.
4. The TAC shall advise on such matters pertaining to the welfare and the advancement of the STs in
the State as may be referred to them by the Governor.
5. The Governor may, by public notification, direct that any particular Act of Parliament or of the
Legislature of the State shall or shall not apply to a SA or any part thereof in the State, subject to such
exceptions and modifications, as specified. The Governor may make regulations for the peace and
good government of any area in the State which is for the time being a SA.
6. In making such regulations, the Governor may repeal or amend any Act of Parliament or of
Legislature of the State or any existing law after obtaining assent of the President.
7. No regulations shall be made unless the Governor, in case a TAC exists, consults such TAC.
States having Fifth Schedule Areas
 At present, 10 States namely Andhra Pradesh, Chhattisgarh, Gujarat, Himachal Pradesh, Jharkhand,
Madhya Pradesh, Maharashtra, Odisha, Rajasthan and Telangana have Fifth Schedule Areas.
 The Fifth Schedule of the Constitution deals with the administration and control of Scheduled Areas
as well as of Scheduled Tribes residing in any State other than the States of Assam, Meghalaya, Tripura
and Mizoram. Tribal habitations in the states of Kerala, Tamil Nadu, Karnataka, West Bengal, Uttar
Pradesh and Jammu & Kashmir have not been brought under the Fifth or Sixth Schedule.
3.3.2 Sixth Schedule

1. Sixth Schedule mentions the provisions related to the tribal areas of the four states – Assam,
Meghalaya, Tripura and Mizoram
2. Sizeable amount of autonomy has been given to the people belonging to the tribal areas of these four
states to govern themselves
3. The tribal areas in these four states come under the name of ‘Autonomous Districts,’ but the state
still has its executive authority over them
4. The power to organise and reorganise the tribal areas as autonomous districts lie with the Governor
of the state. He can also alter the name, boundary of such tribal areas.
5. One autonomous district can have different tribes, which for better administration is divided into
autonomous regions by the governor
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6. There is a district council for each autonomous district:

 It has 30 members
 Four are nominated by the governor – They perform their duties during the pleasure of the
governor
 26 are elected using the adult franchise – Their term of office is five years.
7. There is a separate regional council for each autonomous district
8. The tribal areas in the four states are as given below:
 Assam: North Cachar Hills District, The Karbi Anglong District, The Bodoland Territorial Areas
District
 Meghalaya: Khasi Hills District, Jaintia Hills District, The Garo Hills District
 Tripura: Tripura Tribal Areas District
 Mizoram: The Chakma District, The Mara District, The Lai District
Concept Check
Q. Which of the following states is not included in the Sixth Schedule of the Constitution of India?
(a) Manipur
(b) Assam
(c) Tripura
(d) Mizoram
(e) Meghalaya
Answer: A
3.4 Legislative Enactment

To fulfill the Constitutional provisions pertaining to Scheduled Castes, India has passed various laws to
protect their rights these include the protections of Civil Rights (Anti-untouchability) Act (1955), the
Bonded Labour (Abolition) Act (1976), the Scheduled Castes and Scheduled Tribes (Prevention of
Atrocities) Act (1989) and Rules (1995) , the Employment of Manual Scavenger and Construction of Dry
Latrines (Prohibition) Act (1993) and various land reform laws to redistribute community land to the
landless.
Finally, to monitor enforcement of some of these laws, the Central (i.e., federal) government established
the National Commission for Scheduled Castes and National Commission for Scheduled Tribes and the
National Human Rights Commission.
Let us discuss some important legislations pertaining to the Scheduled Tribes:
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3.4.1 Forest Rights Act, 2006

 The act (formally known as The Scheduled Tribes
and Other Traditional Forest Dwellers
(Recognition of Forest Rights) Act, 2006)
recognize and vest the forest rights and occupation
in Forest land in forest Dwelling Scheduled Tribes
(FDST) and Other Traditional Forest Dwellers
(OTFD) who have been residing in such forests for
generations.
 The act also establishes the responsibilities and
authority for sustainable use, conservation of
biodiversity and maintenance of ecological
balance of FDST and OTFD.
 It strengthens the conservation regime of the forests while ensuring livelihood and food security of
the FDST and OTFD.
 It seeks to rectify colonial injustice to the FDST and OTFD who are integral to the very survival and
sustainability of the forest ecosystem.
The act identifies four types of rights:
1. Title rights
 It gives FDST and OTFD the right to ownership to land farmed by tribals or forest dwellers subject
to a maximum of 4 hectares.
 Ownership is only for land that is actually being cultivated by the concerned family and no new
lands will be granted.
2. Use rights
 The rights of the dwellers extend to extracting Minor Forest Produce, grazing areas, to pastoralist
routes, etc.
3. Relief and development rights
 The rehabilitation in case of illegal eviction or forced displacement and to basic amenities, subject
to restrictions for forest protection
4. Forest management rights
 It includes the right to protect, regenerate or conserve or manage any community forest resource
which they have been traditionally protecting and conserving for sustainable use.
Who can claim these Rights?
 Members or community of the Scheduled Tribes who primarily reside in and who depend on the
forests or forest lands for bona fide livelihood needs.
 It can also be claimed by any member or community who has for at least three generations (75 years)
prior to the 13th day of December, 2005 primarily resided in forests land for bona fide livelihood
needs.
 The Gram Sabha is the authority to initiate the process for determining the nature and extent of
Individual Forest Rights (IFR) or Community Forest Rights (CFR) or both that may be given to FDST
and OTFD.
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Concerns Regarding Implementation of FRA
1. Little progress in recognition of rights: FRA has the potential to secure the forest rights of at least 200
million tribals and other traditional forest dwellers over 40 million ha (50 per cent of India’s forest
land) covering 177,000 villages. However, only 13 per cent of the 40 million ha has been demarcated
under the FRA by the environment ministry.
2. Inadequate efforts to promote co-existence and preservation: Despite Community Forest Resource
(CFR) having being recognized, there have been few efforts from the state forest departments to move
towards co-existence and supporting and recognizing CFRs by gram sabhas.
3. Diversion of tribal Lands: There have been instances where plantations by forest agencies are being
done on land used by tribal communities and other traditional forest dwellers that are entitled to
these lands under FRA.
 As per a study, there has already been a diversion of around 0.39 million hectares (ha) of forest
land between 2008 and 2019.
4. Relocation in violation of FRA: Several people have been denied rights or relocated from Protected
areas or critical wildlife habitats without prior assessment whether co-existence is possible and
exercising forests rights would lead to irreversible damage to the habitat or species.
5. Discrepancies and delays in the process of recognising claims: A large number of claims have been
pending, rejected or the area recognized has been drastically reduced without any proper reasons
along with imposition of extra-statutory and extraneous conditions in the title for recognised rights.
 The situation has been worsened due to misinterpretation of the law by officials, illiteracy among
forest dwellers, lack of awareness about their rights and little knowledge about procedure for filing
claims.
6. Other issues: Inadequate financial and administrative support to implement the law; lack of
coordination between the tribal, revenue and forest department; poor or non-functioning of district
and sub-division level committees; dissatisfactory Rehabilitation and compensation, etc.
Way Forward
1. Organizing large scale awareness campaigns: Efforts should be made to reach out through radio,
television and other media to ensure that people receive the basic communication regarding salient
provisions of the Act, interpretation of community right etc.
2. Intensive capacity building approach: Sub-division and district administration officers, especially
revenue, forest and tribal functionaries entrusted with the task of processing forest rights have to be
systematically trained not only the procedural requirements under FRA but also the challenges and
contexts of forest resource use and access pattern.
3. Participation of civil society: There is a need to identify NGOs working in the area to provide assistance
to tribal communities in filing applications, resolving issues of caste certificates, identification and
measurement of land and negotiating with the officials to resolve conflicts.
4. Using technology to strengthen outreach: Technology needs to be utilised to support implementation
and make the process more efficient and effective. For instance, GPS survey maps can be used to
resolve competing claims at the local level.
5. Expedite the process of claims: There is a need for reviewing all rejected and pending claims to
individual and community forest rights expeditiously.
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6. Ensuring transparency and accountability: On decision making related to claims procedure. The
reasons for rejection or delay in recognition of claims should be conveyed to the claimants.
Concept Check
Q. Under the Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights)
Act, 2006, who shall be the authority to initiate the process for determining the nature and extent of
individual or community forest rights or both?
(a) State Forest Department
(b) District Collector/Deputy Commissioner
(c) Tahsildar/Block Development Officer /Mandal Revenue Officer
(d) Gram Sabha
Answer: D
3.4.2 Panchayats (Extension to Scheduled Areas) Act (PESA), 1996

 It is a law enacted by the Government of India to cover the "Scheduled areas", which are not covered
in the 73rd amendment or Panchayati Raj Act of the Indian Constitution.
 It was enacted on 24 December 1996 to enable Gram Sabhas to self-govern their natural resources.
 It is an Act to provide for the extension of the provisions of Part IX of the Constitution relating to the
Panchayats to the Scheduled Areas.
“Scheduled Areas” means the Scheduled Areas as referred to in Clause (1) of Article 244 of the
Constitution. The Act extended the provisions of Panchayats to the tribal areas of ten states that have
Fifth Schedule Areas.
Provisions
1. A state legislation on panchayats in the scheduled area should take care of the customs, religious
practices and traditional management practices of community resources
2. Every village shall contain a grama Sabha whose members are included in the electoral list for the
panchayats at village level
3. The recommendation of the gram Sabha is mandatory for granting mining licenses in the scheduled
areas
4. Planning and management of minor water bodies are entrusted to the panchayats.
It has provided that the Gram Sabha or Panchayats at appropriate level shall have the following powers:
 To be consulted on matters of land acquisition and resettlement.

 Grant prospecting license for mining lease for minor minerals and concessions for such activities.
 Planning and management of minor water bodies.
 The power to enforce prohibition or to regulate or restrict the sale and consumption of any intoxicant.
 The ownership of minor forest produces.
 The power to prevent alienation of land and to restore any unlawfully alienated land of a scheduled
tribe.
 The power to manage village markets.
 The power to exercise control over money lending to scheduled tribes.
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Concept Check
Q. The Government enacted the Panchayat Extension to Scheduled Areas (PESA) Act in 1996. Which
one of the following is not identified as its objective?
(a) To provide self-governance
(b) To recognize traditional rights
(c) To create autonomous regions in tribal areas
(d) To free tribal people from exploitation
(e) All of the above are identified as objectives of PESA Act 1996.
Answer: C
3.4.3 National Commission for Backward Classes

1. National Commission for Backward Classes is under the Ministry of Social Justice and Empowerment
established on 14 August 1993.
2. It was constituted pursuant to the provisions of the National Commission for Backward Classes Act,
1993.
3. Currently, this body is responsible to look into the inclusion and exclusion of backward classes only.
4. To safeguard the interests of these classes more effectively, there was a need to give constitutional
status to NCBC.
5. For this purpose, 123rd Constitutional Amendment Bill was introduced in the Parliament.
6. The President has given his assent to the Bill after it was passed by the Lok Sabha and Rajya Sabha and
became the Constitution (One Hundred and Second Amendment) Act, 2018.
Concept Check
Q. National Commission for Backward Classes came into effect from
(a) 1993
(b) 1995
(c) 1998
(d) 2005
(e) 2018
Answer: A
3.5 Schemes for SCs, STs & OBCs

List of Schemes being implemented for strengthening the socio-economic and educational conditions of
the Scheduled Castes (SCs), Scheduled Tribes (STs) and Other Backward Classes (OBCs):
3.5.1 Scheduled Caste (SCs)

Scholarships
1. Pre-Matric Scholarship for SC (IX & X)

2. Pre-Matric Scholarships to the Children of those Engaged in occupations involving cleaning and prone
to health hazards
3. Post-Matric Scholarship for SC students
4. Upgradation Of Merit of SC Students
5. Top Class Scholarship for SC students
6. National Overseas scholarship
7. National Fellowship for Scheduled Caste Students
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Hostels
 Babu Jagjivan Ram chhatrawas Yojana
Free Coaching
 Free Coaching Scheme for SC Students
Schemes for Economic Development

1. Credit Enhancement Guarantee Scheme for the Scheduled Castes (SCs)
2. National Safai Karamcharis Finance and Development Corporation (NSKFDC)
3. National Scheduled Castes Finance and Development Corporation (NSFDC)
 NSFDC is an institution under Ministry of Social Justice & Empowerment, Government of India for
financing, facilitating and mobilizing funds for the economic empowerment of persons belonging
to the Scheduled Castes families living below Double the Poverty Line.
 NSFDC finances income generation schemes for the target group through the State Channelising
Agencies (SCAs) nominated by respective State/UT Governments.
 The NSFDC is a Central Public Sector Enterprise incorporated on 8.2.1989 as a Company 'not for
profit' under Section 25 of the Companies Act, 1956. NSFDC is now a Section - 8 Company under
the new Companies Act, 2013.
4. Special Central Assistance to Scheduled Caste Sub Plan (SCSP)
5. Scheme of Assistance to Scheduled Castes Development Corporations (SCDCs)
6. Self-Employment Scheme for Rehabilitation of Manual Scavengers (SRMS)
7. Venture Capital Fund for Scheduled Castes
8. Dr. Ambedkar Medical Aid Scheme
Schemes for Social Empowerment

 Protection of Civil Rights and Prevention of Atrocities
 Pradhan Mantri Adarsh Gram Yojana (PMAGY)
 Dr. Ambedkar Scheme for Social Integration through Inter-Caste Marriage
 Dr. Ambedkar National Relief to Scheduled Caste Victims of Atrocities-revised
3.5.2 Scheduled Tribes

Education
1. Top Class Education for ST Students
2. Upgradation of Merit of ST Students
3. Vocational Training Centres in Tribal Areas
4. National Overseas Scholarships for Scheduled Tribe Students
5. Rajiv Gandhi National Fellowship for ST Students
6. Post Matric Scholarship (PMS) for ST students
7. Centrally Sponsored Scheme of Hostels for ST boys and ST Girls
8. PRE-MATRIC SCHOLARSHIP
9. Establishment of Ashram Schools in Tribal Sub-Plan Areas
State Grant
1. Special Central Assistance to Tribal Sub Plan (SCA to TSP)
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 Special Central Assistance to Tribal Sub-Scheme (SCA to TSS) is 100% grant from Government of
India (since 1977-78). It is charged to Consolidated Fund of India (except grants for North Eastern
States, a voted item) and is an additive to State Plan funds and efforts for Tribal Development.
 This grant is utilized for economic development of Integrated Tribal Development Agency (ITDA),
Integrated Tribal Development Project (ITDP), Modified Area Development Approach (MADA)
Pockets and Clusters, PVTGs and dispersed tribal population.
2. Allocation under SCA to TSP
3. Grants under Article 275(1) of the Constitution of India
 Grants-in-aid under Proviso to Article 275(1) of Constitution of India is 100% annual grant from
Government of India to States. It is charged to Consolidated Fund of India (except grants for North
Eastern States, a voted item) and is an additive to State Plan funds and efforts for Tribal
Development.
 Funds are utilized for socio-economic development of Integrated Tribal Development Agency
(ITDA), Integrated Tribal Development Project (ITDP), Modified Area Development Approach
(MADA) Pockets and Clusters and for PVTGs.
4. Eklavya Model Residential School
5. Development of Forest Village
6. Institutional Support for Development and Marketing of Tribal Product/Produce through TRIFED
 The Tribal Cooperative Marketing Development Federation of India (TRIFED) came into existence
in 1987. It is a national-level apex organization functioning under the administrative control of
Ministry of Tribal Affairs.
 TRIFED has its Head Office located in New Delhi and has a network of 13 Regional Offices located
at various places in the country.
 It mainly undertakes two functions viz. Minor Forest Produce (MFP) development and Retail
Marketing and Development.
7. Minor Forest Produce (MFP) through Minimum Support Price (MSP) and Mechanism of marketing of
Development of Value Chain for MFP
 Minimum Support Price for Minor Forest Produce scheme (MSP for MFP Scheme), started by
Ministry of Tribal Affairs in the year 2013-14, was the first step in the direction of providing fair
price to tribals. Initially, the scheme included 10 MFPs in 9 States. It was later expanded to 24 MFPs
and in all States.
 The Scheme is implemented through State Level Agency (SLA) appointed by the State
Government.
 Ministry of Tribal Affairs provides a revolving fund to the SLA. Loss, if any, is shared by Centre and
State in the ratio of 75:25.
3.5.3 Other Backward Classes

1. Pre-Matric Scholarship to the OBCs for studies in India
2. Post-Matric Scholarship to the OBC for studies in India
3. Construction of Hostels for OBC Boys and Girls
4. Assistance to Voluntary Organizations for Welfare of OBCs
5. Scheme under National Backward Classes Finance and Development Corporation (NBCFDC)
 National Backward Classes Finance & Development Corporation (NBCFDC) is a Govt. of India
Undertaking under the aegis of Ministry of Social Justice and Empowerment.
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 NBCFDC was incorporated on 13th January 1992 as a Company, not for profit with an objective to
promote economic and developmental activities for the benefit of Backward Classes and to assist
the poorer section of these classes in skill development and self-employment ventures.
 NBCFDC provides financial assistance through State Channelising Agencies (SCAs) nominated by
the State Governments/UTs. NBCFDC also provides Micro Financing through SCAs/ Self Help
Groups (SHGs).
Having understood the various Constitutional, legal and schemes rolled out by the government for
improving the Socio-economic status of the SC, ST, and OBC, let’s now understand the people with
disability and welfare measures taken for them.
3.6 Welfare of Persons with Disability
3.6.1 Differently-abled Population Statistics in India

1. As per the Census 2011, the differently-abled population in India is 26.8 million. In percentage terms,
this stands at 2.21 %.
2. Change in population: There has been a marginal increase in the differently-abled population in
India, with the figure rising from 21.9 million in 2001 to 26.8 million in 10 years.
3. Population of Men and Women: There are 14.9 million men with disabilities as compared to 11.8
million women in the country. The percentage of men with disabilities is 2.41 as against 2.01 in
women.
4. Population in Urban and Rural areas: The total number of differently-abled people are over 18 million
in the rural areas and just 8.1 million enumerated in the urban settings.
5. Social Group wise disabled population: Social groups wise analysis shows, 2.45 per cent of the total
disabled population belong to the Scheduled Castes, 2.05 to the Scheduled Tribes and 2.18 per cent
to other than SC/ST. Even among these two social groups, the proportion of men with disabilities is
higher as compared to women.
6. State-wise data shows, Andhra Pradesh, Maharashtra, Orissa and Jammu and Kashmir have more
than 2.51 per cent disabled population whereas in Tamil Nadu, Assam, Meghalaya, Assam and
Nagaland, the percentage is less than 1.75.
7. Over 5.4 million people have some kind of physical disability, followed by hearing impairment affecting
5.07 million and 5.03 million who have problems with their vision. Just about 2 million have speech
disability, and 2 million are affected by mental retardation and other mental illnesses.
3.6.2 Provision of Welfare of Persons with Disabilities

1. The Constitution in the schedule of subjects lays direct responsibility of empowerment of disabled
persons on the State governments. Therefore, the primary responsibility to empower the disabled
rests with the State governments.
2. The Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act,
1995’ has been enacted to ensure equal opportunities for persons with disabilities and their full
participation in nation-building (more about this is covered in the Schemes/Acts document).
 The Act extends to the whole of India, except the State of Jammu and Kashmir. The Government
of Jammu and Kashmir has separately enacted ‘The Persons with Disabilities (Equal Opportunities,
Protection of Rights & Full Participation) Act, 1998’.
3. A multi-sectoral collaborative approach, involving all the appropriate governments, i.e., ministries of
the Central Government, the State Governments/UTs, Central/State undertakings, local authorities
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and other appropriate authorities is being followed in the implementation of various provisions of the
Act.
4. At the International level: India is a signatory to the ‘Declaration on the Full Participation and
Equality of People’ with Disabilities in the Asia-Pacific Region.
 India is also a signatory to the Biwako Millennium Framework working towards an inclusive,
barrier free and rights-based society.
 India signed the UN Convention on Protection and Promotion of the Rights and Dignity of
Persons with Disabilities on 30th March,2007, the day it opened for signature. India ratifies the
UN Convention on 1st October,2008.
5. Creation of Department within Ministry- Dedicated efforts: In order to give focused attention to
Policy issues and meaningful thrust to the activities aimed at welfare and empowerment of the
Persons with Disabilities, a separate Department of Disability Affairs was carved out in the Ministry
of Social Justice and Empowerment on May 12, 2012.
 The Department was renamed as Department of Empowerment of Persons with Disabilities
(Divyangjan) on 08.12.2014.
 The Department acts as a Nodal Agency for matters pertaining to disability and Persons with
Disabilities including effecting closer coordination among different stakeholders: related Central
Ministries, State/UT Governments, NGOs etc. in matters pertaining to disability.
4 Contemporary Issues Related to Social Justice
4.1 Constitutional (127th) Amendment Bill, 2021

In News
Recently, the Parliament passed the Constitution 127th Amendment Bill, 2021 restoring State’s rights to
specify OBC groups.
4.1.1 Background
 According to the Constitution of India, Articles 15(4), 15(5) and 16(4) confer power on a state to
identify and declare the list of socially and educationally backward classes.
 As a matter of practice, separate OBC lists are drawn up by the Centre and each state concerned.
 The 127th Constitution Amendment Bill will amend clauses 1 and 2 of Article 342A and also introduce
a new clause 3. The Bill will also amend Articles 366 (26c) and 338B (9).
 The 127th Amendment Bill is designed to clarify that the states can maintain the "state list" of
OBCs as was the system prior to the Supreme Court judgment. Articles 366 (26c) defines socially and
educationally backward classes.
 The "state list" will be completely taken out of the ambit of the president and will be notified by the
state Assembly as per the proposed Bill.
4.1.2 Need of 127th Constitution Amendment Bill

 The amendment was thought necessary because the SC in its order on Maratha reservations upheld
the 102nd Constitutional Amendment Act that inserted Articles 338B and 342 A (with two clauses)
after Article 342.
 Earlier it was said that the President of India, in consultation with Governors, would specify socially
and economically backward classes, taking away the powers of state governments to do so
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4.2 Should 50% Ceiling Limit on Reservation be reconsidered?
The Supreme Court sought responses from all states on whether the 50% ceiling limit on reservation
needs to be reconsidered.
4.2.1 Debate: The 50% Cap

 The ceiling was imposed by a nine-judge Constitution Bench in the Indra Sawhney case in 1992,
wherein the court strictly held that reservation cannot exceed 50%.
 However, the bench did indicate that in exceptional circumstances, reservation could be extended.
4.2.2 A case for Maratha Reservation

 The court is set to examine whether the Maharashtra State Backward Classes Commission had made
up a case of “extraordinary circumstances” of deprivation suffered by the Maratha community.
 In fact, the Bombay High Court had, in June 2019, reduced the quantum of reservation for Marathas
from the 16% recommended by the Gaikwad Commission to 12% in education and 13% in
employment.
 The ruling was challenged before a Supreme Court Bench, which referred it to a larger Constitution
Bench.
4.2.3 Challenges to the Maratha quota

There are two main constitutional questions for the court to consider in challenge to the Martha quota
law.
 The first is whether states can declare a particular caste to be a socially and educationally backward
class.
 The second is whether states can breach the 50% ceiling for “vertical quotas” set by the Supreme
Court.
4.2.4 What is the Indra Sawhney Case?

 In 1979, the Second Backward Classes Commission (Mandal Commission) was set up to determine
the criteria for defining the socially and educationally backward classes.
 The Mandal report identified 52% of the population at that time as “Socially and Economically
Backward Classes” (SEBCs) and recommended 27% reservation for SEBCs in addition to the previously
existing 22.5% reservation for SC/STs.
 In 1990, when the V P Singh led-government set out to implement the Mandal report, it was
challenged in court amidst widespread protests against the move.
 The case came up before a nine-judge Bench and a 6:3 verdict was delivered in 1992.
4.2.5 What did the verdict say?

 The court upheld the office memorandums that essentially implemented the Mandal report.
 The majority opinion said the executive orders mandating 27% reservation for backward castes were
valid.
 It held that the reservation was made not just on the basis of caste, even if it appears so, but on the
basis of objective evaluation of social and educational backwardness of classes.
 The inclusion in the list of Backward Classes is very much warranted by Article 15(4).
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4.2.6 Precedents set by the judgment

The landmark Indra Sawhney ruling set two important precedents.
 The court said that the criteria for a group to qualify for reservation are “social and educational
backwardness”.
 It also reiterated the 50% limit to vertical quotas it had set out earlier. The court said this 50% limit
will apply — unless in “exceptional circumstances”.
4.2.7 How does the Ninth Schedule come to the picture?

 The Ninth Schedule provides the law with a “safe harbour” from judicial review under Article 31B of
the Constitution.
 Laws placed in the Ninth Schedule cannot be challenged for reasons of violating any fundamental
right protected under the Constitution.
 However, when the Tamil Nadu law was challenged in 2007 (I R Coelho v State of Tamil Nadu), the
Supreme Court ruled that while laws placed under Ninth Schedule cannot be challenged on the
grounds of violation of fundamental rights.
 However, they can be challenged on the ground that it violates the basic structure of the
Constitution.
 A later Bench was to decide whether the Tamil Nadu law itself (breaching the 50% ceiling) violates
basic structure, based on the I R Coelho verdict. The Bench has not yet been set up.
4.3 Sub-categorization of OBCs

Recently, the Union Cabinet approved the term extension of the commission to examine the issue of sub-
categorization of Other Backward Classes (OBCs).
 The Union Government constituted a four-member commission headed by Justice G. Rohini in 2017
under Article 340 with an aim to improve the equitability of sharing of benefits among OBCs.
 The article 340 of the Indian Constitution lays down conditions for the appointment of a
Commission to investigate the conditions of backward classes.
 Mandate of the Commission:
 Examining the extent of inequitable distribution of benefits of reservation (I.e., 27 percent
reservation in jobs and education) among the castes or communities with reference to the central
OBC list.
 Work out the mechanism, criteria, norms and parameters in a scientific approach for sub-
categorization of OBCs.
4.3.1 Who are OBCs?

 OBC is a collective term used by the Government to classify castes which are educationally and
socially disadvantaged.
 OBCs are a vastly heterogeneous group. There are various jaatis or sub-castes which vary significantly
in the societal and economic status.
 For instance, OBCs include land-owning communities in both north and south India alongside
poorer sections of the society living on subsistence labour.
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4.3.2 Background: The Mandal Commission

• In 1990, the then Union government announced that Other Backward Classes (OBCs) would get 27
percent reservation in jobs in central government services and public sector units (under Article
16(4) of the Constitution).
• The decision was based on Mandal Commission Report (1980), which was set up in 1979 and chaired
by B.P. Mandal. The mandate of the Mandal Commission was to identify socially or educationally
backward classes to address caste discrimination.
• The recommendation for OBC reservations in central government institutions was implemented in
1992 while the education quota came into force in 2006 (under Article 15(4) of the Constitution).
• To ensure that benefits of the recommendations of the Mandal Commission percolated down to the
most backward communities, the creamy layer criteria was invoked by Supreme Court in the ruling
called the ‘Indra Sawhney Judgment’ (1992).
 A household with an annual income of Rs 8 lakh or above is classified as belonging to the ‘creamy
layer’ among OBCs and hence is not eligible for reservations.
4.3.3 Idea of sub-categorization

• The First Backward Class Commission report of 1955 had proposed sub-categorization of OBCs into
backward and extremely backward communities.
• In the Mandal Commission report of 1979, a dissent note by member L R Naik proposed sub-
categorization in intermediate and depressed backward classes.
• In 2015, the NCBC had proposed that OBCs be divided into the following three categories:
 Extremely Backward Classes (EBC-Group A) facing social, educational and economic
backwardness even within the OBCs, consisting of aboriginal tribes, nomadic and semi-nomadic
tribes who have been carrying on with their traditional occupations;
 More Backward Classes (MBC-Group B) consisting of vocational groups carrying on with their
traditional occupations; and
 Backward Classes (BC-Group C) comprising of those comparatively more forward.
• According to the NCBC, 11 states (Andhra Pradesh, Telangana, Puducherry, Karnataka, Haryana,
Jharkhand, West Bengal, Bihar, Maharashtra, Rajasthan and Tamil Nadu) have subcategorized OBC
for reservations in state-government-owned institutions.
4.3.4 What is the need for sub-categorization and tentative recommendations of the committee?
• Benefits of reservations have reached only limited sections: The Rohini commission highlighted that
from about 2,633 central list OBCs, about 1900 castes have not proportionately benefitted.
 Half of these 1900 castes have not availed the benefits of reservation at all, and the other half
include those that have availed less than 3 per cent share in the OBC quota.
 The commission highlighted that 25% of benefits from OBC reservations have been availed by
only 10 sub-castes.
 According to the committee, the communities that have got almost no benefits of reservations
include profession-based castes such as Kalaigars, a community that traditionally polishes tins; and
Sikligars and Saranias, communities that traditionally sharpen knives; apart from several other
marginalised groups.
• Benefits are tilted towards economically stronger sub-sections: Research suggests that the Mandal
Commission recommendations helped the economically better positioned OBCs more than the most
backward castes.
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4.3.5 Potential Recommendations

• A fixed quota of between 8 to 10 percent within the 27 percent OBC quota for almost 1900 castes
from among the central list of 2,633 OBCs.
 These 1900 castes constitute about 2-3 per cent of the total seats and won’t affect other groups
significantly but may create substantial opportunities for them.
• Sub-categorization to be based on relative benefits among the OBCs and not on social backwardness,
this may help deprived sections to be able to avail of their fair share of the quota.
4.3.6 What are the challenges in its implementation?

1. Political sensitivity of the issue: The move to sub-categorize OBCs may create agitation in some
sections of OBCs as the benefits get redistributed.
 OBC reservations have caused political turmoil in the past and its possible effect on the upcoming
Bihar assembly elections cannot be denied.
2. Use of older and unreliable estimates: The commission has based its recommendations on quota
within quota on the population figures from the 1931 Census, and not on the more recent Socio-
Economic Caste Census (SECC) 2011.
 Since the implementation of the Mandal Commission report, over 500 new castes have been
added to the Central list of OBCs. The 1931 Census does not have the population for these new
additions.
 The 1931 census also does not have population of princely states that were not ruled by the
British.
3. Information unavailability on social and educational status: There is lack of availability of information
regarding the social and educational backwardness of various castes.
4. It could be a very difficult exercise statistically due to following reasons:
 Large number of castes: According to NCBC, there are 2514 OBC castes in the country and
scientific sub-categorization by analyzing each caste could be challenging.
 Variation from state to state: There are significant variations within castes from state to state
which implies data collection needs to be larger and more robust.
4.4 Horizontal & Vertical Quotas

The Supreme Court has recently clarified the position of law on the interplay of vertical and horizontal
reservations.
4.4.1 What are vertical and horizontal reservations?

 Reservation for Scheduled Castes, Scheduled Tribes, and Other Backward Classes is referred to as
vertical reservation.
 It applies separately for each of the groups specified under the law.
 Horizontal reservation refers to the equal opportunity provided to other categories of beneficiaries
such as women, veterans, the transgender community, and individuals with disabilities, cutting
through the vertical categories.
4.4.2 How are the two categories of quotas applied together?

 The horizontal quota is applied separately to each vertical category, and not across the board.
 For example, if women have 50% horizontal quota, then half of the selected candidates will have to
necessarily be women in each vertical quota category.
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 This means half of all selected SC candidates will have to be women, half of the unreserved or
general category will have to be women, and so on.
 The interlocking of the two types of reservation throws up a host of questions on how certain groups
are to be identified.
 For example, would an SC woman be put in the category of women or SC? Since quotas are fixed in
percentages, what percentage of quota would be attributed to each?
4.4.3 What was the Saurav Yadav case about?

The case was on the technicalities that form a substantial question of law.
 It was this: Two aspirants had secured 276.5949 and 233.1908 marks respectively.
 They had applied under the categories of OBC-Female and SC-Female respectively. OBC and SC are
vertical reservation categories, while Female is a horizontal reservation category.
 The two candidates did not qualify in their categories.
 However, in the General-Female (unreserved-female) category, the last qualifying candidate had
secured 274.8298 marks, a score that was lower than the two backwards.
 The question before the court was that if the underlying criterion for making selections is “merit”.
4.4.4 What did the court decide?

 The court ruled against the UP government.
 It observed if a person belonging to an intersection of the vertical-horizontal reserved category had
secured scores high enough to qualify without the vertical reservation.
 It held that the person would be counted as qualifying without the vertical reservation, and cannot
be excluded from the horizontal quota in the general category.
 If a person in the SC category secures a higher score than the cut-off for the general category, the
person would be counted as having qualified under the general category instead of the SC quota.
4.4.5 What was the government’s argument?

 The government’s policy was to restrict and contain reserved category candidates to their categories,
even when they had secured higher grades.
 The court said this was tantamount to ensuring that the general category was ‘reserved’ for upper
castes.
4.4.6 What was the court’s reasoning?

 The court did the math by examining a number of hypothetical scenarios.
 It concluded that if both vertical and horizontal quotas were to be applied together — and
consequently, a high-scoring candidate who would otherwise qualify without any reservation.
 On the other hand, if a high-scoring candidate is allowed to drop one category, the court found that
the overall selection would reflect more high-scoring candidates.
 In other words, the “meritorious” candidates would be selected.
4.5 Caste Census and Associated Issues

The Tamil Nadu government has decided to appoint a commission to formulate a methodology to collect
caste-wise particulars of its population and use that to come up with a report.
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4.5.1 The issue

 The Centre conducted a ‘Socio-Economic Caste Census’ (SECC) in 2011 throughout the country, but it
did not make public the caste component of the findings.
 In Karnataka, the outcome of a similar exercise has not been disclosed to the public.
4.5.2 Caste details as a part of the census

 Caste was among the details collected by enumerators during the decennial Census of India until
1931.
 It was given up in 1941, a year in which the census operation was partially affected by World War II.
 In his report on the 1941 exercise, then Census Commissioner of India, M.W.M. Yeatts, indicated that
tabulation of caste details separately involved additional costs.
 However, at the time of sorting the details, some provinces or States that wanted a caste record for
administrative reasons were given some data on payment.
4.5.3 Issues with caste in the census

 H. Hutton, the Census Commissioner in 1931, notes that on the occasion of each successive census
since 1901, some criticism had been raised about taking any note of the fact of caste.
 It has been alleged that the mere act of labelling persons as belonging to a caste tends to perpetuate
the system.
 Some argue that there is nothing wrong in recording a fact and ignoring its existence.
4.5.4 How have caste details been collected so far?

 While SC/ST details are collected as part of the census, details of other castes are not collected by
the enumerators.
 The main method is by self-declaration to the enumerator.
 So far, backward classes commissions in various States have been conducting their own counts to
ascertain the population of backward castes.
 The methodology may vary from State to State.
4.5.5 What about SECC 2011?

