B.A.

First Year
Economics, Paper - II

INDIAN ECONOMY

MADHYA PRADESH BHOJ (OPEN) UNIVERSITY – BHOPAL

 Reviewer Committee
1. Dr (Prof) Manish Sharma 3. Dr Bindu Mahawar
Professor Assistant Professor
IEHE, Bhopal Navin College, Bhopal

2. Dr Kalpana Malik
Associate Professor
IEHE, Bhopal

Advisory Committee
1. Dr Jayant Sonwalkar 4. Dr (Prof) Manish Sharma
Hon'ble Vice Chancellor Professor
Madhya Pradesh Bhoj (Open) University, Bhopal IEHE, Bhopal

2. Dr H.S.Tripathi 5. Dr Kalpana Malik

Registrar Associate Professor
Madhya Pradesh Bhoj (Open) University, Bhopal IEHE, Bhopal

3. Dr L.P. Jharia 6. Dr Bindu Mahawar

Director Student Support Assistant Professor
Madhya Pradesh Bhoj (Open) University, Bhopal Navin College, Bhopal

COURSE WRITERS
Prof Meenu Agrawal, Principal, Ginni Devi Modi Girls College, Modinagar, Ghaziabad, UP,
Dr. Suman Lata, Lecturer, Department of Economics, Ginni Devi Modi Girls (PG) College, Modinagar, Ghaziabad
(Units: 1.0-1.1, 1.4, 1.7-1.11, 5.0-5.1, 5.3, 5.3.2, 5.4-5.8)
Dr Sujit Thakur, Assistant Professor, Department of Political Science, Dyal Singh College, University of Delhi
(Units: 1.2-1.3, 1.5-1.6, 2.0-2.1, 2.2, 2.3, 2.4, 2.5, 2.6, 2.7.2, 2.8-2.12, 3.4, 3.5, 3.6, 4.3, 4.6, 5.2, 5.3.1, 5.3.3-5.3.5)
Dr Rupesh Tyagi, Lecturer, Department of Economics, Ginni Devi Modi Girls (PG) College, Modinagar, Ghaziabad
(Unit: 2.7-2.7.1)
Dr. Biswanath Ghosh, Former Professor and Dean of Management, Bengal College of Engineering and Technology, Durgapur
(Units: 3.0-3.3, 3.7-3.11, 4.6.1)
R.P. Tripathy, Associate Editor, Kamal Sandesh
(Units: 4.0-4.2, 4.7-4.11)
Dr Lalitha Sagi, Associate Professor, GITAM, Institute of Foreign Trade, Visakhapatnam
(Unit: 4.4-4.5)

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 SYLLABI-BOOK MAPPING TABLE
Indian Economy

UNIT-I: Structure of Indian Economy, Basic Features: Natural Unit-1: Structure of Indian Economy
Resources-Land, Water, Forest and Mineral Resources. (Pages 3-28)
Demographic Features: Population, Size, Sex, Rural-Urban
Classification. Population Distribution. Composition of Gross
Domestic Product.

UNIT-II: Agriculture: Nature and Importance, Land Use Pattern, Unit-2: Agriculture in India
Changes in Cropping Pattern of Madhya Pradesh. Trends in (Pages 29-69)
Agriculture Production and Productivity, Green Revolution,
Agriculture Marketing and Mechanisation.

UNIT-III: Industrial Policy of 1956, New Industrial Policy of Unit-3: Industrial Policies of India
1991 and Changes there in, Role of Public Sector in Industrialization. (Pages 71-100)
Industrial Policy of Madhya Pradesh. Concepts of Small Scale
Industries (SSI) and Cottage Industries, Problems and Prospects
of SSI in Indian Economy. Start Up India and Make in India.

UNIT-IV: Infrastructure for Indian Economy: Power, Unit-4: Infrastructure of Indian

Transportation and Communication. India's Foreign Trade- Economy
Composition and Direction, Balance of Payment, Role of Foreign (Pages 101-153)
Direct Investment and Multinational Corporation.

