STUDY MATERIAL ON

ECONOMICS-I B.A;LL.B. 1ST

SEMESTER
Posted By: prashant jha September 9, 2018

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economics study material

STUDY MATERIAL

ON

ECONOMICS-I

B.A;LL.B. 1ST SEMESTER

Contents:

(Paper Code : BL – 1004)

1. General Principles

(a). Economics as a science and its relevance to Law.

(b). Economics as a basis of social welfare and social justice.

(c). Free enterprise, planned economy and mixed economy.

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 2. General Principles of Economics

(a). Demand and Supply.

(b). Saving, consumption, investment.

(c). Theories of Economic growth and problems of development.

(d). Banking and fiscal policy – Changing profile of Indian

Banking, RBI and its challenging policy.

3. Indian Economics

(a). Introduction to Indian Economics.

(b). Trends in population growth.

(c). Estimates of national income in India.

(d). Post independence economic policies in India.

4. The Logic of India’s development strategy

(a). Planning process.

(b). Priorities between agriculture and Industry.

(c). Choice of technology.

5. (a). The role of public, private and joint sector

(b). Large, medium and small industries

(c). Role of capital formation, credit and banking system

BOOKS RECOMMENDED

Dhingra, M.L., Principles of Economics.

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 Roger Leroy Miller, Principles Of Economics Today, Prentice – Hall,
India.

Roger Leroy Miller , Economics Today, Canfield Press, San Francisco.

Seth, M.L., Principles of Economics.

Singh, S.P., Principles of Economics.

Soloman, Economics, Prentice – Hall, India.

Introduction of Economics

Economics is a social science. Its basic function is to study how

people –Individuals, household, firms, and nations –maximize their
gains from their limited recourses and opportunities. In economic
terminology, this is called maximizing behavior or, more
appropriately, optimizing behavior. Economics is thus a social
science, which studies human behavior in relation to optimizing
allocation of available recourses to achieve the given ends.

Economics studies how household allocate their limited resources

(income) between centralize various goods and services they consume
so that they are able to maximize their total satisfaction. It analyses
how household with limited income decide ‘What to Consume’ and
‘how much to Consume’ with the aim of maximizing total utility.

Economics is the study of how individuals & group of make decision

with limited resources as the best satisfy their wants, need, and
desires.

Meaning of Economics:

The term ‘Economics’ in English language has its origin in two Greek
words-Oikos (Household) and Nemein (Manage). Thus, they mean
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 ‘Manage of Household’. Wants of each household are unlimited but
most of the means to satisfy them like food, cloth, etc., are limited or
scarce. Thus, faced with scarcity, people while managing the
household must make choice.

Definition of Economics:

1. Adam Smith Marshall 1.LordRobbins 1. Bentham

2. S.Say 2. Cannan 2.Scitovosky 2.J.k Mehta
3. S.Mil 3. Penson 3. Stonier&Hogue
4. Senior Beverages 4. Harvey

Wealth Definition:

According to Adam Smith: “An enquiry into nature & cause

of wealth of nations.”
Adam Smith defines Economics as the “Science of wealth”.
Economics was regarded as the science which studied the
production & Consumption of wealth

Welfare Definition :

According to Alfred Marshall’s: “Economics is a study of

mankind in the ordinary business of life; it examines that part of
individual and social action which is most closely connected with
the attainment and the use of the material requisites of well
being.”

Scarcity Definition:

According to Robbin’s: “Economics is the science which

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 studies human behavior as a relationship between scarce means
which have alternative uses.”
‘Scarcity(also called paucity) is the
fundamental economic problem of having seemingly unlimited
human wants in a world of limited resources. It states that
society has insufficient productive resources to fulfill all human
wants and needs.’

Growth Oriented Definition:

According to Him “Economics is the study of how people and

society end-up choosing, with or without, the use of money, to
employ scarce productive resources that could have alternative
uses to produce various commodities and distribute them for
consumption, now or in the future among the costs and benefits
of improving patterns of resource allocation ”.

Nature of Economics:

The objective of the study of nature of economics is to know whether

economics is a Science or an Art or it is both sciences as well art.

According to Samuelson, “Economics is the oldest of the Arts, the

Newest of Science – Indeed the queen of all the Social Science”.

Economics as a Science: The term Science has its origin in term

‘Scientia’ of Latin Language. It means “to know”. By knowing a
subject we mean understanding it and begin able to describe its
causes and effects. Science has been defined in these terms-“Science
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 is a systematic body of knowledge concerning the
relationship between causes and effects of a particular
phenomenon”.

According to Poincare, “Science is built-up of facts as a house is

built of stones but an accumulation of facts is no more a science than
a heap of stones is a house”. In other words, to build science, we must
collect, classify and analyse the facts systematically. In economics
also one collect classifies, and analyses economics facts
systematically. \

Economics is Positive science.

It is defined as a body of systematized knowledge concerning

what
The objective of a positive science is the establishment of
uniformities
It deals with things as they are.
It explains their causes & effects.

Economics is Normative science.

It is defined as a body of systematized knowledge relating to the

criteria of what ought to be.
It deals with things as they ought to be
The objective of a normative science is the determination of
ideals.

Economics as an Art:

Weather economics is an art or not, is yet another controversial

subject among the economists.

The art is lays down a specific solution for specific problems.

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 According to J.N. Keynes: “An art is a system of rules for the
attainment

Of given ends”.

Science teaches us to know or an Art teaches us to do.

Economics as a Social Welfare :

Welfare economicsis a branch of economics that uses

microeconomic techniques to evaluate well-being (welfare) at
the aggregate (economy-wide) level. … The field of welfare
economics is associated with two fundamental theorems.

Social welfareis not the same as standard of living but is more

concerned with the quality of life that includes factors such as
the quality of the environment (air, soil, and water), level of
crime, extent of drug abuse, availability of
essential social services, as well as religious and spiritual
aspects of life.

Economics as a Social Justice:

Economic justiceis a component of social justice. It’s a set of

moral principles for building economic institutions, the
ultimate goal of which is to create an opportunity for each person
to create a sufficient material foundation upon which to have a
dignified, productive, and creative life beyond economics.

Economics System is the means by which countries and

governments distribute resources and trade goods and services. They
are used to control the five factors of production, including: labor,
capital, entrepreneurs, physical resources and information resources.
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 Free Enterprises Economy: Capitalism is an economic system in
which the means of production are privately owned and
operated for profit usually in competitive market.

In other word “An economics System in which investment in and

ownership of the means of production, distribution, and exchange of
wealth is made and maintained chiefly by private individuals or
corporation.

Merits of Free Enterprises Economy:

1. The resources are utilized efficiently and economically.

2. Producers, consumers and the workers all enjoy economic
freedom and are free to work, as they like. Goods are produced
according to the taste, preference and circumstances of the
economy.
3. Capitalist System can make change according to the needs and
circumstances of the economy. It has inbuilt flexibility.
4. An automatic equilibrium is brought about by the operation of
price mechanism and market forces. No central direction is
required for the operation of the economy.
5. There is no interference in economic matters. Every individual is
free to take decisions as to his economic activities keeping in
mind his own – interest.

Demerits of Free Enterprises Economy :

In a Capitalist economy, wealth enjoys the prestige in the society,

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 which results in erosion of human values.

There is a large –scale wastage of resources due to unnecessary

competition.

In capitalist system, owners of the means of production can earn

more as compared to those who do not possess much means of
production. This brings wide inequalities in the distribution of
income and wealth.

In modern capitalist market group rivalries and price wars, price-

agreements etc. are commonly found.

In capitalist countries, society possesses two classes such as haves

and have- notes. Such division result in conflict in the form of strikes,
lockouts and industrial disputes in the economy. Under capitalism,
Capitalists generally exploit the poor laborers.

Planned Economy: A socialist economic system is characterized by

social ownership and democratic control of the means of
production, which may mean autonomous cooperatives or direct
public ownership; wherein production is carried out directly for use.

The term socialism refers to any system in which the production and
distribution of goods and services is a shared responsibility of a group
of people. Socialism is based upon economic and political theories
that advocate for collectivism. In a state of socialism, there is no
privately owned property.

Planned Economy is characterized in the

following ways:
The means of production are owned by public enterprises or
cooperatives (the state), and individuals are compensated based
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 on the principle of individual contribution.
There is equal opportunity for all.

Merits of Planned Economy:

· No Labour Exploitation:
There is only one class in a socialistic economy hence there is no
question of exploitation.

· Proper Utilisation of Recourses:

Under this economy, all types of natural resources are utilized in a
most organized manner. Its main objective is to exploit these
resources for the welfare of society.

Proper Planning:

In order to solve various problems, which arise from time to time,

there is proper economic plan in this type of economy. Thus, with
the help of economic plans socialist economy will adopt the
balanced development strategy.

· Social Welfare:
The aim of socialist economy is to maximize social welfare of the
society. It provides equal opportunities of employment to all
individual according to their abilities

Demerits of Planned Economy:

Economists like Robbins, Maurice Dobb, and Georg Helm etc., have
criticized the socialist economy on the following:

· Evils of Bureaucracy:
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 In socialist economy, all economic activities are controlled
by the government. Thus, they develop all evils of bureaucracy like
favoritism, delay; corruption and other evils,

Burden on Government :

All the economic activities are performed by the Central Authority on

behalf of the government. Hence, it is overburdened with daily
activities and, therefore, it gets very less time to think and plan for the
economic prosperity of the economy.

Expenditure on Planning :

In fact, planning is a long process in a socialist economy. This

expenditure is unnecessarily wasteful and a burden on the national
economy.

Mixed Economy :

It is a golden mixture of capitalism and socialism. Under this

system there is freedom of economic activities and government
interferences for the social welfare. Hence it is a blend of both the
economies. The concept of mixed economy is of recent origin.

According to “Murad”:

“Mixed economy is that economy in which both government and

private individuals exercise economic control.

According to Prof. Samuelson,

“Mixed economy is that economy in which both public and

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 private sectors cooperate.”

Merits of Mixed Economy :

Best Allocation of Recourses: mixed economy incorporates

the good features of both capitalism and socialism, the resources
of the economy are utilised in the best possible manner. The
price mechanism, the profit motive, and the freedoms of
consumption, production, and occupation lead to the efficient
allocation of resources within the economy.
General Balance: A mixed economy maintains a general
balance between the public sector and the private sector. There is
competition as well as cooperation between the two sectors
which are conducive for achieving a high rate of capital
accumulation and economic growth.

Welfare State: A mixed economy contains all the features of a

welfare state. There is no exploitation either by the capitalists as
under a free enterprise economy or by the state as under a
socialist economy. The workers are not forced to work, Workers
are provided monetary incentives in the form of bonus and cash
rewards for inventions.

Difference Between Free Enterprise &Planned

Economy

Free Enterprises Planned Economy

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 1. Individual Freedom. 1. No Individual Problem.

2. Consumer is Sovereign. 2. Loss of Consumer’s

Sovereignty.
3. Unearned income in the form of
profits. 3. No Unearned Income.

4. Existence of Competition. 4. Absence of Competition

5. Right to acquire private 5. State ownership of all factors

property. of production. No right to acquire
private property.
6. Wastage of resources.
(advertisements). 6. No wastage of resources.

7. Price fixed by Demand and 7. No rationale in Price system.

Supply. State fixes prices.

8. No equal opportunities, wealthy 8. Equal opportunities to all.

people get all the opportunities.

UNIT -2

Introduction of Demand

One of the market forces which determine price is demand. Demand

is related to consumption. It represents the process through which a
consumer obtains goods and services he wants to consume The
Demand in economics is something more than desire to purchase
through desire is one element of it. For Example A beggar may
desire food but due to lack of means to purchase it, his demand is not
effective. It economics, demands refer to effective demand, which
implies three things

1. Desire,
2. Means to purchase
3. On willingness to use those means for that Purchase

Definition ,of Demand

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 According to G.L Thiekttle : The demand for any commodity or
service is amount that will be bought at any given price per unit time.

According to Benham : The demand for anything at a given price

is amount of it , which will be bought per unit of time , at that price.

According to Bobber: By demand we mean the various quantities

of a given commodity or service which consumers would buy in one
market in a given period of time at various prices.

Features of Demand :

1. When the person, who is in need and desiring, is willing and able
to pay for what he desires, the desire changes into demand.
2. The demand is always at a price.
3. The demand is always per unit of unit of time.
4. The demand indicates the quantity or the amount of the
commodity the consumer are prepared to buy at the particular
price.

Type of demand

Price demand : Price demand ,other things remaining unchanged

,refers to the various quantities of a commodity or service that a
consumer would of a commodity or service that a consumer would
purchase at a given time in a market at various prices.

Income demand : The Income demand ,other things remaining

unchanged, refer to the various quantities of goods and service which
would be purchased by the consumer at Various Income
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 Type of Income Demand:

Superior Demand: Superior goodsmake up a larger

proportion of consumption as income rises, and therefore are a
type of normal goods in consumer theory. Such a good must
possess two economic characteristics: it must be scarce, and,
along with that, it must have a high price.
Inferior Goods: aninferior good is a good that decreases in
demand when consumer income rises (or rises in demand when
consumer income decreases), unlike normal goods, for which
the opposite is observed. Normal goods are those for which
consumers’ demand increases when their income increases.

Cross Demand : The cross demand, other things remaining

constant, refers o the quantities of a good or service which will be
purchased with reference to change in price not of this good but of
other inter-related goods. These goods are either substitutes, or
complementary good.

Substitution Goods : Substitute goods are two goods that could

be used for the same purpose. If the price of one good increases, then
demand for the substitute is likely to rise.
Therefore, substitutes have a positive cross elasticity of demand. A
decrease in the price of A will result in a rightward movement along
the demand curve of A and cause the demand curve for B to shift
in. Examples of substitute goods include margarine and butter,
tea and coffee

Complementary Goods: A complementary

good or complement is a good with a negative cross elasticity of
demand, in contrast to a substitute good. This means
a good’s demand is increased when the price of another good is
decreased. Conversely, the demand for a good is decreased when the
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 price of another good is increased.

Factors affecting demand or causes of changes in demand :

Price of the commodity: Demand is decisively affected by the

change in the price of the commodity concerned. There is inverse
relation between price and the quantity demanded.
Income of the Consumer: The demand for a normal
commodity goes up when income rises and falls down when
income falls and thus the demand has direct relation with the
Income.
Prices of related goods: In the cases of substitutes example
Tea and Coffee, an increase in the consumption of one will lead
to a decrease in the demand for the other. Thus the demand for
a commodity does not depend only on this own price but the
prices of other goods.
Tastes, preferences and other fashion of the consumer:
The amount demanded also depends on consumer tastes which
include fashion habit custom etc….
Wealth: The amount demanded of a commodity is also affected
by the amount of wealth. The wealthier are the people , higher is
the demand for normal commodities.
Money supply: The additional money supply will add to the
purchasing power of the community, and the prices will rise,
demand for certain goods will be reduced and for others
stimulated.
Saving: Larger the saving, lesser the demand for the
commodities.
Conditions of trade: The level of demand for different
commodities also depends upon the business conditions in the
country. In boom conditions, there will be a marked increase in
demand and demand goes down during depression.
Expectations regarding the future: If consumers expect
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 their income to rise in the near future they may increase the
demand for a commodity just now. If prices are expected to rise
in future the demanded for goods will increase now in the
present.
Climate and Weather: The climate of an area and the weather
of an area and the weather prevailing there has a decisive effect
on consumer demand. In cold areas, woolen cloth is highly
demanded. During hot summer days, ice is very much in
demand.

Demand Schedule:

Demand schedule is a table or a chart which shows the relationship

between price and demand of a commodity or service unit of time. If
we list the different quantities of a commodity demanded at different
prices in the form of raw and column the resulting format is demand
schedule. In other words, demand schedule establishes a functional
relationship between independent variable price and dependent
variable demand.