 The Socio-Economic Caste Census of 2011 was a major exercise to obtain data about the socio-
economic status of various communities.
 It had two components: a survey of the rural and urban households and ranking of these households
based on pre-set parameters, and a caste census.
 However, only the details of the economic conditions of the people in rural and urban households
were released. The caste data have not been released till now.
 While a precise reason is yet to be disclosed, it is surmised that the data were considered too
politically sensitive.
 Fear of antagonizing dominant and powerful castes that may find that their projected strength in
the population is not as high as claimed may be an important reason.
4.5.6 Legal imperative for a caste count

 The Supreme Court has been raising questions about the basis for reservation levels being high in
various States.
 In particular, it has laid down that there should be quantifiable data to justify the presence of a caste
in the backward class list, as well as evidence of its under-representation in services.
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 It has also called for periodical review of community-wise lists so that the benefits do not perpetually
go in favour of a few castes.
4.5.7 Caste data for reservations

 Legislators argue that knowing the precise number of the population of each caste would help tailor
the reservation policy to ensure equitable representation of all of them.
 While obtaining relevant and accurate data may be the major gain from a caste census, the possibility
that it will lead to heartburn among some sections and spawn demands for larger or separate
quotas.
4.6 Job Reservations and Promotion Quotas not a Fundamental Right

The Supreme Court ruled that there is no fundamental right to reservations in appointments and
promotions under articles 16(4) and 16(4A) of the Constitution.
4.6.1 Background
 The case pertains to a decision by the Uttarakhand government in 2012. Back then, the government
had decided to fill up posts in public services without providing reservation to members of the
Scheduled Caste (SC) and Scheduled Tribe (ST) communities.
 The Uttarakhand High Court directed the state government in 2019 to implement reservations in
promotion by promoting only SCs and STs to maintain the quota earmarked for the said categories.
4.6.2 More about the Judgement

The Court held that
 Article 16 (4) and 16 (4-A) are in the nature of enabling provisions, vesting a discretion on the State
Government to consider providing reservations, if the circumstances so warrant.
 Article 16(4) empowers state to make any provision for reservation of appointments in favour
of any backward class which in opinion of the State, is not adequately represented in the services
under State.
 Article 16(4A), empowers state to make provisions for reservation in matters of promotion to
SC/ST employees.
 It is settled law that the state cannot be directed to give reservations for appointment in public posts.
The order further adds that the state is not bound to make a reservation for SCs and STs in matters
of promotions.
 The court said that no mandamus can be issued by the court directing state governments to
provide reservations.
 However, if the state wishes to exercise its discretion and make such provision, it has to collect
quantifiable data showing ‘inadequacy of representation of that class in public services.
 If the decision of the state government to provide reservations in promotion is challenged then the
state concerned will have to place before the court the quantifiable data that reservations became
necessary on account of inadequacy of representation of SCs and STs without affecting general
efficiency of administration as mandated by Article 335.
4.6.3 Analysis of the Judgement

 The fact that reservation cannot be claimed as a fundamental right is a settled position under the
law and has been pointed out by several judgments in the past.
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 In 1967, a five-judge bench in C.A. Rajendran v. Union of India held that the government is under
no constitutional duty to provide reservations for SCs and STs, either at the initial stage of
recruitment or at the stage of promotion.
 The position went on to be reiterated in several other decisions, including the nine-judge bench
ruling in Indra Sawhney v. Union of India (1992) and the five-judge bench decision in M Nagaraj
v. Union of India (2006).
 Although this position of law is a settled one, it is nonetheless at odds with certain other principles
at the heart of the constitutional vision of equality.
 In NM Thomas judgement (1976), the Supreme Court held that the Constitution was committed
to an idea of substantive equality, i.e., it had to take the actual circumstances of people into
account when determining what constituted “equal treatment”.
 The principled reason for this position was that groups of people who face structural and
institutional barriers towards being able to compete on “equal terms” with others in society — for
reasons that are historical, but whose effects are enduring — must be treated in a way that
mitigates those existing conditions of inequality.
 Reservations — under this understanding — were a means to bring about genuine and true
equality, and not a set of privileges or gifts.
 To interpret the obligations of the state purely from the textual foundations of Article 16 is not an
appropriate approach. Fundamental rights are not isolated provisions and ought to be looked into
as an interconnected whole.
 As there are less avenues for the direct appointment in higher posts, reservations play a major role
for the representation of backward classes in higher posts.
 According to a Parliament reply last year, only one of the 89 secretaries posted at the Centre
belonged to the SC, while three belong to the ST. The court order may go against the substantive
equality in higher posts.
 The Supreme Court is not wrong in saying that a writ of mandamus cannot be granted by any court in
order to enforce an enabling provision. The writ of mandamus is issued only to compel an authority
to discharge a binding duty.
4.6.4 Conclusion
It is a settled principle of law that a discretionary power cannot be exercised in a fickle manner. Simply
because the exercise of a power is optional for the government does not mean that it can be exercised
in a whimsical manner. Article 14 of the Indian Constitution has been interpreted to prohibit all kinds of
arbitrary decisions by the government. Thus, the courts are entitled to examine if a discretionary power
has been exercised in a judicious manner.
4.7 National Council for Transgender Persons

The Centre has recently constituted the National Council for Transgender Persons under Transgender
Persons (Protection of Rights) Act, 2019.
4.7.1 About Transgender

• As per the Census of 2011, Transgender population in India is 4.9 lakh.
• The highest proportion (about 28%), has been identified in Uttar Pradesh followed by Andhra
Pradesh, Maharashtra, Bihar, Madhya Pradesh and West Bengal.
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4.7.2 Functions
• To advise the central government on the formulation of policies, programmes, legislation and
projects with respect to transgender persons.
• To monitor and evaluate the impact of policies and programmes designed for achieving equality and
full participation of transgender persons.
• To review and coordinate the activities of all the departments of Government and other
Governmental and non-Governmental Organisations which are dealing with matters relating to
transgender persons
• To redress grievances of transgender persons
• To perform such other functions as prescribed by the Centre.
4.7.3 Concerns
• Less horizontal and vertical representation:
 The council has inadequate community representation for a population of 4.88 lakh.
• Indigenous problems of the unrepresented states and of uneducated and poor section of community
might also not get adequate representation.
• Lack of transparency: Parameters for selecting members are not disclosed to the general public.
• The notification contains no provision for establishing coordination between the National Council
with the Transgender Development Boards set-up post the NLSA judgement in various states.
4.7.4 Conclusion
• The establishment of National Council for Transgender Persons is a welcome step. Its effective
functioning must be ensured to identify the issues faced by the transgender community and
accordingly advice the government.
• A multi-prolonged approach with focus on gender Sensitisation is needed to eliminate the social
stigma associated with the transgender community. This must be started from the school level to
accept the transgender community as an integral component of societal life.
4.7.5 Other Provisions to Protect the Community

• Constitutional Safeguards under Articles 14, 15, 19 and 21 ensures right to equality, and prohibits
discrimination on the grounds of sex, race, caste, religion or place of birth.
• The Supreme Court Judgments on Transgender Rights:
 The Supreme Court in NALSA Judgement, 2014 recognized the third gender along with the male
and female. It also
 acknowledged right to choose one’s gender identity under article 21 of the Constitution.
 directed the state to provide reservations for them in public education and employment.
 directed the state to make special provisions regarding HIV zero-Surveillance for transgender
persons and provide appropriate health facilities
 directed the state to frame social welfare schemes for their all-round development.
 In 2018, SC decriminalised homosexuality by partially striking down the colonial era provisions of
Section 377 of the Indian Penal Code (IPC).
4.7.6 State Level Initiatives

• Kerala became the first state to formulate a transgender policy in 2015 which is aimed at ending the
discrimination and bringing the third sex to the mainstream. The state has also set up a transgender
justice board to deal with their complaints
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• Maharashtra is the second state in India to set up a welfare board and the first, to set up a cultural
institute dedicated to the transgender community.
• Tamil Nadu has established Tamil Nadu Transgender Welfare Board (TGWB) and has also been
providing welfare schemes for socio-economic upliftment of the community.
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Social
Movements

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Contents
1 Introduction ............................................................................................................................................4
2 Understanding Social Movements .........................................................................................................4
2.1 Features of Social Movement .........................................................................................................5
2.2 Distinguishing Social Change and Social Movements .....................................................................6
2.3 Theories of Social Movement .........................................................................................................6
2.4 Stages in Social Movements ...........................................................................................................8
2.5 Causes of Social Movements ..........................................................................................................9
2.5.1 Cultural Drifts ...........................................................................................................................9
2.5.2 Social Disorganization ..............................................................................................................9
2.5.3 Social Injustice .......................................................................................................................10
3 Social Movements in India ...................................................................................................................10
3.1 Ecological Movements ..................................................................................................................10
3.1.1 Chipko Movement .................................................................................................................10
3.1.2 Narmada Bachao Andolan .....................................................................................................12
3.2 Class Based Movements ...............................................................................................................14
3.2.1 Peasant Movements ..............................................................................................................14
3.2.2 Naxalite Movement ...............................................................................................................15
3.2.3 Workers’ Movements ............................................................................................................17
3.3 Caste Based Movements...............................................................................................................18
3.3.1 The Dalit Movement ..............................................................................................................18
3.3.2 Backward Class Castes Movements.......................................................................................20
3.3.3 The Upper Caste Response ....................................................................................................22
3.4 The Tribal Movements ..................................................................................................................23
3.4.1 Jharkhand...............................................................................................................................23
3.4.2 The North East .......................................................................................................................24
3.5 The Women’s Movement .............................................................................................................27
3.5.1 SEWA Movement ...................................................................................................................29
4 Miscellaneous Movements ..................................................................................................................30
4.1 Movement for Right to Information .............................................................................................30
4.2 Telangana Movement- Carving a new State .................................................................................31

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1 Introduction
A great many students and office-workers around the world go to work only for five or six days. And rest
on the weekends. Yet, very few people who relax on their day off realize that this holiday is the outcome
of a long struggle by workers. That the work-day should not exceed eight hours, that men and women
should be paid equally for doing the same work, that workers are entitled to social security and pension
– these and many other rights were gained through social movements. Social movements have shaped
the world we live in and continue to do so.
We often assume that the rights we enjoy just happened to exist. It is important to recall the struggles of
the past, which made these rights possible. The 19th century social reform movements, of the struggles
against caste and gender discrimination and of the nationalist movement in India brought us
independence from colonial rule in 1947.
It is also evident with the many nationalist movements around the world in Asia and Africa and Americas
that put an end to colonial rule. The socialist movements world over, the civil rights movement in the
United States in the 1950s and 1960s that fought for equal rights for Blacks, the anti-apartheid struggle
in South Africa has all changed the world in fundamental ways.
Social movements not only change societies. They also inspire other social movements. It is evident from
how the Indian national movement shaped the making of the Indian Constitution. And how in turn the
Indian Constitution played a major role in bringing about social change.
2 Understanding Social Movements

 Social movements are any broad social alliances of people who are connected through their shared
interests in blocking or affecting (moving) social change. Social movements do not have to be
formally organized. Multiple alliances may work separately for common causes and still be
considered as a social movement.
 Social movements are conscious, concerted and sustained efforts by ordinary people to change
some aspects of their society by using extra-institutional means. They are more conscious and
organized than fads and fashions. They last longer than a single protest or riot.
 There is more to them than formal organizations, although such organizations usually play a part. They
are composed mainly of ordinary people as opposed to army officers, politicians or economic elites.
They need not be explicitly political, but many are.
 Social movements are one of the principal social forms through which collectivities give voice to their
grievance, concerns about rights, welfare, well-being of themselves and others by engaging in
various types of collective action, such as protesting in the streets, riots.
Concept Check
Q. Social movement is defined as
(a) a great effort by one person to fight against the government
(b) a great effort by one person to bring about or impede social change
(c) an organized effort by a large number of people to fight against the government
(d) an organized effort by a large number of people to bring about or impede social change
Answer: D

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Having understood what are social movements and their context, let us now discuss the features of Social
movements.
2.1 Features of Social Movement

1. Distinct from Social Protest: People may damage a bus and attack its driver when the bus has run
over a child. This is an isolated incident of protest. Since it flares up and dies down it is not a social
movement.
 A social movement requires sustained collective action over time. Such action is often directed
against the state and takes the form of demanding changes in state policy or practice.
Spontaneous, disorganized protest cannot be called a social movement either.
2. Structured thought Process: Collective action must be marked by some degree of organisation. This
organisation may include a leadership and a structure that defines how members relate to each other,
make decisions and carry them out.
3. Objective of Change: Those participating in a social movement also have shared objectives and
ideologies. A social movement has a general orientation or way of approaching to bring about (or to
prevent) change. These defining features are not constant. They may change over the course of a
social movement’s life.
 Social movements often arise with the aim of bringing about changes on a public issue, such as
ensuring the right of the tribal population to use the forests or the right of displaced people to
settlement and compensation.
4. Opposition to Social Change: Think of other issues that social movements have taken up in the past
and present. While social movements seek to bring in social change, counter movements sometimes
arise in defence of status quo. There are many instances of such counter movements.
 When Raja Rammohun Roy campaigned against sati and formed the Brahmo Samaj, defenders
of sati formed Dharma Sabha and petitioned the British not to legislate against sati.
 When reformers demanded education for girls, many protested that this would be disastrous for
society.
 When reformers campaigned for widow remarriage, they were socially boycotted.
 When the so called ‘lower caste’ children enrolled in schools, some so called ‘upper caste’
children were withdrawn from the schools by their families.
 Peasant movements have often been brutally suppressed.
 More recently the social movements of erstwhile excluded groups like the Dalits have often
invoked retaliatory action. Likewise, proposals for extending reservation in educational
institutions have led to counter movements opposing them.
Social movements cannot change society easily. Since it goes against both entrenched interests and
values, there is bound to be opposition and resistance. But over a period of time changes do take
place.
5. Manifestation of Social Movement: While protest is the most visible form of collective action, a social
movement also acts in other, equally important, ways.
 Social movement activists hold meetings to mobilize people around the issues that concern them.
Such activities help shared understanding, and also prepare for a feeling of agreement or
consensus about how to pursue the collective agenda.
 Social movements also chart out campaigns that include lobbying with the government, media
and other important makers of public opinion.

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 Social movements also develop distinct modes of protest. This could be candle and torch light
processions, use of black cloth, street theatres, songs, poetry. Gandhi adopted novel ways such as
ahimsa, satyagraha and his use of the charkha in the freedom movement. Recall the innovative
modes of protest such as picketing and the defying of the colonial ban on producing salt.
Concept Check
Q. Which of the following would likely increase the likelihood of successful actions aimed at bringing
about change?
(a) Unified organizational leadership
(b) New methods of communication
(c) Pre-existing grievances in the citizenry
(d) Ideological coherence among those demanding change
Answer: E
2.2 Distinguishing Social Change and Social Movements

 It is important to distinguish between social change in general and social movements. Social change is
continuous and ongoing. The broad historical processes of social change are the sum total of countless
individual and collective actions gathered across time and space.
 Social movements are directed towards some specific goals. It involves long and continuous social
effort and action by people. We can view sanskritisation and westernisation as social change and see
the 19th century social reformers’ efforts to change society as social movements.
Now let us learn about the theories of Social Movement.
2.3 Theories of Social Movement

1. According to the theory of relative deprivation, social conflict arises when a social group feels that it
is worse off than others around it. Such conflict is likely to result in successful collective protest. This
theory emphasises the role of psychological factors such as resentment and rage in inciting social
movements.
 The limitations of this theory are that while perceptions of deprivation may be a necessary
condition for collective action, they are not a sufficient reason in themselves. All instances where
people feel relatively deprived do not result in social movements.
 To mobilise collectively in a sustained and organised manner, grievances have to be discussed
and analysed in order to arrive at a shared ideology and strategy.
 That is, there is no automatic causal relationship between relative deprivation and collective
action. There are other factors such as leadership and organisation that are equally important.
2. Mancur Olson’s book The Logic of Collective Action argues that a social movement is an aggregation
of rational individual actors pursuing their self-interest. A person will join a social movement only if
s/he will gain something from it. S/he will participate only if the risks are less than the gains. Olson’s
theory is based on the notion of the rational, utility-maximising individual.
3. McCarthy and Zald’s proposed resource mobilisation theory rejected Olson’s assumption that social
movements are made up of individuals pursuing their self-interest. Instead, they argued that a social
movement’s success depends on its ability to mobilise resources or means of different sorts.

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 If a movement can muster resources such as leadership, organisational capacity, and

communication facilities, and can use them within the available political opportunity structure,
it is more likely to be effective.
 Critics argue that a social movement is not limited by existing resources. It can create resources
such as new symbols and identities. As numerous poor people’s movements show, scarcity of
resources need not be a constraint. Even with an initial limited material resources and
organisational base, a movement can generate resources through the process of struggle. Think
of examples from both the past and the contemporary period.
THEORIES OF SOCIAL MOVEMENTS

Deprivation Theory People experiencing relative deprivation begin social movement. The social
movement is a means of seeking change that bring participants greater
benefits. Social movements especially arise when rising expectation are
frustrated.
Mass Society Theory William Kornhauser advocated the Mass Society Theory in 1959.
People who lack established social ties are mobilized into social movements.
Periods of social breakdown are likely to spawn social movements. The social
movement gives members sense of belonging and social participations.
Structural Strain Peoples come together because of their shared concern about the inability of
Theory the society to operate as they believe it should. The growth of a social
movement reflects many factors, including a belief in its legitimacy and some
precipitating event that provokes actions. It proposes six factors that
encourage social movement development.
1. Structural conduciveness - People come to believe their society has
problems
2. Structural strain - People experience deprivation
3. Growth and spread of a solution -Solution to the problems people are
experiencing is proposed and spread
4. Precipitating factors - Discontent usually requires a catalyst (often a specific
event) to turn it into a social movement
5. Lack of social control - The entity that is to be changed must be at least
somewhat open to the change; if the social movement is quickly and
powerfully repressed, it may never materialize
6. Mobilization - This is the actual organizing and active component of the
movement; people do what needs to be done
Resource People may join for all the reason noted above and also because of social ties
Mobilization Theory with the existing members. The success or failure of a social movement
depends largely on the resources available to it. And also, the extent of
opposition within the larger society is important.
New Social People who become part of social movements are motivated by quality of life
Movement theory issue, not necessarily economic concern. Mobilization is national or
international in scope. New social movements arise in response to the
expansion of the mass media and new information technology.

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Concept Check
Q. Which of the following theories of social movements was advocated by William Kornhauser?
(a) New Social Movement theory
(b) Structural Strain Theory
(c) Resource Mobilization Theory
(d) Deprivation Theory
(e) Mass Society Theory
Answer: E
2.4 Stages in Social Movements

Though one social movement differs from another, almost all social movements go through similar stages.
They are as follows:
1. Stage 1: Emergence
The perception that all is not well triggers off social movements. Widespread dissatisfaction becomes
the basis of other movements. Sometimes, a small vanguard (forerunner/ lead) group increases public
awareness on some issues and makes it a prominent public issue.
2. Stage 2: Coalescence (Blending, Union)

 Once a social issue has emerged as a movement, it must define itself and develop a strategy for
“going public”. The leaders must determine policies and tactics, and there should be a drive to
recruit new members.
 At this stage, collective actions such as demonstrations or rallies must be organized to attract
public and media attention. Alliances with other organizations should be formed in order to gain
necessary resources.
3. Stage 3: Bureaucratization
 A social movement must take on bureaucratic traits in order to become a political force. As it
becomes established, the movement starts depending on the talents and charisma of its leaders
and relies more on a capable staff.
 If movements do not become established in this manner, they may face the risk of dissolution.
Sometimes, bureaucratization can also hinder a social movement, as leaders may become too
involved in building up the organization and not concentrate on encouraging the members
towards change.
4. Stage 4: Decline
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 Over a period of time, social movements lose their importance and influence. Sometimes, if the
goals of the movement are fulfilled, decline simply indicates success. Organizational factors such
as poor leadership, loss of interest among members, or repressive authority may also lead to the
demise of a movement.
 Sometimes, a social movement declines because the established power structure diverts leaders
from their goals through different means such as offer of money, prestige, and other rewards.
Cooptation or “selling out” is common, and organizational leaders use their position to enrich
themselves. Another cause for the decline of a social movement is repression.
 Participants may be threatened by officials, who discourage new recruits, and even by imprisoned
leaders in order to crush a social movement. Sometimes, a social movement can collapse because
it may opt for “going mainstream”. Such movements may become an accepted part of system,
and no longer challenge the authorities or the status quo.
Concept Check
Q. The third stage of the social movement life cycle is known as __________.
(a) Bureaucratization
(b) Beautification
(c) Dictatorship
(d) Domination
Answer: A
Having understood the theories and stages, it is essential one understands the root causes of Such Social
movements.
2.5 Causes of Social Movements

The social unrest may be caused by the following factors
2.5.1 Cultural Drifts

 The society undergoes constant changes. The values and behavior are changing all the time in civilized
societies. In the course of cultural drift, most people develop new ideas. To get these ideas operative
in the society they organize a movement.
 Examples: The development of a democratic society, the emancipation of women, the spread of
mass education, the removal of untouchability, the equality of opportunity for both the sexes, and
the growth of secularism are some examples of cultural drift.
2.5.2 Social Disorganization

 A changing society is, to some extent, disorganized because changes in different parts of the society
do not take place simultaneously. One-part changes more rapidly than the other, thereby producing
numerous lags.
 Industrialization has brought about urbanization which in turn has caused numerous social problems.
Social disorganization brings confusion and uncertainty, because the old traditions no longer form a
dependable guide to behavior, and individuals become rootless. They feel isolated from society.
 A feeling develops that the community leaders are indifferent to their needs. Individuals feel
insecure, confused, and frustrated. Confusion and frustration lead to social movements.

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2.5.3 Social Injustice

1. When a group of people feel that injustice was done to them, they become frustrated and alienated.
Such feeling of injustice provides fertile soil for social movements. The feeling of social injustice is not
limited to the miserable poor.
2. Any group, at any status level, may come to feel itself the victim of social injustice. The wealthy class
may feel a sense of injustice when faced with urban property ceiling law—or high taxes—intended to
benefit the poor. Social injustice is a subjective value judgment.
3. A social system is unjust when it is so perceived by its members. Thus, social movements occur
whenever such kind of social situation arises.
4. In a stable and well-integrated society, the chances for social movements are very rare. It is
understood that people living in such a society are contented and satisfied.
5. In a disorganized and continuously changing society, social movements occur more frequently, as
most people are dissatisfied with the existing conditions.
6. Lack of social justice also makes people dissatisfied and paves the way for social movements. Modern
society is more afflicted with social movements than the earlier societies.
Now having formed the base of social movements, let’s look at the social movements in India.
3 Social Movements in India

3.1 Ecological Movements
Introduction: For much of the modern period the greatest emphasis has been laid on development. Over
the decades there has been a great deal of concern about the unchecked use of natural resources and a
model of development that creates new needs that further demands greater exploitation of the already
depleted natural resources.
 This model of development has also been critiqued for assuming that all sections of people will be
beneficiaries of development. Thus, big dams displace people from their homes and sources of
livelihood. Industries displace agriculturalists from their homes and livelihood.
 The impact of industrial pollution is yet another story. Here we take just one example of an ecological
movement to examine the many issues that are interlinked in an ecological movement.
3.1.1 Chipko Movement

Overview: The Chipko movement, an example of the ecological movement, in the Himalayan foothills is
a good example of such intermingled interests and ideologies.
1. According to Ramachandra Guha in his book Unquiet Woods, villagers rallied together to save the
oak and rhododendron forests near their villages.
2. When government forest contractors came to cut down the trees, villagers, including large numbers
of women, stepped forward to hug the trees to prevent their being felled.
3. At stake was the question of villagers’ subsistence. All of them relied on the forest to get firewood,
fodder and other daily necessities. This conflict placed the livelihood needs of poor villagers against
the government’s desire to generate revenues from selling timber.
4. The economy of subsistence was pitted against the economy of profit. Along with this issue of social
inequality (villagers versus a government that represented commercial, capitalist interests), the
Chipko movement also raised the issue of ecological sustainability.
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5. Cutting down natural forests was a form of environmental destruction that had resulted in
devastating floods and landslides in the region.
6. For the villagers, these ‘red’ and ‘green’ issues were inter-linked. While their survival depended on the
survival of the forest, they also valued the forest for its own sake as a form of ecological wealth that
benefits all.
7. In addition, the Chipko movement also expressed the resentment of hill villagers against a distant
government headquartered in the plains that seemed indifferent and hostile to their concerns. So,
concerns about economy, ecology and political representation underlay the Chipko movement.
Let us now take a deeper look into the Chipko movement and also understand Narmada Bachao Andolan
movement which is other ecological movement.
Details of the Movement: The Chipko

Andolan or the Chipko movement is a
movement that practiced methods of
Satyagraha where both male and
female activists from Uttarakhand
played vital roles, including Gaura
Devi, Suraksha Devi, Sudesha Devi,
Bachni Devi and Chandi Prasad Bhatt,
Virushka Devi and others.
1. Seed of the movement: The
movement began in two or three
villages of Uttarakhand when the
forest department refused
permission to the villagers to fell
ash trees for making agricultural
tools.
2. Trigger for the movement: The
forest department allotted the same patch of land to a sports manufacturer for commercial use.
 This enraged the villagers and they protested against the move of the government.
 The struggle soon spread across many parts of the Uttarakhand region.
 Larger issues of ecological and economic exploitation of the region were raised.
3. Demand of the villagers: The villagers demanded that no forest-exploiting contracts should be given
to outsiders and local communities should have effective control over natural resources like land,
water and forests.
 They wanted the government to
provide low-cost materials to small
industries and ensure
development of the region without
disturbing the ecological balance.
The movement took up economic
issues of landless forest workers
and asked for guarantees of
minimum wage.
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4. Women’s active participation in the Chipko agitation: It was a very novel aspect of the movement.
The forest contractors of the region usually doubled up as suppliers of alcohol to men.
 Women held sustained agitations against the habit of alcoholism and broadened the agenda of
the movement to cover other social issues.
5. Achievements of the movement: It achieved a victory when the government issued a ban on felling
of trees in the Himalayan regions for fifteen years, until the green cover was fully restored.
 But more than that, the Chipko movement, which started over a single issue, became a symbol of
many such popular movements emerging in different parts of the country during the 1970s and
later.
Concept Check
Q. Suraksha Devi, Sudesha Devi and Bachni Devi are the names of activists often associated with
which of the following Social Movement in India?
(a) SEWA Movement
(b) Narmada Bachao Andolan
(c) Chipko Movement
(d) Dalit Panther
Answer: C
3.1.2 Narmada Bachao Andolan

Background
1. Protest: Social movement (tribal people, adivasis,
farmers, environmentalists and human rights
activists) against the Sardar Sarovar Dam being built
across the Narmada River, Gujarat, India.
2. Huge cost of the project: Displacement of 2,50,000
people from their land in three states (Gujarat,
Madhya Pradesh and Maharashtra) and loss of
agricultural land and forest (approx. 37,000
hectares).
3. Focus of the movement - Saving the trees and the fauna, rehabilitation of the poor people living
around the area.
4. Genesis of the Movement: It started in 1985 when the World Bank lent India $450 million for the
Sardar Sarovar project. Movement started by a social worker named Medha Patkar.
 As leader and co-founder of Narmada Bachao Andolan (Save Narmada Movement), she has been
spearheading the movement against the building of the Sardar Sarovar Dam on the Narmada River
in Gujarat, giving particular attention to the rehabilitation of the poor who are being displaced
by the project.
Approach
1. Multipronged approach: The success of the NBA campaign resulted from its innovative strategies of
resistance that operated simultaneously at the grassroots, national, and international level.
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 While the NBA originally employed ‘‘Gandhian methods’’ such as peaceful marches and protests,
after a high-profile hunger fast in 1991 failed, the NBA announced a ‘‘noncooperation movement’’
in the Narmada valley.
 Strategies include legal challenges, demonstration, civil-disobedience and other non-violent
tactics.
2. Objectives of the movement: This movement campaigned against the payment of taxes and sought
to deny entry to the villages to all government officials, except teachers and doctors.
3. International Support: Large-scale protests at home were complemented by international
interventions abroad.
 Lori Udall, then with the Environmental Defense Fund, led the international campaign against
the Sardar Sarovar dam and implemented a multi-pronged strategy of public pressure, organizing,
media outreach, and lobbying.
4. Narmada International Action Committee— It consisted of NGOs from India, the United States,
Canada, Europe, Australia, and Japan—lobbied against the Narmada Project in several investing
countries which helped focus international and national attention on the Narmada issue.
Outcomes
1. Multifarious achievements: Apart from bringing the dam-displacement issue to national and
international attention, the NBA has succeeded in bringing women out of homes to stand shoulder-
to-shoulder with their menfolk at the forefront of resistance.
 The NBA has succeeded in uniting people across the language divide of the three affected States.
2. Morse Commission: The World Bank announced in June 1991 that it would commission a team of
independent experts, known as the Morse Commission, to reexamine the Sardar Sarovar Project.
 The Commission’s independent review had two aims:
I. To assess steps taken to resettle those affected by the Sardar Sarovar dam, and
II. To assess the efficacy of measures aimed at diminishing the project’s environmental impact.
3. Redefining Development: The NBA’s influence in the social and economic areas in re-defining
development in the face of rampant and destructive corporate-driven industrialisation has been
proportionately large.
Concept Check
Q. ‘Morse Commission’ was associated with which of the following social movements in India?
(a) Narmada Bachao Andolan
(b) Appiko Movement
(c) Silent Valley Movement
(d) Jungle Bachao Andolan
Answer: A
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3.2 Class Based Movements
3.2.1 Peasant Movements

1. Nature of Peasant Movements: Peasant movements or agrarian struggles have taken place from pre-
colonial days. The movements in the period between 1858 and 1914 tended to remain localised,
disjointed and confined to particular grievances.
2. Examples: Well-known are the Bengal revolt of 1859-62 against the indigo plantation system and the
‘Deccan riots’ of 1857 against moneylenders. Some of these issues continued into the following
period, and under the leadership of Mahatma Gandhi became partially linked to the Independence
movement.
3. Became part of National freedom struggle: For instance, the Bardoli Satyagraha (1928, Surat District)
a ‘non-tax’ campaign as part of the nationwide noncooperative movement, a campaign of refusal to
pay land revenue and the Champaran Satyagraha (1917-18) directed against indigo plantations.
 In the 1920s, protest movements against the forest policies of the British government and local
rulers arose in certain regions.
4. Growth of Peasant organisations: Between 1920 and 1940 peasant organisations arose. The first
organisation to be founded was the Bihar Provincial Kisan Sabha (1929) and in 1936 the All-India
Kisan Sabha.
 The peasants organised by the Sabha’s demanded freedom from economic exploitation for
peasants, workers and all other exploited classes.
 At the time of Independence, we had the two most classical cases of peasant movements, namely
the Tebhaga movement (1946-47) and the Telangana movement (1946-51).
 Tebhaga Movement- It was a struggle of sharecroppers in Bengal in North Bihar for two thirds
share of their produce instead of the customary half. It had the support of the Kisan Sabha and
the Communist Party of India (CPI).
 Telangana movement- It was directed against the feudal conditions in the princely state of
Hyderabad and was led by the CPI.
5. Change in Nature of movements Post-Independence: Certain issues which had dominated colonial
times changed after independence.
 For land reforms, zamindari abolition, declining importance of land revenue and public credit
system began to alter rural areas.
 The period after 1947 was characterized by two major social movements. The Naxalite struggle
and the ‘new farmer’s movements.’
 The Naxalite movement started from the region of Naxalbari (1967) in Bengal, which is discussed
in the subsequent section.
 Many of the agrarian problems persist in contemporary India. The Naxal movement is a growing
force even today.
6. New Farmer’s Movements: The so called ‘new farmer’s movements began in the 1970s in Punjab
and Tamil Nadu.
 These movements were regionally organised, were non-party, and involved farmers rather than
peasants. (Farmers are said to be market-involved as both commodity producers and purchasers)
 The basic ideology of the movement was strongly anti-state and anti-urban. The focus of demand
was ‘price and related issues’ (for example price procurement, remunerative prices, prices for
agricultural inputs, taxation, non-repayment of loans).
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 Novel methods of agitation were used such as blocking of roads and railways, refusing politicians
and bureaucrats entry to villages, and so on.
 It has been argued that the farmers’ movements have broadened their agenda and ideology and
include environment and women’s issues. Therefore, they can be seen as a part of the worldwide
‘new social movements.’
Let us now delve deeper into Naxalite movement, which has emerged as major threat to Internal Security
of India.
3.2.2 Naxalite Movement

Introduction: In the summer of 1967, a tiny
village on the foothills of the Himalayas was
making headlines.
 Located in the Darjeeling district in West
Bengal, Naxalbari lit a fire that would
spread across large parts of India and burn
till today in the form of the Maoist
movement.
1. Exploitation of peasants: The peasants of
Naxalbari, who mainly worked on tea
plantations and at large estates, had for
centuries been exploited by the landowning classes and the moneylenders.
2. Trigger for the Movement: On March 25, 1967, when one of the sharecroppers in the village tried to
till the land from which he had been illegally evicted, the landlord got him brutally beaten up and
took away his belongings. Exasperated by the exploitation of the landlords, peasants across the village
got together and rose in rebellion.
3. Seeds of the movement: In the two years before 1967, the seeds of rebellion in Naxalbari were being
nurtured by the cadres of the Communist Party of India (Marxist) (CPI-M).
 A splinter group from the Communist Party of India (CPI), the CPI-M was convinced that a real
socialist revolution was possible only when the workers and peasants would launch an armed
uprising against the moneyed classes.
4. Conducive environment for the revolution: After the March 25 incident at Naxalbari, they were
convinced that the moment had arrived. Charu Mazumdar, one of the leaders of the CPI-M, is believed
to have held that “there was an excellent revolutionary situation in the country with all the classical
symptoms”.
 On May 25 that year, he along with the two other key leaders, Kanu Sanyal and Jangal Santhal,
launched the peasant uprising in Naxalbari.
 The movement was quick to face the wrath of the state government with the police dealing with
protesters with an iron hand. Nonetheless, in the next few days, months and decades, the
Naxalbari uprising would go on to determine the very nature of armed revolution in India.
5. Tracing the movement: The movement in its current form has altered significantly, both in its nature
and objectives.
 In the late sixties and early seventies, the Naxalbari uprising ignited a fire in the hearts of both the
urban youth and the rural masses.
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 In the next few months, similar movements became common in pockets of Bihar, Jharkhand and
West Bengal, in parts of Odisha, all the way till Andhra Pradesh and Maharashtra.
6. Romanticization of the movement for Youth: Also significant was the way the movement appealed
to the urban youth, particularly students, from some of the most esteemed universities of the
country, for whom the movement exemplified the precise way in which the establishment could be
challenged.
 In the immediate aftermath of the Naxal uprising, the urban youth of India, several among them
being from the privileged sections of society, were remarkably inspired to rise in revolution.
 Descendants of a generation that had seen Independence, for those in their twenties in the 1960s
and 70s, Naxalbari was their moment of bringing change in the way in which their parents’
generation had risen against the colonial state.
 It was not uncommon to see posters of Naxalbari hanging across the walls of colleges in Calcutta
and Delhi. Many students left college to join the Naxalites.
7. Fueling the movement: Charu Mazumdar took a number of steps as well to entice students into
joining the Naxal movement.
 He declared that the revolution was not just for the rural masses but rather a fight against
everyone who was a ‘class enemy’ which included University teachers, businessmen, police and,
of course, the government.
 Naxalites took over Jadavpur University and Calcutta University. Presidency College in Calcutta
and St. Stephens in Delhi became hotbeds for Naxalite activities.
8. The real achievement of the movement: It lays in the way it shook up rural India. In the days
immediately following the Naxalbari uprising, a similar uprising took place at Srikakulam in Andhra
Pradesh.
 Believed to have its roots in the Telangana rebellion of 1946, the uprising at Srikakulam in October
1967 is said to be inspired by the Naxalbari episode.
 Two men associated with the communists, Koranna and Manganna, were killed here by the local
landlords. In retaliation, the tribal population of the village rose up in arms, looting the landlords
of their land and grains.
 The movement escalated by 1968 when groups of tribal peasants organised themselves into
guerilla squads to attack police officers.
9. Spread of the movement: Bihar was influenced as well. Movements modeled along the lines of
Naxalbari sprung up in the Mushahari region of Muzaffarpur district in north Bihar, in parts of Bhojpur
and Patna districts in central Bihar, and in Hazaribagh, Ranchi, Singhbhum and Dhanbad districts of
south Bihar.
 Kerala saw a period of time when the movement was backed by students and resulted in a violent
crackdown by the authorities.
 After more than five decades, the movement is mainly operating in parts of Chhattisgarh,
Jharkhand, Orissa and Andhra Pradesh.
 It was dealt with severely, particularly during the Emergency period under the then prime minister,
Indira Gandhi.
 In the ensuing decades, despite a strong surveillance by the Indian police, the movement managed
to remain alive although in a significantly altered form.
10. The contemporary times: The programme of agrarian revolution and anti-imperialist mobilisation
have acquired a fresh appeal in the era of globalisation and economic reforms seen in the past two
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decades. Tribal people increasingly find themselves distressed by shrinking access to forest resources
and large-scale displacement by mega-mining projects.
 If the movement is still surviving, the credit is due not so much to prescience of its leaders, as to
the Indian state which, with its abysmal failures in socio-economic areas, persists in nourishing the
soil for the continuation of the Naxalite movement.
Concept Check
Q. Naxalite movement in India can be considered to have started from which of the following Indian
states?
(a) Bihar
(b) Odisha
(c) Andhra Pradesh
(d) West Bengal
(e) Jharkhand
Answer: D
3.2.3 Workers’ Movements

1. Start of Industrialization: Factory production began in India
in the early part of the 1860s. The general pattern of trade
set up by the colonial regime was one under which raw
materials were procured from India and goods
manufactured in the United Kingdom were marketed in the
colony.
 These factories were, thus established in the port towns
of Calcutta (Kolkata) and Bombay (Mumbai). Later
factories were also set up in Madras (Chennai). Tea
plantations in Assam were established as early as 1839.
 In the early stages of colonialism, labour was very cheap
as the colonial government did not regulate either wages or working conditions.
2. Protests across the Country: Though trade unions emerged later, workers did protest. Their actions
then were, however, more spontaneous than sustained.
 Some of the nationalist leaders also drew in the workers into the anti-colonial movement.
 The war led to the expansion of industries in the country but it also brought a great deal of misery
to the poor. There were food shortage and sharp increase in prices.
 There were waves of strikes in the textile mills in Bombay. In September and October 1917 there
were around 30 recorded strikes. Jute workers in Calcutta struck work.
 In Madras, the workers of Buchingham and Carnatic Mills (Binny’s) struck work for increased
wages. Textile workers in Ahmedabad struck work for increase in wages by 50 per cent.
3. Birth of Trade Unions: The first trade union was established in April 1918 in Madras by B.P. Wadia, a
social worker and member of the Theosophical Society.
 During the same year, Mahatma Gandhi founded the Textile Labour Association (TLA).
4. Birth of AITUC: In 1920 the All-India Trade Union Congress (AITUC) was formed in Bombay. The
AITUC was a broad-based organisation involving diverse ideologies.
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The main ideological groups were the communists led by S.A. Dange and M.N. Roy, the moderates
led by M. Joshi and V.V. Giri and the nationalists which involved people like Lala Lajpat Rai and
Jawaharlal Nehru.
 The formation of the AITUC made the colonial government more cautious in dealing with labour.
 It attempted to grant workers some concessions in order to contain unrest. In 1922 the
government passed the fourth Factories Act which reduced the working day to 10 hours.
 And in 1926, the Trade Unions Act was passed, which provided for registration of trade unions
and proposed some regulations.
 By the mid-1920s, the AITUC had nearly 200 unions affiliated to it and its membership stood at
around 250,000.
5. Birth of INTUC: During the last few years of British rule the communists gained considerable control
over the AITUC. The Indian National Congress chose to form another union called the Indian National
Trade Union Congress (INTUC) in May 1947.
 The split in the AITUC in 1947 paved the way for further splits on the line of political parties. Apart
from the working-class movement being divided on the lines of political parties at the national
level, regional parties too started to form their own unions from the late 1960s.
 In 1966-67 the economy suffered a major recession which led to a decrease in production and
consequently employment. There was a general unrest. In 1974 there was a major railway
workers’ strike.
 The confrontation between the state and trade unions became acute. During the Emergency in
1975-77 the government curbed all trade union activities. This again was short lived. The workers’
movement was very much part of the wider struggle for civil liberties.
3.3 Caste Based Movements
3.3.1 The Dalit Movement

Social movements of Dalits show a particular character. The movements cannot be explained
satisfactorily by reference to economic exploitations alone or political oppression, although these
dimensions are important. This is a struggle for recognition as fellow human beings.
1. Testing Struggle: It is a struggle for self-confidence and a space for self-determination. It is a struggle
for abolishment of stigmatisation, that untouchability implied. It has been called a struggle to be
touched.
2. Usage of the word Dalit: The word Dalit is commonly used in Marathi, Hindi, Gujarati and many other
Indian languages, meaning the poor and oppressed persons. It was first used in the new context in
Marathi by neo-Buddhist activists, the followers of Babasaheb Ambedkar in the early 1970s.
 It refers to those who have been broken, ground down by those above them in a deliberate way.
There is, in the word itself, inherent denial of pollution, karma and justified caste hierarchy
3. Assertion of Dalit Identity: There has not been a single, unified Dalit movement in the country now
or in the past. Different movements have highlighted different issues related to Dalits, around
different ideologies. However, all of them assert a Dalit identity though the meaning may not be
identical or precise for everyone.
4. Quest for Higher Ideals: Notwithstanding differences in the nature of Dalit movements and the
meaning of identity, there has been a common quest for equality, self-dignity and eradication of
untouchability.
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 This can be seen in the Satnami Movement of the Chamars in the Chattisgarh plains in eastern MP,
Adi Dharma Movement in Punjab, the Mahar Movement in Maharashtra, the socio-political
mobilisation among the Jatavas of Agra and the Anti Brahman Movement in south India.
5. In the contemporary period: The Dalit movement has unquestionably acquired a place in the public
sphere that cannot be ignored. This has been accompanied by a growing body of Dalit literature.
6. Dalit literature: It is squarely opposed to the Chaturvarna system and caste hierarchy which it
considers as responsible for crushing the creativity and very existence of lower castes.
 Dalit writers are insistent on using their own imageries and expressions rooted in their own
experiences and perceptions. Many felt that the high-flown social imageries of mainstream
society would hide the truth rather than reveal it.
 Dalit literature gives a call for social and cultural revolt. While some emphasise the cultural struggle
for dignity and identity, others also bring in the structural features of society including the
economic dimensions.
Now let’s take a look at the manifestation of Dalit movement in the post-independence era, which is
discussed below.
3.3.1.1 Dalit Panthers

Origins
1. Dissent from the Dalit

graduates: By the early
nineteen seventies, the
first-generation Dalit
graduates, especially those
living in city slums began to
assert themselves from
various platforms.
 Dalit Panthers, a
militant organisation of
the Dalit youth, was
formed by Namdeo
Dhasal, Raja Dhale and
Arun Kamble in
Maharashtra in 1972 as
a part of these
assertions.
2. Demand for Social Justice: In the post-Independence period, Dalit groups were mainly fighting against
the perpetual caste-based inequalities and material injustices that the Dalits faced in spite of
constitutional guarantees of equality and justice.
 Effective implementation of reservations and other such policies of social justice was one of their
prominent demands.
 You know that the Indian Constitution abolished the practice of untouchability. The government
passed laws to that effect in the 1960s and 1970s. And yet, social discrimination and violence
against the ex-untouchable groups continued in various ways.
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3. Isolated Settlements: Dalit settlements in villages continued to be set apart from the main village.
They were denied access to common source of drinking water.
 Dalit women were dishonoured and abused and worst of all, Dalits faced collective atrocities over
minor, symbolic issues of caste pride.
 Legal mechanisms proved inadequate to stop the economic and social oppression of Dalits. On
the other hand, political parties supported by the Dalits, like the Republican Party of India, were
not successful in electoral politics.
 These parties always remained marginal; had to ally with some other party in order to win
elections and faced constant splits. Therefore, the Dalit Panthers resorted to mass action for
assertion of Dalits’ rights.
Activities
Activities of Dalit Panthers mostly centred around fighting increasing atrocities on Dalits in various parts
of the State.
1. Outcome of the Movement: As a result of sustained agitations on the part of Dalit Panthers along
with other like-minded organisations over the issue of atrocities against Dalits, the government
passed a comprehensive law in 1989 that provided for rigorous punishment for such acts.
2. Vision of Dalit Panthers: The larger ideological agenda of the Panthers was to destroy the caste
system and to build an organisation of all oppressed sections like the landless poor peasants and
urban industrial workers along with Dalits.
3. Change through Writing: The movement provided a platform for Dalit educated youth to use their
creativity as a protest activity. Dalit writers protested against the brutalities of the caste system in
their numerous autobiographies and other literary works published during this period.
 These works portraying the life experiences of the most downtrodden social sections of Indian
society sent shock waves in Marathi literary world, made literature more broad based and
representative of different social sections and initiated contestations in the cultural realm.
4. Death of the movement: In the post- Emergency period, Dalit Panthers got involved in electoral
compromises; it also underwent many splits, which led to its decline. Organisations like the Backward
and Minority Communities’ Employees Federation (BAMCEF) took over this space.
Concept Check
Q. With reference to Dalit Panthers, which of the following statements is/are correct?
(a) It is a social organisation that seeks to combat caste discrimination.
(b) The initiative to form the Dalit Panther movement was taken up by Namdeo Dhasal, J. V. Pawar,
Raja Dhale and Arun Kamble.
(c) It was inspired by the Black Panther Party of the United States of America.
(d) The Dalit Panthers led a renaissance in Marathi literature and art.
Answer: E
3.3.2 Backward Class Castes Movements

1. Caste- Basis of Patronage: The emergence of backward castes/classes as political entities has occurred
both in the colonial and post-colonial contexts. The colonial state often distributed patronage on the
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basis of caste. It made sense, therefore, for people to stay within their caste for social and political
identity in institutional life.
2. Consolidation of Castes: It also influenced similarly placed caste groups to unite themselves and to
form what has been termed a ‘horizontal stretch’. Caste, thus began to lose its ritual content and
become more and more secularised for political mobilisation.
3. Origin of the term Backward Classes: The term ‘Backward Classes’ has been in use in different parts
of the country since the late 19th Century. It began to be used more widely in Madras presidency
since 1872, in the princely state of Mysore since 1918, and in Bombay presidency since 1925.
4. Emergence of organizations: From the 1920s, a number of organisations united around the issue of
caste sprang up in different parts of the country. These included the United Provinces Hindu Backward
Classes League, All-India Backward Classes Federation, All India Backward Classes League. In 1954, 88
organisations were counted working for the Backward Classes.
Now let us take a brief look at the example of backward class movement which took place in reality.
3.3.2.1 Dravidian Movement

1. Introduction:‘Vadakku Vaazhkirathu;
Therkku Thaeikirathu’ [The north
thrives even as the south decays].
This popular slogan sums up the
dominant sentiments of one of India’s
most effective regional movements,
the Dravidian movement, at one point
of time. This was one of the first
regional movements in Indian politics.
2. Call for Dravida Nation: Though some
sections of this movement had
ambitions of creating a Dravida
nation, the movement did not take to
arms.
 It used democratic means like
public debates and the electoral
platform to achieve its ends. This
strategy paid off as the movement acquired political power in the State and also became influential
at the national level.
3. Formation Of Dravidar Kazhagam Party: The Dravidian movement led to the formation of Dravidar
Kazhagam [DK] under the leadership of Tamil social reformer E.V. Ramasami ‘Periyar’.
 The organisation strongly opposed the Brahmins’ dominance and affirmed regional pride against
the political, economic and cultural domination of the North. Initially, the Dravidian movement
spoke in terms of the whole of south India; however, lack of support from other States limited the
movement to Tamil Nadu.
4. Chasm within the party: The DK split and the political legacy of the movement was transferred to
Dravida Munnetra Kazhagam (DMK). The DMK made its entry into politics with a three-pronged
agitation in 1953-54.
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5. Demands of DMK: First, it demanded the restoration of the original name of Kallakudi railway station
which had been renamed Dalmiapuram, after an industrial house from the North. This demand
brought out its opposition to the North Indian economic and cultural symbols.
 The second agitation was for giving Tamil cultural history greater importance in school curricula.
 The third agitation was against the craft education scheme of the State government, which it
alleged was linked to the Brahmanical social outlook.
 It also agitated against making Hindi the country’s official language. The success of the anti-Hindi
agitation of 1965 added to the DMK’s popularity.
6. Consolidation of the base: Sustained political agitations brought the DMK to power in the Assembly
elections of 1967. Since then, the Dravidian parties have dominated the politics of Tamil Nadu.
7. Another Split within the party: Though the DMK split after the death of its leader, C. Annadurai, the
influence of Dravidian parties in Tamil politics actually increased.
 After the split there were two parties – the DMK and the All India Anna DMK (AIADMK) – that
claimed Dravidian legacy.
 Both these parties have dominated politics in Tamil Nadu for the last four decades. Since 1996,
one of these parties has been a part of the ruling coalition at the Centre.
In the 1990s, many other parties have emerged. These include Marumalarchchi Dravida Munnetra
Kazhagam (MDMK), Pattali Makkal Katchi (PMK) and Desiya Murpokku Dravidar Kazhagam (DMDK). All
these parties have kept alive the issue of regional pride in the politics of Tamil Nadu. Initially seen as a
threat to Indian nationalism, regional politics in Tamil Nadu is a good example of the compatibility of
regionalism and nationalism.
Concept Check
Q. With reference to E.V. Ramasami, which of the following statements is/are correct?
(a) He founded the Dravida Munnetra Kazhagam.
(b) He started a counter movement against Dravidian Movement.
(c) He is also referred to as Periyar.
Answer: C
3.3.3 The Upper Caste Response

The increasing visibility of both Dalits and other backwards classes has led to a feeling among sections of
the upper caste that they are being given short shrift. The government, they feel, does not pay any heed
to them because they are numerically not significant enough.
Sociologists need to recognise that such a ‘feeling’ does exist and then need to scrutinize to what extent
such an impression is grounded on empirical facts. We also need to ask why earlier generations from the
so called ‘upper castes” did not think of ‘caste’ as a living reality of modern India? This is answered in
the box below.
By and large when compared to the situation prevailing before independence, the condition of all social
groups, including the lowest caste and tribes, has improved today. But by how much has it improved?
How have the lowest castes/ tribes fared in comparison to the rest of the population?
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It is true that in the early part of the 21st century, the variety of occupations and professions among all
caste groups is much wider than it was in the past. However, this does not change the massive social
reality that the overwhelming majority of those in the ‘highest’ or most preferred occupations are from
the upper castes, while the vast majority of those in the menial and despised occupations belong to the
lowest castes.
3.4 The Tribal Movements

Different tribal groups spread across the
country may share common issues. But the
distinctions between them are equally
significant. Many of the tribal movements have
been largely located in the so called ‘tribal belt’
in middle India, such as the Santhals, Hos,
Oraons, Mundas in Chota Nagpur and the
Santhal Parganas.
The region constitutes the main part of what

has come to be called Jharkhand. We will not
be able to go into any detailed account of the
different movements. We take Jharkhand as an example of a tribal movement with a history that goes
back a hundred years. We also briefly touch on the specificity of the tribal movements in the North East
but fail to deal comprehensively the many differences that exist between one tribal movement and
another within the region.
3.4.1 Jharkhand
1. Genesis: Jharkhand is one of the newly-formed states of India, carved out of south Bihar in the year
2000. Behind the formation of this state lies more than a century of resistance.
 The social movement for Jharkhand had a charismatic leader in Birsa Munda, an adivasi who led
a major uprising against the British.
 After his death, Birsa became an important icon of the movement. Stories and songs about him
can be found all over Jharkhand. The memory of Birsa’s struggle was also kept alive by writing.
2. Spread of literacy: Christian missionaries working in south Bihar were responsible for spreading
literacy in the area. Literate Adivasis began to research and write about their history and myths.
 They documented and disseminated information about tribal customs and cultural practices. This
helped create a unified ethnic consciousness and a shared identity as Jharkhandis.
3. Demand for Separate State: Literate adivasis were also in a position to get government jobs so that,
over time, a middle-class adivasi intellectual leadership emerged that formulated the demand for a
separate state and lobbied for it in India and abroad.
 Within south Bihar, adivasis shared a common hatred of dikus – migrant traders and money-
lenders who had settled in the area and grabbed its wealth, impoverishing the original residents.
 Most of the benefits from the mining and industrial projects in this mineral-rich region had gone
to dikus even as adivasi lands had been alienated.
 Adivasi experiences of marginalisation and their sense of injustice were mobilised to create a
shared Jharkhandi identity and inspire collective action that eventually led to the formation of a
separate state
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4. The issues against which the leaders of the movement in Jharkand agitated were:
 Acquisition of land for large irrigation projects and firing ranges;
 Survey and settlement operations, which were held up, camps closed down, etc.
 Collection of loans, rent and cooperative dues, which were resisted;
 Nationalisation of forest produce which they boycotted
3.4.2 The North East

The process of state formation initiated by the Indian government following the attainment of
independence generated disquieting trends in all the major hill districts in the region. Conscious of their
distinct identity and traditional autonomy the tribes were unsure of being incorporated within the
administrative machinery of Assam.
Movements in the North East
1. Geography of North- East: In the North-East, regional aspirations reached a turning point in 1980s.
This region now consists of seven States, also referred to as the ‘seven sisters.
 The region has only 4 per cent of the country’s population but about twice as much share of its
area. A small corridor of about 22 kilometers connects the region to the rest of the country.
 Otherwise, the region shares boundaries with China, Myanmar and Bangladesh and serves as
India’s gateway to south east Asia.
2. Political reorganization: The region has witnessed a lot of change since 1947. Tripura, Manipur and
Khasi Hills of Meghalaya were erstwhile Princely States which merged with India after independence.
 The entire region of North-East has undergone considerable political reorganisation.
 Nagaland State was created in 1963; Manipur, Tripura and Meghalaya in 1972 while Mizoram and
Arunachal Pradesh became separate States only in 1987.
 The partition of India in 1947 had reduced the North-East to a land locked region and affected its
economy.
 Cut off from the rest of India, the region suffered neglect in developmental terms. Its politics too
remained insulated.
 At the same time, most States in this region underwent major demographic changes due to influx
of migrants from neighbouring States and countries.
3. The isolation of the region: Its complex social character and its backwardness compared to other
parts of the country have all resulted in the complicated set of demands from different states of the
North-East.
 The vast international border and weak communication between the North-East and the rest of
India have further added to the delicate nature of politics there.
 Three issues dominate the politics of North-East: demands for autonomy, movements for
secession, and opposition to ‘outsiders’.
Major initiatives on the first issue in the 1970s set the stage for some dramatic developments on the
second and the third in the 1980s. Now let’s understand these issues in detail.
a) Demands for Autonomy

I. Imposition of Assamese language: At independence the entire region except Manipur and Tripura
comprised the State of Assam. Demands for political autonomy arose when the non-Assamese felt
that the Assam government was imposing Assamese language on them.
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 There were opposition and protest riots throughout the State. Leaders of the major tribal
communities wanted to separate from Assam.
II. Call for Statehood: They formed the Eastern India Tribal Union which later transformed into a
more comprehensive All Party Hill Leaders Conference in 1960.
 They demanded a tribal State to be carved out of Assam. Finally, instead of one tribal State,
several States got carved out of Assam.
 At different points of time the Central Government had to create Meghalaya, Mizoram and
Arunachal Pradesh out of Assam. Tripura and Manipur were upgraded into States too. The
reorganisation of the North-East was completed by 1972. But this was not the end of
autonomy demands in this region.
III. Conflicting tendencies: In Assam, for example, communities like the Bodos, Karbis and Dimasas
wanted separate States. They worked for this demand by mobilising public opinion and popular
movement as well as through insurgency.
 Often the same area was claimed by more than one community. It was not possible to go on
making smaller and yet smaller States. Therefore, some other provisions of our federal set up
were used to satisfy their autonomy demands while remaining in Assam.
 Karbis and Dimasas have been granted autonomy under District Councils while Bodos were
recently granted Autonomous Council.
b) Secessionist Movements
Demands for autonomy were easier to respond to, for these involved using the various provisions in the
Constitution for accommodation of diversities. It was much more difficult when some groups demanded
a separate country, not in momentary anger but consistently as a principled position. The country’s
leadership faced this problem for a very long time in at least two States in the North-East. A comparison
of these two cases offers us a lesson in democratic politics.
I. Demand for Separate country from Mizos: After independence, the Mizo Hills area was made an
autonomous district within Assam. Some Mizos believed that they were never a part of British India
and therefore did not belong to the Indian union.
II. Mishandling by the Assam Government: The movement for secession gained popular support after
the Assam government failed to respond adequately to the great famine of 1959 in Mizo hills.
 The Mizos’ anger led to the formation of the Mizo National Front (MNF) under the leadership of
Laldenga.
 In 1966 the MNF started an armed campaign for independence. Thus, started a two-decade long
battle between Mizo insurgents and the Indian army.
 The MNF fought a guerilla war, got support from Pakistani government and secured shelter in
the then East Pakistan.
 The Indian security forces countered it with a series of repressive measures of which the common
people were the victims. At one point even Air Force was used. These measures caused more
anger and alienation among the people.
 At the end of two decades of insurgency everyone was a loser. This is where maturity of the
political leadership at both ends made a difference.
 Laldenga came back from exile in Pakistan and started negotiations with the Indian government.
Rajiv Gandhi steered these negotiations to a positive conclusion.
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III. Move towards Peace: In 1986 a peace agreement was signed between Rajiv
Gandhi and Laldenga. As per this accord Mizoram was granted full-fledged
statehood with special powers and the MNF agreed to give up secessionist
struggle. Laldenga took over as the Chief Minister.
 This accord proved a turning point in the history of Mizoram. Today,
Mizoram is one of the most peaceful places in the region and has taken big
strides in literacy and development.
IV. The story of Nagaland: It is similar to Mizoram, except that it started much
earlier and has not yet had such a happy ending.
 Led by Angami Zaphu Phizo, a section of the Nagas declared independence
from India way back in 1951. Phizo turned down many offers of negotiated
settlement.
 The Naga National Council launched an armed struggle for sovereignty of
Nagas.
 After a period of violent insurgency a section of the Nagas signed an
agreement with the government of India but this was not acceptable to
other rebels. The problem in Nagaland still awaits a final resolution.
c) Movements against Outsiders

1. Infiltration of the region: The large-scale migration into the north-east gave rise to a special kind of
problem that pitted the ‘local’ communities against people who were seen as ‘outsiders’ or migrants.
 These latecomers, either from India or abroad are seen as encroachers on scarce resources like
land and potential competitors to employment opportunities and political power. This issue has
taken political and sometimes violent form in many States of the north-east.
2. Feeling of deprivation: The Assam Movement from 1979 to 1985 is the best example of such
movements against ‘outsiders.’
 The Assamese suspected that there were huge numbers of illegal Bengali Muslim settlers from
Bangladesh. They felt that unless these foreign nationals are detected and deported they would
reduce the indigenous Assamese into a minority.
 There were other economic issues too. There was widespread poverty and unemployment in
Assam despite the existence of natural resources like oil, tea and coal. It was felt that these were
drained out of the State without any commensurate benefit to the people.
3. Outbreak of the movement: In 1979 the All-Assam Students’ Union (AASU), a students’ group not
affiliated to any party, led an anti-foreigner movement.
 The movement was against illegal migrations, against domination of Bengalis and other
outsiders, and against faulty voters’ register that included the names of lakhs of immigrants.
 The movement demanded that all outsiders who had entered the State after 1951 should be sent
back.
 The agitation followed many novel methods and mobilised all sections of Assamese people,
drawing support across the State. It also involved many tragic and violent incidents leading to loss
of property and human lives.
 The movement also tried to blockade the movement of trains and the supply of oil from Assam to
refineries in Bihar.
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4. Resolving the issue: Eventually after six years of turmoil, the Rajiv Gandhi-led government entered
into negotiations with the AASU leaders, leading to the signing of an accord in 1985.
 According to this agreement those foreigners who migrated into Assam during and after
Bangladesh war and since, were to be identified and deported.
 With the successful completion of the movement, the AASU and the Asom Gana Sangram
Parishad organised themselves as a regional political party called Asom Gana Parishad (AGP).
 It came to power in 1985 with the promise of resolving the foreign national problem as well as to
build a ‘Golden Assam’.
5. Problem Persists: Assam accord brought peace and changed the face of politics in Assam, but it did
not solve the problem of immigration. The issue of the ‘outsiders’ continues to be a live issue in the
politics of Assam and many other places in the North-East.
 This problem is particularly acute, for example, in Tripura as the original inhabitants have been
reduced to being a minority in their own land. The same feeling informs the hostility of the local
population to Chakma refugees in Mizoram and Arunachal Pradesh.
Concept Check
Q. Assam Accord was signed in the year
(a) 1979
(b) 1985
(c) 1991
(d) 2004
(e) 2015
Answer: B
3.5 The Women’s Movement

1. The 19th Century Social Reform Movements and Early Women’s Organisations
 You are already familiar with the 19th century social reform movements that raised various issues
concerning women.
 The early 20th century saw the growth of women’s organisations at a national and local level. The
Women’s India Association (WIA) (1917), All India Women’s Conference (AIWC) (1926), National
Council for Women in India (NCWI) (1925) are ready names that we can mention.
 While many of them began with a limited focus, their scope extended over time. For instance, the
AIWC began with the idea that ‘women’s welfare’ and ‘politics’ were mutually exclusive. Few years
later the Presidential address stated, “…Can the Indian man or woman be free if India be a slave?
How can we remain dumb about national freedom, the very basis of all great reforms?”
 It can be argued that this period of activity did not constitute a social movement. It can be argued
otherwise too.
Let us recall some of the features that characterise social movements. It did have organisations, ideology,
leadership, a shared understanding and the aim of bringing about changes on a public issue. What they
succeeded together was to create an atmosphere where the women’s question could not be ignored.
2. Agrarian Struggles and Revolts

 It is often assumed that only middle class educated women are involved in social movements. Part of
the struggle has been to remember the forgotten history of women’s participation. Women
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participated along with men in struggles and revolts originating in tribal and rural areas in the colonial
period.
 The Tebhaga movement in Bengal, the Telangana arms struggle from the erstwhile Nizam’s rule, and
the Warli tribal’s revolt against bondage in Maharashtra are some examples.
3. Post 1947
An issue that is often raised is that if there was an active women’s movement before 1947, what happened
afterwards. One explanation has been that many of the women activists who were also involved in the
nationalist movement got involved in the nation building task. Others cite the trauma of Partition as
responsible for the lull.
In the mid-1970s there was a renewal of the women’s movement in India. Some call it the second phase
of the Indian women’s movement. While many of the concerns remained the same there were changes
both in terms of organisational strategy as well as ideologies.
a) Autonomous women’s movements: There was the growth of what is termed as the autonomous
women’s movements. The term ‘autonomy’ referred to the fact that they were ‘autonomous’ or
independent from political parties as distinct from those women’s organisations that had links with
political parties.
 It was felt that political parties tended to marginalise issues of women. Apart from organisational
changes, there were new issues that were focussed upon.
 For instance, violence against women. Over the years there have been numerous campaigns that
have been taken up. You may have noticed that application for school forms have both father’s
and mother’s names. This was not always true.
 Likewise important legal changes have taken place thanks to the campaign by the women’s
movement. Issues of land rights, employment have been fought alongside rights against sexual
harassment and dowry.
b) Disparity among Women: There has been a recognition too that while all women are in some way
disadvantaged vis-a-vis men, all women do not suffer the same level or kind of discrimination.
 The concerns of the educated middle-class woman are different from the peasant woman just as
the concern of the Dalit woman is different from the ‘upper caste’ woman.
 Let us take the example of violence.
Struggle against Dowry, Sexual crimes
against women.
 There has also been greater recognition
that both men and women are constrained
by the dominant gender identities.
 For instance, men in patriarchal societies
feel they must be strong and successful. It
is not, manly, to express oneself
emotionally.
Struggle against Dowry
 A gender-just society would allow both
men and women to be free. This of course Struggle Against Dowry
rests on the idea that for true freedom to
grow and develop, injustices of all kind have to end.
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Now let us look at one of the post-independence Women movements in detail.
3.5.1 SEWA Movement

I. Background
a) Origin of Sewa: In 1972 Ela Bhatt founded
the Self-Employed Women’s Association
(SEWA) as a trade union of self-employed
women. In registering as a trade union,
SEWA faced major resistance because the
Labor Department felt that since members
had no employer SEWA did not fit the
model of a trade union.
b) Registration as Trade Union: After arguing
that a union is not only for struggles against
employers, but more importantly it is for
the unity of workers, SEWA was finally registered as a trade union in 1972 with 320 members.
c) Tracing the roots of SEWA: It grew out of the Textile Labour Association, TLA, India's oldest and
largest union of textile workers founded in 1920 by a woman, Anasuya Sarabhai.
 The inspiration for the union came from Mahatma Gandhi, who led a successful strike of
textile workers in 1917.
d) Model: SEWA adopts an Integrated & Need based Approach for Organizing the poor, self-
employed women workers.
 Presently It is a member-based movement of about 7,00,000 poor, informal sector women
workers of India.
e) Extent of SEWA: SEWA movement covers 17 states of India. It exclusively works in 14 districts of
Gujarat, covering 50% of the State of Gujarat
 There are about 3500 local producers’ groups and 9 Economic Federation. Members represent
more than 125 different kinds of trades
f) Objective of the Organization: SEWA’s main goals are to organise women workers for full
employment. (Full employment means employment whereby workers obtain work security,
income security, food security and social security)
 Practically, the strategy is carried out through the joint action of union and cooperatives.
g) Gandhian thinking is the guiding force for SEWA’s poor, self-employed members in organising for
social change following the principles of satya (truth), ahimsa (non-violence), sarvadharma
(integrating all faiths, all people) and khadi (propagation of local employment and self reliance).
h) The SEWA movement is enhanced by its being a sangam or confluence of three movements: the
labour movement, the cooperative movement and the women’s movement.
i) It is also a movement of self-employed workers: their own, home-grown movement with women
as the leaders. Through their own movement women become strong and visible.
II. SEWA Approach
1. Empowering Women: Organize women workers into trade groups, often helping them create
cooperatives. They further help build their members’ capacity through training on technical skills,
leadership, and product development.
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 These organizing services help empower working women by allowing them to demand higher
wages, better prices, and better work conditions, and also by increasing their productivity
2. Demand Driven Approach: SEWA’s approach in organising rural members has been to identify the
issues or needs of the communities. Design demand driven programmes that strategically link with
the existing Government programmes thereby satisfy the needs of the communities.
3. Integrated Approach: SEWA’s approach has been an integrated approach, where various inputs are
needed not one after the other but simultaneously.
 SEWA thereby strategically links the producers and their demands to the market.
4. SEWA provides its members with both financial and social support: Through SEWA’s cooperative
bank (governed, owned, run mainly by the members themselves) SEWA provides its members with
access to low interest loans, the ability to develop savings accounts, and the opportunity to buy into
various insurance schemes.
 Through several cooperatives and in some cases coordination with the government, SEWA offers
its members a variety of social services, such as health care, child care, literacy courses, better
housing and access to water.
5. Clarion Call to Institutes: SEWA advocates on behalf of its members to local, national, and
international bodies demanding changes in laws to take into account self-employed women’s critical
role in the labor force.
Concept Check
Q. Self Employed Women’s Association, a trade union working for the upliftment of women in the
unorganized sector, was founded by
(a) Mahatma Gandhi
(b) Kiran Bedi
(c) Medha Patkar
(d) Aruna Roy
(e) Ela Bhatt
Answer: E
4 Miscellaneous Movements
4.1 Movement for Right to Information
The movement for Right to Information (RTI) is one of the few recent examples of a movement that did
succeed in getting the state to accept its major demand.
1. Genesis of the movement: It started in 1990, when a mass-based organisation called the Mazdoor
Kisan Shakti Sangathan (MKSS), under the leadership of Aruna Roy, in Rajasthan took the initiative
in demanding records of famine relief work and accounts of labourers.
 The demand was first raised in Bhim Tehsil in a very backward region of Rajasthan.
 The villagers asserted their right to information by asking for copies of bills and vouchers and
names of persons on the muster rolls who have been paid wages on the construction of schools,
dispensaries, small dams and community centres.
 On paper such development projects were all completed, but it was common knowledge of the
villagers that there was gross misappropriation of funds.
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 In 1994 and 1996, the MKSS organised Jan Sunwais or Public Hearings, where the administration
was asked to explain its stand in public.
2. Course of Legislation: The movement had a small success when they could force an amendment in
the Rajasthan Panchayati Raj Act to permit the public to procure certified copies of documents held
by the Panchayats.
 The Panchayats were also required to publish on a board and in newspapers the budget, accounts,
expenditure, policies and beneficiaries.
 In 1996 MKSS formed National Council for People’s Right to Information in Delhi to raise RTI to
the status of a national campaign.
 Prior to that, the Consumer Education and Research Center, the Press Council and the Shourie
committee had proposed a draft RTI law.
 In 2002, a weak Freedom of Information Act was legislated but never came into force. In 2004 RTI
Bill was tabled and received presidential assent in June 2005.
Concept Check
Q. Right to Information Act was enacted in the year
(a) 1996
(b) 2002
(c) 2003
(d) 2004
(e) 2005
Answer: E
4.2 Telangana Movement- Carving a new State

1. Historical Background: The region, now being called Telangana, was part of the erstwhile Hyderabad
state which was merged into the Indian Union on 17 September, 1948.
2. Creation of Hyderabad State: Central government appointed a civil servant, M K Vellodi, as the first
Chief Minister of Hyderabad state on 26 January 1950.
 In 1952, Burgula Ramakrishna Rao was elected Chief Minister of Hyderabad state in the first
democratic election.
3. Creation of Andhra: Andhra was the first state to be carved out (from erstwhile Madras state) on
linguistic basis on 1 November, 1953.
 It had Kurnool town (in Rayalaseema region) as its capital after the death of Potti Sriramulu who
sat on a 53-day fast-unto-death demanding the new state.
4. Amalgamation of Hyderabad with Andhra: The proposal for amalgamation of Hyderabad state with
Andhra state came up in 1953 and the then Chief Minister of Hyderabad state, Burgula Ramakrishna
Rao, supported the Congress central leadership’s decision in this regard though there was opposition
in Telangana region.
 Accepting the merger proposal, Andhra assembly passed a resolution on November 25, 1955
promising to safeguard the interests of Telangana.
 An agreement was reached between Telangana leaders and Andhra leaders on February 20, 1956
to merge Telangana and Andhra with promises to safeguard Telangana's interests.
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 A “Gentlemen’s Agreement” was then signed by Bezawada Gopala Reddy and Burgula
Ramakrishna Rao to the effect.
 Eventually, under the States Re-organisation Act, Telugu-speaking areas of Hyderabad state were
merged with Andhra state, giving birth to the state of Andhra Pradesh on 1 November, 1956.
 The city of Hyderabad, the then capital of Hyderabad state, was made the capital of Andhra
Pradesh state.
5. Beginning of protests: In 1969, an agitation began in Telangana region as people protested the failure
to implement the Gentlemen’s Agreement and other safeguards properly.
 Marri Channa Reddy launched the Telangana Praja Samiti espousing the cause of a separate state.
The agitation intensified and turned violent with students in the forefront of the struggle and
about 300 of them were killed in violence and police firing that ensued.
6. Eight Point Plan by Indira Gandhi: Following several rounds of talks with leaders of the two regions,
the then Prime Minister Indira Gandhi came up with an eight-point plan on April 12, 1969. Telangana
leaders rejected the plan and protests continued under the aegis of Telangana Praja Samiti.
7. Counter Reaction to Telangana Movement: In 1972, Jai Andhra movement started in Andhra-
Rayalaseema regions as a counter to Telangana struggle.
8. Finding Peace: On September 21, 1973, a political settlement was reached with the Centre and a 6-
point formula put in place to placate people of the two regions.
9. Incidence of Injustice: In 1985, employees from Telangana region cried foul over appointments in
government departments and complained about ‘injustice’ done to people of the region.
10. Safeguarding the interests: The then Telugu Desam Party government, headed by N T Rama Rao,
brought out a Government Order to safeguard the interests of Telangana people in government
employment.
 Till 1999, there was no demand from any quarters for division of the state on regional lines.
11. Ulterior motive of Congress: In 1999, Congress demanded creation of Telangana state. Congress was
then smarting under crushing defeats in successive elections to the state Assembly and Parliament
with the ruling Telugu Desam Party in an unassailable position.
 Yet another chapter opened in the struggle for Telangana when Kalvakuntla Chandrasekhar Rao,
who was seething over denial of Cabinet berth in the Chandrababu Naidu government, walked out
of TDP and launched Telangana Rashtra Samiti on 27 April, 2001.
12. Demand for Second States Reorganisation Commission: Following pressure applied by Telangana
Congress leaders, the Central Working Committee of Congress in 2001 sent a resolution to the then
NDA government seeking constitution of a second States Re-organisation Commission to look into
Telangana state demand, which was rejected by the then Union Home Minister L K Advani saying
smaller states were “neither viable nor conducive” to integrity of the country.
13. Building the movement for new state: TRS started gradually building the movement for a separate
state. Congress forged an electoral alliance with TRS by promising to create Telangana state.
 Congress came to power in 2004, both in the state and at the Centre, and TRS became part of the
coalition governments at both places.
 Protesting delay in carving out the separate state, TRS quit the coalition governments in the state
and at the Centre in December 2006 and continued an independent fight.
 In October 2008, TDP changed its stance and declared support for bifurcation of the state.
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14. Hunger strike for the movement: TRS launched an indefinite hunger-strike on 29 November, 2009
demanding creation of Telangana. The Centre budged and came out with an announcement on 9
December, 2009 that it was "initiating the process for formation of Telangana state".
 But the Centre announced on 23 December, 2009 that it was putting Telangana issue on hold.
This fanned protests across Telangana with some students ending their lives for a separate state.
15. Formation of Committee: The Centre then constituted a five-member Committee on 3 February,
2010, headed by former judge Srikrishna, to look into statehood demand. The Committee submitted
its report to the Centre on 30 December, 2010.
16. Series of Movements: Telagana region witnessed a series of agitations like the Million March, Chalo
Assembly and Sakalajanula Samme (general strike) in 2011-12 while MLAs belonging to different
parties quit from the House.
 With its MPs from Telangana upping the ante, Congress made Union Home Ministry to convene
an all-party meeting on December 28, 2012 to find an “amicable solution” to the crisis.
17. Culmination of the movement: After several years of protest and agitation, the central government,
under the United Progressive Alliance, decided to bifurcate the existing Andhra Pradesh state and
on 7 February 2014, the Union Cabinet unilaterally cleared the bill for the creation of Telangana.
Lasting for almost a decade, this has been one of the most long-lasting movements in South India.
 On 18 February 2014, the Lok Sabha passed the bill with a voice vote. Subsequently, the bill was
passed by the Rajya Sabha two days later, on 20 February. As per the bill, Hyderabad would be the
capital of Telangana, while the city would also remain the capital of residual state of Andhra
Pradesh for no more than ten years. On 2 June 2014, Telangana was created.
Concept Check
Q. Which of the following statements is/are true about social movements?
(a) Social movements take place outside of civil society.
(b) Social movements are relatively common in modern, democratic societies.
(c) Social movements are equally likely under all regime types.
(d) All social movements are left wing.
Answer: B
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Indian Political
Systems