Type of Demand Schedule

Demand schedule are of two types:

1. Individual Demand Schedule

2. Market Demand Schedule.

Individual Demand Schedule : This is a tabular statement

showing the different quantities of a commodity demanded by a
consumer or a household within a given period of at different
prices. For Example Let us suppose that a household purchase
350 gm of apples per days at a price of Rs. 10 per kilogram.
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 When the price fall to Rs. 9 per kilogram It increases its demand
to 600 grams. As the price goes on decreasing. The household
continues to increase its demand. When the price falls to Rs. 1
per kilogram ,its demand shoots upto 8 kilogram

Price per kg Apple demanded (in kg)

10 .35
9 .60
8 1.00
7 1.40
6 1.90
5 2.50
4 3.40

Market demand Schedule for obtaining the market demand

schedule quantities demanded by different buyers at each price are
added up. Every individual buyer will purchase different quantities of
apple at different prices. The slope of this demand curve will be
negative. It will slope downward from left to right. If there are only
two buyers in the market and their demand schedule are identical
then the demand for the commodity in the market will be exactly
double the quantity demanded by a single buyer. Therefore, we have
added up the quantities demanded by various buyers at different
prices. This gives us the market demand schedule.

Price per Qty demanded Qty demanded Market

kg 1 2 demanded
10 .35 1.25 1.60
9 .60 1.40 2.00
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 8 1.00 1.45 2.45
7 1.40 1.60 3.00
6 1.90 1.75 3.65
5 2.50 1.95 4.45
4 3.40 2.10 5.50
3 4.60 2.15 6.75
2 5.90 2.50 8.40
1 8.00 3.35 11.35

Reason for the law of demand or the sloping downwards of

the demand curve

The downward slope of the demand curve implies inverse

relationship between demand and price of a commodity. Following
are the reasons for the downward or negative slope of the demand
curve:

1. Substitution Effect : when the price of a commodity falls, it

becomes relatively cheaper than other commodities. It induces
consume to substitute the commodity whose price has fallen for
other commodities. When have now become relatively expensive.
The result is that total demand for the commodity whose price
has fallen increases.
2. Income Effect :when the price of a commodity falls the
consumer can buy the same quantity of the commodity with
lesser money or he can buy more of the same commodity with
the same money. In other words as a result of fall in the price of
the commodity, consumer real income or purchasing power
increases. This increase in the real income induces him to buy
more of that commodity. Thus demand for that commodity
increases.
3. Diminishing Marginal Utility : when a consumer buys more
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 units of a commodity , the marginal utility of that commodity
continues to decline. Therefore the consumer will buy more unit
of that commodity only when its price falls. When fewer units are
available, utility will be high and the consumer will be prepared
to pay more for the commodity. This proves that the demand will
be more at a lower price and it will be less at a higher price. That
is why the demand curve is downward sloping.
4. Different Uses : There are different uses of certain
commodities and service that are responsible for the negative
slope of the demand curve. With the increase in the price of such
products. They will be used only for more important uses and
their demand will fall. On the contrary, with the fall in price,
they will be put to various uses and their demand will rise.
5. Price Effect : every commodity has certain consumers but
when its price falls, new consumers start consuming it, as a
result demand increase. On the contrary, with the increase in the
price of the product, many consumers will either reduce or stop
its consumption and the demand will be reduced. Thus ,due to
the price effect when consumers consume more or less of the
commodity ,the demand curve slope downward.

The law of demand

Meaning and definition of Law of Demand

Law of demand explains the relationship between change in quantity

demanded and change in price. It states that higher the price. The
lower would be the quantity demanded in the market. And the lower
the price. The higher would be the quantity demanded in the market.
“The law of demand says that and the price and the quantity
demanded are inversely related, all other things being equal”.

According to Marshall “( The amount demanded increases with a

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 fall in price and diminishing with a rise in price).”

According to Bilas “ ( The law of demand states that other things

being equal the quantity demanded per unit at time will be greater ,
lower the price and smaller, higher the price”)

According to Prof. Samuelson “(law of demand states that

people will buy more at lower prices and buy less at higher prices
other things remaining the same)”

According to Ferguson’s “(the law of demand the quantity

demanded varies inversely with price)”

Assumptions of the Law of demand

According to Prof.Stigler and Boulding, the main assumptions of the

law are:

1. No change in tastes and preferences, fashions of the consumers;

2. Consumer’s income ,both money and real income must remain
the same;
3. The price of the other commodities related to the commodity in
demand should not change;
4. There should be no change in the wealth of the consumers;
5. Substitutes are not discovered ;
6. No anticipatory changes in prices.

Different types changes in demand for a commodity

There are four types of changes in demand. Two types of changes take
place due to change in price and they are extension of demand and
contraction of demand. Two types of changes take place due to
change of other things and they are increase in demand and decrease
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 in demand

1. Extension of Demand: when other things remain the same

with a fall in the price, the amount demanded goes up or
extends. There will be downwards movement along the same
demand curve.

PRICE QTY
5 5
4 10
3 15
2 20
1 25

In Table when price of commodity is Rs. 5, its quantity demanded is

5 unit. As the price of the commodity falls Rs. 4 quantity demanded
increase to 10 unit, again when price falls to Rs 1 ,its quantity
demanded further increases to 25 unit

2. Contraction of Demand it means other things remaining the

same ,an increase in price leads to a fall in demand .

When price of commodity is Rs. 1, its quantity demanded is 30 unit.

As the price of the commodity falls Rs. 3 quantity demanded increase
to 20 unit, again when price falls to Rs 5, its quantity demanded
further increases to 10 unit

Price Qty
:
 1 30
2 25
3 20
4 15
5 10

Increase in demand : as a result of changes in factor other than

price, the demand shifts to another demand curve which is on the
right side and above. The demand curve itself moves to the right side
and moves above.

Decrease in demand : As a result of changes in factors other that

price the demand shifts to another demand curve which than price
the demand shifts to another demand curve which is on the left side
below. The demand curve itself moves to the left side and moves
below.

Thus we can find clear difference between extension and increase in

demand and contraction and decrease in demand.

SUPPLY

Meaning and definition of Supply

Price is determined by the forces of demand and supply. They are

called market forces. Supply indicates the amount of the goods
offered for sale at a given price. Supply changes with the change in
price. Supply is a flow of goods in the market.

According to Mayers “supply means the amount offered for sale at

given price. We may define supply as a schedule of the amount of a
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 good that would be offered for sale at all possible prices at any one
instant of time, or during any one period of time,”

For a large number of goods, there is an intermediate step in supply.

Individuals supply factors of production of firms. Firms are
organizations of individuals that transform factors of production into
consumable goods. For produced goods, supply depends not only on
individuals decision to supply factors of production it also depends
firm ability to produce to transform these factors of production into
consumable goods.

The supply of non produced goods is more direct. Individuals supply

their labour in the form of service directly to the good market.

Example; an independent contractor may repair washing machine.

The contractor supplies his labour directly.

supply function

Supply of a goods or service refers to the quantities that the seller is

willing to and able to offer for sale at various prices within a given
time period, other factors held constant.

The quantity supplied of a commodity is not dependent upon its price

alone but on a number of factors such as the prices of other
commodities, the price of factors used in its production the goals of
producers and the state of technology. These factors can be written in
the form of equation known as supply Function thus:

Sn =f (pn, p1 ……. (n-1), T, Fp, MT,)

Sn = QUANTITY OF SUPPLY OF THE GOODS N,

F= REPRESENTS THE FUNCTIONAL RELATIONSHIP

PN = PRICE OF THE GOODS N

P1 …… (n-1) = price of the other goods

:
 T = technology

Fp = price of factors of production which are include in cost

MT = TIME PERIOD

In a simple form we can say, the supply function other things

remaining constant is Sn=f (Pn). This means that the quantity
supplied of a good varies directly with price.

Causes of change in supply

1. Prices of the commodity: The supply of the commodity

depends on the price of that commodity. Higher the price greater
is the supply
2. Prices of other commodities: The supply of the commodity
also depends on the prices of other commodities. If the prices of
other goods are more attractive then, they are demanded more
and the demand of this commodity goes down.
3. Cost of production: Supply is influenced by the cost of
production. Cost of production of a commodity may rise due to
increase in the cost of the various factors of production. This will
result in a decrease in supply
4. State of Technology: Supply depends on the state of
technology. Improvement in technology lowers cost of
production and increase supply
5. Means of communication: Improvement in the means of
communication and transport may increase the supply of a
particular commodity by expanding the market.
6. Nature: Favorable natural condition like better rainfall would
increase the supply of food grain and larger supply of agriculture
product provide lower costs for the production of industrial
goods and increase in their supply.
7. Producer’s goals: The supply of goods in determined by the
goals set by the producing firms for themselves. They can decide
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 to produce more or less on the basis of their ideology.
8. Number of seller: Entry of more sellers will increase the
supply and the exit of sellers will decrease the supply.

SAVING

Meaning and Definition of Saving

Saving is important to the economic progress of a country because of

its relation to investment. If there is to be an increase in productive
wealth, some individuals must be willing to abstain from consuming
their entire income. Progress is not dependent on saving alone; there
must also be individuals willing to invest and thereby increase
productive capacity. Saving, process of setting aside a portion of
current income for future use, or the flow of resources accumulated in
this way over a given period of time.

According to Keynesian “Saving is income not spent, or

deferred consumption. Methods of saving include putting money
aside in, for example, a deposit account, a pension account, an
investment fund, or as cash. Saving also involves reducing
expenditures, such as recurring costs.
Saving Function

Saving is defined as the part of income which is not consumed

because disposable income is either consumed or saved.

Thus,

Y=C+S

S=Y-C

Where Y=Disposable income, C=Consumption , S= Saving

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 The saving function can be written as

S = f(Y)

Saving function is a counterpart of a consumption function,

Therefore, given a particular consumption, function, we can derive
the corresponding saving function. Let us take the Keynesian
consumption, namely, C = a+bY, We can derive saving function
corresponding to it.

Since Y = C+S

S = Y-C (i)

Now. Substituting the above Keynesian function for C in (i) we have

S = Y-(a+bY)

= Y- a – b Y

= -a+Y-bY

= -a+(1-b)Y

(ii) That (1-b) in the above saving function in (ii) is the value of
marginal propensity to save where b is the value of marginal
propensity to consume.

Consumption

Meaning and Definition of Consumption

The process in which the substance of a thing is completely destroyed,

used up, or incorporated or transformed into something
else. Consumption of goods and services is the amount of them
used in a particular time period.
:
 Consumption is the value of goods and services bought by people.
Individual buying acts are aggregated over time and space.

Consumption is normally the largest GDP component. Many

persons judge the economic performance of their country mainly in
terms of consumption level and dynamics.

According to Mainstream, “The final purchase of goods and

services by individuals constitutes consumption, while
other types of expenditure in particular, fixed investment,
intermediate consumption, and government spending — are placed
in separate categories”

Consumption Function

As the demand for a good depends upon its price, similarly

consumption of a community depends upon the level of income. In
other words, “consumption is a function of income”.

The consumption function relates the amount of consumption to the

level of income. When the income of a community rises ,
consumption also rises. How much consumption rises in response to
a given increase in income depends upon the marginal propensity to
consume. It should be borne in mind that the consumption function
is the whole schedule which describes the amounts of consumption at
various levels of income.

Income Average Marginal

Consumption
Propensity to Propensity to
(Rs. In
(Rs. In Crores) C
Crores) Y Consume = Consume
1000 750 =0.75

1100 825 = 0.75 =0.75

1200 900 = 0.75 = 0.75

:
 1300 975 = 0.75 = 0.75

1400 1050 = 0.75 = 0.75

1500 1125 = 0.75 = 0.75

1600 1200 = 0.75 = 0.75

Consumption function should be carefully distinguished from the

amount of consumption. By consumption function is meant the whole
schedule which shows consumption at various levels of income,
whereas amount of consumption means the amount consumed at a
specific level of income. The schedule described above reflects the
consumption function of a community i.e., it indicates how the
consumption changes in response to the change in income. In the
above schedule it will be seen that at the level of income equal to Rs.
1200 crores, the amount of consumption is Rs. 900 crores. As the
national income increases to Rs. 1500 crores, the consumption rises
to Rs. 1125 crores. Thus, with a given consumption function, amount
of consumption is different at different levels of income.

The above schedule of consumption function reveals an important

fact that when income rises, consumption also rises but not as much
as the income. This fact about consumption function was emphasised
by Keynes, who first of all evolved the concept of consumption
function. The reason why consumption rises less than income is that
a part of the increment in income is saved.

Therefore, we see that when income increases from Rs. 1000 crores to
Rs. 1100 crores, the amount of consumption rises from Rs. 750 crores
to 825 crores. Thus, with the increase in income by Rs. 100 crores,
consumption rises by Rs. 75 crores; the remaining Rs. 25 crores are
saved. Similarly, when income rises from Rs. 1100 crores to Rs. 1200
crores, the amount of consumption increases from Rs. 825 crores to
Rs. 900 crores.
:
 Here also, as a result of increase in income by Rs. 100, the amount of
consumption has risen by Rs. 75 crores and the remaining Rs. 25
crores has been saved. The same applies to further increases in
income and consumption. We shall see later that Keynes based his
theory of multiplier on the proposition that consumption increases
less than income and this theory of multiplier occupies an important
place in macroeconomics

Consumption demand depends on income and propensity to

consume. Propensity to consume depends on various factors such as
price level, interest rate, stock of wealth and several subjective
factors. Since Keynes was concerned with short-run consumption
function he assumed price level, interest rate, stock of wealth etc.
constant in his theory of consumption. Thus with these factors being
assumed constant in the short run, Keynesian consumption function
considers consumption as a function of income. Thus

C= f(Y)

In a specific form Keynesian function can be written as:

C = a + bY

Where “a” and “b” are constant. While “a” is intercept term of the
consumption function, “b” stands for the slope of the consumption
function and therefore represents marginal propensity to consume.

Investment

Meaning and definition of investment :

Investment is the purchase of goods that are not consumed today but
are used in the future to create wealth. In finance, an investment is a
monetary asset purchased with the idea that the asset will provide
:
 income in the future or will be sold at a higher price for a profit. An
investment is an asset or item that is purchased with the hope that it
will generate income or will appreciate in the future. In an economic
sense, an investment is the purchase of goods that are not consumed
today but are used in the future to create wealth. In finance, an
investment is a monetary asset purchased with the idea that the asset
will provide income in the future or will be sold at a higher price for a
profit.

According to economic theories, “ investment is defined as the

per-unit production of goods, which have not been consumed, but
will however, be used for the purpose of future production”.
Examples of this type of investment are tangible goods like
construction of a factory or bridge and intangible goods like 6 months
of on-the-job training.
In terms of national production and income, Gross Domestic Product
(GDP) has an essential constituent, known as gross investment.

Type of Investment

Different Types of Investment

1. Gross Investment: Gross Investment means the total amount

of money spent for a creation of new capital assets like Plant,
House, Factories, Machinery, etc.

It is the total expenditure made on new capital assets in period.

Gross Investment = Net Investment +Capital consumption

2. Net Investment : Net Investment refers to that amount of

:
 expenditure which is obtained after deducting the capital
consumption from the Gross Investment .

Net Investment = Gross Investment – Capital Consumption

3. Financial Investment : Investment made in buying financial

Instruments such as a new shares, Bonds, securities etc. is
considered as a financial Investment.

However, the Money used for Purchasing existing financial

instruments such as old bond, old shares, etc., cannot be considered
as financial investment. It is a transfer of financial assets from one
individual to another. In financial investment, money invested for
buying of new shares and bonds as well as debentures have a positive
impact on employment level.

4. Real Investment : Investment made a new Plant and

Equipment, Construction of Public utilities like schools. Roads,
and Railway, etc.., is considered as Real Investment.

Real Investment in new machine tools, Plants and equipments

purchased, factory building etc.., Increases employment, production
and economic growth of the nation. Thus real investment has a direct
impact on employment generation, economic growth, etc..,

5. Planned Investment : Investment made with a plan in several

sectors of the economy with specify objectives is called as
Planned Investment.

Planned Investment can also be called Intended Investment Because

an Investor while making investment makes a concrete plan of his
:
 investment.

6. Unplanned Investment : Investment t done without any

planning is called as an Unplanned Investment.

In Unplanned Investment Investors make investment randomly

without making any concrete plans. Hence it can also be called
Unintended Investment. Under this type of investment, the investor
may not consider the specific objectives while making an Investment
decision.