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Contents
1 Part I: Introduction .................................................................................................................................6
1.1 What is Polity? ................................................................................................................................6
1.2 What is a constitution? ...................................................................................................................6
1.3 Types/Classification of the Constitution .........................................................................................6
1.3.1 Written Constitution ................................................................................................................7
1.3.2 Un-written Constitution...........................................................................................................7
1.3.3 Unitary Constitution ................................................................................................................7
1.3.4 Federal Constitution ................................................................................................................7
1.3.5 Rigid & Flexible Constitution ...................................................................................................7
1.4 Indian Constitution – A living document ........................................................................................7
1.5 Sources of Indian Constitution ........................................................................................................8
1.6 Important Committees of the Constituent Assembly.....................................................................8
1.7 Indian Constitution – Unitary & Federal Features ..........................................................................9
1.7.1 Unitary Government ................................................................................................................9
1.7.2 Federal Government ................................................................................................................9
1.7.3 Unitary & Federal Government – A comparative study ........................................................10
1.7.4 Unitary Features of Indian Constitution ................................................................................10
1.7.5 Federal Features of Indian Constitution ................................................................................10
1.8 Presidential & Parliamentary forms of Government ....................................................................11
1.8.1 Parliamentary Form of Government .....................................................................................11
1.8.2 Presidential Form of Government .........................................................................................12
1.8.3 India – Parliamentary Form of Government .........................................................................12
2 Part II: Fundamental Rights ..................................................................................................................13
2.1.1 Fundamental Rights ...............................................................................................................13
2.2 Classification of Fundamental Rights as incorporated in the Constitution of India .....................14
2.3 Fundamental Rights & Judiciary....................................................................................................16
2.3.1 Judicial Review .......................................................................................................................16
2.4 Parliament’s Power to Amend Constitution .................................................................................16
2.4.1 Shankari Prasad Case (1951) .................................................................................................16
2.4.2 Sajjan Singh Case (1964) ........................................................................................................16
2.4.3 Golak Nath Case (1967) .........................................................................................................16
2.4.4 Kesavanand Bharti Case (1973) .............................................................................................17
2.4.5 Minerva Mills Case.................................................................................................................17
2.5 Armed Forces and Fundamental Rights ........................................................................................17

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3 Part III: Directive Principles of State Policy ..........................................................................................17

3.1 Meaning and Nature .....................................................................................................................17
3.2 DPSP – Why is it non-justiciable? ..................................................................................................18
3.3 List of DPSPs under Indian Constitution .......................................................................................18
3.4 Comparison Fundamental Rights & Directive Principles ..............................................................18
3.5 Fundamental Rights & DPSP – Relative Importance.....................................................................19
3.5.1 Champakam Dorairajan Case (1952) .....................................................................................19
3.5.2 Golaknath Case (1967)...........................................................................................................19
3.5.3 Kesavananda Bharati Case (1973) .........................................................................................20
3.5.4 Minerva Mills Case (1980) .....................................................................................................20
4 Part IV: Fundamental Duties ................................................................................................................20
4.1 Swaran Singh Committee ..............................................................................................................20
4.2 List of Fundamental Duties ...........................................................................................................21
5 Part V: President of India .....................................................................................................................21
5.1 Executive Powers ..........................................................................................................................22
5.2 Legislative Powers .........................................................................................................................22
5.3 Financial Powers ...........................................................................................................................22
5.4 Judicial Powers ..............................................................................................................................23
5.5 Military Power ...............................................................................................................................23
5.6 Diplomatic Power ..........................................................................................................................23
5.7 Emergency Powers ........................................................................................................................23
5.8 Veto Power over Legislations........................................................................................................23
5.8.1 Absolute Veto ........................................................................................................................23
5.8.2 Suspensive Veto .....................................................................................................................23
5.8.3 Pocket Veto ............................................................................................................................24
5.9 Ordinance Making Power of the President...................................................................................24
6 Part VI: Prime Minister & Council of Ministers ....................................................................................24
6.1 Powers & Functions of the Prime Minister ...................................................................................24
6.1.1 Head of the Government .......................................................................................................24
6.1.2 Leader of the Cabinet ............................................................................................................25
6.1.3 Link between President & the Cabinet ..................................................................................25
6.1.4 Leader of the Parliament .......................................................................................................25
6.2 Important Articles .........................................................................................................................25
6.2.1 Article 74 ................................................................................................................................25

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6.2.2 Article 75 ................................................................................................................................25

7 Part VII: Governor .................................................................................................................................26
7.1 The Office of the Governor ...........................................................................................................26
7.2 Dual Role of the Governor ............................................................................................................26
7.2.1 Constitutional Head of State .................................................................................................26
7.2.2 Governor as the Agent of Centre...........................................................................................26
7.3 Discretionary Powers of the Governor .........................................................................................26
7.3.1 Constitutional discretion .......................................................................................................26
7.3.2 Situational discretion .............................................................................................................27
8 Part VIII: Judiciary .................................................................................................................................28
8.1 Supreme Court of India .................................................................................................................28
8.2 High Courts ....................................................................................................................................28
8.3 Appointment of Supreme Court Judges .......................................................................................28
8.4 Appointment of High Court Judges ...............................................................................................29
8.5 Controversy over appointment of Judges ....................................................................................29
8.6 Removal of Judges ........................................................................................................................29
8.7 Powers or Jurisdiction of Supreme Court .....................................................................................29
8.7.1 Article 129: Court of Records.................................................................................................29
8.7.2 Article 131: Original Jurisdiction ............................................................................................29
8.7.3 Appellate Jurisdiction ............................................................................................................29
8.7.4 Article 136: Appeal by Special Leave .....................................................................................30
8.7.5 Article 143: Advisory Jurisdiction ..........................................................................................30
8.7.6 Article 132: Writ Jurisdiction .................................................................................................30
8.7.7 Judicial Review .......................................................................................................................30
9 Part IX: Centre-State Relations .............................................................................................................30
9.1 Legislative Relations ......................................................................................................................30
9.1.1 Union List ...............................................................................................................................31
9.1.2 State List ................................................................................................................................31
9.1.3 Concurrent List.......................................................................................................................31
9.1.4 Residuary & Implied Subjects ................................................................................................31
9.1.5 When can Parliament legislate on subjects of State List? .....................................................32
9.1.6 Centre’s control over State Legislation .................................................................................33
9.2 Administrative Relations ...............................................................................................................33
9.3 Financial Relations ........................................................................................................................33

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9.3.1 Scheme of Distribution of Sources of Revenue .....................................................................33

9.3.2 Grants-in-Aid..........................................................................................................................34
9.3.3 Borrowing Powers of the Union and the States ....................................................................34
9.3.4 Exemption of Union Property from State Taxation ...............................................................34
9.3.5 Article 280: Finance Commission...........................................................................................34
9.3.6 Article 360: Financial Emergency...........................................................................................34
9.3.7 Comptroller & Auditor-General of India ................................................................................35
10 Part X: Panchayati Raj .......................................................................................................................35
10.1 New Panchayati Raj System: 73rd Amendment and After ...........................................................35
10.2 Salient features of the 73rd Constitutional Amendment Act .......................................................36
11 Miscellaneous ...................................................................................................................................37
1 Part I: Introduction
1.1 What is Polity?

 A particular form or system of government
 A state or other organized community or body
 Examples: Tyranny, Monarchy, Oligopoly, Democracy etc.
1.2 What is a constitution?

Whenever a civilized society decides to organize itself politically i.e., put
in place an organized system of government, it faces some vital
questions:
 What system of government it would have?
 What will be the principal organs of such a government and how and in what manner will they be
constituted?
 What will the main functions and powers of such organs?
 What shall be the status of the citizens under such a Polity?
 What kind of rights & privileges will the citizens have?
 All such questions and many more of the similar nature are answered while preparing a
comprehensive document that constitutes the fundamental law of the land called the
CONSTITUTION.
1.3 Types/Classification of the Constitution

The constitutions may be classified into the following principal types:
1. Written or Un-written constitutions
2. Unitary or Federal constitutions
3. Flexible or rigid constitutions
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1.3.1 Written Constitution

 Features: The provisions are written into a document that constitutes the supreme law of the land
 Examples: The constitution of the United State of America (1787) -is the world’s first written
constitution. India also has a written constitution.
 Accomplishment: Task for drafting the same was accomplished on Nov.26, 1949 that involved an
arduous task of writing the same over a period of 2 years, 11 months and 18 days.
1.3.2 Un-written Constitution

1. Features: Not embodied in a one single comprehensive document. Instead, it is found scattered and
interspersed in a number of sources
2. Sources for Constitution: Such sources can be customs, traditions, conventions, common law cases,
etc.
3. Examples: Perhaps only the Great Britain has an unwritten constitution.
4. Absence of Supreme Document: No single document in England that can strictly be called an
instruction manual to initiate one into a complete study of the constitutional law of that country.
5. No distinction between the two species of law: The one that is being made under the provisions of
the Constitution and the other that takes the form of administrative fiats, executive decrees or the
Presidential or Governor ordinances having the force of law.
6. Tyranny of Government: Affords ample room to a State for unbridled power and authority to employ
any law as an unquestionable instrument of legitimate coercion against a common man.
1.3.3 Unitary Constitution

1. Supreme Central Government: Constitution that sets up one Central government in which all powers
of the government are concentrated.
2. Features: Is nothing short of an autocracy or an equivalent of an oligarchy
3. Concentration of Powers: Only a handful of the people sitting at the centre call the shots and control
the levers of the government in all spheres
4. States- Subordinate to Centre: States operate as subordinates to the central government and enjoy
only those powers that are being delegated to them by the central government in a very limited
sphere.
 The unit governments or the states function as mere cogs in the wheels of the central government
1.3.4 Federal Constitution

 There is a clear-cut division of powers between the two units of the government -the central
government and state governments.
 Unit governments in such a system are not subordinate to the central government instead, both
coordinate with each other.
1.3.5 Rigid & Flexible Constitution

 A rigid constitution is one which requires a special, complex and more technical procedure for its
amendment.
 A flexible constitution provides for a simple and an uncomplicated procedure for its amendment.
1.4 Indian Constitution – A living document

Features
1. It is a unique blend of rigidity & flexibility.

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2. Balance between preserving core values and adapting them to new circumstances
3. The flexible part of the Indian constitution encompasses certain provisions that can be amended by
the simple majority procedure as is followed for enacting ordinary laws.
4. At the same time, there are other provisions of the constitution that can only be amended after
following a special, more difficult and a technical procedure such that they can be amended by having
a special majority in both the houses of the union legislature as well as ratification by at least one half
of the state legislative Assemblies.
5. An amendment of this kind is what is exactly called a constitutional amendment under the provisions
of Article-368 of the Indian constitution.
1.5 Sources of Indian Constitution

 The Structural part of the Constitution has been, to a large extent, derived from the Government of
India Act, 1935.
 The Philosophical part (Fundamental Rights, DPSPs) from the USA and Irish constitutions respectively.
 The Political part (principles of the cabinet government, relationship between the executive and
legislature), largely from the British Constitution.
Provisions Sources
Parliamentary System U.K.
Fundamental Rights U.S.A.
The organization and powers of the Supreme Court U.S.A.
Judicial review U.S.A.
Post of Vice President U.S.A.
Federal system Canada, Govt. of India act 1935
The directive principles of state policy Ireland
Emergency provisions Germany, Govt of India Act 1935
Fundamental duties Former Soviet Russia
Legislative procedure U.K.
Parliamentary privileges U.K.
Republic France
Concurrent list Australia
Constitution amendment South Africa
Procedure established by law Japan
Rule of law U.K.
1.6 Important Committees of the Constituent Assembly

The committee on rules of procedure The committee was to consist of a chairman and 15
other members.
The negotiating committee It was to have 6 original members while 3 other
members might be added later
The steering committee Having a chairman and eleven other members
The business committee It consisted of a chairman, K.M.Munishi and two
members, N. Gopalaswami Ayyangar and Bishwanath
Das

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The advisory committee on minorities Consisted originally of fifty members

Fundamental Rights etc.
Fundamental rights sub-committee Under the chairmanship of J.B. Kriplani and include
thirteen other members
The minorities sub-committee Under the chairmanship of W.C. Mookerjee and had
twenty-five other members
Union procedure committee It was to consist of twelve members with Shri
J.L.Nehru as chairman.
The Union Constitution committee Shri J.L. Nehru as chairman and consisting of fourteen
other members.
The provincial constitution committee. With Sardar Patel as chairman and consisting of 24
other members
The drafting committee It consisted of a chairman, Dr. B.R. Ambedkar and six
other member, N. Gopalswami Iyangar, Alladi
Krishnaswami Ayyar, K.M. Munshi, Saiyid Mohd
Sa’adulla, Madhava Rao and D.P. Khetan.
The linguististic provinces It consists of three members, S.K. Dhar (chairman),
Panna lal and Jagat Narian
The expert committee on the financial Consisting of three members, N.R.Sarkar (chairman),
provisions of the union constitution V.S. Sundram and .V.Rangachari.
1.7 Indian Constitution – Unitary & Federal Features
1.7.1 Unitary Government

 All-important powers are concentrated in the hands of the Central Government.
 Political subdivisions may be created for administrative convenience.
 The central government is supreme, various political subdivisions, if at all in existence, are subordinate
to it.
 Powers of the various sub divisions are not their original powers but are delegated to them by the
Central government.
 Single citizenship and a uniform system of law prevails throughout the country.
1.7.2 Federal Government

 Constitution clearly defines the jurisdiction of the two sets of government, National and Regional.
 There is equality of status between the two.
 The Constitution is supreme.
 Two sets of laws corresponding to the two sets of governments, each legislating on subjects in their
respective jurisdiction.
 While the central or the federal government is charged with the administration of affairs of national
importance, matters of regional or local importance are given to the governments of the units.
 The government of the units should not be taken as subordinate governments rather both the federal
and the provincial governments are coordinate in relation to each other.
 Envisages double citizenship.

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1.7.3 Unitary & Federal Government – A comparative study

Unitary Features of Indian Constitution Federal Features of Indian Constitution
A Written or Unwritten Constitution A Written Constitution
A Flexible Constitution A rigid Constitution
Fusion of Powers Separation of Powers
Curtailed Judicial system (more or less) Independent and impartial Judiciary
Single and integrated level of government Two relatively autonomous levels of government
1.7.4 Unitary Features of Indian Constitution
 The power of the Union to legislate on the matters included in the State List under certain specific
circumstances
 Emergency provisions which make the system virtually unitary during emergencies
 Change in the name and boundaries of States by the Parliament
 Integrated Judicial System
 All India Services – I.A.S./I.F.S./I.P.S.
 Appointment of Governors of States by the Union
 The Election Commission, as a central agency for all elections
 Resolution of disputes among States by the Union
 Unequal representation of States in the Council of States
 The provision to reserve the bills passed by the State Legislature for the assent of the President
 Flexible Constitution (to a certain extent)
 Planned development for the whole country by the Planning Commission (now NITI AAYOG)
 Dependence of states on the centre for economic assistance and grants
 Residuary powers vested in the Union
1.7.5 Federal Features of Indian Constitution

1. Dual Polity: The Constitution establishes a dual polity consisting of the Union at the Centre and the
states at the Periphery.
 Each is endowed with sovereign powers to be exercised in the field assigned to them respectively
by the Constitution.
 The Union government deals with the matters of national importance like defence, foreign affairs,
currency and communication and so on.
 The state governments, on the other hand, look after the matters of regional and local
importance like public order, agriculture, health, local government and so on
2. Written Constitution: The Constitution is not only a written document but also the lengthiest
Constitution of the world.
 Originally, it contained a Preamble, 395 Articles (divided into 22 Parts) and 8 Schedules. At present
(2021), it consists of a Preamble, about 465 Articles (divided into 25 Parts) and 12 Schedules.
 It specifies the structure, organization, powers and functions of both the Central and state
governments and prescribes the limits within which they must operate. Thus, it avoids the
misunderstandings and disagreements between the two.
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3. Division of Powers: The Constitution divided the powers between the Centre and the states in terms
of the Union List, State List and Concurrent List in the Seventh Schedule.
 The Union List consists of 100 subjects (originally 97), the State List 61 subjects (originally 66) and
the Concurrent List 52 subjects (originally 47).
 Both the Centre and the states can make laws on the subjects of the concurrent list, but in case of
a conflict, the Central law prevails.
 The residuary subjects (i.e., which are not mentioned in any of the three lists) are given to the
Centre
4. Supremacy of the Constitution: The Constitution is the supreme (or the highest) law of the land. The
laws enacted by the Centre and the states must confirm to its provisions.
 Otherwise, they can be declared invalid by the Supreme Court or the High Court through their
power of judicial review.
 Thus, the organs of the government (legislative, executive and judicial) at both the levels must
operate within the jurisdiction prescribed by the Constitution.
5. Rigid Constitution : The division of powers established by the Constitution as well as the supremacy
of the Constitution can be maintained only if the method of its amendment is rigid.
 Hence, the Constitution is rigid to the extent that those provisions which are concerned with the
federal structure (i.e., Centre–state relations and judicial organisation) can be amended only by
the joint action of the Central and state governments.
 Such provisions require for their amendment a special majority of the Parliament and also an
approval of half of the state legislatures.
6. Independent Judiciary: The Constitution establishes an independent judiciary headed by the Supreme
Court for two purposes:
a) To protect the supremacy of the Constitution by exercising the power of judicial review; and
b) To settle the disputes between the Centre and the states or between the states.
The Constitution contains various measures like security of tenure to judges, fixed service conditions
and so on to make the judiciary independent of the government.
7. Bicameralism: The Constitution provides for a bicameral legislature consisting of an Upper House
(Rajya Sabha) and a Lower House (Lok Sabha).
 The Rajya Sabha represents the states of Indian Federation, while the Lok Sabha represents the
people of India as a whole.
 The Rajya Sabha (even though a less powerful chamber) is required to maintain the federal
equilibrium by protecting the interests of the states against the undue interference of the Centre
1.8 Presidential & Parliamentary forms of Government

Defined on the basis of nature between the legislative and executive organs of the government.
1.8.1 Parliamentary Form of Government

1. Nominal and Real Head: The head of the state holds a ceremonial position and is the nominal
executive. For example, the President.
2. In India: The head of government is the Prime Minister who is the real executive. Article 75 of the
Indian constitution provides for a Prime Minister to be appointed by the president.
 According to Article 74, the Prime Minister headed council of ministers would aid and advise the
President in the exercise of his functions.
3. Executive is a Part of Legislature: The Executive forms a part of the legislature. In India, the person
should be a member of parliament to become a member of the executive.
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 However, the constitution provides that a person can be appointed as a minister for a period of
not more than six consecutive months if he is not a member of the parliament, after which the
person ceases to be a minister.
4. Majority Party Rule: The party which wins majority seats in the elections of the Lower House forms
the government. In India, the President invites the leader of the majority party in Lok Sabha to form
the government.
 The President appoints the leader as the Prime Minister and the other ministers are appointed by
the President on the advice of the Prime Minister. The President may invite a coalition of parties
to form the government, in case, no party has got majority.
5. Collective Responsibility: The council of ministers are collectively responsible to the parliament. The
lower house of parliament has an ability to dismiss a government by getting the no confidence motion
passed in the house.
 In India, the government survives till the time it enjoys support of the majority of members in the
Lok Sabha. Thus, Lok Sabha is empowered to introduce no-confidence motion against the
government.
6. Prime Minister as the Centre of Power: In India, the Prime Minister is the real executive. He is the
head of the government, the council of ministers and the ruling government. Thus, he has to play a
significant and important role in the working of the government.
7. A Parliamentary Opposition: No government in the parliament can get hundred percent majority. The
opposition plays an important role in checking the arbitrary use of authority by the political executive.
8. Independent Civil Service: The civil servant’s advice and implement decisions of the government. Civil
servants hold permanent appointments based on merit-based selection process.
 They ensure continuity of employment even when the government changes. The civil service also
ensures efficiency in execution of duties and responsibilities.
9. Bicameral Legislature: Most of the countries following parliamentary system, including India, have
bicameral legislature.
 The members of the Lower House of all these countries are elected by the people. The Lower
House can be dissolved, in case, the term of the government is over or there is no scope of
government formation due to lack of majority in house.
 In India, the President can dissolve the Lok Sabha on recommendation of the Prime Minister.
10. Secrecy: The members of the executive in this system have to follow the principle of secrecy in matters
such as proceedings, executive meetings, policymaking etc. In India, the ministers take oath of secrecy
before entering their office.
1.8.2 Presidential Form of Government

 Based on the doctrine of the separation of powers
 The chief executive (President) is the real head of the State
 He/She is elected by the people, whether directly or indirectly, for a definite period
 Is not accountable to the legislature
 But one may be removed by the process of impeachment.
 Examples: USA, Russia, Sri Lanka, Brazil, etc.
1.8.3 India – Parliamentary Form of Government

India has opted for a parliamentary system of Government.
Features of Parliamentary Government in India
 Article 74: Presence of nominal (The President) and real executive (The PM and the council of
ministers)
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 Article 75: Ministers are collectively responsible to the Parliament in general and to the Lok Sabha in
particular
 Majority party rule
 Ministers are members of both the legislature and the executive
 PM is the leader of the council of ministers, leader of the Parliament and leader of the party in power
 Secrecy: Ministers operate on the principle of secrecy, take oath of secrecy before entering their office
Separation of Power
 There should be three separate organs of the government with their separate sets of functions and
powers.
 The underlying principle: In a government each organ of the government shall perform their own
functions within the defined area of their activity and operation
 None should try to encroach upon the independence and jurisdiction of another.
 Presidential form of the government is exactly based on the doctrine of separation of powers.
 Parliamentary Govt. stands for the concentration of executive & legislative powers.
 But the concept of ‘separation of powers’ has duly been recognized by the apex court as one of the
ingredients of the ‘basic structure’ of the constitution
 It has been enunciated by the Apex court in some of the leading cases like that of Keshavananda
Bharati and Minerva mills etc.
Who said what about Indian Constitution?
“A case of bargaining federalism” ----- Morris Jones.
“A case of cooperative federalism” ----Granville Austin
“A case of Quasi-federalism” -----------K.C.Wheare
“A unitary state having subsidiary features of a federal system and not a federal state having subsidiary
features of a unitary system.” ----K.C.Wheare
“A federation with a strong centralizing tendency” ---Ivor Jennings
“A constitution establishing a strong centre” --------S.C.Kashyap
“India is a case- ‘sui-generis’.” ---------------Prof. C.H. Alexandrowicz
2 Part II: Fundamental Rights
2.1.1 Fundamental Rights

 Incorporated in the fundamental law of the land.
 Are justiciable and are binding on public authorities and are available to all citizens alike.
 Named so because they are guaranteed and protected by the Constitution, which is the fundamental
law of the land.
 Are ‘fundamental’ also in the sense that they are most essential for the all-round development
(material, intellectual, moral and spiritual) of the individuals.
 Part III of the Constitution : Articles 12-35, Inspired from the Constitution of USA (Bill of Rights)
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 Part III- The Magna Carta of Indian Constitution
2.2 Classification of Fundamental Rights as incorporated in the Constitution of India

Category Consists of
1. Right to equality (a) Equality before law and equal protection of laws (Article 14)
(Articles 14 - 18) (b) Prohibition of discrimination on grounds of religion, race, caste, sex or
place of birth (Article 15).
(c) Equality of opportunity in matters of public employment (Article 16)
(d) Abolition of untouchability and prohibition of its practice (Article 17)
(e) Abolition of titles except military and academic (Article 18)
2. Right to freedom (a) Protection of six rights in respect of: (i) speech and expression, (ii)
(Articles 19 - 22) assembly, (iii) association (iv) movement (v) residence and (vi) profession
(Article 19).
(b) Protection in respect of conviction for offences (Article 20).
(c) Protection of life and personal liberty (Article 21).
(d) Right to elementary education (Article 21 A).
Added by 86th Amendment Act, 2002
(e) protection against arrest and detention in certain cases (Article 22)
3. Right against (a) Prohibition of traffic in human beings and forced labor (Article 23).
exploitation (Articles 23 - (b) Prohibition of employment of children in factories, etc. (Article 24).
24)
4. Right to freedom of (a) Freedom of conscience and free profession, practice and propagation of
religion (Article 25 - 28) religion (Article 25).
(b) Freedom to manage religious affairs (Article 26).
(c) Freedom from payment of taxes for promotion of any religion (Article
27).
(d) Freedom from attending religious instruction or worship in certain
educational institutions (Article 28).
5. Cultural and (a) Protection of language, script and culture of minorities (Article 29).
educational rights (b) Right of minorities to establish and administer educational institutions
(Articles 29 - 30) (Article 30).
6. Right to constitutional Right to move the Supreme Court for the enforcement of fundamental
remedies (Article 32) rights including the writs of (i) Habeas corpus, (ii) Mandamus, (iii)
Prohibition, (iv) Certiorari, and (v) Quo warranto (Article 32).
These writs are discussed below.
Writs issued by Supreme Court and High courts (Articles 32 and 226):
Writ Meaning Description Applicable Not Applicable
Habeas- To have It is an order issued to a Both public Where the
Corpus the body person who has detained authorities as (a) Detention is lawful,
of another person, to well as private (b) Proceeding is for contempt
produce the body of the individuals. of a legislature or a court,
latter before it. Thus, this (c) Detention is by a
writ is a bulwark of competent court, and
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individual liberty against (d) Detention is outside the

arbitrary detention. jurisdiction of the court.
Mandamus We Command issued asking a A public (a) Against a private individual
command person/body to perform official, any or body;
the official duties that public body, a (b) To enforce departmental
he/it has failed or refused corporation, instruction that does not
to perform. inferior court, possess statutory force;
a tribunal or (c) When the duty is
government discretionary and not
for the same mandatory;
purpose. (d) To enforce a contractual
obligation;
(e) Against the president of
India or the state governors;
and
(f) Against the chief justice of a
high court acting in judicial
capacity.
Prohibition To forbidIt is issued to a lower Judicial and Against administrative
court or tribunal to quasi-judicial authorities, legislative bodies,
prevent it from exceeding authorities. and private individuals or
its jurisdiction or bodies.
usurping a jurisdiction
that it does not possess.
Thus, unlike mandamus
that directs activity, the
prohibition directs
inactivity.
Certiorari To be It is issued to a lower Judicial and Against legislative bodies and
certified court or tribunal either to quasi-judicial private individuals or bodies.
or to be transfer a case pending authorities
informed with it to itself or to and since
squash its order in a case. Supreme
It is issued on the grounds Court’s ruling
of excess of jurisdiction or in 1991, even
error of law. against
Thus, unlike prohibition, administrative
which is only preventive authorities.
certiorari is both
preventive as well as
curative.
Quo – ‘By what It is issued to enquire into Only in case of In case of ministerial office or
Warranto authority the legality of claim of a a substantive private office.
person to a public office. public office of
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or Hence, it prevents illegal a permanent

warrant’ usurpation of public character
office by a person. created by a
Unlike the other four statute or by
writs, this can be sought the
by any interested person Constitution.
and not necessarily by the
aggrieved person.
2.3 Fundamental Rights & Judiciary
2.3.1 Judicial Review

Article 13 provides for the doctrine of judicial review
1. Provision of Article 13: All laws inconsistent with or in derogation of any of the FRs shall be void
 Supreme Court can pronounce upon the constitutional validity of laws passed by the Legislature
and the actions taken by the administrative authorities.
 It acts as the guardian of the Constitution.
2. Article 32: Confers the right to remedies for the enforcement of the FRs of an aggrieved citizen
3. Exemptions from Judicial Review: Constitution itself exempts some provisions from judicial review,
such as
I. Advice tendered by the Council of Ministers to the President or Governor,
II. Privileges of members of Parliament and State Legislatures,
III. Validity and conduct of proceedings in Parliament,
IV. Delimitation of constituencies, etc.
4. Can only Assess constitutionality, not the objectives: In India the Supreme Court can pronounce upon
the constitutionality of a law only if it is contrary to the letter of the Constitution; it cannot go into the
objectives underlying the law or administrative action and declare it unconstitutional.
5. Similar power of judicial review is also conferred upon the State High Courts by virtue of Article 226.
2.4 Parliament’s Power to Amend Constitution
2.4.1 Shankari Prasad Case (1951)

SC held that the Fundamental Rights can be amended by the Parliament as laid down under Article 368.
2.4.2 Sajjan Singh Case (1964)

SC reiterated that the word ‘Law’ in Article 13 does not include a law passed by Parliament by virtue of its
constituent power taking away or abridging the Fundamental Rights.
2.4.3 Golak Nath Case (1967)

1. Reversal of Earlier decisions: Supreme Court reversed its earlier decisions and declared that
Parliament, acting under Article 368, has no power to take away or abridge the Fundamental Rights.
2. Stamp of Judicial Supremacy: Was looked upon as a design of the Supreme Court to establish judicial
supremacy.
3. Parliament challenging the Supreme Court verdict: Parliament passed the 24th amendment, 1971,
which empowered the Parliament to amend the Constitution including the Fundamental Rights in
accordance with the procedure laid down in Article 368.
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 Ousted the jurisdiction of the Supreme Court to set aside any Constitutional amendment in future.
4. Parliament passed the 25th amendment, 1971: Authorized the Parliament to amend or modify
Fundamental Rights for giving effect to Directive Principles of State Policy and for the attainment of
the objectives set out in the Preamble of the Constitution.
 New article, viz. Article 31-C was incorporated into the Constitution: It Provided that the laws
relating to the implementation of the Directive Principles of State Policy as enunciated under
Article 39 (b) and (c) are to be accorded preference over Fundamental Rights as enunciated under
Article 14 and 19.
2.4.4 Kesavanand Bharti Case (1973)

 Judgement of Supreme Court: It held that Parliament is entitled to abridge any Fundamental Right or
amend any provision of the Constitution but the amending power does not extend to damaging or
destroying any of the basic features of the Constitution
 Introduction of Basic Structure: Fundamental Rights are a part and parcel of the notion of basic
features.
 Parliament passed the 42nd amendment, 1976: Provided that all laws relating to the implementation
of the Directive Principles of State Policy are to be accorded preference over all Fundamental Rights.
2.4.5 Minerva Mills Case

 The Supreme Court added a new clause to the basic structure doctrine, judicial review and harmony
between Fundamental Rights and Directive Principle of the State Policy.
 In this case, the Court also held that the Limited amending power of the Parliament is a part of the
basic structure doctrine.
 SC held that to abrogate the Fundamental Rights while purporting to give effect to the Directive
Principles is to destroy one of the basic features of the Constitution.
 Validity of the substantive part of Article 31-C as originally enacted was left untouched.
2.5 Armed Forces and Fundamental Rights

Article 33: Empowers the Parliament to restrict or abrogate the fundamental rights of the members of
armed forces, para-military forces, police forces, intelligence agencies and analogous forces.
 Objective is to ensure the proper discharge of their duties and the maintenance of discipline among
them.
Having Understood the Fundamental Rights part, Now let us understand Directive Principles of state policy
in detail.
3 Part III: Directive Principles of State Policy

 Idea borrowed from the Irish Constitution which had borrowed it from the Spanish Constitution.
 Contained in Part IV of the Constitution: Article 36 to Article 51
 Resemble the Instrument of Instructions enumerated in GOI Act, 1935
 Dr Ambedkar: These principles are the novel features of the Indian constitution
3.1 Meaning and Nature

 DPSPs are in the nature of general directions or instructions to the State.
 Embody the objectives and ideals which the Union and State Governments must bear in mind while
formulating policy and making laws.
 Embody the concept of a welfare state and not a police state
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 Constitute a comprehensive economic, social and political programme for a modern democratic
state.
 Seek to establish economic and social democracy in the country
 Lay down a code of conduct for the administrators of India while they discharge their responsibilities
 Help the courts in examining and determining the constitutional validity of a law
 Guide the path which will lead to the achievement of the noble ideals as enshrined in the Preamble:
Justice - social, economic and political; Liberty - Equality and Fraternity.
 Not legally enforceable by any court
 Article 37 - These principles are fundamental to the governance of the country and it shall be the
duty of the state to apply these principles in making laws.
3.2 DPSP – Why is it non-justiciable?