7. Induced Investment : Investment which change with the

changes in the income level, is called as Induced Investment
Induced Investment is positively related to the income level.
That is, at high levels of income entrepreneurs are induced to
invest more and vice-versa. At a high level of income,
consumption expenditure increases this leads to an increase in
investment of capital goods, in order to produce more consumer
goods.
8. Autonomous investment : Autonomous investment is that
kinds of investment which is not affected by the changes in the
level of income or output and is not induced solely by profit
motive. Autonomous investment is not a function of output or
income. It is related to the technological developments,
discovery of the new resources growth of population, etc.

Difference between Saving and Investment

The basic differences between savings and investment are explained

in the following points:

1. Savings means to set aside a part of your income for future use.
Investment is defined as the act of putting funds into productive
uses, i.e. investing in such investment vehicles which can reap
:
 money over time.
2. People save money, to fulfill their unexpected expenses or urgent
money requirements. Conversely, investments are made to
generate returns over the period that can help in capital
formation.
3. With an investment, there is always a risk of losing money.
Unlike savings, where the no or comparatively fewer chances of
losing the hard-earned money.
4. Undoubtedly, the investment provides higher returns than
savings, as there is a nominal rate of interest on savings.
However, the investments can earn money more than the
invested amount, if invested wisely.

You can have access to your savings, anytime because they are
highly liquid, but in the case of investment you cannot have easy
access to money because the process of selling the investments
takes some time

Theories of Economic Growth

Economists have been indulging in building growth models to explain

the process economic development. However these models are built
in the light of economic development in western countries especially
England. For a long time, economists were concerned with problems
other than growth foreign trade, natural resources full employment
etc.

Prof. Samuelson: Many writers have tried to read into economic

history a linear progression through inevitable stages, such as
primitive economy, feudalism capitalism and some from
communism. Actual facts have not agreeably stuck to such timetables,
in particular the mixed economics dominate the western world and
came into being without the permission of social prophets… The
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 single most surprising development of our age was that unpredicted
growth in production and living standards has taken place in second
level countries – Japan , Germany , Italy , France, Scandinavia, And
Western Europe , generally , rather than in the most advanced
countries like the US and Asia whose smaller rates of growth imply a
widening relative group.

Growth Models

Economic growth is the increase in the goods and services

produced by an economy, typically a nation, over a long period of
time. It is measured as percentage increase in real gross domestic
product (GDP) which is gross domestic product (GDP) adjusted for
inflation. Economics as a science is, on the one hand, a body of
knowledge and on the other hand, an engine of analysis.

As a result of knowledge, it contains generalizations about the

working of economic system. Prof. Ricardo added little to the
economic knowledge gathered by Smith.

As an analytical engine, economics provides an apparatus through

which actual economic problems are analyzed.

RICARDIAN ’S THEORY

Ricardo’s greatest contribution to economics is the provision of

engine of analysis. By using the technique of deductive or abstract
reasoning, he constructed a rigorous model in which some selected
economic variables were systematically placed to form logic. Such a
theoretical model helps to understand how a system works and how
the change in variables affects the working of the system.
:
 Ricardo propounded no theory of development. He simply discussed
the theory of distribution. This theory is based on the marginal and
surplus principles. The marginal principle explains the share of rent
in national output and surplus principle explains the division of the
remaining share between wages and profits.

Assumptions:

The Ricardian theory is based on certain assumptions

which are as under:

1. Supply of land is fixed.

2. Land is used for production of corn and the working force in
agriculture helps in determining the distribution in industry.
3. Law of diminishing returns operates on land.
4. Demand for corn is perfectly inelastic.
5. Labour and capital are variable inputs.
6. Capital consists of circulating capital.
7. There is capital homogeneity.
8. All workers are paid subsistence wages.
9. The state of technological knowledge is given.
10. There is perfect competition.
11. Demand for labour depends upon accumulation of capital.
12. Demand and supply price are independent of the marginal
productivity of labour.
13. The supply price of labour is given and constant.
14. Capital accumulation results from profits.

Ricardian system considers agriculture as the most important sector

of the economy. The difficulty of providing food to expanding
population is the main problem. According to Ricardo, there are three
major groups in the economy. They are landlords, capitalists and
labourers among whom the entire productive land is distributed. It is
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 the capitalists who initiate the process of economic development in
the society by reinvesting profits and, thus, increasing capital
formation

MARXIAN MODEL

In Marxism, Marxian class theory asserts that an individual’s

position within a class hierarchy is determined by his or her role in
the production process, and argues that political and ideological
consciousness is determined by class position.

Karl Marx, the father of scientific socialism, is considered a great

thinker of history.

He is held in high esteem and is respected as a real prophet by the

millions of people.

Prof. Schumpeter wrote,

“Marxism is a religion. To an orthodox Marxist, an opponent is not

merely in error but in sin”.

He is regarded as the father of history who prophesied the decline of

capitalism and the advent of socialism.

The Marxian analysis is the greatest and the most penetrating

examination of the process of economic development. He expected
capitalistic change to break down because of sociological reasons and
not due to economic stagnation and only after a very high degree of
development is attained. His famous book ‘Das Kapital’ is known as
the Bible of socialism (1867). He presented the process of growth and
collapse of the capital economy.

Assumptions of the Theory:

:
 Marxian economic theory of growth is based on certain
assumptions:

1. There are two principal classes in the society. (1) Bourgeoisie and
(2) Proletariat.
2. Wages of the workers are determined at subsistence level of
living.
3. Labour theory of value holds good. Thus labour is the main
source of value generation.
4. Factors of production are owned by the capitalists.
5. Capital is of two types: constant capital and variable capital.
6. Capitalists exploit the workers.
7. Labour is homogenous and perfectly mobile.
8. Perfect competition in the economy.
9. National income is distributed in terms of wages and profits.

Mahalanobis Model

Mahalanobis strategy of development emphasizing basic heavy

industries which was adopted first of all in the Second Plan also
continued to hold the stage in Indian planning right up to the Fifth
Plan which was terminated by the Janata Government in March 1978,
a year before its full term of five years.

It will be useful to explain first Mahalanobis model of growth which

provided a rationale for the heavy industry biased development
strategy. An important point to note is that Mahalanobis identifies
the rate of growth of investment in the economy not with rate of
growth of savings as is usually considered by the economists but with
rate of growth of output in the capital goods sector within the
economy.

The growth of capital goods sector in turn depends upon the

proportions of total investment allocated to the capital goods sector
:
 and output-capital ratio in the capital goods sector. Given the output-
capital ratio in capital goods sector (i.e. heavy industries), he proves
that if the proportion of total investment allocated to the capital
goods is relatively greater, the rate of growth of output of capital
goods will be greater and hence, given the Mahalanobis assumption,
the future rate of growth of investment in the economy will be
greater.

Rostow’s Theory of Economics Growth

Rostow’s theory of the stages of Economics Growth is the most widely

circulated and highly commented piece of economics literature in
recent years. Rostow’s Stages of Economic Growth model is one
of the major historical models of economic growth. It was
published by American economist Walt WhitmanRostow in 1960.
The model postulates that economic growth occurs in five
basic stages, of varying length: … Preconditions for take-off

Rostow took an historical approach in suggesting that developed

countries have tended to pass through 5 stages to reach their
current degree of economic development.

These are:

1. Traditional Society Not Necessary for Development :

This is an agricultural economy of mainly subsistence farming,

little of which is traded. The size of the capital stock is
limited and of low quality resulting in very low labour productivity
and little surplus output left to sell in domestic and overseas market.

According to critics, it is not true that every country essentially passes

though the first stage of traditional Society. There are countries in the
world like USA, New Zealand, Australia, Canada, which were born
:
 free traditional society and they attained the preconditions from the
U.K.-an advanced country.

2. Preconditions May Not Precede the Take –Off : the stage

of precondition for take-off Rostow views agriculture as
performing three roles, first, agriculture must produce sufficient
food-grains to meet the demand of growing population and of
the workers who get employment in agriculture.
3. Secondly, increase in agricultural incomes would lead to the
demand for industrial products and stimulate industrial
investment.
4. Take off : Manufacturing industry assumes greater importance,
although the number of industries remains small. Political and
social institutions start to develop – external finance may still be
required. Savings and investment grow, perhaps to 15% of GDP.
Agriculture assumes lesser importance in relative terms although
the majority of people may remain employed in the farming
sector. There is often a dual economy apparent with rising
productivity and wealth in manufacturing and other industries
contrasted with stubbornly low productivity and real incomes in
rural agriculture.
5. Drive to maturity : Industry becomes more diverse. Growth
should spread to different parts of the country as the state of
technology improves – the economy moves from being
dependent on factor inputs for growth towards making better
use of innovation to bring about increases in real per capita
incomes
6. Age of mass consumptions: Output levels grow, enabling
increased consumer expenditure. There is a shift towards tertiary
sector activity and the growth is sustained by the expansion of a
middle class of consumers.

Problems of Economics Growth :

:
 Major obstacles to economic development and growth of
underdeveloped countries are as follows:

Vicious Circles of Poverty: According to Prof. Nurkse, “The main

reason of vicious circle of poverty is the lack of capital formation.”

Similarly, Kindleberger opined that vicious circle of poverty takes

place due to the small size of the market.

Vicious Circles of Poverty can be classified into three groups

1. Supply side of vicious circles

2. Demand side of vicious circles
3. Capital Shortage

Traditional obsolete and outdated technology : Another

obsolete as to development of

An underdeveloped country is existence of traditional, obsolete and

outdated Technology. The progress which we witness in developed
countries in only due to the adoption of modern and latest
technology.

The underdeveloped countries are not in a position to use this

modern and latest technology on account of several bottlenecks, such
as abundant supply of Labour lack of skilled labour, sacristy of capital
, poverty etc..,

Population Explosion : Rapid growth of population is another

important obstacle in the way of economic development of
underdeveloped countries. According to Jacob Viner “Population
increase hovers like a menacing dark cloud over all poor countries”.
Population growth in a backward country does not induce capital
widening investment or innovation.
:
 Population may be considered positive hindrance in the way of
economic development of a country.

In a ‘capital poor’ and technologically backward country, growth of

population reduces output by lowering the per capita availability of
capital.

Too much population is not good for economic development

The rate of growth of population is very high. So far as the size of

population is concerned, India ranks second next only to China (1312
million in 2006). India’s population is now 1110 million in 2006- 07.
During the decade of 1991, the growth rate of population in India was
1.61 p.c. per annum, as compared to 0.7 p.c. growth rate of population
of developed countries.

High birth rate (23.5 per 1000) coupled with low death rate (7.5. per
1000 in 2005-06) is the genuine cause for population explosion in
India. In the 20th century, India’s population went up by 5 p.c. as
against 3 p.c. increase in the world’s population as a whole.

Agriculture Constraints: Another major obstacle to the economic

development of underdeveloped countries relates to agriculture
sector. The majority of underdeveloped countries are predominantly
agricultural.

Less developed countries live mainly upon agriculture and extractive

industries, like mining, fisheries and forests. Predominance of
agriculture is explained from the viewpoint of sectoral composition of
national income and occupational pattern.

In India, in 1950- 51, more than 55 p.c. of our GDP came from the
agricultural sector or the so- called primary sector. In 2007-08,
however, the contribution of this sector toward GDP came down to
:
 19.4 p.c.

Banking

According to Prof. Sayers “ Ordinary banking business consists of

changing cash for bank deposits and bank deposits for cash;
transferring bank deposit from one person or corporation to another,
given bank deposits in exchange for bill of exchange , Government
Bonds and so Forth.”

A commercial bank is a financial institution that provides various

financial service, such as accepting deposits and issuing loans.
Commercial bank customers can take advantage of a range
of investment products that commercial banks offer like savings
accounts and certificates of deposit. The loans a commercial bank
issues can vary from business loans and auto loans to mortgages.
Functions of a Commercial Bank

1. Acceptance of deposits
2. Advancing of loans
3. Creation of money or credit
4. Clearing of cheques
5. Financing foreign trade
6. Financing industries

It is seen from the above that commercial bank play a vital role in the
economy. Therefore a central Agency i.e. Central Bank is necessary to
supervise and direct the operations of the Commercial Bank and that
they should not misuse their powers. A Central Bank has been
established in every country for this purpose. As an apex of the
monetary and banking structure of the country, it performs the
following functions. In India, the Reserve Bank Of India:

1. Issue Currency of the Country

:
 2. The performance of general banking and agency service for the
State Bank.
3. Protection of depositor’s interests.
4. Controlling Fluctuations in the Economy.

Monetary Policy: Monetary policy is the

macroeconomic policy laid down by the central bank. It involves
management of money supply and interest rate and is the demand
side economic policy used by the government of a country to achieve
macroeconomic objectives like inflation, consumption, growth and
liquidity.

“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.”

According to Prof. Crowther “Monetary policy is referred to as either

being expansionary or contractionary, where an expansionary
policy increases the total supply of money in the economy more
rapidly usual, and contractionary policy expands the money supply
more slowly than usual or even shrinks it.”

According to Dr.D.C. Rowan, “The monetary policy is defined as

discretionary action undertaken by the authorities designed to
influence:

The Supply of Money

Cost of Money or Rate of Interest
The Availability of Money

Objective of Monetary Policy

The monetary policy in developed economies has to serve the

:
 function of stabilization and maintaining proper equilibrium in the
economic system. But in case of underdeveloped countries, the
monetary policy has to be more dynamic so as to meet the
requirements of an expanding economy by creating suitable
conditions for economic progress. It is now widely recognized that
monetary policy can be a powerful tool of economic transformation.

Neutrality of money
Stability of exchange rates
Price stability
Full Employment
Economic Growth
Equilibrium in the Balance of Payments

Limitation of
Monetary Policy
1. Higher Proportion of Non –Banking Credit:
2. Limitations of Monetary Instruments
3. Limitations of Monetary Aggregates
4. High Currency Deposit Ratio
5. Selective Application of Credit Constraints
6. Rigidity In the Policy
7. Interest Rate
8. Growing Fiscal

Control of Credit
Credit control is an important tool used by Reserve Bank of India, a
major weapon of the monetary policy used to control the demand and
supply of money (liquidity) in the economy. Central Bank administers
control over the credit that the commercial banks grant.
:
 The instruments of Monetary Policy may be classified according to
the area of their greatest initial impact- whether they operate
principally on the supply of money through changing either the stock
of reserve money or the multiplier, or on the demand for credit
through cost and other influences.

Broadly, the methods of credit control by the Reserve Bank of India

are quantitative as can be seen in the following chart:

Methods of Credit
Control
1. Bank Rate: The bank rate is the rate at which the Central Bank
of a country is prepared to re-discount the first class securities.

It means the bank is prepared to advance loans on approved

securities to its member banks.

2. Open Market Operation: In Narrow Senses The Central

Bank starts the purchase and sale of Government securities in
the money market. But in the Broad Sense—the Central Bank
purchases and sale not only Government securities but also of
other proper and eligible securities like bills and securities of
private concerns. When the banks and the private individuals
purchase these securities they have to make payments for these
securities to the Central Bank. This gives result in the fall in the
cash reserves of the Commercial Banks, which in turn reduces
the ability of create credit. Through this way of working the
Central Bank is able to exercise a check on the expansion of
credit.
3. Cash Reserve Ratio: Under this system the Central Bank
controls credit by changing the Cash Reserves Ratio. For
example—If the Commercial Banks have excessive cash reserves
:
 on the basis of which they are creating too much of credit which
is harmful for the larger interest of the economy. So it will raise
the cash reserve ratio which the Commercial Banks are required
to maintain with the Central Bank. This activity of the Central
Bank will force the Commercial Banks to curtail the creation of
credit in the economy. In this way by raising the cash reserve
ratio of the Commercial Banks the Central Bank will be able to
put an effective check on the inflationary expansion of credit in
the economy. With this, the Commercial Banks will now be in a
position to create more credit than what they were doing before.
Thus, by varying the cash reserve ratio, the Central Bank can
influence the creation of credit.
4. Rationing Credit: Under this method the credit is rationed by
limiting the amount available to each applicant. The Central
Bank puts restrictions on demands for accommodations made
upon it during times of monetary stringency. In this the Central
Bank discourages the granting of loans to stock exchanges by
refusing to re-discount the papers of the bank which have
extended liberal loans to the speculators. This is an important
method of credit control and this policy has been adopted by a
number of countries like Russia and Germany.
5. Direct Action: Under this method if the Commercial Banks do
not follow the policy of the Central Bank, then the Central Bank
has the only recourse to direct action. This method can be used
to enforce both quantitatively and qualitatively credit controls by
the Central Banks. This method is not used in isolation; it is used
as a supplement to other methods of credit control. Direct action
may take the form either of a refusal on the part of the Central
Bank to re-discount for banks whose credit policy is regarded as
being inconsistent with the maintenance of sound credit
conditions. Even then the Commercial Banks do not fall in line;
the Central Bank has the constitutional power to order for their
:
 closure.
6. Publicity: In modern times, Central Bank in order to make
their policies successful, take the course of the medium of
publicity. A policy can be effectively successful only when an
effective public opinion is created in its favor. Its officials
through news-papers, journals, conferences and seminar’s
present a correct picture of the economic conditions of the
country before the public and give a prospective economic
policies. In developed countries Commercial Banks
automatically change their credit creation policy. But in
developing countries Commercial Banks being lured by regional
gains. Even the Reserve Bank of India follows this policy.
7. Regulation of Consumer Credit: Under this method
consumers are given credit in a little quantity and this period is
fixed for 18 months; consequently credit creation expanded
within the limit. This method was originally adopted by the
U.S.A. as a protective and defensive measure, there after it has
been used and adopted by various other countries.

Fiscal policy

Fiscal policy means the use of taxation and public expenditure by the
government for stabilisation or growth.

According to Culbarston, “By fiscal policy we refer to government

actions affecting its receipts and expenditures which we ordinarily
taken as measured by the government’s receipts, its surplus or
deficit.”

The government may offset undesirable variations in private

consumption and investment by compensatory variations
of public expenditures and taxes.

Fiscal Policy is fundamentally concerned with the aggregate effects of

:
 Public Expenditure and taxation on Income, output and employment

Components of Fiscal Policy

The Main Components of Fiscal Policy are as follows:

Budgetary Policy: According to Prof. J.M Keynes “The old classical

economists advocated a policy of balanced and small budgets.
However, this policy will not help to tide over depression and
unemployment. The need at such a time is to increase the flow of
income stream into the economy and could be made possible, only
through deficit budgeting.

Taxation Policy: Taxation is a powerful instrument of fiscal policy

in the hands of public authorities which greatly affect the changes in
disposable income, consumption and investment. An anti- depression
tax policy increases disposable income of the individual, promotes
consumption and investment. Obviously, there will be more funds
with the people for consumption and investment purposes at the time
of tax reduction.

Public Expenditure: An increase in Public Expenditure can also be

employed by the government as an instrument to fight against
depression and unemployment. Increase in Public Expenditure at
such a time may take the following to forms:

Pump Priming: Pump Priming refers to that public Expenditure

which helps initiate and revive economic activity in an economy
where stagnation reigns supreme consequent upon depression.

Compensatory Spending: Compensatory Spending refers to the

government expenditure which is undertaken with a view to
compensating the decline in Private Investment
:
 Objectives of Fiscal Policy

The main objectives of Fiscal Policy are as follow:

Economic Stabilisation: The first and the foremost objective of

fiscal policy are to eliminate cyelical fluctuations in economic activity
and to maintain it at a stable level. The up –and –down swings in
business are checked by compensatory fiscal action to counteract
fluctuations.

Economics Growth: The second important objective of Fiscal

Policy is to maintain a continuous upward trend in economic activity.
Stability continues to be an important aim of fiscal Policy.

Full Employment: Fiscal policy is considered as an effective

instrument for reducing unemployment and securing full
employment. Full employment occurs where there is job available for
everyone who is fit to work and wants a job at the prevailing wage
rates.

Full Employment:

Fiscal policy is considered as an effective instrument for reducing

unemployment and securing full employment. Full employment
occurs where there is job available for everyone who is fit to work and
wants a job at the prevailing wage rates.

unit -3
Introduction of Indian Economy
Indian economy is developing economy in which agriculture is the
back bone of Indian economy. About 30 % of India’s population is on
the below poverty line. Mineral resources are not fully utilized.
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 Majority of the people of India are poor. Indian economy is affected
by it. Countries which are on the part of progress and which have
their potential for development are called developing economies. So,
India is termed as developing economy by modern schools. India is of
mixed economy, both public and private sectors coexist. Industries in
India are broadly divided into two categories: those that are run by
the public sector and those that are licensed to be established and run
by the private sector.

Economy before British Rule

To understand the present level of the Indian economy, it is

important to understand the economic system of India during the
British rule and post-independence economic development policies.

Before the advent of British rule, India had an independent

economy. It was largely primary sector economy and the major
occupations were agriculture, handicrafts, and many other
primary sector works.
The economy was full of resources and a prosperous one.
Therefore, high quality agricultural products and handicrafts
made by the Indians were traded across the world.

Economy during British Rule

During the British rule, India’s economy became a net raw

material supplier and a net importer of finished products.
No British economist attempted to measure the per capita
income and national income of India.
Some of the Indian economists Dadabhai Naoroji, V.K.R.V. Rao,
R.C. Desai and British Findlay Shirras and William Digby
attempted to measure India’s national income. Among all,
V.K.R.V. Rao was the most successful.
Before independence, India’s economy was solely dependent
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 upon agriculture.
85 percent of the Indian populations were rural and their main
source of subsistence was agriculture.
During the British colonial period, agriculture (in spite of being
the main occupation) was suffering from many problems and
hence the effective growth was zero percent.
Land settlement system was totally in favors of the British.
Agricultural system was stagnant; however, later there was a
gradual growth, but that was not because of improvement and
development of the agricultural system, but because of the
expansion of agricultural land.\

Features of Indian Economy

During the last five and half year decades a number of significant
changes have taken place in the Indian economy. These changes point
to the fact that the economy should be called a developing Economy:

Some feature of Indian Economy

1. Low Per Capita Income: Underdeveloped economies have

low per capita income. India has no exception to it. In 1947-48,
per capita income was Rs. 230. People were poor. They were not
getting fair square meals a day. They had no shelter and clothing.
Most of the people were unemployed
2. Predominance of Agriculture: Indian economy was
predominantly agricultural. In 1948, about 70% population was
engaged in agriculture. Moreover, agriculture constituted 50% of
national income. But agriculture itself was backward. Regarding
productivity, it was 110 kg/hectare for rice in 1947 as against 748
kg in Japan.
3. Unemployment and Underemployment: Unemployment is
a phenomenon of all economies whether developed or
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 4. But nature and degree of unemployment is different in
developed and underdeveloped economies. In developed
economics most of the unemployment is cyclical which arises
because of fluctuations in business cycles. In underdeveloped
economies like India, chronic unemployment is found which
results from the structural defects in the economy. Moreover,
underemployment is widespread in underdeveloped countries.
Underemployment is a condition in which a person is getting
work but not according to his/her capacity and qualifications.
5. Inequality: Inequality in distribution of income and wealth is
found in every country but this is wider in underdeveloped
economies. In India bottom 40% of rural population possess
only 5% of rural assets while 8% top households possess 46% of
total rural assets. This disparity is more intensive in urban areas.
6. Scarcity of Capital: Capital is considered as the most
important factor in the development of an economy. In
underdeveloped economies like India, capital availability per
person is very low which results in low productivity and low per
capita income. Low per capita income again results in low
savings, low investment and low capital formation.Thus
Underdeveloped Countries (UDCs) are caught in the grip of
vicious circle of poverty. Lack of capital does not allow an
economy to introduce the latest technologies. Thus, economy
becomes technologically backward and internationally in
competitive.
7. Balance of Payments (BoP): BoP is the systematic record of
all economic transactions like trade of goods, trade of services,
unilateral transfers, foreign investment, etc. between a country
and rest of the world. BoP of a country is also an indicator of
development or underdevelopment of the country. Bop of UDCs
like India shows that these countries export primary
(agricultural) products and raw materials and import final
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 products and technologies from developed countries.

8. Social Peculiarities: High illiteracy rate, male dominated

society, joint family system, fatalism, lack of entrepreneurship,
casteism, communalism, widespread child labour, etc. are some
characteristics of Indian society which distinguish it from
developed societies.

Trends of Population Growth

India is second most populous country in the world, next to China.

According to 2001 Census, Indian population was 1027 million while
according to 2011 census; India’s population was 1210.2 million.
India has 17.2% of the total world population (so one in every six
people in the world is an Indian), but in terms of land area, India
stands at the seventh place and has only 2.42% of total land area of
the world, while land area of U.S.A. is about 4.8%. India’s population
is about three times than that of U.S.A., twenty-one times than that of
Canada and about six times than that of Japan.

Size and Growth of Population Growth

. The size and composition of a country’s population can exert a

powerful influence on a country’s development. The population size,
composition, and distribution influence the range of industries a
country can support and the pool of talent that are available in the
country. In size of population, India is the second largest country in
the world after China, constitutes 2.4 per cent of the world’s land area
and supports 16.25 per cent of the world’s population. The population
growth in India has proved to be more an obstacle to its development
efforts rather than a contributory factor in economic growth.
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 Population Explosion

Population Explosion refers the sudden and rapid rise in the size
of population, especially human population. It is an unchecked
growth of human population caused as a result of:

increased birth rate,

decreased infant mortality rate, and
Improved life expectancy.

A drastic growth in population beyond normal limits is called

population explosion. It is more prominent in under-developed and
developing countries than in developed countries.

Population explosion mainly refers to the surge in population post-

World War II. However, in context to India, it refers to the rapid
increase in population in post-Independent era.

Population explosion refers to the rapid and dramatic rise in world

population that has occurred over the last few hundred years.
Between 1959 and 2000, the world’s population increased from 2.5
billion to 6.1 billion people. According to United Nations projections,
the world population will be between 7.9 billion and 10.9 billion by
2050.

Most of the growth is currently taking place in the developing world,

where rates of natural increase are much higher than in industrialized
countries. Concern that this might lead to over population has led
some countries to adopt population control policies

According to a report by the United Nation Population fund, total

population is likely to reach 10 billion by 2025 and grow to 14 billion
by the end of the next century unless birth control use increases
dramatically around the world within the next two decades.
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 Effects of Populations Explosion

The effects of population explosion in India are as follows:

1. Over-population: Population explosion may lead to

overpopulation, i.e., a condition where population surges to a
level that the earth cannot accommodate comfortably, and poses
a threat to the environment.
2. Unemployment:In developing countries like India, with a
backward economy and little scope for fruitful employment,
millions of people find no work to do. The unemployed, having
nothing to do and without an ensured living, are left frustrated
and demoralize, losing their faith in life itself. As it happens in
India and several underdeveloped countries in Asia and Africa,
the unemployed threatens the very process of development and
plunge the country in gloom. It is only natural. Those who are
born with two hands consider it a curse when they are denied the
simple right to work and earn a living. While their numbers go
on multiplying and the growth rate becomes menacing, the fruits
of development are found to be too inadequate to bridge the
yawning gulf.
3. Poverty:High birth rate, both historically and statistically, is
associated with poverty and low standard of living. It may be
noted that poverty is both the cause and effect of population
explosion. Due to poverty, there has been massive growth of
population. On the other hand, the large masses of people live in
poverty due to over population. It may sound queer, but the law
is that the poorer a country the greater is the growth rate of its
population. India, caught in the morass of her age-old poverty,
finds herself in the midst of a population explosion. The
population that was less than 400 million in the forties was
found to be about 1.21 billion in 2011 census. As a result of this
even the six plans completed by now have so far failed to cope
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 with the enormous problem of unemployment.
4. Illiteracy: The resources available are fixed. In theory and in
practice, the total available resources are shared by the people
using them. Population explosion is the key reason for illiteracy
in India. People prefer engage their children in economic
activities, rather than providing them education.
5. Poor Health:If people do not get adequate food and nutrition,
then they may suffer from poor health.
6. Economy:People need food, clothes, shelter, and occupation to
make their living. The demand for consumption should never
exceed the production or resource limit. The economy of any
country is negatively impacted, if there is massive population
explosion beyond the tolerance limit.
7. Pollution and Global warming:Too much population causes
too much pressure on earth. There arises excessive demand for
finished products leading to over-industrialization and over-
utilization of resources. The industrial discharges, and fumes are
the chief causes for water and air pollution. Further,
the poisonous gases released because of burning of fossil fuels in
factories is widely responsible for Global warming.

Causes of Population Explosion

The causes of population explosion are as follows:

Accelerating birthrate:Due to lack of awareness about the

positive impact of using birth-control method, there has been a
steady growth in birthrate.
Decrease in infant mortality rate:An improvement in
medical science and technology, wide usage of preventive drugs
(vaccines), has reduced the infant mortality rate. There has been
great improvement in medical and health-care facilities during
the past few decades.
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 Increase in life expectancy:Due to improved living
conditions, better hygiene and sanitation habits, better nutrition,
health education, etc. the average life expectancy of human
population has improved significantly. Steady supplies of good
quality food make sure that the population is well nourished.
Populations grow when they are adequately nourished.
Increased immigration:An increase in immigration often
contributes towards population explosion, particularly in
developed countries. It happens when a large number arrive at
an already populated place with the intention to reside
permanently.
Less space than required:In urban cities, it is often found
that there is very less scope for making available extra space to
absorb the additional population. In such cases, a large
population is seen packed into a smaller space.

Indian Scenario

Alarming growth of population is one of the most formidable

problems India is facing today, and is seriously threatening its
economic development. In 1921, the India Population was 25 crores.
It reached 84 crores in 1991: crossed the one billion mark with the
billionth India born on August 15, 1999; and is expected to jump to
1.4 billion by 2030 AD. The population explosion through a
worldwide phenomenon, poses a serious threat to India as it has to
maintain 16.9% of world’s population on only 2.4% of the world area.
The present growth rate of 1.7% is much higher than the world
population growth rate of 1.3%, which is of great concern.

National Population Policy 2000

The population policy of the Government of India has Passes through

the following five phases
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 1. The period of Indifference;
2. The period of neutrality (1947-51)
3. The period of experimentation (1951-61)
4. The beginning of the policy of control 9from 1961 onwards);
5. Paradigm shift

National Population Policy of India was formulated in the year 2000

with the long term objective of achieving a stable population by 2045,
at a level consistent with the requirements of sustainable economic
growth, social development, and environmental protection. The
immediate objective of the policy 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 Rate) to replacement levels by 2010, through vigorous
implementation of inter-sectoral operational strategies. TFR is the
average number of children each women would have in her life time.

National Population Policy pursues to achieve following Socio-

Demographic goals by 2010:

Address the unmet needs for basic reproductive and child health
services, supplies and infrastructure.
Make school education up to age 14 free and compulsory, and
reduce drop outs at primary and secondary school levels to below
20 percent for both boys and girls.
Reduce infant mortality rate to below 30 per 1000 live births.
Reduce maternal mortality ratio to below 100 per 100,000 live
births.
Achieve universal immunization of children against all vaccine
preventable diseases.
Promote delayed marriage for girls, not earlier than age 18 and
preferably after 20 years of age.
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 Achieve 80 percent institutional deliveries and 100 percent
deliveries by trained persons.
Achieve universal access to information/counseling, and services
for fertility regulation and contraception with a wide basket of
choices.
Achieve 100 per cent registration of births, deaths, marriage and
pregnancy.
Contain the spread of Acquired Immunodeficiency Syndrome
(AIDS), and promote greater integration between the
management of reproductive tract infections (RTI) and sexually
transmitted infections (STI) and the National AIDS Control
Organization.
Prevent and Control communicable diseases.12. Integrate Indian
Systems of Medicines (ISM) in the provision of reproductive and
child health services, and in reaching out to households.
Promote vigorously the small family norm to achieve
replacement levels of TFR.
Bring about convergence in implementation of related social
sector programs so that family welfare becomes a people
centered programme.

Objective of National Population Policy

1. To provide or undertake activities aimed to achieve population

stabilization, at a level consistent with the needs of sustainable
economic growth, social development and environment
protection, by 2045.
2. To promote and support schemes, programmers, projects and
initiatives for meeting the unmet needs for contraception and
reproductive and child health care.
3. To promote and support innovative ideas in the Government,
private and voluntary sector with a view to achieve the objectives
of the National Population Policy 2000.
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 4. To facilitate the development of a vigorous people’s movement in
favor of the national effort for population stabilization.
5. To provide a window for canalizing contributions from
individuals, trade organizations and other within the country
and outside, in furtherance of the national cause of population
stabilization.
6. There shall be no discrimination on the ground of religion,
community, caste or class, carrying out the objects of the Kosh.