 The country did not possess sufficient financial resources to implement them.
 The presence of vast diversity and backwardness in the country would stand in the way of their
implementation.
 The newly born independent Indian State with its many preoccupations might be crushed under the
burden unless it was free to decide the order, the time, the place and the mode of fulfilling them.
3.3 List of DPSPs under Indian Constitution

Article 36: Defines State as same as Article 12 unless the context otherwise defines.
Article 37: Application of the Principles contained in this part.
Article 38: It authorizes the state to secure a social order for the promotion of the welfare of people.
Article 39: Certain principles of policies to be followed by the state.
Article 39A: Equal justice and free legal aid.
Article 40: Organization of village panchayats.
Article 41: Right to work, to education and to public assistance in certain cases.
Article 42: Provision for just and humane conditions of work and maternity leaves.
Article 43: Living wage etc. for workers.
Article 43-A: Participation of workers in management of industries.
Article 43-B: Promotion of cooperative societies.
Article 44: Uniform civil code for the citizens.
Article 45: Provision for early childhood care and education to children below the age of six years.
Article 46: Promotion of education and economic interests of SC, ST, and other weaker sections.
Article 47: Duty of the state to raise the level of nutrition and the standard of living and to improve public
health.
Article 48: Organization of agriculture and animal husbandry.
Article 48-A: Protection and improvement of environment and safeguarding of forests and wildlife.
Article 49: Protection of monuments and places and objects of national importance.
Article 50: Separation of judiciary from the executive.
Article 51: Promotion of international peace and security.
3.4 Comparison Fundamental Rights & Directive Principles

 The Fundamental Rights seek to protect the individual from State encroachment; the Directive
Principles are aimed at the promotion of the general welfare of society.
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 The Fundamental Rights constitute limitations upon State action; the Directive Principles are positive
instructions to the Government to take steps to establish a just social, economic and political order.
 The Fundamental Rights are justiciable; the Directive Principles are not enforceable by the courts if
the State has not implemented them.
 If there is no law enacted to carry out the policy stipulated in any of the Directives, no individual or
the State, for that matter, can violate any existing law under the pretext of following a Directive. In
other words, legislation is required before any Directive is implemented. The Fundamental Rights, on
the other hand, are guaranteed by the Constitution
Fundamental Rights Directive Principles

1. These are negative as they prohibit the 1. These are positive as they require the State to do
State from doing certain things. certain things.
2. These are justiciable, that is, they are 2. These are non-justifiable, that is, they are not legally
legally enforceable by the courts in case of enforceable by the courts for their violation.
their violation.
3. They aim at establishing political 3. They aim at establishing social and economic
democracy in the country. democracy in the country.
4. These have legal sanctions. 4. These have moral and political sanctions.
5. They promote the welfare of the 5. They promote the welfare of the community. Hence,
individual. Hence, they are personal and they are solitarian and socialistic.
individualistic.
6. They do not require any legislation for 6. They require legislation for their implementation.
their implementation. They are automatically They are not automatically enforced.
enforced.
7. The courts are bound to declare a law 7. The courts cannot declare a law violative of any of
violative of any of the Fundamental Rights as the Directive Principles as unconstitutional and
unconstitutional and invalid. invalid. However, they can uphold the validity of a law
on the ground that it was enacted to give effect to a
directive.
3.5 Fundamental Rights & DPSP – Relative Importance

Initially, the Directive Principles were considered subordinate to the Fundamental Rights and the courts
struck down a number of laws enacted to implement Directive Principles on the ground that they violated
the Fundamental Rights.
3.5.1 Champakam Dorairajan Case (1952)

 The SC mandated that the chapter on Fundamental Rights is sacrosanct and the DPSPs have to
conform to and run subsidiary to the chapter on FRs
 It also held that the FRs can be amended by the Parliament.
3.5.2 Golaknath Case (1967)

 The SC laid down that Parliament cannot take away or abridge any of the FRs which are sacrosanct in
nature.
 It also said that the Fundamental Rights cannot be abridged/diluted to implement the Directives.
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 The Parliament reacted by enacting the 24th and 25th Constitutional Amendments which
respectively authorized the Government to amend the Fundamental Rights (by amending Article 13
and 368) and to give preference to the Directives laid down under Article 39 (b) and (c) even if they
infringe upon the Fundamental Rights as guaranteed by Articles 14 ,19 and 31 (by inserting Article
31C)
3.5.3 Kesavananda Bharati Case (1973)

 The SC ruled that the Parliament can amend any and every part of the Constitution including FRs but
it cannot destroy the basic structure of the Constitution.
 The Parliament now tried to enhance the scope of Article 31-C by bringing about the 42nd
Constitutional Amendment, 1976 wherein a provision to give primacy to any or all the Directive
Principles (and not just Article 39 (b) and (c)) and to deprive the courts of the right to look into such
cases was made.
3.5.4 Minerva Mills Case (1980)

 The above attempt through 42nd amendment by parliament was thwarted by the Supreme Court
 It asserted that such total exclusion of judicial review would offend the basic structure of the
Constitution. The widening of Article 31-C to include any or all of the Directives was struck down.
 The SC held that the Indian Constitution is founded on the bedrock of the balance between the FRs
and DPSPs.
 On the whole, however, the conflict between these two features of the Constitution is meaningless.
In fact, the Fundamental Rights and Directive Principles are Complementary and Supplementary to
each other. The courts have increasingly based their judgments on a harmonious reading of Parts III
and IV of the Constitution.
Having understood the topic of DPSP, now let us understand Fundamental duties which are
complementary to the Fundamental rights.
4 Part IV: Fundamental Duties

Original Constitution contained only the fundamental rights and not the fundamental duties.
4.1 Swaran Singh Committee

 Set up in 1976, to make recommendations about the incorporation of fundamental duties in the
constitution
 Recommended the inclusion of fundamental duties in the form of a separate chapter.
 The recommendations were accepted and enacted in the form of 42nd Constitutional Amendment Act
that inserted a new part, Part-IV-A to the constitution that carries a single article, Article 51A.
 Inspired by the Constitution of erstwhile USSR.
 10 fundamental duties were added by adding Article 51A clause (a) to (j)
 One more fundamental duty added by the 86th Amendment Act, 2002 (Article 51A (k))
 “It shall be the duty of every citizen of India who is a Parent or Guardian to provide opportunities
for education to his child or ward between the age of six and fourteen years.”
 Not enforceable in a court of law, but the courts can look at the conduct of a citizen concerned and
refuse any remedy against the violation of his or her fundamental right.
 Parliament can also enforce them by suitable legislation
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 Confined to citizens only and do not extend to foreigners
4.2 List of Fundamental Duties

Article 51A
(a) to abide by the constitution and respect its ideals and institutions, the national flag and anthem
(b) to cherish and follow the noble ideals that inspired the national freedom struggle
(c) to uphold and protect the sovereignty, unity and integrity of India
(d) to defend the country and render national service when called upon to do so
(e) to promote harmony and spirit of brotherhood amongst all people of India
(f) to value and preserve the rich heritage of country's composite culture
(g) to protect and preserve the natural environment
(h) to develop scientific temper, humanism and spirit of enquiry and reform
(i) to safeguard public property
(j) to strive towards excellence in all spheres of individual and collective activity
(k) to provide opportunities for education to his child between the age of 6 and 14 years
The Section of Fundamental Rights, DPSP’s and Fundamental duties illustrated different points sensitizing
an individual about the Constitutional rights and now let us move to the Executive Section of the Political
System.
5 Part V: President of India

 At the head of the Union executive stands the President of India, who is the First citizen of India.
 Mode of Election: President is Elected indirectly in accordance with the system of proportional
representation by means of single transferable vote
 Electoral college for election of President consists of:
 Elected members of both houses of Parliament
 Elected members of the legislative assemblies of states
 Elected members of the legislative assemblies of the UTs of Delhi and Puducherry
 Adjudicating Authority: All disputes regarding election of President are enquired into by the Supreme
Court whose decision is final
 Criteria of calculation of vote: To calculate the value of vote of an MLA, according to 84th
Amendment Act, 2001, the population of 1971 census is taken into account
 Tenure of office: Term of office is 5 years
 Eligible for re-election any number of times
 Enjoys personal immunity from legal liability for his official acts
 Criminal Proceedings: During his term of office, immune from any criminal proceedings, even in
respect of his personal acts and cannot be arrested or imprisoned.
 Civil proceedings: They can be instituted against him after giving 2 months’ notice (in respect of his
personal acts, even during his term of office)
 Departing from Presidency: Can resign by addressing his resignation to the Vice President
 Can be removed by impeachment for 'violating the Constitution' (Article 61)
 Constitution does not define the term 'violation of the Constitution'
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5.1 Executive Powers

 Nominal Head: Executive actions of the government taken formally in his name
 Article 77: Can make rules specifying the manner in which the orders made and executed in his name
shall be authenticated
 Article 75: Appoints the PM and other ministers, hold office during his pleasure
 Appointing Authority: Appoints Attorney General, determines his remuneration, Appoints the CAG of
India, Judges of the Supreme Court and the High Courts, the Governors of the States, the Chief Election
Commissioner and other members of the Election Commission, the Chairperson and other members
of the Finance Commission, etc.
 Article 78: Has a right to be informed of the affairs of the Union
 Social Justice Mandate: Can appoint a commission to investigate into the conditions of SCs, STs and
other backward classes
 Can appoint Commission on Official Language
 Can appoint Special officer for Linguistic Minorities
 Article 263: Can appoint an Inter State Council
 Control over UT: Directly administers the UTs
 Vigilance over scheduled areas: Can declare any area as scheduled area, has power to administer such
areas
5.2 Legislative Powers

 The President is integral part of the Parliament
 Summons or prorogues the Parliament and dissolves the Lower House.
 Article 108: Summons a joint sitting of both houses of Parliament in case of a deadlock between them.
 Addresses both Houses of Parliament assembled together, at the first session after each general
election to the House of People and at the commencement of the first session of each year.
 Has the right to address either House or their joint sitting, at any time.
 Can send messages to the Houses of Parliament
 Decides on question of disqualification of MPs in consultation with the EC
 Lays the reports of CAG, Finance Commission, UPSC, etc. before the Parliament
 Prior recommendation is necessary for introduction of certain types of bills like money bill, etc.
 Nominates 12 members to the Council of State from among people having special
knowledge/experience in literature, arts, science and social service
 Can nominate 2 members to the House of People from the Anglo-Indian community
 Can promulgate ordinances under Article 123.
 Article 111: A Bill will not become an Act of the Indian Parliament unless it receives the assent of the
President
5.3 Financial Powers

 Causes to be laid before Parliament the annual budget and the supplementary budget, if any.
 No Money Bill can be introduced in Parliament without his prior recommendation.
 Constitutes a Finance Commission after every 5 years
 No demand for grant can be made except on his recommendation
 Can make advances out of the Contingency Fund of India
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 Allocates to the States of Assam, West Bengal, Bihar and Orissa grants-in-aid in lieu of their shares in
export duty on jute.
5.4 Judicial Powers

 Appoints the Chief Justice and the judges of SC and high courts
 Enjoys the power to grant pardon, reprieve, respite or remission of punishment or suspend, remit or
commute the sentence of any person convicted of any offence:
 where the punishment or sentence id by a court martial
 where the punishment or sentence is for an offence against a Union law
 In all cases where the sentence is a sentence of death
 Can seek advice from the Supreme Court on any matter of law or fact
 The advice is not binding upon him.
5.5 Military Power

 The Supreme Command of the Defence Forces is vested in the President of India.
5.6 Diplomatic Power

 Represents India in international affairs and has the power to appoint Indian representatives to other
countries and receives diplomatic envoys of other States.
5.7 Emergency Powers

 National Emergency: Can proclaim if satisfied that the security of India or any part thereof has been
threatened by war, external aggression or armed rebellion (Article 352).
 Failure of Constitutional Machinery in a State: Empowered to make a proclamation, when he is
satisfied that the Government of a State cannot be carried on in accordance with the provisions of the
Constitution (Article 356).
 Financial Emergency: If the President is satisfied that a situation has arisen whereby the financial
stability or credit of India is threatened (Article 360).
5.8 Veto Power over Legislations

 When a bill is presented to the President, after its passage in both Houses, President can take any of
the following 3 steps:
 may declare his assent to the bill
 may declare that he withholds his assent to the bill
 may return the bill for reconsideration (except money bill)
 The President of India has Absolute veto, Suspensive veto and Pocket veto, which are discussed below.
5.8.1 Absolute Veto

 Legacy of the Government of India Act, 1935.
 Usually exercised in the following 2 cases:
 In case of private members Bill; and
 If, after the passage and before the assent by the President, the council of ministers resigns, the
next cabinet can advise the President to use this veto to reject the Bill altogether.
5.8.2 Suspensive Veto

 Exercised when the President returns a bill for reconsideration of Parliament
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 If the Parliament again passes the Bill (with or without the amendments,) it is obligatory for the
President to give his assent.
 Not available in the case of Money Bill (Article 110).
5.8.3 Pocket Veto

 More scope than that available to his American counterpart.
 Timeframe fixed for the US President to return the Bill is only 10 days, no time limit is fixed for the
Indian President.
 Article 111 of the Indian Constitution provides that, “the President may, ‘as soon as possible’ after
the presentation to him of a Bill for assent, return the Bill...”.
 President of India can exercise this type of veto by simply ignoring the Bill, for an ‘indefinite period’ of
time.
 Giani Zail Singh, exercised pocket veto in the case of the Indian Post Office (Amendment) Bill, 1986.
5.9 Ordinance Making Power of the President

Article 123
 Most important legislative power of the President
 Devised to enable the executive to deal with a situation that may suddenly arise when the Parliament
is not in session
 Not a parallel power of legislation
 Can make ordinance only when
 he is satisfied those circumstances exist that render it necessary for him to take immediate action
 both the Houses of Parliament are not in session or when either of the 2 Houses is not in session
 President's satisfaction can be questioned in a court of law on the ground of being malafide (Cooper
Case 1970)
 Coextensive as regards all matters except duration, with the law-making powers of the Parliament
 Can be retrospective
 Can alter or amend tax law also
 Cannot be issued to amend the Constitution
 D.C Wadhwa Case (1987): SC ruled that successive repromulgation of ordinances with the same text
without any attempt to get the bills passed by the Assembly would amount to violation of the
Constitution
 Must be laid before both the Houses when it reassembles
 Ceases to operate on the expiry of 6 weeks from the reassembly of Parliament
 Can be withdrawn by the President at any time
The next important Position after president in the Constitution is Prime Minister and Council of Ministers.
Let us now try to understand it in detail.
6 Part VI: Prime Minister & Council of Ministers
6.1 Powers & Functions of the Prime Minister
6.1.1 Head of the Government

 President-Head of the State, but the Prime Minister is the head of the Government.
 President acts only on the advice of the Council of ministers headed by the PM
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6.1.2 Leader of the Cabinet

 Selects other ministers and distributes portfolios among them.
 Presides over the meetings of the Cabinet.
 Can demand a minister’s resignation or have him dismissed by the President.
 Resignation of PM involves the resignation of all ministers
6.1.3 Link between President & the Cabinet

 Article 78: PM acts as a link between the President and the Council of Ministers.
 Communicates to the President all decisions of the Council of Ministers
 Furnishes such information relating to the administration of the affairs of the Union and proposals for
legislation as the President may call for
 If the president so requires, he submits for the consideration of the Council of Ministers any matter
on which a decision has been taken by a minister but which has not been considered by the Council.
6.1.4 Leader of the Parliament

 PM is the leader of the Parliament.
 Determines the dates of its meetings, as also its programmes for the session.
 Decides when the House is to be prorogued or dissolved.
 Is the chief spokesman of the Government in the House.
 Keeps the Parliament informed about the Government’s intentions.
 Makes announcement of principal government policies and answers questions.
6.2 Important Articles
6.2.1 Article 74
 There shall be a council of ministers with the PM at the head to aid and advise the President who
shall, in the exercise of his functions, act in accordance with such advice.
 This advice shall not be inquired into in any court (Relation of Council of Ministers and President is
confidential)
6.2.2 Article 75
 The PM shall be appointed by the President.
 Other ministers shall be appointed by the President on the advice of the PM.
 The total number of ministers, including the PM, in the council shall not exceed 15% of the total
strength of the Lok Sabha (Added by 91st Constitutional Amendment Act, 2003).
 MP disqualified on ground of defection shall also be disqualified to be appointed as a minister (Added
by 91st Constitutional Amendment Act, 2003).
 Ministers shall hold office during the pleasure of the President (which actually is the pleasure of the
PM). This implies individual responsibility.
 Collective responsibility of the council of ministers to the Lok Sabha.
 Minister who is not a member of either house of Parliament for any period of 6 consecutive months
shall cease to be a minister.
 Salaries and allowances of ministers to be determined by the Parliament.
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After Understanding the power structure at the union level, now let us try to understand the parallel
power structure at the State level.
7 Part VII: Governor
7.1 The Office of the Governor

 7th Constitutional Amendment Act: Appointment of the same person as a governor for 2 or more
states
 Mode of Appointing Governor: Neither directly elected nor indirectly by a special constituted
electoral college (as in the case of the President)
 Appointed by President by warrant under his hand and seal
 Tenure: The term of office is normally for five years. One can hold office beyond his term of 5 years
until his successor assumes charge
 Can be terminated earlier either by dismissal or through resignation
 Constitution does not lay down any grounds upon which a governor may be removed
 Restrictions: Debarred from holding any other office of profit or being a member of the Union
Parliament or any state legislature.
 Eligibility for appointment:
 Citizen of India
 Completed 35 years of age
7.2 Dual Role of the Governor
7.2.1 Constitutional Head of State

 Ceremonial head of the State
 The Constitution provides for a Council of Ministers with a CM at the head to aid and advise the
Governor in the exercise of his functions except when he can act at his own discretion.
 The courts of the land do not have the power to question the action of the Governor taken in his
discretion and the decision of the Governor shall be final.
 All the executive powers are exercised by the Cabinet in the name of the Governor
 Has executive, legislative, financial as well as judicial powers
7.2.2 Governor as the Agent of Centre

 Constitutional link between the Centre and the States.
 Ensures that the directives issued by the Centre to the States are carried out
 Ensures that the government of the state is carried on in accordance with the provisions of the
Constitution.
 It is on the recommendations of the Governor that the President usually issues a proclamation of
emergency in the State on account of the constitutional breakdown
 Under President’s rule the Governor is the Chief representative of the President in the State.
7.3 Discretionary Powers of the Governor

 The Governor’s discretion may be underlined into two parts:
7.3.1 Constitutional discretion

 Reservation of bill for the consideration of the President
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 Recommendation for the imposition of President's rule in the state

 Exercising his functions as the administrator of an adjoining UT
 Seeking information from the CM with regard to the administrative and legislative matters of the
state
 Determining the amount payable by the government of Assam, Meghalaya, Tripura and Mizoram to
an autonomous tribal district council as royalty
7.3.2 Situational discretion

 Framers of Constitution believed that the situational discretion would be exercised in extra ordinary
circumstances and under the pressing needs of the political circumstances existing in the State.
 The occasions where the Governor’s situational discretion may be used are as follows:
1. The Appointment of a CM:

According to the Sarkaria Commission if there is no single party having an absolute majority in the
assembly, the Governor should select a CM from among the following parties or groups of parties in
the following order of preference:
I. An alliance of parties that was formed prior to the elections.
II. The largest single party staking a claim to form the government with the support of others,
including ‘independents’
III. A post-electoral coalition of parties, with all the partners in the coalition joining government.
IV. A post-electoral alliance of parties, with some of the parties in the alliance forming the
Government and the remaining parties, including ‘independents’ supporting the government
from outside.
2. Dismissal of a Ministry:
 If the Governor has reasons to believe that the Ministry is engaged in activities, which are likely to
endanger national security or solidarity.
 If the Ministry has lost the confidence of the legislature and the Ministry wants to continue in
office.
 According to the Sarkaria Commission, the Governor cannot dismiss the Council of Ministers so
long as they continue to command a majority in the Legislative Assembly.
 Conversely, he is bound to dismiss them, if they lose the majority but do not resign.
 When the Legislative Assembly is in session, the question of majority should be tested on the
floor of the House.
3. Dissolution of the Legislative Assembly:
 Not a normal practice to dissolve a legislature before it has completed its prescribed period of life.
 The Governors have exercised their marginal discretion differently in refusing/granting the
dissolution of the Assemblies of the States.
4. Some other occasions:
 Asking information from the CM relating to legislative and administrative matters.
 Asking the CM to submit for the consideration of the Council of Ministers any matter on which a
decision has been taken by a Minister but which has not been considered by the Council.
 Refusing to give assent to a Bill passed by the Legislature and sending it back for re-consideration.
 Reserving a bill passed by the State Legislature for the assent of the President.
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 Seeking instructions from the President before promulgating an ordinance dealing with certain
matters.
 Advising the President for the proclamation of an emergency.
 In the case of the Governor of Assam, certain administrative matters connected with the tribal
areas and settling disputes between the government of Assam and the District Council with
respect to mining royalties.
Likewise, Governor of Nagaland, Sikkim, Arunachal Pradesh and Mizoram, Meghalaya and Tripura have
been entrusted certain specific functions to be exercised by them in their discretion.
Having discussed the executive wing of the government, let us now understand the Judiciary wing of the
government.
8 Part VIII: Judiciary

 Principle role of judiciary - to protect the rule of law and ensure supremacy of law.
 Indian Constitution is based on a delicate principle of limited separation of powers and checks and
balances.
 India has a single system of courts, adopted from the Government of India Act 1935 for enforcement
of both central and state laws.
 Parliament is authorized to regulate the organization, procedures, etc. of the judiciary.
8.1 Supreme Court of India

 Inaugurated in 1950.
 Succeeded the Federal Court of India established under Government of India Act, 1935.
 Replaced the British Privy Council as the highest court of appeal.
 Articles 124 to 147 in Part V deal with Supreme Court.
8.2 High Courts

 Institution of High Court originated in India in 1862 when High Courts were established in Calcutta,
Bombay and Madras.
 Articles 214 to 231 in Part VI deal with High Courts.
 7th Amendment Act, 1956 - Parliament authorized to establish a common High Court for 2 or more
states and a Union Territories.
8.3 Appointment of Supreme Court Judges

 Chief Justice of India is appointed by President in consultation with such judges of Supreme Court and
High Courts as he deems necessary. (Focus on the word Consultation because it has been a bone of
contention for appointment between the government and Judiciary which is discussed in the
subsequent section)
 Other judges are appointed by President after consultation with Chief Justice of India and such other
judges of the Supreme Court and High Courts as he deems necessary.
 No minimum age has been prescribed by the Constitution for the appointment of judges.
 Constitution has also not fixed the tenure of a judge of the Supreme Court. However, it states that a
judge of Supreme Court holds office till the age of 65 years (62 in case of High Court), can resign by
writing to President and can be removed by President on recommendation of Parliament.
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8.4 Appointment of High Court Judges

 Chief Justice of the High Court is appointed by President after consultation with the Chief Justice of
India and the Governor of the state concerned.
 For other judges, the Chief Justice of the concerned high court is also consulted.
8.5 Controversy over appointment of Judges

 First Judges Case 1982: Supreme Court held that consultation does not mean concurrence.
 Second Judges Case 1993: Reversed its earlier ruling, said that consultation means concurrence and
that the Chief Justice of India would tender advice after consulting 2 of his senior most colleagues.
 Third Judges Case 1998: The Chief Justice of India should consult a collegium of 4 senior most judges
of the Supreme Court for appointment of a judge to Supreme Court and a collegium of 2 senior most
judges of Supreme Court for appointment of judge of High Court.
8.6 Removal of Judges

 Same procedure for the removal of Supreme Court as well as High Court judge
 Judges Enquiry Act 1968 regulates the procedure: They Can be removed by an order of President on
grounds of removal- proved misbehavior or incapacity
 The removal motion must be passed by special majority i.e., a majority of the total membership of
the House and not less than 2/3rd of the members of the House present and voting
 An impeachment motion for the removal of a judge does not lapse on the dissolution of the Lok Sabha
 No judge of SC or HC has been impeached so far.
8.7 Powers or Jurisdiction of Supreme Court
8.7.1 Article 129: Court of Records

 Supreme Court to be a court of record, which has the power to punish for contempt of its own.
8.7.2 Article 131: Original Jurisdiction

Original jurisdiction covers all disputes:
 Between the Government of India (GoI) and one or more States;
 Between the GoI and any State or States on one side and one or more States on the other;
 Between two or more States.
8.7.3 Appellate Jurisdiction

 The Supreme Court is the highest court of appeal from all Courts in the territory of India.
 The Appellate jurisdiction divided under three heads:
I. Cases involving interpretation of the Constitution
II. Civil Cases, irrespective of any constitutional question; and
III. Criminal Cases irrespective of any constitutional question.
 An appeal lies to the Supreme Court from any judgment, decree or final order in a civil proceeding of
a High Court in two classes of cases -
 Where the case involves a substantial question of law as to the interpretation of the Constitution
(Article 132).
 In case where no constitutional question is involved, appeal shall lie if the High Court certifies
that the following conditions are satisfied -
 That the case involves a substantial question of law;
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 That in the opinion of the High Court the said question should be decided by the Supreme
Court (Article 133 (I))
 Article 134 provides for an appeal to the Supreme Court from the judgment, final order or sentence
in a criminal proceeding of a High Court, as of right, in two specified classes of cases -
 Where the High Court has in an appeal reversed an order of acquittal of an accused person and
sentenced him to death;
 Where the High Court has withdrawn for trial before itself any case from any Court subordinate to
its authority and has in such trial convicted the accused and sentenced him to death.
 Besides these two classes of cases, an appeal may lie to the Supreme Court in any criminal case if the
High Court certifies that the case is a fit one for appeal to the Supreme Court.
8.7.4 Article 136: Appeal by Special Leave

Supreme Court may grant special leave to appeal from any judgment, decree, determination, sentence or
order in any cause or matter passed or made by any court or tribunal in the territory of India.
8.7.5 Article 143: Advisory Jurisdiction

President can seek the opinion of the Supreme Court in 2 categories of matters:
 On any question of law or fact of public importance
 On any dispute arising out of any pre-Constitution treaty, agreement, etc.
The opinion of the Supreme Court is not binding on the President.
8.7.6 Article 132: Writ Jurisdiction

 The Supreme Court is the guardian of the liberties and Fundamental Rights of the citizens of India.
 Can issue writs in the nature of Habeas Corpus, Mandamus, Prohibition, Certiorari, Quo Warranto
and the like for the enforcement of fundamental rights.
8.7.7 Judicial Review

 The Supreme Court of India has been empowered to review laws passed by the legislature and
declare them ultra vires or unconstitutional if they contravene any provision of the Constitution.
 It means that the SC can ensure that the laws passed by the Parliament and State legislatures and the
orders issued by the Union as well as State executives do not contravene the provisions of the
Constitution.
 The term 'judicial review' does not find mention anywhere in the Constitution.
Having developed an insight into the Executive and judiciary wing of the government, now let us
understand the Legislative wing of the government.
9 Part IX: Centre-State Relations
9.1 Legislative Relations

 Government of India Act, 1935: Legislative powers divided into three lists; Federal, Provincial and
Concurrent
 Residue powers were given to the Governor-General to be assigned by him either to the Central
Government or the provinces.
 Constitution divides the legislative powers between the Centre and States
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 Articles 245 to 255 in Part XI deal with legislative relations and some other articles also deal with the
same subject.
 There is 3-fold distribution of legislative subjects, which is mentioned in Seventh Schedule of the
Constitution.
 List I- Union List (100 subjects, originally 97)
 List II- State List (61 subjects, originally 66)
 List III- Concurrent List (52 subjects, originally 47)
 42nd Amendment Act, 1976: Transferred 5 subjects from State list to the Concurrent list.
 The concept of concurrent list has been borrowed from the Constitution of Australia
 The Residuary power of legislation is given to the Parliament
 This system is similar to the system that is there in the Constitution of Canada.
9.1.1 Union List

 Parliament has exclusive powers of legislation with regard to the items mentioned in Union list.
 The selection of these items is made on the basis of interest to the Union and where uniformity of
legislation throughout the union is essential.
9.1.2 State List

 In ordinary circumstances, the State legislature has the exclusive power of legislation over state list.
 The selection of these items is made on the basis of local interest like law and order, health,
agriculture etc.
 Envisages the possibility of diversity of treatment with respect to different items in the different
States of the Union.
9.1.3 Concurrent List

 Items with respect to which uniformity of legislation throughout the Union is desirable but not
essential.
 Placed under the jurisdiction of both the Union and the States.
 The Parliament of India and the State legislatures have concurrent powers of legislation over the items
included in this list.
 Once Parliament enacts a law on an item in this list, parliamentary law shall prevail over any state
law on the item.
 One exception: A law made by the state legislature on any item in the Concurrent List shall prevail
over an earlier law of Parliament on the same subject, if the State law was reserved for the
consideration of the President and received his assent.
9.1.4 Residuary & Implied Subjects

 If an item or subject does not find mention anywhere in the above lists, it is called a residuary
subject.
 Article 248 -Residuary powers are vested in the Union under the Constitution of India.
 On this only the Parliament is empowered to legislate.
 An item whose presence or inclusion in any of the three lists is implied or can be deduced implicitly is
called an implied subject.
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 For example, telecasting as separate & an explicit subject although, is not mentioned anywhere in any
of the three lists, but is implied by another specific entry in the Union list under the subject of
“broadcasting.”
9.1.5 When can Parliament legislate on subjects of State List?

1. Article 249
 If the Rajya Sabha declares by a resolution supported by not less than two-thirds of the members
present and voting that it is necessary or expedient in the national interest that Parliament
should make laws with respect to any matter enumerated in the State List
 Becomes lawful for Parliament to make laws for the whole or any part of the territory of India with
respect to that matter
 Such a resolution remains in force for such a period, but not exceeding one year
 The Rajya Sabha can extend the period of such a resolution for a further period of one year any
number of times
 State legislature can also make laws on the same matter, in case of inconsistency, parliamentary
law will prevail.
2. Article 250
 Parliament is empowered to make laws on any item included in the State List for the whole or
any part of India while a proclamation of National Emergency is in operation.
 The maximum period for which such a law can be in force is the period for which emergency lasts
and six months beyond that period.
 State legislature can also make laws on the same matter, in case of inconsistency, parliamentary
law will prevail.
3. Article 252
 If two or more States request the Central Government to legislate on a particular subject
mentioned in the State List, in so far as their State is concerned, the Central Parliament can
legislate on these subjects as well. Ex: Environment protection act 1986.
 If any such law is to be amended or repealed, it can be done only by Parliament alone but the
initiative for it rests with the States.
 State legislature ceases to have the power to make a law w.r.t. that matter
4. Article 253
 Parliament has power to make any law for the whole or any part of India for implementing any
treaty, agreement or convention with any other country or countries or any decision made at any
international conference, association or other body.
5. Articles 356 and 357
 Under President's Rule, he might declare that the powers of the Legislature of that State would
be exercisable by or under the authority of Parliament.
 A law made so by the Parliament shall remain operative even after President's rule, but can be
repealed, reenacted or altered by the state legislature after President Rule ceases to operate.
 The effect of Article 357 would be that the legislature of the State in question would stand
dissolved or suspended and the law-making power would rest in Parliament during the period the
proclamation of emergency is in force.
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9.1.6 Centre’s control over State Legislation

 Article 200: Governor can reserve certain types of Bills of the State Legislature for the consideration
and assent of the President.
 Bills on certain matters can be introduced in state legislature only with the previous sanction of the
President.
 President can direct the states to reserve money bills and other financial bills passed by the state
legislature for his consideration during a financial emergency
9.2 Administrative Relations

 Articles 256 to 263 in Part XI and some other articles also deal with such relations.
 Executive power is co-extensive with the legislative power.
 Authority of the Union Executive extends over all those matters on which the Parliament is
competent to legislate.
 Similarly, the authority of the State Executive extends to coincide with the legislative competence of
the state legislature.
 Both the Union and the States were to have their own administrative staff with full control over them.
 In respect of matter in the Concurrent list, the executive power rests with the states
 Exception: Unless a constitutional provision or a parliamentary law specifically confers it on the
Centre.
9.3 Financial Relations
9.3.1 Scheme of Distribution of Sources of Revenue

 Articles 268 to 293 in Part XII and other provisions to deal with this aspect
 The Union List contains 15 items of taxation
 These taxes fall under five categories –
1. Taxes levied by the Union but collected and appropriated by the States
 Examples: Stamp duties and duties of excise on medicinal and toilet preparations, etc.
2. Taxes levied and collected by the center but assigned to the States
 Examples: Succession and estate duties, terminal taxes on passengers and goods carried by
railway, sea or air, taxes on railway fares and freight, etc.
3. Taxes levied and collected by the Centre and compulsorily distributed between the Union and
the States
 Examples: Taxes on income other than agriculture.
4. Taxes levied and collected by the Centre and may be distributed between the Union and the
States, if Parliament by law so provides
 Examples: Union excise duties, excise on medical and toilet preparations.
5. Taxes levied and collected and retained by the Centre
 Examples: Customs, corporation tax, and surcharge on income-tax.
 The State List contains 20 items, viz., land revenue, liquor and opium excise, stamps, agriculture
income, sales and purchase taxes, taxes on land and buildings, terminal taxes on passengers and
goods, taxes on consumption and sale of electricity, taxes on vehicles, animals and books,
amusements, betting and gambling profession, trade and callings, etc.
 Every State is entitled to levy, collect and appropriate these taxes.
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 Residuary power of taxation is vested in the Centre.
9.3.2 Grants-in-Aid
 Article 275 (Statutory Grants) empowers Parliament to give financial assistance to the States in need
of such assistance.
 The grants are based upon the recommendations of the Finance Commission.
 Article 282 (Discretionary Grants) empowers the Centre to make public purpose grants to the States
and to any institution within the States.
 On the recommendations of the Planning Commission (Now NITI AAYOG)
9.3.3 Borrowing Powers of the Union and the States

 Article 292 authorizes the Union Government to borrow on the security of the Consolidated Fund of
India. While doing so no territorial limitations have been imposed.
 States can also borrow upon the security of their Consolidated Funds; Article 293 provides that they
could do so only within the territory of India.
9.3.4 Exemption of Union Property from State Taxation

 Article 285 exempts the property of the Union from all taxes imposed by a State or by any authority
within a State unless Parliament by law provides otherwise.
 On the basis of the principle of reciprocal immunity, Article 289 exempts property and income of a
State from Union taxation.
 This does not prevent the Union from imposing any tax in respect of a trade or business of any kind
carried on by or on behalf of the Government of a State.
9.3.5 Article 280: Finance Commission

 Provides that the President shall within two years from the commencement of the Constitution and
thereafter at the expiration of every fifth year or earlier as he considers necessary, by order constitute
a Finance Commission
 It is the duty of the Commission to make recommendations to the President as to:
 The distribution between the Union and the States of the net proceeds of taxes and the
allocation between the States of the respective shares of the proceeds;
 The principles which should govern the grants-in-aid to the states by the Centre out of the
Consolidated Fund of India;
 The measures needed to augment the Consolidated Fund of a state to supplement the resources
of Panchayats and the municipalities on the basis of recommendations of the State Finance
Commission
 Any other matter referred to the Commission by the President in the interests of sound finance.
9.3.6 Article 360: Financial Emergency

 President can suspend the provisions relating to the division of the taxes between the Union and the
State and the grants-in-aid to the States.
 The executive authority of the Union shall extend to the giving of directions to any State to observe
such canons of financial propriety as may be specified in the direction or any other directions which
the President may deem necessary for purpose.
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9.3.7 Comptroller & Auditor-General of India

 Is responsible for the maintenance of audit of Union and State accounts
 He can direct the State Governments to keep their records in a particular manner and these are duty
bound to obey his instructions.
Having understood the functioning of all the wings of the government, lets us now try to understand the
decentralization measures taken the government to enhance democracy at the grassroot level.
10 Part X: Panchayati Raj

 Strong and vibrant local governments ensure: active participation, purposeful accountability,
meaningful economic development and achievement of social justice.
 Decentralization is also a political and administrative imperative. Self-governing village communities
existed in India from the earliest times in the form of 'sabhas' (village assemblies). In the course of
time, these bodies took the shape of Panchayats.
 In modern times, elected local government bodies have been created after 1882.
 Father of local self-government in India – Lord Ripon: In 1882, Lord Ripon issued a resolution hailed
as the Magna Carta of local self-government.
 Government of India Act, 1919 - Village panchayats were established in a number of provinces. Trend
continued after the Government of India Act 1935.
 Nearly one-third of the villages of India had traditional Panchayats the time of independence. When
the Constitution was prepared, the subject of local government was assigned to the States. It was
also mentioned in the DPSPs under Article 40 (one of the Gandhian Principles).
 After independence, the story of Panchayati Raj in India has been a story of ups and downs. Has
passed through four distinct phases in its short span of life.
 The phase of ascendancy (1959-1964),
 The phase of stagnation (1965-1969),
 The phase of decline (1969-1983) and
 The phase of revival (1983 onwards).
 In 1952, Programme of Community Development was started for economic planning and social
reconstruction. Block Advisory Committees were established, which were later redesigned as the
Block Development Committees.
 In January 1957, Balwant Rai Mehta Committee was appointed to review the working of the
Community Development Programme. Report was submitted in 1957.
Committees associated with Panchayati Raj Institutions in India
1. Balwant Rai Mehta Committee
2. Ashok Mehta Committee
3. Hanumanth Rao Committee
4. GVK Rao Committee
5. LM Singhvi Committee
10.1 New Panchayati Raj System: 73rd Amendment and After

 Historical background: Unsuccessful attempts by the Rajiv Gandhi government and V.P Singh
government to bring in constitutional amendment.
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 P.V. Narsimha Rao Government introduced the Constitutional Amendment Bill in 1991, which was
passed as the 73rd Constitutional Amendment Act, 1992.
 Act came into force w.e.f April. 24, 1993 and mandated all states of the Indian union, of course, to the
exclusion of J & K, Mizoram, Meghalaya and Nagaland as well as some scheduled areas of other
states, that they should either make new laws or make suitable amendments to their existing laws to
ensure their being in consonance with the Act.
10.2 Salient features of the 73rd Constitutional Amendment Act

 A new Part IX consisting of 16 Articles (Article 243 to 243 O) and a new schedule -the Eleventh
Schedule added to the Constitution.
 Article 243A: Gram Sabha may exercise such powers and perform such functions at the village level
as the legislature of a State may by law provide. Gram Sabha is envisaged as the foundation of the
PR System.
 Gram Sabha is a body consisting of persons registered in the electoral rolls of a village comprised
within the area of a Panchayat at the village level.
 Article 243B: It provides that in every state there shall be constituted Panchayats at the village,
intermediate and district levels.
 Small states having a population not exceeding 20 lakhs have been given an option not to
constitute the Panchayats at the intermediate level.
 Article 243C: Legislature of a State may by law make provisions with respect to the composition of
Panchayats. However, all the members at the village, intermediate and district levels shall be elected
directly.
 The chairperson of panchayats at the intermediate and district levels shall be elected indirectly.
 Chairperson of the panchayat at the village level shall be elected in such a manner as the state
legislature determines.
 Article 243D: Reservation of seats for SCs and STs in every panchayat in proportion of their
population to the total population in the panchayat area
 Reservation of not less than one third of the total number of seats for women
 Not less than one third of the total number of offices of chairpersons in the panchayats at each
level shall be reserved for women.
 Panchayat bodies to have an assured duration of 5 years, with elections mandatory before the
expiration of 5 years or in case of dissolution, before the expiry of a period of 6 months from the date
of dissolution.
 State Election Commission for the superintendence, direction and control of the preparation of
electoral rolls and conduct of all elections to the panchayats.
 State Election Commissioner to be appointed by the Governor.
 Finances: The state legislature may (a) authorize a panchayat to levy, collect and appropriate taxes,
duties, tolls and fees (b) assign to panchayat taxes, duties, tolls and fees levied by the state
government; (c) provide for making grants in aid to the panchayats from the consolidated fund of the
state; (d) provide for constitution of funds for crediting all moneys of the panchayats
 Finance Commission: The governor of a state shall, after every 5 years, constitute a finance
commission to review the financial position of panchayats.
 Disqualifications for Membership: A person shall be disqualified for being chosen as or for being a
member of Panchayats:
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 If he is so disqualified by or under any law for the time being in force for the purposes of elections
to the legislature of the State concerned;
 If he is so disqualified by or under any law made by the legislature of the State.
 But no person shall be disqualified on the ground that he is less than 25 years of age, under clause
(a), if he has attained the age of 21 years.
 Eleventh schedule
 It contains 29 functional items placed within the purview of the panchayats
 Some items are: agriculture, land improvement, minor irrigation, water management, rural
housing, drinking water, social forestry, women and child development, etc.
Compulsory Provisions of the Act
 Organization of Gram Sabha
 Establishment of panchayats at the 3 levels
 Direct elections to all seats at the 3 levels
 Indirect elections to the post of chairperson at the intermediate and district level
 21 years to be minimum age for contesting elections
 Reservations of seats for SCs, STs and women
 Fix tenure of 5 years and regular elections
 Establishment of State Election Commission
 Establishment of State Finance Commission
Voluntary Provisions of the Act

 Giving representation to the members of Parliament (both Houses) and the state legislature (both
Houses) in the Panchayats at the different levels falling within their constituencies
 Providing reservation of seats for backward classes in panchayats at any level (OBC reservation)
 Granting power and authority to the panchayats to enable them to function as institutions of self-
government
 Devolution of powers and responsibilities to prepare plans for economic development and social
justice; to perform some or all of the 29 functions listed in the XIth Schedule
 Granting financial powers to the panchayats
11 Miscellaneous
Change in political values over time
India has produced world class politicians in the form of Mahatma Gandhi, Jawaharlal Nehru, Lal Bahadur
Shastri, Sardar Vallabhbhai Patel, etc. They were all freedom fighters and did the public service of the
highest quality in selfless manner. These leaders held values like probity, fairness, equity, etc. Over the
period of time these political values have been diluting to low moral standards. The analysis of their
political values is of prime importance.
Political values can be defined as set of beliefs, principles carried by an individual or group which guides
their general behaviour/attitude toward political 'objects' (leaders, events, ideologies), they are the
mental construct and are not tied to any object.
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 Since political values have evaluative element in it, therefore they help individual to arrive at certain
decision.
 They believed in ideas like idea of nation building, Fraternity, Equality, Fraternity, Unity, Diversity of
Nation, etc.
 To achieve these ideas they believed in values integrity, non-partisanship, probity, accountability,
fairness, etc.
Change In political Values over time
1. Dilution of secular value: There was no presence of communalism in first two decades post-
independence but since 1970s Communalism has taken the center stage and disrupted the fabric of
society. Ex Babri-Masjid issue had created tensions in the society until being resolved recently.
2. Dilution of democratic Values: In the years succeeding independence Intra party elections were held
for the party posts, but over the years they have been taken up by family members. Ex: Top post of
Congress is held by Family members.
3. Dilution of Integrity: Erstwhile politicians firmly believed in transparency, were led by responsiveness.
Before anyone asking for details, politicians themselves came forward with details. But over time
Election commission has made it mandatory to disclose their personal details before the elections.
-Example: Lal Bahadur Shastri resigned in 1956 as Railway minister, when there was incident of train
accident, setting high standards of probity in public life.
4. Dilution of Accountability: Earlier politicians believed in deliberation, regularly attending Parliament
sessions, but today’s politicians avoid parliament sessions, and they are focusing on disruption rather
than deliberation.
5. Dilution of Public service: The notion of public service has been diluted. Rather than prioritizing the
people who are in need of the resources, rigid laws are followed, there by obstructing the public
service. Ex: Poor 65-year-old man is demanded bribe to avail the government service rather than
government authorities dealing humanely with him by making the excuse of rigid rules.
6. Contemporary Values: Over the period of time post-Independence, we have witnessed the erosion of
political values to manipulation, rivalry, corruption, Nepotism etc. Ex: Congress family is still led by
members of Gandhi family, nepotism at play rather than meritocracy.
7. Focus on Power over Public service: Today’s politicians are more interested in securing power rather
than improving the lives of people through better governance. Ex: Governments in various state being
formed by BJP through luring MLA’S of opposition through bribes.
8. Changing Society: Politicians cannot be blamed alone for such values completely, rather society in
which they grew up is to be blamed. Political values can be defined as political relationships,
institutions, organizations, views and ideas resulting from the transforming, creative sociopolitical
practice of the social forces that meet the requirements of social progress and of the development of
human personality on a social scale.
The Society as a whole should prosper not in development terms alone but also in ethical values, because
those values will be transmitted to next generation people. Those people will again produce leaders for
themselves, hence people with high moral standards have to enter public life, which can change the lives
of millions. The bulwarks of Indian democracy that is Judiciary, Election Commission of India, and
Comptroller and Auditor General of India should play a proactive role in instilling those values among the
politicians and the masses at large.
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Human
Development

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Contents
GDP alone cannot symbolize the development of a country: Why?....................................................................4
Meaning of Human Development ........................................................................................................................5
Why is human development needed? How important is human development? ................................................6
What is Human Development approach? ............................................................................................................6
Pillars of Human Development .............................................................................................................................7
5.1 Equity ............................................................................................................................................................8
5.2 Efficiency and Productivity ...........................................................................................................................8
5.3 Participation and Empowerment .................................................................................................................8
5.4 Sustainability.................................................................................................................................................8
5.5 Capability Approach to Human Development ..............................................................................................8
Dimensions of Human Development....................................................................................................................9
6.1 Education: Human Capital and Human Capability......................................................................................10
6.2 Health and Human Development ...............................................................................................................11
6.3 Gender and Human Development..............................................................................................................13
Status of Human Development in India..............................................................................................................14
Reasons for Low Human Development in India .................................................................................................15
Way Forward ......................................................................................................................................................16
The Human Development Report...................................................................................................................16
10.1 The Human Development Index (HDI)........................................................................................................17
10.2 Inequality-Adjusted HDI (IHDI) ...................................................................................................................17
10.3 Gender Development Index (GDI) ..............................................................................................................17
10.4 Gender Inequality Index (GII) .....................................................................................................................18
10.5 Multidimensional Poverty Index (MPI) .......................................................................................................18
Gross National Happiness ...............................................................................................................................19
Limitations of HDI ...........................................................................................................................................19
Conclusion ......................................................................................................................................................20

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GDP alone cannot symbolize the development of a country: Why?

The following arguments make us realize the fact that GDP alone cannot symbolize the development of
a country.
 Distribution of GDP – how uniform is: If the GDP of the country is rising, the welfare may not rise as
a consequence. This is because the rise in GDP may be concentrated in the hands of very few
individuals or firms.
Let us consider an example to understand this,
1. Suppose in year 2000, an imaginary country had 100 individuals each earning Rs 10. Therefore, the
GDP of the country was Rs 1,000 (by income method).
2. In 2001, let us suppose the same country had 90 individuals earning Rs 9 each, and the rest 10
individual earning Rs 20 each.
3. Suppose there had been no change in the prices of goods and services between these two periods.
4. The GDP of the country in the year 2001 was 90 × (Rs 9) + 10 × (Rs 20) = Rs 810 + Rs 200 = Rs 1,010.
5. Observe that compared to 2000, the GDP of the country in 2001 was higher by Rs10.
6. But this has happened when 90 per cent of people of the country have seen a drop in their real income
by 10 per cent (from Rs 10 to Rs 9), whereas only 10 per cent have benefited by a rise in their income
by 100 per cent (from Rs 10 to Rs 20).
7. 90 per cent of the people are worse off though the GDP of the country has gone up.
8. If we relate welfare improvement in the country to the percentage of people who are better off, then
surely GDP is not a good index.
To measure the income inequality that exists in a

country, we can use the Lorenz Curve and the Gini-
Coefficient
1. Lorenz Curve
 It is a graphical representation of wealth
distribution developed by American
economist Max Lorenz in 1905.
 On the graph given below, the straight
diagonal line represents perfect equality of
wealth distribution; the Lorenz curve lies
beneath it, showing the reality of wealth
distribution.
 The difference between the straight line and the curved line is the amount of inequality of
wealth distribution.
2. Gini-Coefficient: The Gini-coefficient can be calculated using the formula

 Gini-coefficient = Area between Line of Equality and Lorenz Curve/Area under Line of Equality.
 The value ranges from 0 to 1.
 Tracking it can demonstrate wealth trends in particular nations over time.
 In an economy with perfect equality, 20% of the population would hold 20% of the wealth. As
the percentage of the population in consideration rises, so does their cumulative wealth.

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 In a perfect inequality curve, the Gini-coefficient is 1 and the curve represents 100% of a
nation’s wealth held by one single person or entity.
 The greater the disparity within a nation, the closer the Gini-coefficient will be towards 1.
From the above discussion, we can infer that we need a different approach to measure the development
of a country. An approach that would be able to give a true reflection of a country’s progress. One such
approach is the Human Development approach.
Before proceeding ahead with Human Development Approach, let us try to understand the meaning of
Human development, which is discussed in the subsequent section.
Meaning of Human Development

1. Meaning and Its Pillars: Human development aims to enrich people’s lives by widening their choices.
Through investing in people, in terms of education, health, safety, and so on, this discipline attempts
to build human capability.
 Capability is basically what people are actually able to do and to be.
 Equality, sustainability, productivity, and empowerment are the four pillars of human
development.
2. Inclusive Development- Theme: This approach emphasizes the belief that though economic growth
is essential, its quality and distribution determine the extent to which it enriches people’s lives in a
sustainable manner.
 The attempt is to create an environment in which people can enjoy long, healthy, and creative
lives. The idea of human development is also linked with the concepts of rights, liberty and justice.
 Seeing humans as ends of development process was not the sole purview of human development
paradigm.
3. The UN Declaration on Human Rights (1948) put forward that all humans should be free and equal
in dignity and rights, such as the right to work, the right to education, the right to health, the right to
vote, the right to nondiscrimination, the right to decent standard of living etc.
 It was written in the hope that the atrocities committed during the Second World War would
never be repeated again. There are significant connections between human rights approach and
that of human development and capability.
 According to the Human Development Report (2000), “Human Rights and Human Development
share a common vision and a common purpose – to secure freedom, wellbeing and dignity of all
people everywhere”.
 A human right is claimed to be a fundamental benefit that should be enjoyed universally by all
people everywhere on the basis of equality and non-discrimination.
4. The Evolution of the concept of human development can be traced to the writings of renowned
thinkers and philosophers of ancient times.
 Aristotle, the great philosopher reflected in his writing that “wealth is not the good that we are
seeking for; it is merely for the sake of something else”.
 Another great philosopher, Immanuel Kant argues that human beings are ends in themselves,
rather than the means to other ends.
 Adam Smith, Robert Malthus, Karl Marx, John Stuart Mill, and many other modern economists
have also come forward with the similar idea of treating human beings as the real end of all
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However, the undeniable reality is that human beings are the beneficiaries of progress, and, at
the same time, they are directly or indirectly, the primary means of production. Thus, human
beings are the means through which a productive progress is brought about.
5. Human Development has been accepted in development economics literature as
 An expansion of human capabilities
 A widening of choices
 An enhancement of freedoms
 A fulfillment of human rights
Having understood the meaning of human development, let us now understand why is human
development needed and its importance in bringing about economic development.
Why is human development needed? How important is human development?

 A country can never progress until and unless its people lead a healthy and happy life.
 Even an economic development of a country depends on its human resources. Capital, natural
resources, as well as other productive resources remain inactive in the nature. Human resources are
necessary to mobilize them.
The following points clearly help us understand the importance of Human Resource in Economic
Development:
1. Utilization of Natural resources: Human resources are necessary for the utilization of natural
resources like mineral, water, forest etc. Utilization of these resources is necessary for economic
development. Thus, only human resources mobilize and utilize them properly.
2. Compensate the deficiency of natural resources: The utilization of human resource compensates the
deficiency of natural resources. Many countries are poor in natural resources like Japan, Hong Kong,
Singapore etc. but they are able to achieve high economic growth by properly utilizing human
resource.
3. Utilization of physical capital: Only the existence of physical capital can’t do anything for economic
development. They should be properly utilized. To operate machinery & equipment and to run
factories and industries is impossible without the involvement of human resource.
4. Increase in production: The human resources of a country help to increase in the production of
different goods and services. By using skilled human resources, a country can produce the variety of
goods and services having high quality.
5. Changes in technology: Human resources of a country can bring the new technology. Advance
technology is necessary to bring development in country.
After having studied the indispensability of human beings in bringing about economic growth and
development, let us now study in a little more detail the concept of human development approach.
What is Human Development approach?

1. It is an approach to development in which the objective is to expand what people are able to do and
be – what might be called, people’s real freedoms.

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2. It puts people first. Or we can rather say that it puts human beings at the center of development. For
each action taken, the effect it has on the human beings is measured. People are provided with fair
opportunities and choices. So, we can call it as people-focused approach to development.
3. In this kind of approach, a healthy economy is one which enables people to enjoy a long healthy life,
a good education, a meaningful job, family life, democratic debate, and so on.
In other words, Human Development Approach focuses on the following:
1. People: The human development approach focuses on improving the lives people lead rather than
assuming that economic growth will lead, automatically, to greater opportunities for all. Income
growth is an important means to development, rather than an end in itself.
2. Opportunities: Human development is about giving people more freedom and opportunities to live
lives they value. In effect this means developing people’s abilities and giving them a chance to use
them.
- For example, educating a girl would build her skills, but it is of little use if she is denied access to
jobs, or does not have the skills for the local labour market.
3. Choices: Human development is, fundamentally, about more choice. It is about providing people with
opportunities, not insisting that they make use of them. No one can guarantee human happiness, and
the choices people make are their own concern.
- The process of development – human development - should at least create an environment for
people, individually and collectively, to develop to their full potential and to have a reasonable
chance of leading productive and creative lives that they value.
Concept of Human Development:

 The human development concept was developed by economist Mahbub ul Haq.
 At the World Bank in the 1970s, and later as minister of finance in his own country, Pakistan, Dr.
Haq argued that existing measures of human progress failed to account for the true purpose of
development—to improve people’s lives.
 In particular, he believed that the commonly used measure of Gross Domestic Product failed to
adequately measure well-being.
 Working with Nobel Laureate Amartya Sen and other gifted economists, in 1990 Dr. Haq published
the first Human Development Report, which was commissioned by the United Nations
Development Programme.
Having understood the human development approach, let us now look at the pillars of human
development, which is discussed in subsequent section.
Pillars of Human Development

 The human development approach is inherently multidimensional. The central goal of human
development is to enable people to become direct agents in their own lives. People are not passive
objects of social welfare provisions but are active subjects with the power to determine how they
choose to live.
 People should be empowered so that they can define their respective priorities, as well as choose
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to be agents of their own lives, people need the freedom to be educated, to speak in public without
fear, or have freedom of expression and association.
 The four main pillars of human development are
1. Equity
2. Efficiency and productivity
3. Participation and empowerment
4. Sustainability
5.1 Equity
1. The principle of equity encompasses the ideal of equality whereby all human beings should have
equal rights and entitlements to human, social, economic, and cultural development, and an equal
voice in civic and political life.
2. Affirmative Action: The principle of equity also recognizes that those who have unequal
opportunities due to various disadvantages may require preferential treatment, or affirmative
action.
5.2 Efficiency and Productivity

1. Efficiency is defined as the least costly method of reaching goals through the optimal use of human,
material, and institutional resources to maximize opportunities for individuals and communities,
thereby enhancing productivity.
2. Productivity can be enhanced through efficient use of resources. It also requires investment in
people and enabling macroeconomic environment for them to achieve their maximum potential.
- For human development, people must be enabled to increase their productivity and to participate
fully in the process of maximizing opportunities so that they become effective agents of growth.
5.3 Participation and Empowerment

1. Participation and engagement in social and political life is an important aspect of human
development. People’s participation is crucial in community programmes and government
interventions.
2. Empowerment can occur through enhanced participation and involvement. For instance, reservations
of women in various elected bodies are made to empower them through such participation.
Involvement of parents, guardians and/or communities in village education committees is another
example.
5.4 Sustainability
 Human development questions the long-term sustainability of economic growth and aims to ensure
that resources are utilized in a manner that meets present day human needs while preserving the
environment, so that the needs of future generations can also be met with.
After understanding the pillars of Human development, let us look at the pathbreaking work of Amartya
Sen in the Subsequent section.
5.5 Capability Approach to Human Development

1. Amartya Sen’s Pathbreaking work: The human development approach has been profoundly inspired
by Amartya Sen’s pioneering works in welfare economics, social choice, poverty, and famine and
development economics.

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 While Sen’s works cover an extremely wide range of topics, his ‘capability approach’ has led to a
critical evolution in the field of economics, and in social sciences in general.
2. Genesis of approach: The roots of the capability approach go back to Aristotle, Adam Smith, and Karl
Marx. Aristotle made extensive use of his own analysis of human beings and linked it with his
examination of the functions of man. Adam Smith and Karl Marx discussed the importance of
‘functioning’s’ and ‘capability’ as determinants of wellbeing.
3. Core Concepts of the approach: If life is a set of doings and beings that are valuable, the exercise of
assessing the quality of life takes the form of evaluating these functioning’s and the capability to
function. But what actually are ‘capability’ and ‘functioning’?
a) According to Amartya Sen, “Capability is a vector of functioning’s, reflecting the person’s
freedom to lead one type of life or another….to choose from possible livings”.
- In other words, capabilities are the substantive freedoms he, or she, enjoys to lead the kind of life
he, or she, has reason to value.
- Just as a person with a pocket full of coins can buy many different things, a person with many
capabilities can enjoy many different activities, and pursue different life paths.
b) Functioning’s are valuable activities and states that constitute people’s well-being such as
healthy body, being safe, being educated, and so on. Functioning is, thus, an achievement of a
person: what he or she manages to do, or, to be.
- For example, when people’s basic need for food is met, they enjoy the functioning of being well
nourished.
c) Apart from capability and functioning, the third core concept of the capability approach is
“agency”. It refers to a person’s ability to pursue and realize goals he, or she, has reason to value.
4. Criticism of the approach: Martha Nussbaum argues that Sen’s ‘Capability Approach’ is incomplete.
Since what people consider to be valuable and relevant can often be the product of structures of
inequality and discrimination, and because not all human freedoms are equally valuable
The capability approach advocates the removal of obstacles in people’s lives, increasing their freedom
to achieve the functioning that they value. It recommends progressive social policies which would foster
the development of human capabilities, such as improved health, knowledge, skills and also ensure
equitable access to human opportunities.
Having discussed human development in detail, let us now understand the dimensions of human
development in subsequent section.
Dimensions of Human Development

1. There can be many dimensions of human development, but it is important to list down the important
ones so that the concept of human development becomes measurable and practical.
 For this purpose, UNDP has come up with the dimensions that have been mentioned in the
diagram below.
 The diagram below looks at aspects of human development that are foundational (that is they are
a fundamental part of human development); and aspects that are more contextual (that is they
help to create the conditions that allow people to flourish).
2. Three foundations for human development are to live a healthy and creative life, to be
knowledgeable, and to have access to resources needed for a decent standard of living.

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 Many other aspects are important too, especially in helping to create the right conditions for
human development, such as environmental sustainability or equality between men and women.
3. Assessment of development: So far, we have seen that overall, there are two approaches to measure
the development of a country, one is the income approach and the other is the human development
approach.
- Now, these two approaches are at the extreme ends. We need to find a balance between the two.
- To fulfill this purpose, UNDP comes out with the Human Development Report that measures the
human development of a country by using certain parameters that are measurable when
compared to the idealist human development approach which seems very vague as it can
encompass various dimensions under it.
Let us now understand the components of Human development report in detail. Broadly, the main
dimensions are: (I) education (ii) health and (iii) gender.
6.1 Education: Human Capital and Human Capability

1. Comparing Human Capital against Human Capability: Comparing human capital, as given by Gary S.
Becker, Theodore Schultz, with the capability approach, given by Sen, who argues that education as
a human capital concentrate on the agency of human beings, through skill and knowledge as well as
effort, in augmenting production possibilities.
 The capability approach to education focuses on the ability of human beings to lead lives they
have reason to value, and to enhance the substantive choices they have.
 Both approaches are connected because they both are concerned with the role of human beings,
and in particular, with the actual abilities that they achieve and acquire.
 Consider the following example: if education makes a person more efficient in commodity
production, then there is clearly an enhancement of human capital. This can add to the value of
production in the economy, and to the income of the person who has been educated. But, even
with the same level of income, a person may benefit from education in reading, communicating,
arguing, being able to choose in a more informed way, being taken seriously by others, and so
on.
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 The benefits of education, thus, exceed its role as human capital in commodity production. The
broader human capability perspective would add these roles. Thus, the human capital perspective
fits into the broader human capability perspective, which covers the direct, as well as indirect,
consequences of human abilities.
2. Amartya Sen has identified three distinct ways to link the importance of education to the expansion
of valuable capabilities.
a) Education fulfills an instrumental social role. For example, literacy fosters public debate and
dialogue about social and political arrangements.
b) Education also has an instrumental process role in facilitating our capacity to participate in the
decision-making process in the household, and at the community, or national level.
c) Education has an empowering and distributive role in facilitating the ability of disadvantaged,
marginalized, and excluded groups to organize themselves politically, since, without education,
these groups would be unable to gain access to centers of power, and affect redistribution of
resources.
3. Overall, education has an interpersonal impact because people are able to use the benefits of
education to help others as well as themselves, and can contribute to democratic freedoms, and to
the overall good of society as a whole.
4. International declarations such as the Millennium Development Goals, Education for All, and the
Decade of Education for Sustainable Development, attempt to look at education beyond simple
human capital concerns.
5. The human development perspective, thus, considers the purpose of education to be much wider
than simply developing skills that will enhance economic growth. Education nurtures the processes
of critical reflection and connection with others that are intrinsically ethical.
6. Education brings empowerment, and it is central to human growth. Not only does it open the minds
of people and further their horizons, it also opens the way for people to acquire other valuable
capabilities.
7. The human development reports take into account the central importance of education by
incorporating an education indicator – literacy rates – into the first Human Development Index, later
versions include education indicators based on enrollment rates.
6.2 Health and Human Development

1. The conventional approach argues that health, through its contribution to the quality of human
capital, has a strong, and significant effect on economic growth. This approach puts economic growth
as an end, and health as a means to achieving this end.
 The reverse is also argued, where wealth is seen as a necessary input for the achievement of
health outcomes. However, these approaches lead to the critical question of whether economic
growth is necessary for improving health.
2. Amartya Sen, by quoting the examples of pre-reform China, Sri Lanka, and Kerala (India), describes
that improvement in health (without economic growth) can be attained by prioritizing social services
especially health care, and basic education.
 He says that “health is among the most important conditions of human life, and a critically
significant constituent of human capabilities which we have reason to value.
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 In addition to its intrinsic value, health is instrumental to economic growth, educational

achievements and cognitive development, employment opportunities, income earning potential
as well as for dignity, safety, security and empowerment”.
3. Considerable empirical evidence supports the capability approach in substantiating the importance
of conversion factors in translating health inputs to valued health outputs.
 One clear example of a conversion factor in health is education. Numerous studies have
demonstrated that educated individuals tend to have lower mortality and morbidity than less
educated counterparts.
 In addition, children of educated mothers fare better in terms of health than those with less
education.
 Yet another conversion factor is the authority an individual has within their household, or
community, to assess or convert, a particular resource into a value-added health outcome.
- For example, the unequal rights to property, unequal access to economic assets, restrictions on
physical mobility, especially in the case of women, hamper their health situation.
- Thus, conversion factors include a number of external conditions, the natural and manmade
environment in which we operate, the formal and informal rules and regulations to which we
subscribe, social and family dynamics that determine our daily lives, and so on.
4. A basic principle of public health is that all people have a right to health. Differences in the incidence
and prevalence of health conditions and health status between groups are commonly referred to as
health disparities.
 Most health disparities affect groups that are marginalized because of socioeconomic status, race
or ethnicity, sexual orientation, gender, disability, geographic location, or some combination of
these.
 People in these groups not only experience worse health, they also tend to have less access to
the ‘social determinants or conditions (e.g., healthy food, good housing, good education, safe
neighborhoods, freedom from racism, and other forms of discrimination) that support a healthy
life.
 Health disparities are referred to as health inequities when they are the result of the systematic
and unjust distribution of these critical conditions.
 According to WHO, health equity, is experienced when everyone has the opportunity to “attain
their full health potential” and no one is “disadvantaged from achieving this potential because
of their social position or other socially determined circumstance.”
 Health is, thus, a fundamental capability which is instrumental in the achievement of other
capabilities.
5. The unfair distribution of health capabilities may affect social justice in several ways. For example,
high maternal undernutrition, leads to intra-uterine growth retardation, which leads to a high
prevalence of low-birth-weight babies.
 This phenomenon contributes to a high prevalence of child undernutrition and adult ailments.
Thus, women’s deprivation in terms of nutrition and health attainment has serious repercussions
for society as a whole.
 Deprivation in health can cause deprivation in a number of other dimensions such as education,
employment, and participation in social spheres.
 When people are ill or malnourished, their overall capabilities are greatly reduced. Lack of good
health can, therefore, be at the heart of interlocking deprivations.
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 The 2005 WHO Report finds a close link between chronic diseases and poverty. Poor health is not
just suffering from illness. For those living in poverty, it pushes individuals and households towards
losses in productivity, incomes, assets, and education further entrenching the cycle of poverty.
Health deprivations, thus, reinforce deprivations in other dimensions, which in turn reinforce
deprivations in health.
6.3 Gender and Human Development

In no society do women enjoy the same opportunities as men. A widespread pattern of inequality persists
among men and women in their access to education, health, and nutrition, and even more, in their
participation in the economic and political spheres.
Amartya Sen has identified seven different types of gender inequalities presently existing in this world.
1) Mortality inequality: In some regions in the world, inequality between women and men directly
involves matters of life and death, and takes the brutal form of unusually high mortality rates of
women, and a consequent preponderance of men in the total population, as opposed to the
preponderance of women found in societies with little, or no gender bias in health care and nutrition.
 Mortality inequality has been observed extensively in North Africa, and in Asia, including China,
and South Asia.
2) Natality inequality: Given the preference for boys over girls that many male dominated societies have,
gender inequality can manifest itself in the form of the parents wanting the newborn to be a boy
rather than a girl.
 There was a time when this could be no more than a wish, but with the availability of modern
medical techniques to determine the gender of the foetus, sex-selective abortion has become
common in many countries.
 It is particularly prevalent in East Asia, in China and South Korea in particular, but also in Singapore
and Taiwan, and it is beginning to emerge as a statistically significant phenomenon in India and
South Asia as well. This is high tech sexism.
 Sen coined the term, ‘missing women’, to describe the phenomena of sex ratio imbalances. Sex
ratios were viewed as a composite indicator of the status of women in any society by the
Committee on the Status of Women in India (CSWI) in its report, “Towards Equality”, in 1974.
3) Basic facility inequality: Even when demographic characteristics do not show much or any anti-female
bias, there are other ways in which women can have less than a fair deal.
 Afghanistan may be the only country in the world where the government is keen on actively
excluding girls from schooling (it combines this with other features of massive gender inequality),
but there are many countries in Asia, Africa, and in Latin America, where girls have far less
opportunity for schooling than boys.
 There are other deficiencies in basic facilities available to women, varying from encouragement
to cultivate one’s natural talents, to fair participation in the social functions of their communities.
4) Special opportunity inequality: Even when there is relatively little difference in basic facilities,
including schooling, the opportunities for higher education may be far fewer for young women than
for young men.
 Indeed, gender bias in higher education and professional training is observed even in some of the
richest countries in the world, in Europe, and North America.
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5) Professional inequality: In terms of employment, as well as in promotions at work, women often face
greater handicaps than men.
 A country like Japan may be egalitarian in matters of demography, or basic facilities, and even,
largely, in higher education, and yet, progress to elevated levels of employment and occupation
seems to be much more problematic for women than for men.
6) Ownership inequality: In many societies, the ownership of property can also be very unequal. Even
basic assets, such as homes and land, may be asymmetrically shared.
 The absence of claims to property can not only reduce the voice of women, but also make it harder
for women to enter and flourish in commercial, economic, and even some social activities. This
type of inequality exists in most parts of the world, with local variations.
 For example, even though traditional property rights have favoured men in most of India, in the
state of Kerala, there has been, for a long time, matrilineal inheritance for an influential part of
the community, namely the Nairs.
7) Household inequality: Often enough, there are basic inequalities in gender relations within the family,
or the household, which can take many different forms.
 Even in cases in which there are no overt signs of anti-female bias in, say, survival, or son-
preference, or education, or even in promotion to higher executive positions, the family
arrangements can be quite unequal in terms of sharing the burden of housework and child care.
 For example, it is common in many societies to take it for granted that while men will work outside
the home, their women could work too, if, and only if, they combine work with various
inescapable, and unequally shared household duties.
 This unequal status leaves considerable disparities between how much women contribute to
human development, and how they share its benefits.
Having understood the different dimensions of Human development report, let us now look at the
present status of human development in India in the subsequent section.
Status of Human Development in India

 India ranked 131 among 189 countries on the Human Development Index (HDI) for 2019, slipping
two places from the previous year, according to the Human Development Report (HDR) 2020 released
by the United Nations Development Program (UNDP).
 The 2020 Report has introduced planetary pressures-adjusted Human Development Index, which
adjusts the standard Human Development Index (HDI) by a country’s per capita carbon dioxide
emissions and material footprint.
The Human Development Report published by the United Nations Development Programme estimates
the HDI in terms of three basic parameters: to live a long and healthy life, to be educated and
knowledgeable, and to enjoy a decent economic standard of living.
 Key points
1. Human Development Index: HDI emphasizes that people and their capabilities should be the ultimate
criteria for assessing the development of a country, not economic growth alone.
2. Based on three Basic Dimensions of Human Development:
a) A long and healthy life,
b) Access to knowledge, and
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c) A decent standard of living.

3. Top Performers for 2019: Norway topped the index, followed by Ireland and Switzerland. Hong Kong
and Iceland complete the top five.
4. Performance of the Asian Region:
 Singapore was ranked 11, Saudi Arabia 40, and Malaysia was at 62 in the global index, representing
the top bracket among the Asian countries with “very high human development".
 Sri Lanka (72), Thailand (79), China (85) and Indonesia and Philippines (both 107), and Vietnam
(117), among others, were “high human development" countries.
 India, Bhutan, Bangladesh, Myanmar, Nepal, Cambodia, Kenya and Pakistan were ranked among
countries with “medium human development" with ranks between 120 and 156.
5. India’s Performance:
 Overall Performance: HDI value for 2019 is 0.645, which puts the country in the medium human
development category, positioning it at 131 out of 189 countries and territories.
 Between 1990 and 2019, India’s HDI value increased from 0.429 to 0.645, an increase of 50.3%.
 Long and Healthy Life: Life expectancy for Indians at birth was 69.7 years in 2019, slightly lower
than the south Asian average of 69.9 years.
 Between 1990 and 2019, India’s life expectancy at birth increased by 11.8 years.
 Access to Knowledge: The expected years of schooling in India was 12.2 years, compared with
11.2 years in Bangladesh and 8.3 years in Pakistan.
 Between 1990 and 2019, mean years of schooling increased by 3.5 years, and expected years
of schooling increased by 4.5 years.
 A Decent Standard of Living: In terms of Gross National Income (GNI) per capita, India at USD
6,681 fared better than some others in 2019, despite a fall over the previous year.
 India’s GNI per capita increased by about 273.9% between 1990 and 2019.
After understanding that India’s Standing is poor in HDI, let us now explore the reasons for its poor
standing which is discussed in subsequent section.
Reasons for Low Human Development in India

The 2019 HDI ranks India with a per capita income of $6,681 in the 131st position, which is a notch lower
than its 130th rank in 2018. The malefic effects of deep-rooted societal and economic disadvantages
account for a low rank for an economy that is in the global top 6 by size. Following factors can be dubbed
as reasons for India’s dismal performance in HDI:
1. Increasing Income Inequalities: Income inequalities amplify failings on other HDI indices of human
development. Intergenerational income mobility is lower in countries with high-income inequality.
 It manifests at birth and determines access to quality healthcare, education, and opportunities.
 Further, there is an increasing trend in income inequality. In India, the income growth of the
bottom 40% between 2000 and 2018 (58%) was significantly below the average income growth
for the entire population (122%).
2. Gender Inequality: Numbers show female per capita income in India was only 21.8% of that of males,
while it was more than double at 49% in other developing countries.
 The meagre per capita income of females in India is mainly because of their exclusion from the
labour force.
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 Only 20.5% of the women in the working-age group were in the labour force, pointing to its dismal
Female Labour Force Participation Rate (LFPR).
3. Cumulative Impact: The cumulative impact of these factors spills over across generations. It is this
intergenerational cycle which denies opportunities to those at the bottom of the pyramid.
Having understood the reasons for dismal performance of India, let us look at the way forward for India
in the Subsequent section.
Way Forward
1. Fair Income Distribution: While the size of economic resources is a key factor affecting human
development, the distribution and allocation of these resources also play a major role in determining
the level of human development.
 Many global case studies show that high growth accompanied by more effective income
distribution can help enhance human development, even with moderate social expenditures.
 For Example, South Korea and Taiwan improved income distribution through early land reforms.
2. Investing in Social Infrastructure: Universalization of education and health care could have pulled
deprived sections out of the poverty trap.
 Sustaining and improving the quality of life will also depend on policies crafted to handle major
emerging challenges such as urbanisation, the housing deficit, access to power, water, education
and health care.
3. Streamlining of the Finances: Streamlining the traditional approach of generating new sources of
revenue generation, steps like rationalized targeting of subsidies, judicious use of revenues meant for
social sector development etc. will probably meet the financial requirements needed for improving
HDI.
4. Good Governance Reforms: Effective performance evaluation of the projects and activities engaged
in the social sector development through innovative methods like outcome budgeting, social auditing
and participatory democracy has been known to yield positive results.
5. Gender Empowerment: Government should invest in Gender equality and women’s empowerment,
as they are integral to human development.
Let us now look at the human development report and its components in detail, which is released
annually.
The Human Development Report

 The Human Development Report (HDR) is an annual milestone published by the Human Development
Report Office of the United Nations Development Programme (UNDP).
 The only year without a Human Development Report since 1990 was 2012.
 In addition to a global Report, UNDP publishes regional, national, and local Human Development
Reports.
Note: Kindly refer India’s rank in the indices mentioned below in the last two years. Also, the comparison
of India with its neighbours, among the BRICS countries is important. The data regarding top three
countries should also be referred.
Kindly go through EduTap’s monthly ESI current affairs document for all the updates.
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10.1 The Human Development Index (HDI)

The first Human Development Report introduced the Human Development Index (HDI) as a measure of
achievement in the basic dimensions of human development across countries.
1. What was the need for this index?