Suggestions to Popularise Family Planning

The success of the family planning programme depends ultimately on

both demand for smaller families and supply of family planning
services.

Demand represents the basic determinants of fertility. There are

five categories of variables that ultimately determine the level of
demand for smaller families; education, economic status, health,
and urbanization, status of women.
Supply represents the necessary mechanism through which
demand gets expressed in actual reproductive behavior.

Some of the important suggestions that can be made to

popularize family planning are as follow
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 The family planning programme in India has been in operation for
more than five decades. But it has not been able to reduce the
infantile mortality rate, crude birth rate and total fertility rate to a
level which should achieve the objective of population stabilization
even in the next 50 years. The need is to motivate, educate and spread
the family planning programme among the masses, to strengthen the
Government programme and to rope in non-government
organizations (NGOs).

1. Motivation:

For the success of family planning programme, there is need to

motivate the people. India lives in villages where people are illiterate,
ignorant and tradition bound. They think and act according to the
rural value system. Even in urban areas, vast sections of the
population hold on to old beliefs, traditions and values. The
traditional joint family system is a barrier to the small family norm.

.On the other hand, an additional child in rural areas and among the
urban poor is looked upon as an asset. Similarly, a male child is
considered essential in Indian families, even if there are many female
children. Thus such beliefs, attitudes, values and traditions
perpetuate large families.

2. Population Education:

A UNESCO Report defines population education as “an educational

programme which provides for a study of the population situation in
the family, community, nation and the world with the purpose of
developing in the students, rational and responsible attitudes and
behaviour towards coping with that situation.”

The aim of population education is to create awareness and

understanding of the causes and consequences of population growth
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 among students, teachers, parents, social workers, and other sections
of the society. Population education is essential to motivate parents
and prospective parents to limit the size of their families and to adopt
appropriate family planning methods and techniques. For this, the
following measures are suggested at various levels.

3. Raising the Status of Women:

Even though a beginning has been made in women empowerment in

India, the status of women is still very low in the family and society,
especially in rural areas and traditional families. Their role in the
family has been largely confined to giving birth to children, rearing
them and carrying out daily household work.

Being overburdened, they are malnourished and give birth to weak

children leading to large infantile mortality. The lack of economic
independence and the absence of education, training and professional
career among the majority of women have a direct effect on family
size and population growth in India.

4. Voluntary Agencies:

Voluntary agencies can play a very important role through non-

formal programmes in rural areas and poor urban areas. In this
context, the service youth clubs, labour unions, women’s
organisations, religious and social societies, Panchayats and Gram
Sabhas (village level societies) can go a long way in educating the
people towards the importance of the small family norm.

Students studying in medical colleges can be entrusted with the task

of training and other Para-medical workers in health centres. Funds
can also come from voluntary agencies which should be distributed
on non-sectarian basis. Such voluntary agencies should work in close
co-operation with government family planning department. Besides,
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 there is the need for international cooperation both in terms of funds
and transfer of modern family planning technology to India.

5. Incentives and Disincentives:

Incentives and disincentives play an important role in the family

planning programme. Incentives may be in the form of social or
economic rewards paid to an individual to delay or limit the size of
the family. Incentives in cash and kind, especially to the poor and
illiterate sections of the society, encourage the couples to undergo
sterilization.

Since such a measure involves large funds, the Government can seek
the help of the organised sector and NGOs to finance or raise funds,
and also hold special camps for the purpose. The Government should
also give suitable tax exemption for specified family planning
activities to such institutions. But those who are educated and
working in government, semi-government and private organisations
may be given incentives in the form of advance increments if they
undergo sterilization after two children.

6. Economic Growth:

The aim of family planning is not only to bring about a decline in

fertility rates but also to improve the quality of life of the people.
These are possible through rapid economic growth. It is not an
illusion to believe that a reduction in population growth will
automatically raise living standards. In fact, an effective family
planning policy should be integrated with measures to accelerate
economic development.

As the Ninth Five Year Plan observes: “Several of the South Asian
countries have been able to achieve economic prosperity and
improvement in quality of life inspite of population growth. This has
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 been attributed to the increase in productivity due to development
and utilisation of innovative technologies by the young educated
population who formed the majority of the growing population. These
countries have been able to exploit the dynamics of demographic
transition to achieve economic growth by using the human resources
as the engine driving the economic development, improved
employment with adequate emoluments has promoted saving and
investment which in turn stimulated growth.”

National Income

Meaning and definition of National Income

National income is an uncertain term which is used interchangeably

with national dividend, national output and national expenditure. On
this basis, national income has been defined in a number of ways. In
common parlance, national income means the total value of goods
and services produced annually in a country.

In other words, the total amount of income accruing to a country

from economic activities in a year’s time is known as national income.
It includes payments made to all resources in the form of wages,
interest, rent and profits.

The definitions of national income can be grouped into two classes:

One, the traditional definitions advanced by Marshall, Pigou and
Fisher; and two, modern definitions.

The Marshallian Definition:

According to Marshall: “The labour and capital of a country acting on

its natural resources produce annually a certain net aggregate of
commodities, material and immaterial including services of all kinds.
This is the true net annual income or revenue of the country or
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 national dividend.” In this definition, the word ‘net’ refers to
deductions from the gross national income in respect of depreciation
and wearing out of machines. And to this, must be added income
from abroad.

For example, a peasant sells wheat worth Rs.2000 to a flour mill

which sells wheat flour to the wholesaler and the wholesaler sells it to
the retailer who, in turn, sells it to the customers. If each time, this
wheat or its flour is taken into consideration, it will work out to
Rs.8000, whereas, in actuality, there is only an increase of Rs.2000
in the national income.

The Pigouvian Definition:

A.C. Pigou has in his definition of national income included that

income which can be measured in terms of money. In the words of
Pigou, “National income is that part of objective income of the
community, including of course income derived from abroad which
can be measured in money.”

This definition is better than the Marshallian definition. It has proved

to be more practical also. While calculating the national income now-
a- days, estimates are prepared in accordance with the two criteria
laid down in this definition.

First, avoiding double counting, the goods and services which can be
measured in money are included in national income. Second, income
received on account of investment in foreign countries is included in
national income.

according to this definition, in the backward and underdeveloped

countries of the world, where a major portion of the produce is simply
bartered, correct estimate of national income will not be possible,
because it will always work out less than the real level of income.
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 Thus the definition advanced by Pigou has a limited scope.

Fisher’s Definition:

Fisher adopted ‘consumption’ as the criterion of national income

whereas Marshall and Pigou regarded it to be production. According
to Fisher, “The National dividend or income consists solely of services
as received by ultimate consumers, whether from their material or
from the human environments. Thus, a piano, or an overcoat made
for me this year is not a part of this year’s income, but an addition to
the capital. Only the services rendered to me during this year by these
things are income.”

Fisher’s definition is considered to be better than that of Marshall or

Pigou, because Fisher’s definition provides an adequate concept of
economic welfare which is dependent on consumption and
consumption represents our standard of living.

Estimation of National Income

The national income of a country can be measured by three

alternative methods: (i) Product Method (ii) Income Method, and (iii)
Expenditure Method.

1. Product Method:

We calculate the money value of all final goods and service produced
in an economy during a year. The money value of these goods and
service is calculated at market prices. The sum total is called the GDP
at market Price.

2. Income Method:

We estimate the income earned by various factor services engaged in

the process of production. The sum of these incomes provides us the
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 measure of gross National Income at factor cost.

3. Expenditure Method:

We sum up the flow of expenditure in an economy to arrive at

National Income estimate. If we add the values of expenditures on all
these items we get value of gross National expenditure at market
prices.

Relation between Economics welfare and National Income

Pigou establishes a close relationship between economic welfare and

national income, because both of them are measured in terms of
money. When national income increases, total welfare also increases
and vice versa.

The effect of national income on economic welfare can be

studied in two ways:

(1) By change in the size of national income, and

(2) By change in the distribution of national income.

Change in the Size of National Income:

The change in the size of national income may be positive or negative.

The positive change in the national income increases its volume. As a
result, people consume more of goods and services, which lead to
increase in the economic welfare.

Whereas the negative change in national income results in reduction

of its volume. People get lesser goods and services for consumption
which leads to decrease in economic welfare. But this relationship
depends on a number of factors.
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 1. Change in Prices:

Is the change in national income real or monetary? If the change in

national income is due to change in prices, it will be difficult to
measure the real change in economic welfare. For example, when the
national income increases as a result of increase in prices, the
increase in economic welfare is not possible because it is probable
that the output of goods and services may not have increased. It is
more likely that the economic welfare would decline as a result of
increase in prices. It is only the real increase in national income that
increases economic welfare.

2. Working Conditions:

It depends on the manner in which the increase in national income

comes about. The economic welfare cannot be said to have increased,
if the increase in national income is due to exploitation of labour e.g.,
increase in production by workers working for longer hours, by
paying them lesser wages than the minimum. Forcing them to put
their women and children to work, by not providing them with
facilities of transport to and from the factories and of residence, and
their residing in slums.

3. Per Capita Income:

National income cannot be a reliable index of economic welfare, if per

capita income is not kept in mind. It is possible that with the increase
in national income, the population may increase at the same pace and
thus the per capita income may not increase at all. This is because the
economic welfare of people depends not on capital goods but on
consumption goods used by them. Similarly, when the national
income and the per capita income rise sharply during war time, the
economic welfare does not increase because during war days the
entire production capacity of the country is engaged in producing war
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 material and there is shortage of consumption goods. As a result, the
standard of living of the people fall and the economic welfare
decreases.

4. Method of Spending:

The influence of increase in national income on economic welfare

depends also on the method of spending adopted by the people. If
with the increase in income, people spend on such necessities and
facilities as milk, ghee, eggs, fans, etc. which increase efficiency, the
economic welfare will increase.

But on the contrary, the expenditure on drinking, gambling etc. will

result in decreasing the economic welfare. As a matter of fact, the
increase or decrease in economic welfare as a result of increase in
national income depends on changes in the tastes of people. If the
change in fashions and tastes takes place in the direction of the
consumption of better goods, the economic welfare increases.

Conclusion:

It is clear from the above analysis that though the national income
and economic welfare are closely inter-related, yet it cannot be said
with certainty that the economic welfare would increase with the
increase in national income and per capita income.

The increase or decrease in economic welfare as a result of increase in

national income depends on a number of factors such as the rate of
growth of population, the methods of earning income, the conditions
of working, the method of spending, the fashions and tastes, etc.
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 New Economics Policy 1991

In 1990s the govt. of India in order to come out of the economic crisis
decided to devite from its previous economic policies and learn
towards Privatization. In July 1991 when the devaluation of Indian
currency took place the govt. started announcing its new economic
polices one after another. Though these polices pertained to different
aspects of the economic field they had one thing in common. The
economic element was to orient the Indian system towards the world
market it is in this context the govt. launched its new economic policy
which consisted of among other things three important features.
Liberalization, Privatization and Globalization .Liberalization of the
economy means to free if from direct or physical control imposed by
the Govt. Economic reforms were based on the assumption that
marten forces could guide the economy in amore effective manner
Than Government.

Main objectives of New –Economic Policy – 1991

The main objectives behind the launching of the new –economic

policy (NEP) in 1991 by the union finance minister Dr. Manmohan
Singh, could be stated as follows:

The main objective was to plunge Indian economy in to the arena

of ‘Globalization and to give it a new thrust on market
orientation.
The NEP intended to bring down the rate of inflation and to
remove imbalances in payment.
It intended to move towards higher economic growth rate and to
build sufficient foreign exchange reserves.
It wanted to achieve economic stabilization and to convert the
economic in to a market economy by removing all kinds of
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 unnecessary restrictions.
It wanted to permit the international flow of goods, services,
capital, human resources and technology, without many
restrictions.

Beginning with mid-1991, the govt. has made some radical changes in
its policies bearing on trade, foreign investment exchange rate,
industry, fiscal of fairs etc…The various elements, when put together,
constitute an economic policy which marks a big departure from what
has gone before.

Branches of New Economics Policy

The term “liberalization” in this context implies economic

liberalization. “Economic liberalization” constitutes one of the basic
elements of the new Economic policy (NEP) which the Indian
Government launched in the middle of the year 1991. The other
important aspects of the policy are –Privatization of the public sector,
Globalization and market friendly state.

The main trust of the new economic policy is “liberalization”. The

essence of this policy is that greater freedom is to be given to the
entrepreneur of any industry, trade or business and that
governmental control on the same is reduced to the minimum.

MAIN FEATURES OF THE POLICY OF LIBERALISATION:

Following are main features of liberalization.

Lessened Government control and freelance to private Enterprises.

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 Capital Markets opened for private Entrepreneurs
Simplification of Licensing policy
Opportunity to purchase foreign exchange at market prices
Right To Take Independent Decisions Regarding The Market
Better opportunity for completion
Widened Liberty in the Realm of Business and Trade

PRIVATIZATION

Privatization is a managerial approach that has attracted the interest

of many categories of people academicians, politicians, government
employee players of the private sector and public on the whole.
Privatization has an adverse impact on the employee morale and
generates fear of dislocation or termination more likely it also adds
on to the apprehension pertaining to accountability and quality.
Experts both advocate and criticize Privatization making it more or
less provocative decision that calls for diligent scurrying by the
decision makers in assessment of process and cons attached to the
concerned policy.

In India Privatization has been accepted with a lot of resistance and

has been dormant initially during the inception period of economic
Liberalization in the country. The article intends to analyze the
present status of Privatization in India and summarize its advantages
and disadvantages in context with the Indian economy. Privatization
is also one of the aspects other new economic policy which came to
take shape in the decade 1990. The term “Privatization ” can notes
wide range of ideas. But the broad meaning of Privatization is that in
the economic field much broader role is to be agencies and the role of
the public sector activities is to be limited.

MAIN OBJECTIVEOF PRIVATIZATION

The process of Privatization has been triggered with the main

:
 intention of improving industrial efficiency and to facilitate the inflow
of foreign investments.

1. It also wants to make the public sector undertakings strong able

efficient companies. It recommends a change in the role of the
government from that of the “owner manager” to that of a mere
“controller” or “regular”.
2. It also intend to ensure efficient utilization of all types of
resources including human resources.
3. Privatization insists on the government to concentrate on the
area such as education administration and infrastructure and to
give up the responsibility of looking after business and running
industries. It is expected to strengthen the capital market by
following appropriate trade policies.

GLOBALIZATION

Globalizations represent one of the aspects of the new economic

policy lunched in the decades of 1980 and 1990s. The new economic
policy has also made the economy out wardly oriented such that its
activities are now to be governed both by domestic market and the
world market.

The tem Globalization was first coined in 1980s . But even before this
there were interaction among nations. But in the modern days
Globalization has launched all spheres of life such as economy,
education, technology, cultural phenomenon , social aspects etc……
the term global village is also frequently used to high light the
significance of the Globalization . “ Globalization of production refers
to the integration of economic activities by units of private capital on
awaked scale .”S.K Misra and V.K Pury “stated that in simple terms
Globalization means integrating economy of a country with the world
economy.”
:
 In simple words” Globalization is refers to a process of increasing
economic integration and growing economic interdependence
between countries in the world economy”

New Industrial Policy 1991

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. 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.
before1991 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 70’s and 80’s, Government initiated liberalization measures in
the industrial policy framework. The drastic liberalization measures
were however, carried out in 1991.

Objectives:

The New Industrial Policy,1991 seeks to liberate the industry from the
shackles of licensing system Drastically reduce the role of public
sector and encourage foreign participation in India’s industrial
development. The broad objectives of New Industrial Policy are as
follows:

(i) Liberalising the industry from the regulatory devices such as

licenses and controls.

(ii) Enhancing support to the small scale sector.

:
 (iii) Increasing competitiveness of industries for the benefit of the
common man.

(iv) Ensuring running of public enterprises on business lines and thus

cutting their losses.

(v) Providing more incentives for industrialisation of the backward

areas, and

(vi) Ensuring rapid industrial development in a competitive

environment.

Unit- 4
.
The idea of Five year planning was taken from the erstwhile Soviet
Union under socialist influence of first Prime Minister Jawaharlal
Nehru.
:
 An overview of all plans implemented in India is given below. The
first eight plans had their emphasis on growing the public sector with
massive investments in basic and heavy industries, but since the
launch of the Ninth Plan in 1997, attention has shifted towards
making government a facilitator in growth.

Planning without an objective is like driving without any destination.

There are generally two sets of objectives for planning, namely the
short-term objectives and the long-term objectives. While the short-
term objectives vary from plan to plan, depending on the immediate
problems faced by the economy, the process of planning is inspired by
certain long term objectives. In case of our Five Year plans, the long-
term objectives are:

(i) A high rate of growth with a view to improvement in standard of

living.

(ii) Economic self-reliance;

(iii) Social justice and

(iv) Modernization of the economy

(v) Economic stability

(i) High Rate of Growth

All the Indian Five Year Plans have given primary importance to
higher growth of real national income. During the British rule, Indian
:
 economy was stagnant and the people were living in a state of abject
poverty. The Britishers exploited the economy both through foreign
trade and colonial administration. While the European industries
flourished, the Indian economy was caught in a vicious circle of
poverty. The pervasive poverty and misery were the most important
problem that has to be tackled through Five Year Plan.

During the first three decades of planning, the rate of economic

growth was not so encouraging in our economy Till 1980, the average
annual growth rate of Gross Domestic Product was 3.73 percent
against the average annual growth rate of population at 2.5 percent.
Hence the per-capita income grew only around 1 percent. But from
the 6th plan onwards, there has been considerable change in the
Indian economy. In the Sixth, Seventh and Eight plan the growth rate
was 5.4 percent, 5.8 percent and 6.8 percent respectively. The Ninth
Plan, started in 1997 targeted a growth rate of 6.5 percent per annum
and the actual growth rate was 6.8 percent in 1998 – 99 and 6.4
percent in 1999 – 2000. This high rate of growth is considered a
significant achievement of the Indian planning against the concept of
a Hindu rate of growth.

(ii) Economic Self Reliance

Self reliance means to stand on one’s own legs. In the Indian context,
it implies that dependence on foreign aid should be as minimum as
possible. At the beginning of planning, we had to import food grains
from USA to meet our domestic demand. Similarly, for accelerating
the process of industrialization, we had to import, capital goods in the
form of heavy machinery and technical know-how. For improving
infrastructure facilities like roads, railways, power, we had to depend
on foreign aid to raise the rate of our investment.

By the end of the fifth plan, Indian became self-sufficient in food-

:
 grain production. In 1999-2000, our food grain production reached a
record of 205.91 million tons. Further, in the field of industrialization,
now we have strong capital industries based on infrastructure. In case
of science and technology, our achievements are no less remarkable.
The proportion of foreign aid in our plan outlays have declined from
28.1 percent in the Second Plan to 5.5 percent in the Eighth Plan.
However, in spite of all these achievements, we have to remember
that hike in price of petroleum products in the international market
has made self-reliance a distant possibility in the near future.

(iii) Social Justice:

Social justice means to equitably distribute the wealth and income of

the country among different sections of the society. In India, we find
that a large number of people are poor; while few lead a luxurious life.
Therefore, another objective of development is to ensure social justice
and to take care of the poor and weaker sections of the society. The
Five-Year Plans have highlighted four aspects of social justice. They
are:

(i) Application of democratic principles in the political structure of

the country;

(ii) Establishment of social and economic equity and removal of

regional disparity;

(iii) Putting an end to the process of centralization of economic

power; and

(iv) Efforts to raise the condition of backward and depressed classes.

Thus the Five Year Plans have targeted to uplift the economic
condition of socio-economically weaker sections like scheduled caste
and tribes through a number of target oriented programmes. In order
:
 to reduce the inequality in the distribution of landed assets, land
reforms have been adopted. Further, to reduce regional inequality
specific programmes have been adopted for the backward areas of the
country.

In spite of various efforts undertaken by the authorities, the problem

of inequality remains as great as ever. According to World
Development Report (1994) in India the top 20 percent of household
enjoy 39.3 percent of the national income while the lowest 20 percent
enjoy only 9.2 percent of it. Similarly, another study points out that
the lowest 40 percent of rural household own only 1.58 percent of
total landed asset while the top 5.44 percent own around 40 percent
of land. Thus the progress in the field of attaining social justice has
been slow and not satisfactory.

(iv) Modernization of the Economy:

Before independence, our economy was backward and feudal in

character. After attainment of independence, the planners and policy
makers tried to modernize the economy by changing the structural
and institutional set up of the country. Modernization aims at
improving the standard of living of the people by adopting a better
scientific technique of production, by replacing the traditional
backward ideas by logical reasoning’s and bringing about changes in
the rural structure and institutions.

These changes aim at increasing the share of industrial output in the

national income, upgrading the quality of products and diversifying
the Indian industries. Further, it also includes expansion of banking
and non-banking financial institutions to agriculture and industry. It
envisages modernization of agriculture including land reforms.

(v) Economic Stability:

:
 Economic stability means to control inflation and unemployment.
After the Second Plan, the price level started increasing for a long
period of time. Therefore, the planners have tried to stabilize the
economy by properly controlling the rising trend of the price level.
However, the progress in this direction has been far from satisfactory.

Thus the broad objective of Indian plans has been a non-inflationary

self-reliant growth with social justice.

Need of Economic Planning for the rapid economic

development, the under developing and developing countries have
taken the shelter under economic planning. Thus, the arguments in
favour of economics planning in underdeveloped and developing
countries may be started as under:

1) Weak, Private Sector:

In an underdeveloped country, private enterprise is weak and may fail

to take the necessary risks of pioneering those industries which are
necessary for rapid economic development of the country.

Therefore, the State must come to the forefront action. The

underdeveloped countries have remained almost stationary.

This task of their development is a big task. These countries need a

big push. It is only possible through a comprehensive planning. Thus
the Government should follow comprehensive planning for the
development of underdeveloped countries.

(2) Inequalities of Income:

Inequalities of income and wealth exist in underdeveloped

economies. Private enterprise system does not secure an equal
distribution of the benefits of economic development among different
:
 classes of the community. The developing social conscience of the
people cannot tolerate the existence of such grave inequalities. This
would secure a better distribution of national income among all
classes of people in the country.

(3) Problem of Unemployment:

Another reason why the underdeveloped countries need a plan is that

the working of pricing system has failed to solve the problem of mass
unemployment. The mass unemployment which existed during
1930’s was horrible. No country wanted to experience such as mass
unemployment again. There is also the acute problem of disguised
unemployment in under-developed countries. The mass
unemployment, particularly disguised unemployment, which exists in
underdeveloped countries, cannot be dealt with unless a
comprehensive economic plan for development is formulated.

(4) Change in Attitude:

All underdeveloped countries have become development-minded.

Now they want to pack the development of centuries into a few years.
They like to raise the standard of living of their people. Therefore,
these countries require quick economic development.

(5) Need of More Capital:

Higher rate of growth of development requires huge capital

investment. It involves a considerable degree of central planning and
control. Among the underdeveloped countries, higher rates of growth
have been registered in those countries where there is a planned
development. In the last 15-20 years, the rate of growth of income in
poor countries has been on the whole, higher than it was before they
adopted planned development.
:
 (6) Foreign Aid:

In modern economic activities the progress of one nation is related

directly or indirectly to the progress of other nations. Thus, the
detailed plan, mentioning specific output projects and investment
projects, is very useful in creating favorable atmosphere for bilateral
and multi-lateral agreements of foreign aid. Thus, carefully designed
plan outlay is essential for increasing foreign trade and thereby
improving development prospects.

(7) Structural Changes:

In an un-developed or under- developed country, the main economic

sector is predominantly agriculture. The secondary and tertiary
sectors are substantially less developed. This results into structural
dis-equilibrium. Thus, for increasing the overall productivity, it is
very essential that optimum labor force be diverted and employed on
secondary and tertiary sectors of the economy. This is possible only
by proper planning in different sectors of the economy.

(8) Economies of Scale:

The structured changes encourage and facilitate the setting up of new

industrial units, which invariably created external economies. But
these newly create economies are not usually taken into account by
the private entrepreneurs under the market system. In case of
external economies, role of public sector along with planning is
essential.

Thus, the overall gains are maximized by making proper plan

adjustments. Thus a specified investment can be best utilized taking a
macro-economic view to have appropriate social as well as private
gains. This strongly favors a planned development specially in case of
less developed countries.
:
 (9) Future Requirements:

In an attempt to maximize the current profit, the producers exploit

the natural resources without considering the future requirement.
Therefore, it is evident that if exhaustible natural resources are not
properly utilized, less will be available for future generations. To
conserve the natural resources carefully it is important to make and
execute proper plans.

Role of Agriculture in Indian Economy

Agriculture plays a vital role in the Indian economy. Over 70 per cent
of the rural households depend on agriculture as their principal
means of livelihood. Agriculture, along with fisheries and forestry,
accounts for one-third of the nation’s GDP and is its single largest
contributor. Agriculture provides food to all the citizens of our
country.

Share in national income

Agriculture is India’s big economy. Although the share of agriculture
in the total national income has been gradually decreasing on account
of development of the secondary and tertiary sectors its contribution
continues to be significant. IN 1950, the share of agriculture was 57%
but it is only 26% now. The more developed a country is the lesser is
the contribution of agriculture.
Source of Employment

Today almost 60% of the population depends directly or indirectly on

agriculture. The greater independence of working population on
agriculture indicates the underdevelopment of non-agricultural
activities in the country.
:
 Importance in industrial development

Agriculture provides raw materials to pour leading industries such as

cotton textiles and sugar industries. Not only have this workers in
industries depended on agriculture for their food. Agriculture also
provides the market for a variety of goods.
Importance in international trade

A number of the agricultural commodities like tea, coffee, spices and

tobacco constitute our main items of exports. This amount to almost
15% of our total exports. Hence agriculture provides foreign exchange
which helps us to buy machines from abroad. It also maintains a
balance of payments and makes our country self-sufficient.
Development of tertiary sector

Tertiary sector provides helpful services to the industries and

agriculture like banking, warehousing etc. Internal trade is mostly
done in agricultural produce. For example, various means of
transport get bulk of their business by the movement of agricultural
goods.
Revenue to the government

State government get a major part of their revenue in terms of land

revenue, irrigation charges, agricultural income tax etc.Central
government also earns revenue from export duties on the agricultural
production. Moreover our government can raise substantial revenue
by imposing agricultural income tax. However this has not been
possible due to some political reasons.
International importance
:
 Our agriculture has brought fame to the country. India enjoys first
position in the world as far as the production of tea and groundnuts
are concerned.
Internal trade

Agriculture plays a important role in the internal trade. It is because

of the fact that 90% of our population spends 60% of their income on
the purchase of the items like food, tea, milk etc.
Prof. Gunar Myrdal has rightly remarked, “It is the agricultural sector
that the battle for long term economic development of India will be
won or lost.”
IN fact the prosperity of agriculture is the prosperity of Indian
economy. We should not build industries at the cost of agricultural
land

and livestock on a farm. .

Interdependence between Agriculture

and Industry
Industry is not the substitute of agriculture; rather they are
complementary to one another. Both these sectors are so attached
with each other that it is not possible to increase the growth of one
sector without the improvement of the other sector. If agriculture is
considered as the ‘heart’ of the country, then obviously industry must
be consider as the ‘brain’.

The interdependence of these sectors is listed below:

(A) Impact of Agriculture on Industry:

Agriculture has huge positive impacts on the industrial

development, such as:
:
 (a) It regularly supplies raw materials like sugarcane , jute cotton,
oilseeds, tea, spices, wheat; paddy etc. to the consumer goods
industries.

(b) It supplies cereals, vegetables and other food items to the

industrial labourer and fodders for the domestic animals in the dairy
industries on a regular basis.

(c) Farmer-households used to save their money in the bank and

other financial institutions which ultimately is used by the industry
owners in the form of investment.

(d) Both for consumer and capital goods Industries agriculture sector
gives a ready market for the finished products.

(e) It regularly supplies manpower to the industries

(B) Impact of Industry on Agriculture:

This is needless to mention the impact of industry on agriculture.

The impact of industry on agriculture as follows:

(a) It regularly supplies scientific tools and equipment’s like tractors,

harvesters, pump-sets chemical fertilizers etc. to agriculture increase
the per hectare production.

(b)To increase the market for finished agricultural goods some

infrastructural development like roads, railway, storage etc. are very
essential. In this connection industry plays a vital role.

Choice of Technology
According to Frenkel, “Technology change is not a mere important in
the technical know – how. It means much more than this. It should
:
 be preceded by sociological change also, a willingness and desire on
the part of the community to modify their social, political and
administrative institution so as to make them fit with new techniques
of production and faster tempo of economic activity.” But the absence
of technological change means end of growth after a point.

However, the modern technology is changing rapidly and today no

country can hope to maintain steady advancement unless it keeps
pace with modern technological advancement or change. Today, the
main problems of underdeveloped and developing countries are:

1. Low production
2. Low productivity
3. High cost of production
4. Increases in demand existence of traditional technology

The economic development of a country lies in technological change

because both are closely related with each other.

Labour Intensive Techniques

Labor intensive refers to a process or industry that requires a large
amount of labor to produce its goods or services. The degree of labor
intensity is typically measured in proportion to the amount of capital
required to produce the goods or services; the higher the proportion
of labor costs required, the more labor intensive the business.

According to Prof. Myint, “labour intensive methods of production

are those that require a large quantity of labour with a given unit of
capital.” With this method of production, it is possible to raise output
by using the same amount of capital but greater amount of labour.

Argument in favour of Labour Intensive

Techniques
:
 (1) More Employment Generation:

It needs no argument to say that labour intensive techniques are

more employment generating. Underdeveloped countries face the
scarcity of capital and abundance of manpower. The capital labour
ratio in these countries is very low. So, labour intensive technique is
indispensable if the problem of unemployment and disguised
unemployment is to be resolved.

(2) Utilization of Scarce Capital:

Underdeveloped countries suffer from an acute shortage of capital

and entrepreneurial resources. Keeping these facts in mind they will
have to select a technique which can economies the use of these
scarce resources. Thus, the adoption of these methods of production
is more suitable in underdeveloped countries as it will release the
scarce capital resources for other important uses.

(3) Decentralisation:

The use of labour intensive techniques will confer the benefits of

decentralisation and avoid the evils of factory system. As these
techniques are invariably associated with small and cottage industries
and hence they can be fruitful in the establishment of an economically
decentralised society. The present democratic governments have
desired to attain decentralisation with social justice.

(4) Favourable Effect on Distribution of Income:

Labour intensive technique is also favored because it has favourable

effect on distribution of income. A labour intensive project will tend
to raise the income level of a relatively large number of low income
workers. By providing more employment these methods of
production tend to provide higher degree of economic equality to a
:
 common man.

(5) Higher Level of Consumption:

Labour intensive technique will be a useful method to raise the

present level of consumption. These techniques tend to raise the level
of wages. These increased wages will automatically be spent on
consumption. In a sense labour intensive technique will ensure a
higher level of consumption of the working classes.

(6) More Production at Cheaper Rate:

Another argument advanced in favour of labour intensive technique

is that it provides the cheaper way of raising output in less developed
countries. In a poor country, the social price of labour is likely to be
below or even zero compared with the high price of capital. Therefore,
the most efficient use of resources in a poor country will tend to
favour labour intensive methods.

(7) Creation of Economic and Social Overheads:

It is also argued that labour intensive technique would also mean a

considerable saving in expenditure on the development of economic
and social overheads. Industries using these techniques are usually
set up in villages. Less spending is made on the building of houses,
development of roads and other means of transport and providing
civic amenities. Thus, there is a considerable scope of saving of
expenditure on economic and social overheads.

(8) Control on Inflationary Pressures:

Labour intensive techniques have a counter-inflationary effect and

hence they are preferred in developing countries. These techniques
ensure quick and rapid increase in the supply of consumer goods
:
 which in turn is helpful in combating the inflationary pressure which
has become a common feature in most of the underdeveloped
countries.