 The state of the nation is often expressed through GDP (Gross Domestic Product), daily stock
market results, consumer spending levels, and national debt figures. But these numbers provide
only a partial view of how people are faring. However, these monetary measures are inadequate
proxies of development.
 Thus, The Human Development Index was developed as an alternative to simple money metrics.
2. Components of Human Development Index:
 HDI is a composite statistic of life expectancy, education, and per capita income indicators, which
are used to rank countries into four tiers of human development. Countries are ranked based on
scale ranging between 0 (low) to 1 (high).
 Countries fall into four broad human development categories: Very High Human Development,
High Human Development, Medium Human Development and Low Human Development.
 A country scores higher HDI when the lifespan is higher, the education level is higher, and the GDP
per capita is higher.
10.2 Inequality-Adjusted HDI (IHDI)

What is the purpose of the Inequality-adjusted HDI (IHDI)?
 The HDI represents a national average of human development achievements in the three basic
dimensions making up the HDI: health, education and income.
 Like all averages, it conceals disparities in human development across the population within the same
country. Two countries with different distributions of achievements can still have the same average
HDI value.
 The IHDI takes into account not only the average achievements of a country on health, education and
income, but also how those achievements are distributed among its population by “discounting”
each dimension’s average value according to its level of inequality.
 An IHDI value can be interpreted as the level of human development when inequality is accounted
for.
 The relative difference between IHDI and HDI values is the loss due to inequality in distribution of the
HDI within the country.
10.3 Gender Development Index (GDI)

 The GDI measures gender gaps in human development achievements by accounting for disparities
between women and men in three basic dimensions of human development—health, knowledge and
living standards using the same component indicators as in the HDI.
 The GDI is the ratio of the HDIs calculated separately for females and males using the same
methodology as in the HDI.
 The closer the ratio is to 1, the smaller the gap between women and men.
 It is a direct measure of gender gap showing the female HDI as a percentage of the male HDI.
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 The GDI shows how much women are lagging behind their male counterparts and how much women
need to catch up within each dimension of human development.
 It is useful for understanding the real gender gap in human development achievements and is
informative to design policy tools to close the gap.
10.4 Gender Inequality Index (GII)

 Gender inequality remains a major barrier to human development.
 Girls and women have made major strides since 1990, but they have not yet gained gender equity.
The disadvantages facing women and girls are a major source of inequality. All too often, women and
girls are discriminated against in health, education, political representation, labour market, etc.—with
negative consequences for development of their capabilities and their freedom of choice.
 The GII is an inequality index. It measures gender inequalities in three important aspects of human
development—reproductive health, measured by maternal mortality ratio and adolescent birth rates;
empowerment, measured by proportion of parliamentary seats occupied by females and proportion
of adult females and males aged 25 years and older with at least some secondary education; and
economic status, expressed as labour market participation and measured by labour force
participation rate of female and male populations aged 15 years and older.
 The GII is built on the same framework as the IHDI—to better expose differences in the distribution
of achievements between women and men. It measures the human development costs of gender
inequality. Thus, the higher the GII value the more disparities between females and males and the
more loss to human development.
10.5 Multidimensional Poverty Index (MPI)

 Like development, poverty is multidimensional — but this is traditionally ignored by headline money
metric measures of poverty.
 The Multidimensional Poverty Index (MPI), published for the first time in the 2010 Report,
complements monetary measures of poverty by considering overlapping deprivations suffered by
individuals at the same time.
 The index identifies deprivations across the same three dimensions (education, health and living
standards) as the HDI and shows the number of people who are multidimensionally poor (suffering
deprivations in 33% or more of the weighted indicators) and the number of weighted deprivations
with which poor households typically contend with.
 The MPI can help the effective allocation of resources by making possible the targeting of those with
the greatest intensity of poverty; it can help address some SDGs strategically and monitor impacts of
policy intervention.
So far, we have discussed various dimensions of human development through the indices brought out by
UNDP.
One very important dimension of human development is ‘Happiness’ of the individuals. This dimension
is very abstract and becomes very difficult to measure it.
The countries have tried to find a way to measure the prevalence of ‘Happiness’ in their countries. Thus,
a concept known as ‘Gross National Happiness’ has been evolved.
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Gross National Happiness

 Gross National Happiness (GNH) is a measurement of the collective happiness in a nation.
 In the 1970s, developing countries were focused on increasing economic success to help
develop prosperity. Bhutan's King, Jigme Wangchuck, however, believed an economic approach
dehumanized the development process.
 The GNH concept evolved through the contribution of international and local scholars and researchers
to become an initiative beyond the borders of Bhutan.
 The concept of GNH has often been explained by its four pillars: good governance, sustainable socio-
economic development, cultural preservation, and environmental conservation.
 Lately the four pillars have been further classified into nine domains in order to create widespread
understanding of GNH and to reflect the holistic range of GNH values.
 The nine domains are: psychological wellbeing, health, education, time use, cultural diversity and
resilience, good governance, community vitality, ecological diversity and resilience, and living
standards.
 The domains represent each of the components of wellbeing of the Bhutanese people, and the term
‘wellbeing’ here refers to fulfilling conditions of a ‘good life’ as per the values and principles laid down
by the concept of Gross National Happiness.
To compare the prevalence of happiness in various countries, there is a report ‘World Happiness Report’
brought out by the UN Sustainable Development Solutions Network every year since 2012 on the eve of
International Day of Happiness (20th March).
Some important points about this report are mentioned below:
 The World Happiness Report is a landmark survey of the state of global happiness which is published
by United Nations Sustainable Development Solutions Network.
 The index ranked countries based on six parameters such as healthy life expectancy, GDP per capita,
freedom, generosity, public trust (i.e., a lack of corruption in government and business) and social
support.
 Together these six parameters are used to generate a happiness score of country on a scale from 1 to
10.
Though the human development index appears Comprehensive, still there are lacunae in it. Let us
understand its limitations in the Subsequent section.
Limitations of HDI
Though Human Development Index is a very important indicator in giving us an idea about the well-being
of the people of a country, it has its own limitations.
These limitations are:
1. Focus On Basic Dimensions: The HDI is not a comprehensive measure of human development. It just
focuses on the basic dimensions of human development and does not take into account a number of
other important dimensions of human development.
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- For example, other parameters such as access to clean drinking water, sanitation coverage also
play an important role in the development of an individual.
2. Does not reflect the Efforts of Policies: It is composed of long-term human development outcomes.
Thus, it does not reflect the input efforts in terms of policies nor can it measure short-term human
development achievements.
- For example, life expectancy reflects long-term changes.
3. Lack of Simplicity: It shares all the limitations of composite measures. But it is important to keep it
simple with minimum variables to ensure its acceptability, understanding and predictability.
4. Conceals the Disparities: The HDI is an average measure and thus masks a series of disparities and
inequalities within countries. Disaggregation of the HDI in terms of gender, regions, races and ethnic
groups can unmask the HDI and can be and has been used widely for policy formulation.
5. Issue with Income Indicator: Income enters into the HDI not in its own right, but as a proxy for
resources needed to have a decent standard of living. The issue with regard to income is how it is
transformed into the health and education dimensions of the HDI.
- Thus, between income and the other two dimensions of the HDI, the issue is that
of transformation, and not of substitution.
- For example, higher GNI per capita may hide widespread inequality within a country. Some
countries with higher real GNI per capita have high levels of inequality (e.g., Russia, Saudi Arabia).
Conclusion
 Any index be it HDI or GDP of a country when analyzed individually cannot provide the complete
picture of human development of a country and its economy.
 We need to look at a bigger picture and take all possible indexes into account.
 Any nation cannot prosper without the upliftment of its people. Only healthy, happy people can build
a prosperous nation.
 India’s HDI scores can be substantially enhanced if a politically committed government rolls out
inclusive policies that strengthen public health, education and nutrition, and end gender
discrimination to usher in a more egalitarian order.
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Social Sectors in
India, Health and
Education

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Contents
1 Health - Background ...........................................................................................................................4
1.1 Introduction .................................................................................................................................................. 5
1.2 Why Health - Importance /Dimensions related to Health ........................................................................... 6
1.3 Challenges in Health in India ........................................................................................................................ 7
1.4 India’s Achievements in Health Sector ......................................................................................................... 8
1.5 Other Steps Taken to Improve Health Care in India ..................................................................................... 9
1.6 National Family Health Survey (NFHS) .......................................................................................................10
1.6.1 Key findings of the NFHS – 5 ...............................................................................................................11
1.7 Malnutrition in India ...................................................................................................................................12
1.7.1 What is malnutrition? .........................................................................................................................12
1.7.2 What is the extent of malnutrition in India? ......................................................................................12
1.8 Government Interventions .........................................................................................................................13
1.9 National Health Policy, 2017: Salient Features: .........................................................................................13
1.10 The Mental Healthcare Act 2017 ................................................................................................................14
1.11 Conclusion ..................................................................................................................................................15
2 Education ..........................................................................................................................................15
2.1 Introduction ................................................................................................................................................15
2.2 What is Education? .....................................................................................................................................16
2.3 History Of Education in India ......................................................................................................................17
2.4 Status of Education in India ........................................................................................................................18
2.4.1 Literacy Rates in India .........................................................................................................................18
2.5 Education related data ...............................................................................................................................19
2.6 Fundamental Rights ....................................................................................................................................20
2.7 Right to Education Act (RTE), 2009 .............................................................................................................20
2.7.1 Important update ...............................................................................................................................22
2.7.2 Important highlights of the Act ..........................................................................................................22
2.8 Elementary Education in India: Its present status and problems...............................................................22
2.8.1 Annual Status of Education Report (ASER) .........................................................................................22
2.8.2 National Achievement Survey ............................................................................................................22
2.9 Secondary and Higher Secondary Education in India (IX to XII) .................................................................23
2.9.1 The following are the important data points mentioned in the U-DISE 2015-16 ..............................23
2.9.2 Higher Education in India....................................................................................................................24
2.9.3 All India Survey on Higher Education (AISHE).....................................................................................25
2.9.4 Global Ranking of Universities ............................................................................................................26
2.9.5 QS World University Rankings ............................................................................................................26
2.9.6 The Times Higher Education World University Rankings ...................................................................26

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2.9.7 Academic Ranking of World Universities (ARWU) ..............................................................................26

2.10 Different Levels of Education in India – Issues, Challenges and Solutions .................................................26
2.11 Privatization In Education ...........................................................................................................................29
2.12 Regulatory Structure in India ......................................................................................................................29
2.12.1 Regulation In Higher Education ..........................................................................................................30
2.13 National Education Policy of India ..............................................................................................................31
2.13.1 National Education Policy 2020 ..........................................................................................................31
2.14 Conclusion ..................................................................................................................................................34
1 Health - Background
In the chapters of ‘Measurement of Growth and National Income’ and Human Development, we have
looked into the various ways that are used to measure the economic growth of a nation.
We also realized the fact that economic growth of a nation does not essentially symbolize the overall
development of a country. We came to a conclusion that we require a different approach that would
give a true reflection of a country’s progress.
The most appropriate approach is the Human Development Approach which was discussed in detail as
part of the ‘Human Development’ chapter.
There was a discussion regarding the Human Development Report which is brought out by the UNDP.
This report can be said to be a balance between the Income approach and the Human Development
approach which are at the two extremes.
The Human Development Report comes out with certain measurable parameters which gives us a
reflection of the country’s overall progress.
When we talk about Human Development, one of the very important parameters that indicates the
overall Human Development is the ‘Health’ of the individuals of a country.

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It is very evident from the fact that it forms one of the indicators while computing the Human
Development Index (HDI) by the UNDP.
When we talk about health, it is not just referring to the ‘healthy body’ but also a ‘healthy mind’.
Further, we can gauge the importance of the health sector from the fact that as part of the Union
Budget, the government makes substantial allocation towards the healthcare sector.
So, it becomes one of the important areas of concentration in the Fiscal Policy of the government as
well.
In this chapter, we shall be studying about ‘Health’ in general and various reports and findings that
give us an idea regarding the situation of Health in India.
Quotes by famous personalities

 Mahatma Gandhi - “It is health that is real wealth and not pieces of gold and silver”
 Buddha - “To keep the body in good health is a duty, otherwise we shall not be able to keep our
mind strong and clear” –
 Publilius Syrus “Good health and good sense are two of life's greatest blessings”
 Winston S. Churchill - “Healthy citizens are the greatest asset any country can have”
 French Proverb - “If Wealth Is Lost, Nothing Is Lost; If Health Is Lost, Something Is Lost”
 Upanishads - “Sarve Bhavantu Sukhinah, Sarve Santu Niramayah” – It means “May All become
Happy, May All be Healthy”
1.1 Introduction
 Health in ancient India was defined as physical, mental, emotional, spiritual and social wellbeing
of an individual. Thus, the system of medicine was not about illness and standalone treatment.
 It combined many concepts such as diet, climate, beliefs, supernatural, empirical, and culture into
treatment of the person.
 The emphasis was on natural and preventive approach to healing. It was aimed at treating the illness
from the root cause.
 The most important practitioners in this field included Susruta, Charvaka and Vagbhata. Susruta is
also considered as the "father of Indian surgery".
 Thus, the most important contributions of India included Yoga, Meditation and Ayurveda.

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 Also, Indian medical practices were gradually dispersed all over Asia, including the southeast,
Indonesia, Tibet, and Japan.
 Health in modern times has been often defined in a negative connotation i.e., absence of illness.
 However, this definition is restrictive and narrow. As Amartya Sen has argued that, “Health is a
social good. A person should be termed healthy, if he is able to actively participate in a society”.
 Our Vedic texts also dwell on the concept of health in totality. It was viewed as the greater form of
wealth and a path to happiness.
“आरो ं परमं भा ं ास्◌्यं सवाार् ◌ासाधनम्॥”
(Arogyam parmam bhagyam, swasthyam sarvarthasadhaanam)
{It means that good health is the greatest blessing. Health is means of everything.}
 Thus, health cannot be seen in isolation but needs to seen in wider perspective of human life, as a
part of human life, as an instrument for fruitful human life.
 Being healthy is a process. It starts right from morning, the way we breathe, the way and what we
eat, and all the way to the modalities of our sleep.
 This sense is aptly captured in the new Indian perspective towards health where there has been an
increasing shift towards Health assurance as opposed to insurance.
1.2 Why Health - Importance /Dimensions related to Health

1. Health as a Social good
 Social good refers to any good which benefits the largest number of people in the largest
possible way.
 Health as a social good enables a society to become more egalitarian, tolerant, sustainable,
sensitive and moral-based society.
 It also helps in better absorption of other social goods like Education, Skills and better
relationship with natural resources.
2. Health as Political good
 Political good refers to any good which enable participation of people into the political process.
 Health as a political good enables the political discourse of a society to become more become
more democratic, more accountable, more decentralized.
 In addition, it becomes very easy to develop consensus on critical issues especially on critical
issues like clean energy, sustainable development etc.
3. Health as an Economic good
 Economic good refers to a good which enable economic growth, prosperity etc.
 Health as an economic good help in better absorption of skills, better productivity of workforce,
better involvement of workforce in industries, better decision-making regarding technologies
etc.
 In addition, lower spending on health leads to lesser burden on family, government and society
as a whole.
 According to Centre for Disease control and prevention (CDC), there is a $10 return on
investment for every $1 spent on childhood vaccinations.
4. Health as an Ecological good
 Health as an ecological good can enable in sustainable development, sustainable consumption
and environment-friendly policy making.

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 The recent Sterlite protests in Tamil Nadu were owing to the impact on health of the people
around. Similar protests have also been in Delhi because of growing pollution and increasing
adverse impact on health.
5. Health as an Ethical good
 Right to Health is now being increasingly recognized as a basic human right.
 Universal Declaration of Human Rights, International Covenant on Economic, Social and Cultural
Rights etc. have recognized health as a basic human right, Sustainable Development Goal # 3 -
Good Health and Wellbeing - have recognized health as a basic human right.
 Also, there has been an increasing consensus in India to declare right to health as a part of
fundamental rights under part III of Indian constitution.
 Thus, it is incumbent on society and societal institutions to fulfill this right.
Let us now understand the status of healthcare in India in the subsequent section.
1.3 Challenges in Health in India

1. Weak primary health care sector
 Expansion of public services has been inequitably distributed e.g., there is one government
hospital bed for every 614 people in Goa compared with one government hospital bed for every
8789 people in Bihar.
 India’s doctor to population ratio remains dismal at less than 1 doctor per 1,000 population in-
spite of being a hub for medical tourism and an exporter of healthcare experts.
2. An overwhelming 70% of healthcare expenses in India are met by out-of-pocket expenditure in-
spite of India being the Global Pharmacy of the World.
 Around 5 crore Indians are pushed into poverty because of healthcare expenses.
 Recently 42 children died over two days at Gorakhpur; A case related to Dengue where the
patient died was charged 16 lakhs by Fortis, Gurgaon.
 These all reflect on the broken system from quality, quantity, footprint, access and affordability
issues
3. Inadequate Financing
 Government spending on healthcare in India remains at a dismal 1.28% of GDP which is less than
30% of total health spending. India’s per capita expenditure is only Rs 3 per day on each citizen.
 Apart from this, the funding pattern is skewed i.e., in favour of curative and communicable
diseases. This despite the well-established fact that expenditure on preventive healthcare is more
favourable and non-communicable diseases form 60% of India’s health burden.
4. Weak Regulatory Framework and Private Sector
 India’s regulatory framework for health remains in shambles. The nodal agency i.e., Medical
Council of India (MCI) has been marked by corruption, nepotism and favouritism.
 Apart from this, the recent cases of Fortis charging exuberant etc. only reflect on the dismal
regulatory framework.
5. Inadequate Healthcare Personnel and Infrastructure
 India has one of the lowest doctors to population ratio which is far less than the recommended
1:1000 by WHO. This problem is even more acute for specialized doctors like cardiologists,
psychiatrists etc.
 In addition, there is a clear rural-urban divide, regional divide, gender-divide etc. regarding
healthcare facilities.
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 For example:
 Urban areas command 73% of the public hospital beds, even when 69% of India’s population
resides in rural areas.
 There is one government hospital bed for every 614 people in Goa compared with one every
8,789 people in Bihar.
6. Inequity in Healthcare
 The divide between the rich and poor in terms of health is wide in terms of access, distribution
and services
7. Fragmented health information systems
 The systems of collecting data have many weaknesses like incomplete data gathering and non-
inclusion of private sector in it means excluding the major health provider in India.
 Weak Governance and accountability
8. Medical Education
 While Indian-educated healthcare professionals are world renowned, medical education in India
has been dismal.
 Most of the problems include nepotism, capitation fees, weak regulatory structure etc. Apart
from these national exams like NEET have failed to take variation according to state into
account.
9. Social Reasons
 Healthcare can’t be seen in isolation but needs to be studied in a social context. The poor state
of healthcare in India is also because of wide poverty, lack of gainful employment, ignorance,
illiteracy, poor status of women, problem of open defecation and poor sanitation facilities.
 Discrimination on the basis of diseases is also a huge problem in Indian society especially in case
of TB, leprosy, HIV/AIDS, etc.
 For example, Diarrhoeal diseases which are closely linked to open defecation kill 1 lakh children
under 11 months old in India each year.
10. Status of Indigenous systems
 While, there has been increasing emphasis on indigenous system of Yoga, Ayurveda etc., their
supporting system for implementation remains weak.
 There is an absence of proper regulatory framework, certification benchmarking and research
into this system.
After studying the Challenges, it seems that India has not done anything good till date, but that’s not
true picture. Let us now look at achievements of India in the health sector in subsequent section.
1.4 India’s Achievements in Health Sector

1. As a Generic Pharmacy of the World
 India accounts for close to 10% of the global pharmaceutical industry in terms of volume. This
number goes to 20% for generic-drug exports by volume.
 The Indian pharmaceutical sector has many advantages - Low cost of land, labor, utilities and
equipment; Favourable domestic laws etc.
2. Medical Tourism
 It has been one of the highest sources of foreign exchange for India owing to its relatively
inexpensive healthcare systems, trained healthcare personnel, indigenous healthcare systems
like Yoga, Naturopathy etc.

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 As of 2015, Medical tourism is valued at 3 billion USD and expected to reach 9 billion USD by
2022.
 India is also one of the Exporter of Healthcare professionals
3. Cost effective solutions

 India has been hub for cost-effective solutions for medical issues.
 The Jaipur Foot was designed and developed in India by Ram Chandra Sharma in 1968.
 India has also emerged as a hub for research and development in vaccines. More than 60% of the
world’s vaccines are being made by India.
 Recently, for the first time, a vaccine named Rotavac vaccine has been conceived and developed
from scratch in India has been “pre-qualified” by the World Health Organization.
4. Major health indicators have improved like India’s MMR at 167(2011-13) has improved significantly
from 212 (2007-09). Our Target is to reduce it to 100; Under 5 mortality rates has declined to
49/1000 live births in 2013, etc.
1.5 Other Steps Taken to Improve Health Care in India

1. Constitutional Provisions
 Supreme Court in its various judgements has declared right to health within the purview of
Article 21 of Indian constitution.
 Apart from, this several articles in Part-IV (Directive Principles) namely Article 39(e), 41, 42, 47
and 48 calls upon State to strengthen healthcare system in India.
2. Legislations, Schemes and Policies for healthcare
 National Health Policy 2017: It aims at providing healthcare in an “assured manner” to all by
addressing current and emerging challenges arising from the ever changing socio-economic,
epidemiological and technological scenarios.
 It aims to raise public healthcare expenditure to 2.5% of GDP by 2025, from current 1.2%,
with more than two-thirds of those resources going towards primary healthcare.
 The policy also seeks to achieve and maintain elimination of leprosy by 2018, and to achieve
‘90:90:90’ global HIV target by 2020.

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3. Intensified Mission Indra-Dhanush

 It is aimed at reaching each and every child under two years of age and all those pregnant
women who have been left uncovered under the routine immunisation programme.
 Ayushman Bharat envisages a Rs 5 lakh annual insurance cover at no cost to 10 crore
households, with the joint collaboration of both central and union governments.
4. Government of India has set the target of working towards elimination of Tuberculosis by 2025.
5. Apart from this there has been growing impetus on reviving indigenous healthcare system.
Government has launched National AYUSH Mission and Yoga Day has been officially declared as a
global annual exercise.
6. The Mental Healthcare Act, 2017 passed by the government takes a rights-based approach to all
aspects of mental healthcare.
7. Efforts of Civil Society Organizations
 Smile India foundation - It is aimed at bringing quality healthcare services to doorsteps of the
needy and to promote healthcare awareness.
 Rural Health Care Foundation - It is aimed at addressing the gap in the availability of low-cost
primary health care in rural areas.
 Seva Nilayam - It is working in partnership with the Government of Tamil Nadu with an objective
to reduce the maternal mortality rate in its rural area.
8. International Organizations
 Some of the international organization working in health sector include WHO, UNDP, FAO etc.
 Apart from this, Bill and Melinda Gates foundation is aimed at enhancing healthcare and
reducing extreme poverty.
 Doctor without Borders - It is best known for its projects in conflict zones and in countries
affected by endemic diseases.
We can understand how India is making advances in various parameters related to maternal
healthcare better by going through data that is brought out by the National Family Health survey – 5
(NFHS – 5), 2019-20.
1.6 National Family Health Survey (NFHS)

Note: The National Family Health Survey (NFHS – 5) is the latest edition available. If there is a new
edition in place, it would be covered as part of the Edu Tap’s ESI and Finance in news monthly Current
Affairs document.
The National Family Health Survey:

 The National Family Health Survey (NFHS) is a large-scale, multi-round survey conducted in a
representative sample of households throughout India.
 The survey provides state and national information for India on fertility, infant and child mortality,
the practice of family planning, maternal and child health, reproductive health, nutrition, anemia,
utilization and quality of health and family planning services.
Ministry of Health and Family Welfare has released the Phase 1 findings of the National Family Health
Survey-5 (NFHS-5), for the period 2019-20.
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About the survey-
 Four rounds of NFHS (1992–93, 1998–99, 2005–06 and 2015–16) have been successfully completed
in India. This is the fifth in the NFHS series.
 All the rounds of NFHS have been conducted by the International Institute for Population
Sciences (IIPS), Mumbai, as the national nodal agency.
 It provides information on population, health, and nutrition for India and each state/union territory
(UT).
About NFHS-5
 The NFHS-5 is being conducted in around 6.1 lakh sample households to provide disaggregated
data up to district levels.
 The first Phase of the survey has analyzed data of 22 states/Union Territories.
 Phase II covering the remaining 12 States and 2 UTs had their fieldwork suspended due to
covid-19, which has been resumed from November 2020, and is expected to be completed by
May, 2021.
 These 22 Phase-I States/UTs are-
 Andhra Pradesh, Assam, Bihar, Goa, Gujarat, Himachal Pradesh, Karnataka, Kerala,
Maharashtra, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Telangana, Tripura, West
Bengal, Andaman Nicobar Island, Dadra and Nagar Haveli and Daman and Diu, Jammu &
Kashmir, Ladakh and Lakshadweep.
 NFHS-5 includes new focal areas such as-
 Expanded domains of child immunization
 Components of micro-nutrients to children
 Menstrual hygiene
 Frequency of alcohol and tobacco use
 Additional components of non-communicable diseases (NCDs)
 Expanded age ranges for measuring hypertension and diabetes among all, aged 15 years and
above.
1.6.1 Key findings of the NFHS – 5

1.6.1.1 Antenatal Care (ANC)
 There is increase in the per cent of women receiving the recommended four or more ANC visits by
health providers in many States/UTs.
 This percentage has increased in 13 States/UTs between 2015-16 to 2019-20.
1.6.1.2 Total Fertility Rate (TFR)

Total Fertility rate:
Total Fertility Rate may be defined as average number of children that would be born to a woman if she
experiences the current fertility pattern throughout her reproductive span (15-49 years). The total
fertility rate is a more direct measure of the level of fertility than the birth rate, since it refers to births
per woman. This indicator shows the potential for population change in a country.
 It has further declined since NFHS-4 in almost all the Phase-1 States and UTs.
 The replacement level of fertility (2.1) has been achieved in 19 out of the 22 States/UTs.
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 The 3-states having TFR above replacement levels are-

 Manipur (2.2), Meghalaya (2.9) and Bihar (3.0).
 Contraceptive Prevalence Rate (CPR)-
 Overall, the CPR has increased substantially in most States/UTs and it is the highest in Himachal
Pradesh and West Bengal (74%).
 Use of modern methods of contraception has also increased in almost all States/UTs.
 Unmet needs of family planning have witnessed a declining trend in most of the Phase-1
States/UTs.
 The unmet need for spacing has come down to less than 10% in all the States except Meghalaya
and Mizoram.
 Male engagement in family planning continues to be limited and disappointing as seen by the
low uptake of condoms and male sterilisation across the States.
1.6.1.3 Institutional births

 Institutional births-
 Increased substantially with over four-fifth of the women delivering in institutions in 19 States
and UTs.
 Institutional delivery is over 90% in 14 out of the total 22 Sates and UTs.
 Almost 91% of districts recorded over 70% institutional deliveries of births in the 5 years
preceding the survey.
 C-section deliveries-
 There has also been a substantial increase in C-section deliveries in many States/UTs especially
in private health facilities.
Institutional delivery or birth

Institutional delivery means giving birth to a child in a medical institution under the overall supervision
of trained and competent health personnel where there are more amenities available to handle the
situation and save the life of the mother and child.
Let us now look at the status of Malnutrition in India.
1.7 Malnutrition in India
1.7.1 What is malnutrition?

 Malnutrition indicates that children are either too short for their age or too thin.
 Children whose height is below the average for their age are considered to be stunted.
 Similarly, children whose weight is below the average for their age are considered thin for their
height or wasted.
 Together, the stunted and wasted children are considered to be underweight – indicating a lack of
proper nutritional intake and inadequate care post childbirth.
1.7.2 What is the extent of malnutrition in India?

 India’s performance on key malnutrition indicators is poor according to national and international
studies.
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 According to UNICEF, India was at the 10th spot among countries with the highest number of
underweight children, and at the 17th spot for the highest number of stunted children in the world.
 Malnutrition affects chances of survival for children, increases their susceptibility to illness, reduces
their ability to learn, and makes them less productive in later life.
 It is estimated that malnutrition is a contributing factor in about one-third of all deaths of children
under the age of 5.
Having understood the prevalence of malnutrition in India, let us now look at the measures taken by
Government to address these vexing issues in the subsequent Section.
1.8 Government Interventions

Based on the identified causes of mortality, five major strategic areas have been identified to improve
child health outcomes. These are:
1. Newborn Health Interventions

2. Nutrition related interventions
3. Interventions to address pneumonia and diarrhoea
4. Interventions to address birth defects, disabilities, delays and deficiencies
5. Immunization activities
Besides the above, maternal health and family planning interventions are also linked inextricably to child
health outcomes. Therefore, the RMNCH+A approach strategizes continuum of care across life stages as
the over-arching umbrella under which these child health interventions have been built in.
Note: The government interventions would be covered in detail as part of the Schemes document
provided by EduTap.
1.9 National Health Policy, 2017: Salient Features:

Note: The National Health Policy 2017 is the latest policy brought out by the Union government. If
there are any updates, kindly refer Edu Tap’s ESI and Finance in news monthly Current Affairs
document.
The Union Cabinet has approved The National Health Policy, 2017 replacing the previous one, which was
framed 15 years ago in 2002.
 The aim of the policy: It aims at providing healthcare in an “assured manner” to all and thus will
address current and emerging challenges arising from the ever changing socio-economic,
technological and epidemiological scenarios.
 Highlights:
 It intends on gradually increasing public health expenditure to 2.5% of the GDP.
 The government aims in shifting focus from “sick-care” to “wellness”, by promoting prevention
and well-being.
 It aims to strengthen health systems by ensuring everyone has access to quality services and
technology despite financial barriers. The policy proposes increasing access, improving quality
and reducing costs.
 It proposes free drugs, free diagnostics and free emergency and essential healthcare services in
public hospitals.
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 It focuses on primary health care: The policy advocates allocating two-thirds (or more) of
resources to primary care. It proposes two beds per 1,000 of the population to enable access
within the golden hour (the first 60 minutes after a traumatic injury).
 It promotes ‘Make in India’ initiative by using drugs and devices manufactured in the country.
 It aims to reduce morbidity and preventable mortality of non-communicable diseases (NCDs) by
advocating prescreening.
 It highlights AYUSH (Ayurveda, Yoga & Naturopathy, Unani, Siddha and Homeopathy) as a tool
for effective prevention and therapy that is safe and cost-effective. It proposes introducing Yoga
in more schools and offices to promote good health.
 Quantitative targets listed in the policy:
 Increase Life Expectancy at birth from 67.5 to 70 by 2025.
 Reduce Under Five Mortality to 23 by 2025.
 Reduce infant mortality rate to 28 by 2019.
 To reduce premature mortality from cardiovascular diseases, cancer, diabetes or chronic
respiratory diseases by 25% by 2025.
 Achieve the global 2020 HIV target (also termed 90:90:90; 90% of all people living with HIV
know their HIV status, 90% of all people diagnosed with HIV infection receive sustained
antiretroviral therapy and 90% of all people receiving antiretroviral therapy will have viral
suppression).
 Reduction of TFR to 2.1 at national and sub-national level by 2025.
 Reduce neo-natal mortality to 16 and still birth rate to “single digit” by 2025.
 Achieve and maintain elimination status of Leprosy by 2018, Kala-Azar by 2017 and Lymphatic
Filariasis in endemic pockets by 2017.
 To achieve and maintain a cure rate of >85% in new sputum positive patients for TB and reduce
incidence of new cases, to reach elimination status by 2025.
 To reduce the prevalence of blindness to 0.25/ 1000 by 2025 and disease burden by one third
from current levels.
 It seeks to establish regular tracking of disability adjusted life years (DALY) Index as a measure
of burden of disease and its major categories trends by 2022.
Having understood the National Health policy, Government is also proactively focusing on improving
nutrition among the people. Let us now delve deeper into the National nutrition Strategy in the
subsequent section.
Now let us look at the pipeline laid down by NITI Aayog for health in the subsequent section.
1.10 The Mental Healthcare Act 2017

 The Mental Healthcare Act, 2017 decriminalizes suicide attempt by mentally ill people and provides
services for people with mental illness.
 It aims to provide for mental healthcare and services for persons with mental illness and ensures
these persons have the right to live a life with dignity by not being discriminated against or
harassed.
Important provisions
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1. Rights of persons with mental illness: This provision states that every person will have the right to
access mental healthcare from services which are operated or funded by the government.
2. Advance Directive: This provision empowers a mentally-ill person to have the right to make an
advance directive that explains how she/he wants to be treated for the requisite illness and who
her/his nominated representative shall be.
3. Mental Health Establishments: This provision states that every mental health establishment has to
be registered with the respective Central or State Mental Health Authority.
4. Decriminalizing suicide and prohibiting electro-convulsive therapy: The most notable of all is that
this provision effectively decriminalizes suicide attempt under the Indian Penal Code by mentally ill
persons by making it non-punishable.
 Electro-convulsive therapy, which is allowed only with the use of anesthesia, is however out of
bounds for minors.
1.11 Conclusion
 Indian healthcare currently stands at a critical juncture.
 To borrow Amartya Sen analogy, India’s healthcare represents an island of California
(achievements) in a sea of sub-Saharan Africa (Challenges).
 However, there is a need for overhaul of healthcare sector in India. This also includes a complete
different perception of healthcare, where it is seen as a process, as a part of life.
 It is important to note that even our ancient texts also subscribed to a similar view.
 In today’s world, where people are running after wealth, where wealth has become the ultimate
desire, it is important to go back to what father of the nation, Mahatma Gandhi said, ‘It is only
health, that is the real wealth’. The choice is ours!
NOTE
 We have dealt in detail regarding very important sector of the economy ‘Health’.
 An economy can prosper only when it has individuals having a healthy body and mind.
 It is very obvious that only a healthy person can contribute efficiently in the growth and
development of an economy.
 Along with this important social sector, there is another sector ‘Education’ which is equally
important.
 In the next Section, we shall discuss in detail about this sector.
2 Education
2.1 Introduction
In the chapters of ‘Measurement of Growth and National Income’ and Human Development, we have
looked into the various ways that are used to measure the economic growth of a nation.
We also realized the fact that economic growth of a nation does not essentially symbolize the overall
development of a country. We came to a conclusion that we require a different approach that would
give a true reflection of a country’s progress.
The most appropriate approach is the Human Development Approach which was discussed in detail as
part of the ‘Human Development’ chapter.
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There was a discussion regarding the Human Development Report which is brought out by the UNDP.
This report can be said to be a balance between the Income approach and the Human Development
approach which are at the two extremes.
The Human Development Report comes out with certain measurable parameters which gives us a
reflection of the country’s overall progress.
When we talk about Human Development, one of the very important parameters that indicates the
overall Human Development is the ‘Education’ of the individuals of a country.
It is very evident from the fact that it forms one of the indicators while computing the Human
Development Index (HDI) by the UNDP.
Further, we can gauge the importance of the education sector from the fact that as part of the Union
Budget, the government makes substantial allocation towards the education sector.
So, it becomes one of the important areas of concentration in the Fiscal Policy of the government as
well.
In this section, we shall have a look at the developments in the ‘Education’ sector.
Quotes by famous personalities

 “Learning is not the product of teaching. Learning is the product of the activity of learners” - John
Holt
 “Education is the most powerful weapon which you can use to change the world” - Nelson
Mandela
 “There is no school equal to a decent home and no teacher equal to a virtuous parent” - Mahatma
Gandhi
 “Don’t limit a child to your own learning, for he was born in another time” - Rabindranath Tagore
 “The best teachers are those who show you where to look but don’t tell you what to see” -
Alexandra K. Trenfor
 “Intelligence plus character that is the goal of true education” - Martin Luther King
 “Learning gives creativity, creativity leads to thinking, thinking provides knowledge and
knowledge makes you great” - Dr. Abdul Kalam
2.2 What is Education?