(9) Saving of Foreign Exchanges:

The adoption of labour intensive techniques would mean a

considerable saving of foreign exchange resources. In short, these
techniques are helpful to solve the problem of foreign exchange.

(10) Social Equality:

It is also pointed out by some supporters of labour intensive

technique that it provides social justice as it is helpful to increase the
income of a common man at village level.

(11) Better Utilization of Local Resources:

Labour intensive techniques are adopted in small scale and rural

industries. Thus, there is ample scope of utilization of local resources.

(12) Scope for Employment to Children and Women:

Labour intensive technique is also supported on the ground that it

provides employment opportunities to children and women.

Arguments against Labour Intensive Techniques:

Some critics have opposed labour intensive technique on the

following grounds.

(i) Labour intensive technique is static and of short term in nature

which cannot be applied in the long run period.

(ii) As this technique leads the redistribute incomes in favour of those

who have low marginal propensity to save, this result low rate of
:
 capital formation.

(iii) There is no possibility of improved and more advanced skill

during the course of labour intensive techniques.

(iv) The production process is very costly.

(v) No possibility of research, modernisation.

Unit -5
Meaning and Definition of Public
Sector/Public Enterprise
Public sector consists of undertaking which are directed either by a
branch of Government itself or by a body set up by Government to
direct the Undertaking in Public Interest. “An enterprises where there
is no private ownership where its function are not merely confined to
the maximization of profits to he promotion of the private interest of
the enterprise but are governed by the public or social interest and
where the management is responsible to the Government either
directly as a departmental undertaking or indirectly as in
Government companies and corporations.”

Growth of Public Sector in India:

The public sector undertaking is growing at a rapid rate after

independence. At present in our country, there are 750 State public
sector enterprises and 225 central public sector enterprises
approximately employing nearly about 1,00,000 managers.

During 7th Five year plan, on an average 50,000 crore of rupees were
invested at the beginning in public sector enterprises which brought a
remarkable contribution in the field of economic development
:
 Needless to mention here that these public sector enterprises covered
all economy sector.

Objectives of Public Sector:

The general objectives of public sector are:

(a) To provide required investment and promotion of industrial

activity by way of indirect public investment either by supplying
financial assistance to private sector or to supply infrastructural and
basic activities;

(b) To supply socio-economic developmental opportunities this

should not be transferred to private sector undertakings;

(c) To nationalize those companies which are foreign dominated,

(d) To supply activities relating to import-substituting and export-

promoting which are essential for the development of the country;

(e) To develop savings by mobilizing resources with the help of proper

public sector prices more quick than others;

(f) To introduce certain activities to take the benefit of foreign aid and
co-operation in the public sector;

(g) To make a balanced regional development by establishing regional

promotional undertakings in less developed regions, e.g., D V. C
(Damodar Vally Corporation);

(h) To protect the interest of small farmers by transferring all private

licenses to the corporations of agricultural reforms;

(i) To control the concentration of economic power and wealth as

well;
:
 (j) To make a social control on long term capital by supplying the
necessary financial assistance through public financial institutions
which are quite justified?

(k) To supply necessary finance for various development programmes

which are essential for the development of the country?

(l) To make opportunities for employment and to form a rational

society this is absolutely desired;

(m) To re-distribute incomes either by rising wage levels and

checking higher salary level or by supply outputs at a concessional
rate to the poor etc.

(n) To generate surplus resources for future growth and development;

and

(o) To use human resources and material resources in a better way.

Role of Public Sector

1. Rapid Economic Development

The prerequisite of faster economic development is the creation of

infrastructure and the growth of basic industries like power, steel
transportation; communication, banking etc. These industries require
huge capital investment and involve long-gestation period and so
private sector may not be interested to undertake the development of
such industries. Further, the private sector lack financial and
technical skills to develop such industries. In other words, reluctance
on the part of private entrepreneurs to develop key industries due to
high risk and low returns necessitated the establishment of PSEs.
Government with its capacity to mobilize huge economic resources
:
 can develop the industries that are significant for growth prospects of
the country. Thus in the earlier phase of development heavy state
spending on investment in basic infrastructural sectors and service
facilities(for example financial institutions, telecommunication
banking etc.) is essential for providing a congenial atmosphere to the
private sector to facilitate the process of accelerated development of
the economy.

2. Reduction of Concentration of Economic Powers

Private Public Sector reduces inequalities of income through welfare

programmes, favorable pricing policy towards small industries and
supply of cheaper goods to the consumer. Private sector may
manipulate the price of essential goods and indulge into quick profit-
making by controlling the volume and price of such goods. PSEs
prevent such concentration of economic power.

3. 3.Balanced Regional Growth

Private sector generally neglects backward regions that lack

infrastructure and other basic facilities such as power, roads,
telecommunication, skilled labor etc. PSEs set up large projects in
these areas and spend huge cost to develop such areas. In this
manner PSEs help to achieve balanced regional growth.

4. Employment Generation

The adequate generation of employment opportunities is a major

objective of the public sector enterprises. This sector has provided
direct employment to more than 80 percent of organized labor.

5. Import-Substitution and Export-Promotion

In the initial period of development foreign exchange constraints

:
 exist due to huge imports of capital goods and low exportable surplus.
PSEs produce importable goods domestically which tend to save
precious foreign exchange and facilitate exports.

6. Resource Mobilization

PSEs mobilize savings through large network of banking and financial

institutions. The profits of PSEs are ploughed back into
developmental activities of the country. Further, PSEs contribute to
the Government’s exchequer through payment of tax and divided.

Problems of Private Sector

1. Poor project planning:

Investment decisions in many public enterprises are not based upon

proper evaluation of demand and supply, cost-benefit analysis and
technical feasibility.

Lack of a precise criterion and flaws in planning have caused undue

delays and inflated costs in the commissioning of projects.
Sometimes, projects are launched without clear-cut objectives and
serious thought.

Many projects in the public sector have not been finished according to
the time schedule. Barauni Refinery was commissioned two years
behind schedule and the Trombay Fertilizer plant was delayed by
three years thereby causing an increase of Rs. 13 corers in the original
cost estimates.

There is lack of clear-cut objectives and managers in the public sector

often find themselves torn between conflicting goals of profitability
and social service.

2. Over-capitalization:
:
 Due to inefficient financial planning, lack of effective financial control
and easy availability of money from the Government, several public
enterprises suffer from over-capitalisation.

The Administrative Reforms Commission found that Hindustan

Aeronautics, Heavy Engineering Corporation and Indian Drugs and
Pharmaceuticals Ltd., were overcapitalized. Such over-capitalization
resulted in high capital-output ratio and wastage of scarce capital
resources.

3. High establishment costs:

Public enterprises incur heavy expenditure on social infrastructure

such as schools, hospitals, etc. Location in backward regions and the
desire to make the undertaking a model employer lead to huge capital
outlay on housing and other amenities for labour.

Recurring expenditure is required to maintain these facilities. High

establishment costs, overhead costs and other expenses reduce the
profitability of public enterprises.

4. Overstaffing:

Manpower planning is not effective due to which several State

enterprises like Bhilai Steel have excess manpower. Recruitment is
not based on sound labour projections. On the other hand, posts of
Chief Executives remain unfilled for years despite the availability of
required personnel.
:
 5. Under-utilisation of capacity:

One serious problem of the public sector has been low utilisation of
installed capacity.

In the absence of definite targets of production, effective production

planning and control, proper assessment of future needs, adequate
supply of power and industrial peace, many undertakings have failed
to make full use of their fixed assets.

The average capacity utilisation in more than 50 per cent of the public
enterprises has been less than 75 per cent. There is considerable idle
capacity. In some cases productivity is low on account of poor
materials management or ineffective inventory control.

6. Lack of a proper price policy:

There is no clear-cut price policy for State enterprises and the

Government has not laid down guidelines for the rate of return to be
earned by different undertakings.

State enterprises are expected to achieve various socio-economic

objectives and in the absence of a clear directive, pricing decisions are
not always based on rational analysis.

In addition to dogmatic price policy, there is lack of cost-

consciousness, quality consciousness, and effective control on waste
and efficiency.

7. Unsatisfactory industrial relations:

In several State enterprises relations between management and

labour are far from cordial. There has been serious and frequent
labour trouble in Durgapur Steel Plant, Bharat Heavy Electricals,
Bhopal, and in Bangalore-based undertakings.
:
 Millions of days and output worth crores of rupees have been lost due
to strikes and gheraos. Wage disparities have been the main cause of
labour trouble in the public sector.

The percentage increase in the per capita emoluments of public sector

employees has been higher than the percentage increase in consumer
price index.

8. Lack of coordination:

Various state enterprises are dependent on one another as the output

of one enterprise is the input of another. For instance, the efficient
functioning of power and steel plants depends on the production and
transportation of coal which in turn is dependent upon supplies of
heavy equipment and machinery.

Despite such interdependence; effective coordination between

different undertakings in the areas of personnel, finance, materials
management and research has not been achieved.

9. Lack of motivation:

Directors and managers of public enterprises have little personal

stake. There is little incentive to work hard and improve efficiency.
Centralisation of authority and rigid bureaucratic control hamper
initiative, quick decisions and flexibility of operations. Personal touch
with employees and sensitivity to consumers’ needs are lacking.

10. Political interference:

There is excessive influence and interference by political leaders and

civil servants in the functioning of public enterprises. Parliamentary
control reduces the autonomy of these enterprises.

Suggestions for Improving the

:
 Performance of Public Sector
/Enterprises
Controlling the cost at every level of public sector enterprises.

Increase the production.

Reforms in capital base.

Increase the standard of public sector enterprises to manage the

competition from both domestic and foreign competitors.

Identifying redundant manpower and dealing with it through

means a retraining, redeployment and encouraging self–
employment etc.

Reasons for the Poor Performance of Public Sector

Enterprises

1. Lack of Importance to Profit Motive:

In the working of public enterprises profitability criteria was not

given proper place.

Some of the persons and economists associated with our Planning

Commission who formulated policies on public sector enterprises as
well as those who were entrusted with setting them up and running
them played down the idea of profit making by public enterprises and
unduly emphasized the social obligations of public enterprises. It is
only recently that profit aspect of public enterprises has been given
due recognition.

2. Inappropriate Location:

An important reason for the low profitability of public enterprises is

:
 their uneconomic location. Usually, public enterprises are set up on
the basis of political considerations rather than economic criteria.
There is clamor for locating these enterprises in certain regions on
the part of the ruling party bosses, influential ministers and public
leaders even at the threat of fasts.

3. Underutilization of Installed Capacity:

Low utilisation of capacity has been a very important reason for the
low profitability of the public undertakings. Enormous installed
capacities have been created with the help of foreign credits and
know-how on easy terms, but fuller use of them has not been made.
The phenomenon of underutilization of capacities has arisen on
account of overestimating demand, administrative deficiencies, lack
of proper working techniques, labour troubles or failure to install
balancing equipment or making technical improvement essential for
fuller utilisation of capacity.

4. Not Making Proper Technical Feasibility Studies:

The technical factors determine the scale of operations of production

enterprises. Technical considerations require that there should be a
thorough investigation into the processes to be used and the
availability of the essential factors of production like raw materials,
fuel, power, water supply, skilled and unskilled labour, credit
facilities, transport, proximity of the markets, etc.

In several cases, there is no evidence that a proper study of these

aspects was made before the project was launched. The scale was
determined more by a bias for launching a big project rather than on
the basis of economic calculation of production potential and likely
demand. The Committee on Public Undertakings pointed out that
tenders were invited without any project reports in the case of
Trombay Fertilizer Project, Hindustan Insecticides and Indian
:
 Telephone Industries.

5. Delay in Project Completion:

Also, very little consideration is given to the time-schedule in the

construction of the public sector projects. The inevitable result is that
the projects are commissioned much later than scheduled. It
unnecessarily raises the cost of construction. Trombay Fertilizer
Project, for instance, took 6-7 years to complete against time schedule
of 3 years and this heavily raised the cost of the project.

6. Absence of Professional Management:

The composition of the Boards of Directors indicates the absence of

professional managers. These boards are dominated invariably by IAS
officers from the civil service, a number of who owe their position to
political patronage rather than their professional managerial abilities.

7. Overstaffing, Defective Recruitment and Promotion

Policy:

With regard to staffing, recruitment and promotion policy a

deplorable situation exists in our public sector. Recruitment is
haphazard; there is overstaffing, drift of personnel and a lack of
regular schemes of ‘executive development’. The Committee on Public
Undertakings pointed out the bureaucratic approach to the
administration of these undertakings and warned against the regular
practice of dumping retired and superannuated Government officials
into their service.

8. Lack of Rational Pricing Policy:

The public enterprises in India have failed to evolve an appropriate

pricing policy for their products. Should public enterprises follow
:
 marginal cost pricing or average cost pricing or the mark-up pricing
policy? In the absence of an appropriate pricing policy, optimal
utilisation of resources and profitability cannot be achieved.

Most of the public enterprises are regulated by the Government and

do not aim at maximising profits. It is worth noting that most of the
products produced by the public enterprises such as steel, fertilizers,
oil etc. are essential inputs for other industries or sectors of the
economy.

9. Political Interference:

The political interference has been forcing the management of public

enterprises to give up sound commercial principles in arriving at vital
decisions pertaining to investment, location, production and pricing
policies of public enterprises.

Most often political considerations guide the decision making of the

public enterprises. Ministers and Members of Parliament put
pressure on the government about the location of the public sector
projects in their constituencies regardless of any economic criteria
and feasibility studies made. This leads to considerable wastage of
capital resources.

Conclusion:

The relatively low surpluses created by the public enterprises are

attributed to their long gestation period, the lack, in the initial period,
of expert and trained personnel, defective planning, wrong selling
policies and monopolistic nature of various public enterprises which
produced lethargy among the managerial staff.

It is true that there may be losses in the initial stages but the losses
should not have become a permanent phenomenon. The public
:
 enterprises suffer from inefficiency and low productivity due to lack
of an effective system of accountability. It is the system of
accountability in the private sector which leads to an efficient
utilisation of resources which ensures profitability.

Private Sector

Private sector includes all different types of individual or corporate

enterprises, both domestic and foreign, engaged in different fields of
productive activity. Private sector enterprises are owned and
managed by the private sector. These private sector enterprises are
mostly characterized by certain common characteristics like private
initiative, profit motive and ownership and management in private
hands.

In 18th and 19th century, most of the countries of the world adopted
the policy of laissez faire where the Governments followed a policy of
non-interference in economic activity by the State. This had led to
huge expansion of private sector in almost all the countries of the
world. In recent times, the private sector has changed its character
and is now quite different from the private enterprises of the past.

Growth of Private Sector in India:

At the dawn of independence, almost the entire productive activities

and trade were owned and managed by the private sector. At that
time, the role of public sector was insignificant, and its activity was
very much confined to irrigation, power, railways, ports, ordinance,
posts and telegraphs etc. But the activity of the public sector was
gradually expanded in different new fields by both the Centre and the
States.

Accordingly, the public sector started to play a significant role in

different areas; in terms of investment, turnover, capital formation,
:
 import substitution, contribution to export etc. Even after the huge
expansion of the public sector, the private sector still continued to
play a dominant role in all spheres and thereby accounting nearly 80
per cent of the gross domestic product and about 90 per cent of the
total employment. In a narrow sense, private corporate sector
provides a picture about the private sector. Thus, it is quite important
to study the growth of private corporate sector in comparison to that
of public sector.

The Government Support and Control and the Private

Sector:

In order to provide necessary support and finance to the private

sector, the Government of India has set up a huge network of
development banking and financial institution since independence.
These institutions include Industrial Finance Corporation of India
(IFCI), the State Financial Corporation’s (SFCs), the Industrial
Development Bank of India (IDBI), the Industrial Credit and
Investment Corporation of India (ICICI), the EXIM Bank, the
National Bank for Agricultural and Rural Development (NABARD)
etc.

These institutions are providing adequate financial support to

different large, medium and small scale industries, agricultural
sector, traders, export oriented units etc. In addition to these
institutions, the Government has set up some other institutions to
assist the private sector in the form of infrastructure, technological
development, raw material supply, marketing arrangements etc.