 Education is derived from two Latin words "educare," which means to train or to mold, and
"educere," meaning to lead out.
 How does Education differ from Literacy?
 Literacy is more of a quantitative measure where education is more qualitative in nature.
 Literacy is mostly confined to formal schooling whereas education not only includes formal
schooling but also parents, family and society at large.
 Literacy is mostly linked to skills where education is linked with all-round development of man. It
not includes skills but also values, morals etc.
 Great philosopher Rabindranath Tagore has also dwelled on education. According to him, the
aim of education is creative self-expression through physical, mental, aesthetic and moral
development.
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 Education is a process in which and by which the knowledge, character and behavior of the human
beings are shaped and molded.
 Education leads to the enlightenment of mankind.
 Aristotle said education is process of creation of sound mind in a sound body.
 The process of education is not only self-realization of the individual, but it is also to bring into action
the potential in man.
Let us trace the history of education in India to better understand today’s context in the next section.
2.3 History Of Education in India

 The earliest education system to develop in India was known as ‘Vedic system’ with the ultimate aim
being complete realization of self. This system was based on ‘Gurukul’ which fostered a bond
between the Guru & the Shishya and established a teacher centric system in which the pupil was
subjected to a rigid discipline and was under certain obligations towards his teacher.
 The world's first university was established in Takshila in 700 BC and the University of Nalanda was
built in the 4th century BC dominated by Indian scholars like Charaka and Sushruta, Aryabhatta,
Chanakya, Patanjali etc. made seminal contribution to world knowledge in diverse fields as
mathematics, astronomy, physics, chemistry, medical science and surgery, etc.
 During the freedom struggle, several leaders like Gokhale, Ram Mohan Roy and Mahatma Gandhi
worked for better education for our people, particularly women. Indigenous model of education was
a major component of Gandhi’s conception of Swaraj and Swadeshi.
 Post-Independence, the importance of education as a precondition for development was very well
recognized by the leadership.
Commissions and Committees related with Education over the years
1. University Education Commission (1948) under chairmanship of Dr. S. Radhakrishnan –

recommended to make higher education accessible to all sections of society, irrespective of
region, caste, gender and region.
2. Secondary Education Commission (1952) chairmanship of Dr. A. Lakshmanaswami Mudaliar-
proposed to increase efficiency of production, diversification of high school courses,
establishment of multipurpose high schools, introducing a uniform pattern throughout India and
recommended the setting up of technical schools.
3. Indian Education Commission (1964-66) under the chairmanship of D. S. Kothari- recommended
a comprehensive reconstruction based on three main aspects -a) Internal transformation b)
Qualitative improvement and c) Expansion of educational facilities.
4. National Educational Policy of 1968 was formulated in accordance with the recommendations of
the Kothari Commission.
 It recommended for - provision of compulsory education to children in the 6-14 years age
group as proposed in the Indian Constitution;
 Emphasis on regional languages in secondary schools;
 English had to be the medium of instruction in schools, considered Hindi as the national
language and promoted the development of Sanskrit;
 6 percent of the national income be spent on education.
5. National Policy on Education (1986) - provide education to all sections of society esp. SCs, STs,
OBCs & women;
 Provision of fellowships for the poor, imparting adult education, recruiting teachers from
oppressed groups and also developing new schools and colleges;
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 Providing primary education to students; education be given to rural people in consonance

with the Gandhian philosophy;
 Establishment of Open Universities;
 Promotion of IT in education;
 Besides opening up the technical education sector in a rather big way to private enterprise.
6. National Policy on Education (1992) - The Government of India had set up a commission under
the chairmanship of Acharaya Ramamurti in 1990 to reassess the impact of the provisions
National Policy on Education, 1986.
 It recommended for - The setting up of Central Advisory Board of Education (CABE) as the
highest advisory body to advise the Central and State Governments; focus on quality
enhancement in education; stressed on developing moral values among students and bringing
education closer to life.
7. T.S.R. Subramanian committee major recommendations – an Indian Education Service (IES)
should be established as an all-India service; outlay on education should be raised to at least 6% of
GDP;
 There should be minimum eligibility condition with 50% marks at graduate level for entry to
existing B.Ed courses;
 Teacher Entrance Tests (TET) should be made compulsory for recruitment of all teachers;
Compulsory licensing or certification for teachers in government and private schools should be
made mandatory;
 Pre-school education for children in the age group of 4 to 5 years should be declared as a right;
 Mid-day meal (MDM) program to be extended to secondary schools;
 Top 200 foreign universities should be allowed to open campuses in India.
8. The central government has constituted Kasturirangan Commission (2017) to draft a new
education policy for India.
 Points to be focused on in the new education policy – Address key areas of concern – access
and participation, quality, equity, research and development and financial commitment to
education development.
 Inclusion of culture education having ‘ethics education’ These will be addressed through policy
interventions broadly into preschool and adolescent education, curriculum development and
examination reform, teacher and faculty training, lifelong literacy, higher education and long-
distance learning
2.4 Status of Education in India

Note: The Schemes in the Education sector will be discussed in the ‘Consolidated Schemes document’.
2.4.1 Literacy Rates in India

Who is a literate?
According to Census, a person aged seven years or more than seven years who can read and write with
understanding in any language is called a literate person. A person who can merely read but cannot
write is not classified as literate. Any formal education or minimum educational standard is not
necessary to be considered literate.
Literacy Rate:
The total percentage of the population of an area at a particular time aged seven years or above who
can read and write with understanding is called literacy rate.
1. The 15th official census in India was calculated in the year 2011.
2. Background: In a country like India, literacy is the main foundation for social and economic growth.
 When the British rule ended in India in the year 1947 the literacy rate was just 12%.
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 Over the years, India has changed socially, economically, and globally.
3. The recent data: As per provisional population totals of Census 2011, literates constitute 74 per cent
of the total population aged seven and above and illiterates form 26 percent.
 Literacy rate has gone up from 64.83 per cent in 2001 to 74.04 per cent in 2011 showing an
increase of 9.21 percentage points.
 Compared to the adult literacy rate here the youth literacy rate is about 9% higher.
 Though this seems like a very great accomplishment, it is still a matter of concern that still so
many people in India cannot even read and write.
4. Comparison of Male Vis-à-vis Female: The literacy rate for males and females works out to 82.14
per cent and 65.46 per cent respectively. The increase in literacy rate in males and females during
2001-2011 is in the order of 6.88 and 11.79 percentage points respectively.
 The gap of 21.59 percentage points recorded between male and female literacy rates in 2001
Census has reduced to 16.68 percentage points in 2011.
5. Distribution of literacy State-wise: Ten States and Union Territories viz., Kerala, Lakshadweep,
Mizoram, Tripura, Goa, Daman & Diu, Puducherry, Chandigarh, NCT of Delhi and Andaman &
Nicobar Islands have achieved literacy rate of above 85 per cent.
 The States/Union Territories which have achieved male-female gap in literacy rate of 10
percentage points or less are Chandigarh, Nagaland, Mizoram, Tripura, Meghalaya,
Lakshadweep, Kerala and Andaman & Nicobar Islands.
2.5 Education related data
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From the above given information, it can be concluded that: Working in anything other than
agriculture will be a tough ask, given the level of education – fewer than 10 per cent make it to higher
secondary or above and just 3.41 per cent of households have a family member who is at least a
graduate.
Let us understand the fundamental rights related to education and other provisions for the upliftment
of the poor in the subsequent section.
2.6 Fundamental Rights

Several provisions relating to Fundamental Rights in the Constitution impact education. Of these, the
most important are the Right to Education, Religious Instruction in Educational Institutions and the
Right of Minorities to Establish and Administer Educational Institutions.
1. Article 21A - Right to Education

2. Article 28 provides for “Freedom of attendance at religious instruction or religious worship in certain
educational institutions” as a Fundamental Right.
 It mandates that no religious instruction shall be provided in any educational institution wholly
maintained out of State funds and that no minor person attending any State-recognized or State-
aided educational institution shall be required to take part in any religious instruction or attend
any religious worship without the consent of his guardian.
 However, this shall not apply to educational institutions which are administered by the State
but established under any endowment or trust which requires that religious instruction be
imparted in the institution.
3. Article 29 (1) guarantees the protection of the linguistic rights of minorities. Any section of citizens
with their own distinct language, script or culture has the Fundamental Right to conserve it.
 Under Article 29 (1), the Constitution recognizes the study and preservation of one’s mother
tongue as a Fundamental Right.
4. Article 29 (2) provides, as a Fundamental Right, that no citizen shall be denied admission to any
educational institution maintained by the State or receiving aid out of State funds on grounds only of
religion, race, caste, language.
5. Article 30 relates to cultural and educational rights of minorities. It lays down that all minorities,
whether based on religion or language, shall have the right to establish and administer educational
institutions of their choice.
Right to education was made Justiciable right, let us trace the journey of the landmark legislation in
the subsequent section.
2.7 Right to Education Act (RTE), 2009

 The RTE was originally included as a non-justifiable Right under the Directive Principles of State
Policy.
 In the Constitution as originally adopted by the Constituent Assembly in November, 1949, Article 45
stated that: “The State shall endeavor to provide, within a period of ten years from the
commencement of this Constitution, for free and compulsory education for all children until they
complete the age of fourteen years.”
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 Further, Article 41 mandated the State, among other things, to make effective provision for securing
the right to education “within the limits of its economic capacity and development.”
 In Mohini Jain vs. State of Karnataka (1992) the Supreme Court ruled that the RTE is implicit in and
flows directly from the right to life under Article 21, thus virtually elevating the RTE to the status of
a fundamental right.
 The Constitution (Eighty-sixth Amendment) Act, 2002 inserted Article 21A in the Constitution as a
Fundamental Right, mandating that “The State shall provide free and compulsory education to all
children of the age of six to fourteen years in such manner as the State may, by law, determine.”
 The 86th Constitutional Amendment, 2002 inserted Article 21A in the Constitution, making the Right
to Education a fundamental right. The Right of Children to Free and Compulsory Education (RTE)
Act, 2009 became operative in the country on 1st April 2010.
 The consequential legislation envisaged to give effect to Article 21 A was: “The Right of Children to
Free and Compulsory Education Act, 2009 (RTE Act)”, giving every child the right to full time
elementary education of satisfactory and equitable quality in a formal school which satisfies certain
essential norms and standards.
 With this, education has been moved to a rights-based framework with the Central and State
Governments having a legal obligation to implement this fundamental child right.
The RTE Act provides for the following Features
1. Right of children to free and compulsory education till completion of elementary education in a
neighbourhood school.
2. Private schools will have to take 25% of their class strength from the weaker section and the
disadvantaged group of the society through a random selection process. Government will fund
education of these children.
3. No child can be held back, expelled and required to pass the board examination till the completion
of elementary education.
4. It makes provisions for a non-admitted child to be admitted to an age-appropriate class.
5. It specifies the duties and responsibilities of appropriate Governments, local authority and parents
in providing free and compulsory education, and sharing of financial and other responsibilities
between the Central and State Governments.
6. It lays down the norms and standards relating inter alia to Pupil Teacher Ratios (PTRs), buildings and
infrastructure, school-working days, teacher-working hours.
7. It provides for appointment of appropriately trained teachers, i.e., teachers with the requisite entry
and academic qualifications.
8. It prohibits
a) physical punishment and mental harassment;
b) screening procedures for admission of children;
c) capitation fee;
d) private tuition by teachers and
e) running of schools without recognition.
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2.7.1 Important update

 There has been a bill introduced for the amendment of the RTE Act, 2009 in the Parliament. The bill
is named as ‘The Right of Children to Free and Compulsory Education (Second Amendment) Bill,
2017.
 The Right of Children to Free and Compulsory Education (Amendment) Act, 2019 which was passed
by the Parliament on January 3, 2019 received the assent of the President of India on January 10,
2019.
Note: Kindly refer EduTap’s ESI and Finance in news monthly Current Affairs magazine for any further
updates related to this bill.
2.7.2 Important highlights of the Act

 The Right to Education Act, 2009 prohibits detention of children till they complete elementary
education i.e., class 8. The Bill amends this provision to state that a regular examination will be held
in class 5 and class 8 at the end of every academic year. If a child fails the exam, he will be given
additional instruction, and take a re-examination.
 If he fails in the re-examination, the relevant central or state government may decide to allow
schools to detain the child.
Let us now understand the status of elementary education, Secondary education and higher
education in the subsequent Section.
2.8 Elementary Education in India: Its present status and problems
Note: In the section below, we have mentioned various surveys that give us an understanding of the
status of education in India.
Kindly refer Edu Tap’s ESI and Finance in news monthly Current Affairs magazine for the latest data
released as part of these surveys.
2.8.1 Annual Status of Education Report (ASER)

 Beginning in 1996, the non-government organization Pratham has worked with children in
thousands of villages and urban slums across India. For much of this period, the focus of this work
has been on helping children master basic skills in reading and arithmetic.
 Every year, it brings out its Annual Status of Education Report (ASER) since 2005, on the basis of
extensive household surveys conducted to assess children’s schooling status and basic learning
levels in reading and arithmetic.
2.8.2 National Achievement Survey

1. At the disaggregated level, The National Council of Educational Research and Training (NCERT) has
conducted National Achievement Surveys (NAS) periodically since 2001 for Classes 3, 5 and 8.
2. The NAS is a school-based national survey covering all States and Union Territories and focusing on
specific classes in particular years.
3. It is carried out by NCERT under the mandate of the Sarva Shiksha Abhiyan programme to “monitor
improvement in children’s learning levels and to periodically assess the health of the government
education system as a whole.
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4. Inter- state Disparity: NAS reveals significant differences in the average achievement levels of
students between states, suggesting that the quality of educational outcomes is far from equal
across the country.
 In a number of States, NAS results also show much diversity in achievement between students in
the highest and lowest performing categories.
 Despite the significant differences in methodology, NAS confirms the findings from a number of
other studies such as ASER, Educational Initiatives etc. and identifies poor learning outcomes as
the biggest challenge facing Indian education.
5. Cascading effect: Poor quality of learning at the primary school stage naturally spills over to the
secondary stage, where the gaps get wider; and continues to the college years, leading to very poor
outcomes in the higher education sector.
 This inevitably leads to students being rendered incapable of taking full advantage of educational
opportunities.
Note: Important change:

 So far four rounds of National Achievement Survey (NAS) have been conducted for class V and three
rounds for classes III & VIII. These surveys give an insight into the learning achievements of the
students in various subjects.
 From the year 2018, the Government has also decided to conduct a National Achievement Survey
with the district area as its sample base and not the State as a unit.
 This will ensure that all districts are not only represented but the data will be robust to reflect a
decentralized picture of the quality of school education.
Note: For further updates regarding the conduct of this survey, kindly refer EduTap’s ESI and Finance
Monthly Current Affairs magazine.
2.9 Secondary and Higher Secondary Education in India (IX to XII)

The Gross Enrollment Ratio (GER) of boys and girls at secondary level is brought out as per the Unified
District Information System for Education (U-DISE).
What is U-DISE?
 U-DISE is the Unified District Information System for Education.
 It has been established through the integration of District Information System for Education (DISE)
of the Elementary level and the Secondary Education Management Information System (SEMIS) of
the Secondary level.
 U-DISE is the primary information source for educational planning and assessing the progress under
the education sector in India, especially under the government funded Sarva Shiksha Abhiyan (SSA)
and Rashtriya Madhyamik Shiksha Abhiyan (RMSA) programmes.
 It collects information on enrolment, availability of infrastructure and teachers and other facilities
available in all schools in the country.
 U-DISE has the school as the unit of data collection and districts as the unit of data dissemination.
 It is under implementation in almost all the districts in India.
2.9.1 The following are the important data points mentioned in the U-DISE 2015-16
Note: The latest available data is that of U-DISE 2019-20.
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As per Unified-District Information System for Education (UDISE) 2019-20, GER, has improved at all
levels of school education in 2019-20 as compared to 2018-19.
a) At Upper Primary Level increased to 89.7% from 87.7%.
b) At Elementary Level increased to 97.8% from 96.1%.
c) At Secondary Level increased to 77.9% from 76.9%.
d) At Higher Secondary Level increased to 51.4% from 50.1%.
 Over the years, there has been significant and rapid increased participation of the private sector and
NGOs, in secondary education.
 Currently, approximately 51% of the secondary schools and 58% of the higher secondary schools are
privately managed.
The other observations of the report are mentioned below.
1. Gaps in average enrolments: From a quantitative standpoint, the gaps in average enrolments
between the general population and specific disadvantaged groups like the girl child, Scheduled
Castes and Scheduled Tribes, Minorities and Children with special needs have decreased.
 However, issues of social access and equity remain complex and have been only partially
resolved.
 Moreover, social and income disparities continue to be reflected in gaps in learning levels, which
remain large and seem to be growing.
2. The Vicious Cycle: Children from historically disadvantaged and economically weaker sections of
society and first-generation learners exhibit significantly lower learning outcomes and are more
likely to fall behind and drop out of school.
3. Need to bridge gender and Social Gaps: The interventions which are currently being made to bridge
these gender and social gaps need to be stepped up, and more focused strategies need to be
worked out for effective inclusion and participation of girls and other special category children.
4. Reach of Secondary education is uneven: While there has been a rise in the demand for secondary
education and increase in the number of secondary schools, the spread of secondary education
throughout the country remains uneven.
5. Rise of Private Sector in Secondary Education: Regional disparities continue, as do differences in
access depending on the socio-economic background of students.
 Absence of teachers, lack of incentives, and low academic standards in government schools have
contributed to the rise of the private sector in secondary school education.
Note: Kindly refer Edu Tap’s ESI and Finance in news monthly Current Affairs magazine for all the
updates related to the latest data brought out as per the U-DISE.
2.9.2 Higher Education in India

There has been an upsurge in the demand for higher education after independence, resulting in a virtual
explosion in the number of universities and colleges in the country.
The institutions of higher learning in India consist of

1. Central Universities established by an Act of Parliament;
2. State Universities established by State Legislatures;
3. Deemed Universities recognized as such by the Central Government on the recommendation of the
UGC;
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4. Private Universities established by various State Governments through their own legislation; and
5. Institutes of National Importance declared as such by the Government of India by an Act of
Parliament.
 All these institutions are empowered to award degrees. A small number of Central and State
Universities are stand-alone unitary institutions; however, the vast majority has constituent or
affiliated colleges attached to them.
 Most colleges in India are affiliated to universities and provide undergraduate education. Some
colleges also undertake post-graduate teaching and research. The affiliating universities are
expected to oversee the standards of the affiliated colleges, hold examinations and award degrees
to successful candidates.
 The utility of higher education in assuring employment is questionable. Many graduates and post
graduate students do not get jobs in their respective fields even after spending several years in
acquiring higher education.
 While the problem of educated unemployed youth remains acute, there is also, paradoxically, a
shortage of skilled manpower in the labour market. There a clear gap between the focus and
quality of education in academia and the actual skills required by industry.
Let us now take a look at the one of the most important survey when it comes to status of higher
education in India.
2.9.3 All India Survey on Higher Education (AISHE)
 To portray the status of higher education in the country, Ministry of Human Resource Development
has endeavoured to conduct an annual web-based All India Survey on Higher Education (AISHE)
since 2010-11.
 The survey covers all the Institutions in the country engaged in imparting of higher education. Data
is being collected on several parameters such as teachers, student enrolment, programmes,
examination results, education finance, infrastructure.
 Indicators of educational development such as Institution Density, Gross Enrolment Ratio, Pupil-
teacher ratio, Gender Parity Index, Per Student Expenditure will also be calculated from the data
collected through AISHE.
 These are useful in making informed policy decisions and research for development of education
sector.
Important fact: The government has set a target of gross enrolment ratio (GER) in higher education of
50% by 2030 according to National Education Policy.
Note: Kindly refer Edu Tap’s ESI and Finance in news monthly Current Affairs magazine for the latest
AISHE report released by the Ministry of Human Resource Development.
The assessment of universities worldwide is done annually by various institutes, let us look at few of the
important institute’s rankings.
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2.9.4 Global Ranking of Universities

 The global ranking of universities is a useful indicator of their institutional performance, based on a
relative assessment in the areas of research and teaching, reputation of faculty members, reputation
among employers, resource availability, share of international students and activities and other
factors.
 There are rankings released each year by some of the prominent organizations and institutions:
Some of the rankings released are discussed below.
2.9.5 QS World University Rankings
 It is an annual publication of university ranking by Quacquarelli Symonds (QS).

 Previously known as Times Higher Education–QS World University Rankings, the publisher had
collaborated with Times Higher Education magazine (THE) to publish its international league tables
from 2004 to 2009 before both started to announce their own versions.
 QS then chose to continue using the pre-existing methodology while Times Higher
Education adopted a new methodology to create their rankings.
 The QS system now comprises the global overall and subject rankings (which name the world's top
universities for the study of 48 different subjects and five composite faculty areas), alongside five
independent regional tables (Asia, Latin America, Emerging Europe and Central Asia, the Arab
Region, and BRICS).
2.9.6 The Times Higher Education World University Rankings

 Times Higher Education World University Rankings is an annual publication of university rankings by
The Times Higher Education (THE) magazine.
 The publication comprises the world's overall, subject, and reputation rankings, alongside three
regional league tables, Asia, Latin America, and BRICS & Emerging Economies which are generated
by consistent methodology.
2.9.7 Academic Ranking of World Universities (ARWU)

 Academic Ranking of World Universities (ARWU), also known as Shanghai Ranking, is one of the
annual publications of world university rankings. Shanghai Ranking Consultancy is an independent
organization focusing on higher education.
Having Understood about the education sector in India, let us now look at the major issues, challenges
and solutions at every stage that is Pre-schooling, Primary level, Secondary level and higher education
level.
2.10 Different Levels of Education in India – Issues, Challenges and Solutions

I. Pre-Schooling level
1. Issues and Challenges
 Early childhood is a very important period of life when the foundations are laid for cumulative
lifelong learning and human development.
 Rapid urbanisation, rise in nuclear family and breaking of Joint Family forcing many parents to
send their children to preschool.
 Role of State - Early childhood Care and Education up to the age of 6 doesn’t form part of the
formal education under Central or State governments. In addition, this vacuum has been partly
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filled by schools and pre-schools which have mushroomed in the private sector without
adequate regulation.
 Pre-schooling has mostly tended to emphasize on a universal or one-size-fits-all approach -
approach to schooling without taking into consideration different demands of children. Also, pre-
schooling has become a platform for admission into prestigious school rather than a platform for
learning.
 Lack of resources and absence of a universal curriculum o Solutions
 Early childhood care and education for children from 4-5 years of age should be declared as a
right within the purview of Right to Education Act, 2008.
 There is a need to introduce a new education component in Anganwadi practices, to ensure that
the pre-school children are exposed to elementary education.
 NCERT and SCERTs should formulate curricular framework for pre-primary education apart from
conducting intensive training programs for teachers to orient them with handling of pre-school.
2. Solutions
 Early childhood care and education for children from 4-5 years of age should be declared as a
right within the purview of Right to Education Act, 2008.
 There is a need to introduce a new education component in Anganwadi practices, to ensure that
the pre-school children are exposed to elementary education.
 NCERT and SCERTs should formulate curricular framework for pre-primary education apart from
conducting intensive training programs for teachers to orient them with handling of pre-school
children.
II. Primary level

 Out of School Children - As per official record, over 92 lakh children still remain out of schools.
 High Dropout and Low Attendance
 Poor Learning Outcomes - Corroborated by Annual Status of Education Survey
 Absence of basic facilities
 Absence of support outside Schooling
 Inadequate support for vulnerable sections like women, tribals etc.
 Rising cost of education because of mushrooming of private schools
2. Solutions
 There is a need to amend RTE Act, to provide for norms for learning outcomes which directly
affect quality of education.
 There is a need to restore detention policy under RTE especially at the upper primary stage along
with provisions for remedial coaching and offering of at least two extra chances to move to a
higher class.
 There is a need to use technology to help slow learners to make up for lost ground.
III. Secondary level

 Access to schooling - States are mainly responsible for provision of education at secondary level
and ensuring quality of education with the Central government playing only a marginal role.
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 High dropout rates - Secondary education reflects a very high level of dropouts especially for
vulnerable groups because of poverty, social restrictions or lack of belief in usefulness of
education
 Curriculum - It has negligible or no emphasis on IT and vocational areas.
 Poor linkage with higher education - Secondary level education has failed to prepare students
for higher education w.r.t skills or values. As a result, there is mushrooming of coaching
institutions and skewed selection of courses for higher education
2. Solutions
 There is a need to gradually extend provision of RTE to cover secondary education.
 There is a need to scale up the existing National Skills Qualification Framework to include more
students. There is also a need to in-line choice of vocational courses in accordance with local
opportunities and resources.
IV. Higher level

 Enrolment and Equity - GER continues to hover around 25% which is low in comparison to other
countries at similar level. In addition, there is no equity in GER among different sects of the
society.
 Regulation - Regulators like MCI, UGC, AICTE continue to be marked by inadequate financial and
human resources, nepotism, corruption and favouritism.
 Political interference - Higher education is fast emerging as a lucrative business and a number of
education institutions have cropped up which are owned by political leaders. In addition, there is
a growing political interference in running educational institution as seen in the case of Delhi
University.
 Resources - Both financial as well as human
 Employability - According to a survey done by Aspiring Minds (Employment solutions company),
only 7% of engineering graduates employable.
 Inadequate emphasis on R&D and collaboration with Industries
2. Solutions
 There is a need for regulatory overhaul in apart from streamlining the financing of higher
education sector.
 Also, there is a need to reform the process of recruitment, opportunities etc. for teachers. There
is a need to introduce performance-based incentives on an objective criterion to rate and
promote teachers.
 Finally, there is a need to also reform the accreditation institutions, their methodology and
accountability
Having understood the Challenges and Solutions at every level of education, let us now understand
the modern phenomenon in education that is privatization in education.
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2.11 Privatization In Education

 According to AISHE, 1,26,451 students are enrolled in Ph.D. in India, that is less than 0.4% of the
total student enrolment.
 According to the International Property Rights Index (IPRI) Report 2017, India ranks fifth globally in
terms of research publications but its patent profile needs a major boost as it is ranked 45th in the
indicator of intellectual property rights (IPR).
Benefits
 Better access to infrastructure, faculty, global exposure and wider interaction with global
educational institutions along with higher level research and innovation.
 It will act as platform for faculty exchange between different institutions resulting in better training
of teachers and opening more opportunities for them.
 It will lead to more competition in education sector thus leading to better quality for students
Challenges
 More inequity as it will deepen the already prevalent class divide in the Indian higher education
system.
 The privatization of education has benefited mainly the parallel system of coaching classes. The
middle and even the lower-class people are spending a fortune on their wards’ education by
enrolling them in coaching classes.
 Kota in Rajasthan is a classic example of how coaching classes have turned themselves into
factories. The students are under tremendous pressure to perform with no time to rest and relax.
Some 24 students, taking tuitions at these coaching factories, have committed suicide in 2017,
unable to cope up with the rigorous schedule of the coaching classes. And last year, nearly 450
teenagers in AP and Telangana have committed suicide, due to the pressure of academic
performance.
 Privatization will lead to commodification of education as most of the private player in education
view it as a business - Issues of capitation fees, poor accountability, fake degrees, fly-by-night
operators etc.
 The privatization should not be an alibi for the corrupt and inefficient functioning of public
 The indiscriminate privatization of education has deprived the children of weaker section and
under privileged the opportunity to receive quality.
Since there has been mushrooming of educational institutes since independence, government has
come up with many regulatory measures to keep a check upon them, which are discussed below.
2.12 Regulatory Structure in India

 Various apex institutions have been vested by Acts of Parliament with the responsibility to regulate
the standards of education.
 The University Grants Commission (UGC) is empowered to coordinate and maintain minimum
standards of university education.
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Note:
In the year 2018, a draft bill – The Higher Education Commission of India (Repeal of University Grants
Commission Act) Bill 2018 was released by the Union Government of India.
The draft bill seeks to repeal the University Grants Commission Act, 1956 and set up a Higher Education
Commission.
What would be the functions of the Higher Education Commission?

 Specifying learning outcomes for courses in higher education;
 Laying down standards for teaching, curriculum development, and skill development;
 Specifying norms for granting autonomy to universities, and
 Framing guidelines for determination of fees chargeable by higher education institutions.
Note: Kindly refer EduTap’s ESI and Finance monthly Current Affairs magazine for the latest updates
regarding this bill.
 The National Assessment and Accreditation Council (NAAC) was established in 1994 to assess the
standards of quality and accredit Universities along with their constituent and affiliated colleges.
 The All-India Council for Technical Education (AICTE) was established in 1987 for planned and
coordinated development of the technical education system in the country.
 The National Board of Accreditation (NAB) has been set up to assess and accredit technical
institutions in the country and make recommendations for recognition and de-recognition of
qualifications.
 Other Statutory bodies: Further, there are apex statutory bodies, like the National Council of
Teacher Education (NCTE), Medical Council of India (MCI), Dental Council of India (DCI), Indian
Nursing Council (INC), Council of Architecture, Bar Council of India (BCI), Pharmacy Council of India
(PCI), Indian Council for Agricultural Research (ICAR), Rehabilitation Council of India, Central Council
of Homeopathy (CCH) and Central Council of Indian Medicine (CCIM), Distance Education Council,
National Council for Vocational Training, etc., which regulate the standards of education in various
professional fields.
2.12.1 Regulation In Higher Education

Higher education in India is currently regulated by a number of agencies like UGC, MCI, AICTE etc.
I. Issues and Challenges

1. Poor global rankings: Currently, India continues to perform abysmally in global ranking of higher
2. Archaic Law: University Grants Commission Act was enacted in 1956. However, it is unsuitable
for regulation today and needs to be changed in-line with the growing complexity and number of
higher educational institutions.
3. Inadequate financial resources and problems of corruption, nepotism, favouritism: Higher
educational sector in India has been characterized by inadequate financial resources and
problems of nepotism, corruption and favouritism.
4. Accreditation: Indian accreditation discourse has been marked by politicization, conflict of
interest, corruption and unscientific methodology.
5. Other Challenges: Other challenges include Deemed Universities, fake universities, fake degrees,
Politicization of UGC (Four-year undergraduate programme etc.)
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II. Recent initiatives by government

 Recently government prepared a draft act for repeal of UGC and setting up of HECI (Higher
Education Commission of India).
 Government has come up with National Medical Commission Bill which is aimed at overhauling
medical education in India and will replace the Medical Council of India.
III. Way forward

 An independent mechanism for administering the national higher education fellowship
programme should be put in place.
 A Central Educational Statistics Agency (CESA) should be established as the central data
collection, compilation and consolidation agency with high quality statistical expertise and
management information system should be used for predictive analysis, manpower planning
and future course corrections.
 An expert committee should be constituted to study the systems of accreditation in place
internationally.
Having understood the regulatory structure in India, let us understand the educational policies enacted
by India, which shape the course of a nation. The government of India has come up with various national
educational policies since independence that is in 1968,1986 and recently in 2020.Let us look at the
background of the new policy that was unveiled last year.
2.13 National Education Policy of India

 India had two policies on education in the past- in 1968 and 1986.
 It serves as a comprehensive framework to guide the development of education in the country and
offers the government of the day an opportunity to leave its imprint on the country’s education
system
 The policy provides a broad direction and state governments are expected to follow it. However,
it’s not mandatory. For eg. Tamil Nadu, even today, does not follow the three-language formula
prescribed by the first education policy in 1968.
2.13.1 National Education Policy 2020

Context: The Union Cabinet has approved the new NEP 2020 with an aim to introduce changes in the
Indian education system so as to meet the needs of 21st Century India.
The Cabinet has also approved the renaming of the MHRD to the Ministry of Education
Did You Know?
 The last NEP was that of 1986 and modified in 1992.

 The current policy is based on the report filed by the committee headed by eminent space scientist
K. Kasturirangan.
 NEP 2020 policy envisages 100% Gross Enrolment Ratio (GER) in school education by 2030
Key Takeaways from NEP 2020
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1. School Education:
 Universalization of education from preschool to secondary level: The Right of Children to Free
and Compulsory Education Act, 2009, will be extended to cover children between 3 and 18 years
 Structure: The current 10+2 system will be divided into 5 (3 to 8 years) +3 (8 to 11 years) + 3 (11
to 14 years) + 4 (14 to 18 years) formats.
 Co-curriculum and vocational subjects like sports, arts, commerce, science will be treated at the
same level.
 Computer Skills: Students will be allowed to take up coding from class 6 onward.
 Vocational Education to start from Class 6 with Internships.
 Additional Meal: Provision of an energy-filled breakfast, in addition to the nutritious mid-day
meal, to help children achieve better learning outcomes.
 Regular Exams: To track progress, all students will take school examinations in grades 3, 5, and 8
which will be conducted by the appropriate authority.\Class 10 and 12 board examinations to
be made easier, to test core competencies rather than memorised facts, with all students
allowed to take the exam twice
 Curriculum content will be reduced in each subject to its core essentials, and will make space for
critical thinking and more holistic, inquiry-based, discovery-based, discussion-based, and
analysis-based learning
 Teacher Capabilities: A new and comprehensive National Curriculum Framework for Teacher
Education (NCFTE) 2021, will be formulated by the National Council for Teacher Education
(NCTE) in consultation with NCERT
2. Medium of Instruction:
 The policy says that wherever possible, the medium of instruction in schools until at least Class 5,
but preferably until Class 8 and beyond, will be the home language or mother tongue or regional
language
 The three languages learned by children will be the choices of states, regions, and of the
students, so long as at least two of the three languages are native to India
3. Higher Education
 Gross Enrolment Ratio in higher education to be raised to 50% by 2035 (presently it is at 26.3%)
 Flexibility in Higher Education: NEP 2020 proposes a multi-disciplinary higher education
framework with portable credits, and multiple exits with certificates, diplomas and degrees
 The common entrance exam for all higher education institutes to be held by NTA. The exam will
be optional and not mandatory
 Multidisciplinary Education and Research Universities (MERUs), at par with IITs, IIMs, to be set
up as models of best multidisciplinary education of global standards in the country.
 The National Research Foundation will be created as an apex body for fostering a strong
research culture and building research capacity across higher education.
 M.Phil. courses will be discontinued and all the courses at undergraduate, postgraduate and PhD
level will now be interdisciplinary.
4. Higher Education Commission of India (HECI)

 It will be set up as a single umbrella body for the entire higher education, excluding medical and
legal education.
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 It will be a single, lean body with four verticals for standards-setting, funding, accreditation and
regulation so as to provide “light but tight” oversight.
 Affiliation of colleges is to be phased out in 15 years and a stage-wise mechanism to be
established for granting graded autonomy to colleges.
5. Technology & Foreign Institutes

 An autonomous body, the National Educational Technology Forum (NETF), will be created to
provide a platform for the free exchange of ideas on the use of technology to enhance learning,
assessment, planning, administration.
 National Assessment Centre- ‘PARAKH’ has been created to assess the students.
 It also paves the way for foreign universities to set up campuses in India.
What are the merits of new NEP 2020?
1. Comprehensive: NEP seeks to address the entire gamut of education from preschool to doctoral
studies, and from professional degrees to vocational training.
2. Early Childhood Education: In adopting a 5+3+3+4 model for school education starting at age 3, NEP
recognises the primacy of the formative years from ages 3 to 8 in shaping the child’s future
3. Easy on Regulations: NEP 2020 makes a bold prescription to free our schools, colleges and
universities from periodic “inspections” and place them on the path of self-assessment and
voluntary declaration
4. Holistic: The policy, inter alia, aims to eliminate problems of pedagogy, structural inequities, access
asymmetries and rampant commercialisation.
5. Promote Inclusion: The Policy proposes creation of ‘inclusion funds’ to help socially and
educationally disadvantaged children pursue education
What are the Challenges ahead w.r.t implementing NEP 2020?
1. Cooperation from States:

 Any educational reform can be implemented only with support from the States, and the Centre
has the giant task of building a consensus on the many ambitious plans
 The idea of a National Higher Education Regulatory Council as an apex control organisation is
bound to be resented by States
2. Inadequate check on donations: Fee regulations exist in some States even now, but the regulatory
process is unable to rein in profiteering in the form of unaccounted donations.
3. Funding: Progress on these crucially depends on the will to spend the promised 6% of GDP as public
expenditure on education.
Conclusion
If implemented in its true vision, the new structure can bring India at par with the leading countries of
the world.
Note: Kindly refer EduTap’s Schemes Section for further detailed information regarding the NEP 2020.
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2.14 Conclusion
 India has one of the youngest populations in an aging world. By 2020, the median age in India will
be just 28, compared to 37 in China and the US, 45 in Western Europe, and 49 in Japan.
 Education with a holistic perspective is concerned with the development of every person's
intellectual, emotional, social, physical, artistic, creative and spiritual potentials.
 To leverage the advantage of demographic dividend India needs to invest into its abundant human
capital through quality education, reforming the curriculum and pedagogical processes, improving
delivering by utilizing public-private partnerships, evolving an efficient audit and accountability
mechanism and resolving the existing lacunae in the current institutional system which will help
unleash the true potential of Indian citizens and lead to economic and social prosperity.
 A shloka from Chanakyaniti –
(The parent who does not facilitate and guide their child for studies is like the greatest enemy of the
child. The presence of an uneducated person in the company of educated people is like a goose in
the company of swans.)
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ESI SUMMARY SHEETS

S /NO. CHAPTER NAME PAGE

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1.9.7 Intermediate Goods Versus Consumer & Capital Goods ......................................................18

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6 Part VI: Summary ..................................................................................................................................50

1 Part I: Basics of Economy

1.1 What is Economy?

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1.2 Why do we study Economy?

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Q. Economics is often defined as a

1.3 Meaning of Macroeconomics

1.3.1 Distinction between Macroeconomics and Microeconomics

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o Macroeconomics: It is basically concerned with determination of aggregate output and

1.4 Factors of Production

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1.5 Factor Payments

1.6 Economic Agents

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1.6.4 Foreign Sector

1.7 Types of Economic System

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1.7.3 Mixed Economy

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1.8 What are the various sectors of Economy?

1.8.1 Primary activities

1.8.2 Secondary activities

1.8.3 Tertiary activities

1.8.4 Quaternary activities

1.8.5 Quinary activities

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Q. Match the following:

1.9 What are the different types of Goods?

1.9.1 What are Goods?

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1.9.2 Economic Goods and Free Goods

1.9.3 Consumer Goods and Producer Goods

1.9.4 Single Use and Durable Use Goods

Durable Use Goods

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1.9.5 Private Goods and Public Goods

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1.9.6 Intermediate Goods

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1.9.7 Intermediate Goods Versus Consumer & Capital Goods

1.9.8 Distinction Between Goods & Services

Q. Match the following pairs correctly:

Type of Good Example

1. Durable Use Good A. Coal

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2. Consumer Good B. Highway

3. Single Use Good C. Sewing Machine

4. Public Good D. Television

5. Capital Good E. Milk

2 Part II: Circular Flow of Income in a Simple Economy

2.1 Two Sector Model

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2.2 Four Sector Model

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