Role Of Private Sector

1. Industrial Development:

During the pre-independence period, the private sector has played a

:
 responsible role in Indian economy where it set up and expanded
cotton and jute textiles, sugar, paper, edible oil, tea etc. After
independence, the national government gave sufficient stress on
industrialization.

The private sector also made a serious attempt to invest on industries

producing wide range of intermediate products which include
machine tools, chemicals, paints, plastic, ferrous and non-ferrous
metals, automobiles, electronics and electrical goods etc. In this way,
the private sector has developed the consumer goods industry,
producing both durables and non-durables and became self-
sufficient in the production of different types of consumer goods.

2. Agriculture:

In India agriculture and other allied activities like animal husbandry,

dairying, poultry etc. are playing a dominant role as it contributes
nearly 30 per cent of GDP and it provided employment to nearly 67
per cent of the total working population of the country. Such a big
sector is completely owned and managed by the private sector.

3. Trading:

Both the wholesale and retail trade in India are in the hands of
private sector. In a big country like India, having a huge size of
population, the entire trading activities are managed by the private
sector in a best possible manner. But in case of scarcity of any
essential commodities, the private businessmen have their natural
tendency in resorting to hoarding and black marketing of such
commodities leading to exploitation of the consumers.

4. Infrastructure:

Private sector is also providing an active support to the

:
 infrastructural sector of the country. Although, the major areas of the
infrastructural sector lies in the hands of public sector but still the
private sector is participating in those areas which remain open for it.
Private sector has been playing dominant role in respect of road
transport, water transport etc. from the very beginning.

5. Services Sector:

The services sector of the country is almost totally under the control
of the private sector. The entire community and personal services,
which contributed nearly 11.1 per cent of GDP in 1994-95, is entirely
managed by the private sector. The entire professional services,
repairing services, domestic services, entertainment services etc. are
solely rendered by the private sector throughout the country.

6. Role in the Indian Economy:

The private sector is playing an important role in Indian economy.

The importance of this sector in the economy of the country can be
visualized from the fact that it contributes to the major portion of
national income and employment.

Again, as per 1991 census, the percentage of population working in

the government sector, including public enterprises and government
administration was only 7 per cent and the remaining 93 per cent of
the working population are engaged in the private sector. Thus, even
after making a huge volume of investments in the public sector and
completing more than 50 years of planning, Indian economy is still
broadly based on the private sector.

7. Small Scale and Cottage Industry:

In India, small scale and cottage industries are playing an important

role in the industrial development of the country. The entire small
:
 scale and cottage industry is owned and managed by the private
sector. As these industries are mostly labour-intensive in nature, thus
they can utilize the local employment opportunities suitably.

The importance of these industries can be visualized from the fact

that in 2001-02 the small scale and cottage industries, numbering
34.42 lakh units, have generated employment to the extent of 192.23
lakh, produced output worth Rs. 6,90,316 crore and contributed
nearly 29 per cent of the total exports of the country.

Joint Sectors

The joint sector represents a new ideology of economic management

geared to sub serve a new economic system.

The term is applied to an undertaking only when both its ownership

and control are effectively shared between public sector agencies on
the one hand and a private group on the other. The basic idea
underlying the concept is combination of joint ownership, joint
control and professional management.

Definition of Joint Sector

The joint sector would include units in which both public and private
investments have taken place and where the state takes an active part
in direction and control.

According to JRD Tata a joint sector enterprise is intended to form a

partnership between the private sector and the Govt. in which the
govt. participation of the capital will not be less than 26 p.c., the
routine management will be normally in the hands of the private
sector partner and control and supervision will be duly exercised by a
governing board on which Government is adequately represented.
:
 The Tata concept of joint sector is heavily private sector oriented,
whereas the Dutt Committee concept of the joint sector was public
sector oriented and aimed at curbing concentration of industries in
the private sector

Features of Joint Sector:

(i) The Central Govt. and private entrepreneurs may jointly set up
new enterprises. Sometimes the Central Govt. and one or more State
Govts, together may set up enterprises in partnership with the private
sector.

(ii) The State Govt. or their industrial development corporations may

set up new companies jointly with private partners, involving equity
participation by both the partners.

(iii) Public financial institutions may, through equity participation or

conversion of loans or debentures into equity, transform enterprises
promoted by private entrepreneurs into joint sector companies.

Government Policy:

The Govt. accepted the concept of joint sector in its industrial policy
decision in 1970 and 1973. The concept of joint sector became very
popular after the Report of the Industrial Licensing Policy Inquiry
Committee was submitted in 1969.

However, this is not a new idea. The industrial policy

pronouncements even before the Dutt Committee Report had
conceived the idea of joint sector. Indeed, the joint sector as a form of
business existed in India even before Independence.

The idea of the joint sector was implicit in the Industrial Policy
Resolutions of 1948 and 1956. The Industrial Policy Resolution of
:
 1948 indicated the possibility of the state securing the cooperation of
private enterprise for the establishment of new units even in the 6
industries where only the state was to have the right to set up new
units, subject to such control and regulation as the Central Govt.
might prescribe.

The Industrial Policy Resolution of 1956 indicated the possibility of

the state securing the cooperation of private enterprises in the
establishment of new units when the national interest so requires in
the industries listed in Schedule A (i.e., industries the future
development of which had been exclusively reserved for the state).

Role of Joint Sector

The basic objective of the joint sector is that public funds should
primarily be used to sub serve the public interest and that their
deployment should not result in undue benefits to a few individuals
or business houses. The joint sector has also acquired other objectives
such as serving as an instrument of state initiative in the development
of priority industries, in dispersal of ownership and control over
industries and in creating a new class of entrepreneurs.

The joint sector is conceived as a marriage between the managerial

expertise of the private sector and the financial resources and social
orientation of the public sector. It is viewed as an effective means of
achieving a mixed economy. In a sense, joint sector enterprises
represent an application of the concept of mixed economy at the
micro level.

Problems of the Joint Sector:

1. While in principle the concept appears acceptable, guidelines in

terms of the roles of the Govt. and private partners in managing
:
 and controlling joint sector enterprises still remain to be spelt
out. From the point of view of private investors, uncertainty
about their role in management and control has been a major
inhibiting factor.
2. The rationale for setting up joint sector projects was mainly for
developing backward areas, reducing concentration of economic
power and to accelerate industrial development. But in reality,
often the purpose for which the joint sector projects were set up
was unrelated to these basic objectives.

The joint sector enabled private entrepreneurs to promote large

projects with less of equity participation; it also enables them to
obtain certain concessions which were denied to projects in the
private sector. Similarly, the main motive for the State in setting up
joint sector projects was to

3. The inter-facing between a purely Govt. agency whose

commitment and accountability are vastly different and a private
group whose main motivation is likely to be commercial
profitability is not always smooth.

There is always the dilemma between “over control” of a unit to

satisfy the rigor of Govt. audit on the one hand which, over time,
stifles initiative and makes it difficult to operate; on the other, there is
a well-recognized accountability to the public and legislature where
Govt. funds are invested that they are expended wisely.

One, therefore, has to steer clear of these two extremes and ensure
that the right “mix” of freedom and interference which will make the
unit grow and expand is achieved.

Small Scale Industry

In Indian economy small-scale and cottage industries occupy an

:
 important place, because of their employment potential and their
contribution to total industrial output and exports.

Government of India has taken a number of steps to promote them.

However, with the recent measures, small-scale and cottage
industries facing both internal competition as well as external
competition.

These are the industrial undertakings having fixed investment in

plant and machinery, whether held on ownership basis or lease basis
or hire purchase basis not exceeding Rs. 1 crore.

Characteristics of Small-Scale Industries:

(i) Ownership:

Ownership of small scale unit is with one individual in sole-

proprietorship or it can be with a few individuals in partnership.

(ii) Management and control:

A small-scale unit is normally a one man show and even in case of

partnership the activities are mainly carried out by the active partner
and the rest are generally sleeping partners. These units are managed
in a personalised fashion. The owner is activity involved in all the
decisions concerning business.

(iii) Area of operation:

The area of operation of small units is generally localised catering to

the local or regional demand. The overall resources at the disposal of
small scale units are limited and as a result of this, it is forced to
confine its activities to the local level.

(iv) Technology:
:
 Small industries are fairly labour intensive with comparatively
smaller capital investment than the larger units. Therefore, these
units are more suited for economics where capital is scarce and there
is abundant supply of labour.

(v) Gestation period:

Gestation period is that period after which teething problems are over
and return on investment starts. Gestation period of small scale unit
is less as compared to large scale unit.

(vi) Flexibility:

Small scale units as compared to large scale units are more change
susceptible and highly reactive and responsive to socio-economic
conditions.

They are more flexible to adopt changes like new method of

production, introduction of new products etc.

(vii) Resources:

Small scale units use local or indigenous resources and as such can be
located anywhere subject to the availability of these resources like
labour and raw materials.

(viii) Dispersal of units:

Small scale units use local resources and can be dispersed over a wide
territory. The development of small scale units in rural and backward
areas promotes more balanced regional development and can prevent
the influx of job seekers from rural areas to cities.

Objectives of Small Scale Industries:

:
 The objectives of small scale industries are:

1. To create more employment opportunities with less investment.

2. To remove economic backwardness of rural and less developed
regions of the economy.
3. To reduce regional imbalances.
4. To mobilise and ensure optimum utilisation of unexploited
resources of the country.
5. To improve standard of living of people.
6. To ensure equitable distribution of income and wealth.
7. To solve unemployment problem.
8. To attain self-reliance.
9. To adopt latest technology aimed at producing better quality
products at lower costs.

Large Scale Industries

In the nineteenth century, India saw the emergence
of large factories, machinery, and government regulation of
industrial work—three features that define a large–scale
industry. … It also examines major industries, labour, capital,
technology, entrepreneurship, management, and the princely states.

(a) Advantages of Large Scale Production:

The following are the merits of large scale production:

1. Internal Economies:

Internal economies arise within the firm because of the expansion of

the size of a particular firm.

They are called the economies of scale.

:
 2. External Economies:

External economies arise with the expansion of the industry. These

are generally the result of large scale production and are associated
with the advantages of localisation.

3. Division of Labour:

The large scale production is always associated with more and more
division of labour. With the division of labour per worker output
increases. Hence, per unit labour cost is reduced in large scale
production.

4. Use of machines:

The large scale production always makes use of machines. So, all the
advantages of the use of machinery are available.

5. More Production:

The large scale industries can produce more goods. For instance, a big
sugar factory can use molasses to make spirits and thus can reduce
the cost of production of sugar.

6. Economies of Organisation:

With an increase in the size of the firm, the cost of management is

reduced.

7. Low Cost of Production:

The large scale production gives many types of economies. Suppose,

there are two different factories, each producing 500 units of a c

ommodity. For these two factories, there must be two managers. But
if the scale of production is enlarged and in one factory we start
:
 producing 1000 units of the same commodity, the work can be
supervised by one manager. In this way, in the large scale production,
the salary of one manager is saved. So, the cost of production is
reduced.

8. Cheap and Easy Loans:

A large business can secure credit facilities at cheaper rates, because

these firms enjoy credit and reputation in the market due to their
fixed assets. Banks and other financial institutions willingly advance
loans to these enterprises at a very low rate of interest.

9. Ancillary Industries:

With the development of large scale production, there arise many

small industries which use its by-products or supply inputs to it.
Suppose, when the production of steel is increased, many other
auxiliary industries develop. The development of auxiliary industries
contributes to the industrialisation of the area and the industry itself.

10. Standard Goods:

The production of standardised goods is possible on account of the

large-scale production. Only a big motor company can produce
standardised motor parts. Besides, it is possible to sell and transport
these goods to distant places only by big business houses.

11. Advertisement and Salesmanship:

A big concern can afford to spend large amounts of money on

advertisement and salesmanship. Ultimately, they do bear fruit. The
amount of money spent on advertisement per unit comes to a low
figure when production is undertaken on a very large scale. The
salesmen can make a careful study of the individual markets and thus
:
 acquire a hold on new markets or strengthen it on the old ones. Thus,
a large scale producer has a greater competitive strength.

12. Research:

The large scale production is conducive for the development of

technology also. With larger amount of capital and financial
resources, the large scale firms can afford to spend more on research
and experiments which ultimately lead to the discovery of new
machines and cheaper techniques of production.

13. Economy of Buying and Selling:

A large concern usually buys things in large quantities and therefore,

at low rates. It also sells things in large quantities and can secure
better terms.

14. Economies of Indivisibility:

Many factors of production are not perfectly divisible. For instance,

assume that one machine can produce 100 units of a commodity, but
we are producing only 50 units by that machine. The machine is
indivisible. If the scale of production is increased and we start
producing 100 units, per unit cost will be reduced. This is the
economy of the indivisible machines.

(b) Disadvantages of Large Scale Production:

The following are the demerits of large scale production:

1. Evils of Factory System:

The large scale production is accompanied by all the evils of the

factory system like over-crowding, density, pollution, bad morals, etc.
Dirty habits of drinking and gambling spread very easily.
:
 2. Danger of Over-Production:

The large scale organisation results in over production at times, so

demand cannot be properly estimated. At last, prices fall and
depression sets in.

3. Less Supervision:

A large scale producer cannot pay full attention to every detail in

various departments. Costs often rise on account of the dishonesty of
workers. Thus, due to inefficient and inadequate supervision, the cost
of production goes up.

4. Monopoly:

The large scale production results in the localisation of industries. As

a result, the bigger fish swallows the smaller ones, and cut-throat
competition and monopolies result.

5. Class Struggle:

The large scale production gives rise to class struggle, the struggle
between the labourers and the capitalists. Their interests cannot go
together, as they are very different from each other. As a result, there
is a struggle between the two groups.

6. Dependence on Foreign Markets:

A large producer has generally to depend on the foreign markets. The

foreign markets may be cut off by wars, etc. This makes the business
risky.

7. Possibility of War:

The large scale production increases the possibilities of wars. Big

:
 producers make attempts to sell their goods in the foreign markets
and try to capture them by fair and foul means, thereby exposing the
world to wars and struggles.

8. Lack of Adaptability:

As huge capital is invested in the large scale production, it is very

difficult to bring about a change in the scale of production according
to the circumstances.

9. Individual Tastes Ignored:

The individual tastes and interests stand completely ignored in large

scale production. Goods of uniform quality are turned out irrespective
of the requirements of the individual customers. Individual tastes are
not, therefore, satisfied. This results in the loss of customers to other
competitors.

10. Unequal Distribution of Wealth:

All wealth and incomes of the country get concentrated in the pockets
of big producers due to large scale production. There is unequal
distribution of wealth and resources on account of the large scale
production. The rich become richer and the poor become poorer.

Capital Formation
Capital formation is a term used to describe the net capital
accumulation during an accounting period for a particular country,
and the term refers to additions of capital stock, such as equipment,
tools, transportation assets and electricity. Countries need capital
goods to replace the current assets that are used to produce goods
and services, and if a country cannot replace capital goods,
production declines. Generally, the higher the capital formation of an
:
 economy, the faster an economy can grow its aggregate income.

Process of Capital Formation:

(i) Creation of saving;

(ii) Mobilisation of saving; and

(iii) Investment of saving.

1. Creation of Saving:

The creation of saving is the first stage of capital formation. It means

that there must be an increase in the volume of real savings, so that
the sources may be used for the production of consumption purposes
and further may be released for other purposes. Therefore, for capital
formation, some current consumption has to be sacrificed for
obtaining a larger part of the flow of consumer goods in the near
future.

For instance, if a community saves nothing and consumes whatsoever

it produces, no new capital will come into existence which will result
in fall in the production of consumer goods in future with the wearing
out of the existing capital assets. Therefore, it is essential that people
should save from the present consumption. The creation of savings
depends upon the power to save, will to save and facility to save.

2. Mobilisation of Saving:

The next process of saving is that it must be mobilised by converting

into investible funds. For this purpose, the existence of banking and
other financial institutions are must. Banking facilities give
considerable help to promote high rate of mobilisation and
:
 channelization of saving. In brief, sound and efficient banking system
enables investors to invest more and more.

3. Investment of Saving:

The final stage is the investment of saving into capital goods. It needs
a class of efficient, dynamic, daring and skilled entrepreneurs. An
able and efficient entrepreneur is always ready to make investments
for the production of capital goods. In short, both saving and
investment are crucial for capital accumulation.
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