UNIT-V: Planning in India- Objectives, Strategy, Achievements Unit-5: Planning in India

and Failure, NITI Ayog, Problems of Indian Economy-Poverty, (Pages 155-190)
Unemployment, Inflation and Black Money.
 CONTENTS
INTRODUCTION 1
UNIT 1 STRUCTURE OF INDIAN ECONOMY 3-28
1.0 Introduction
1.1 Objectives
1.2 Basic Features
1.3 Natural Resources—Land, Water, Forest and Mineral Resources
1.4 Demographic Features: Population Size, Sex, Rural-Urban Classification and Population Distribution
1.5 Composition of Gross Domestic Product
1.6 India’s National Income
1.7 Answers to ‘Check Your Progress’
1.8 Summary
1.9 Key Terms
1.10 Self-Assessment Questions and Exercises
1.11 Further Reading

UNIT 2 AGRICULTURE IN INDIA 29-69

2.0 Introduction
2.1 Objectives
2.2 Agriculture: Nature and Importance
2.3 Land Use Pattern
2.4 Changes in Cropping Pattern of Madhya Pradesh
2.5 Trends in Agriculture Production and Productivity
2.6 Green Revolution
2.7 Agricultural Marketing
2.7.1 India’s Food Policy
2.7.2 Agricultural Mechanisation
2.8 Answers to ‘Check Your Progress’
2.9 Summary
2.10 Key Terms
2.11 Self-Assessment Questions and Exercises
2.12 Further Reading

UNIT 3 INDUSTRIAL POLICIES OF INDIA 71-100

3.0 Introduction
3.1 Objectives
3.2 Industrial Policy of 1956 and 1991 and Changes Therein
3.3 Role of Public Sector in Industrialization
3.4 Industrial Policy of Madhya Pradesh
3.5 Concept of Small-Scale Industries (SSI) and Cottage Industries
3.5.1 Problems and Prospects of SSI in Indian Economy
3.6 Start-up India and Make in India
3.7 Answers to ‘Check Your Progress’
3.8 Summary
3.9 Key Terms
3.10 Self-Assessment Questions and Exercises
3.11 Further Reading
UNIT 4 INFRASTRUCTURE OF INDIAN ECONOMY 101-153
4.0 Introduction
4.1 Objectives
4.2 Power and Transportation
4.3 Communication
4.4 Composition and Direction of India’s Foreign Trade
4.5 Balance of Payment
4.6 Role of FDI and MNCs
4.6.1 Multinational Corporations in India
4.7 Answers to ‘Check Your Progress’
4.8 Summary
4.9 Key Terms
4.10 Self-Assessment Questions and Exercises
4.11 Further Reading

UNIT 5 PLANNING IN INDIA 155-190

5.0 Introduction
5.1 Objectives
5.2 Objectives, Strategies, Achievements and Failures of Planning in India
5.2.1 NITI Aayog
5.3 Poverty and Unemployment
5.3.1 Unemployment
5.3.2 Poverty and Unemployment Eradication Programmes in India
5.3.3 Inflation
5.3.4 Black Money
5.3.5 Other Issues
5.4 Answers to ‘Check Your Progress’
5.5 Summary
5.6 Key Terms
5.7 Self-Assessment Questions and Exercises
5.8 Further Reading
 Introduction
INTRODUCTION

The colonial rule in India brought a significant change in the taxation and agricultural
policies. This led to commercialization of agriculture with a focus on trade. It had NOTES
many adverse effects on Indian economy, such as decreased production of food
crops, mass impoverishment and destitution of farmers and many famines. Thus,
Indian economic policy after independence was influenced by the colonial
experience. Independent India’s domestic policy tended towards protectionism,
concentrating on import substitution industrialization, economic interventionism, a
large public sector, business regulation and central planning.
India initiated the principles of free market in 1991. This move was aimed at
enabling the country to survive in internationally competitive market and attract
foreign investment. Today, the economy of India is the fifth largest in the world by
nominal GDP and the third largest by purchasing power parity (PPP). Our country
is the second largest economy in the world, in terms of both population and arable
land. It has 16 per cent of the world’s population and 12 per cent of the world’s
arable land. According to the World Bank, the per capita GDP in India in 2017
was US$ 1,939.61. However, despite its rapid economic growth, India continues
to face massive income inequalities, high unemployment and malnutrition. This
book, Indian Economy, discusses all these aspects in detail and is divided into
five units.
This book is written keeping the distance learning student in mind. It is
presented in a user-friendly format using a clear, lucid language. Each unit contains
an Introduction and a list of Objectives to prepare the student for what to expect
in the text. At the end of each unit are a Summary and a list of Key Terms, to aid
in recollection of concepts learnt. All units contain Self-Assessment Questions and
Exercises, and strategically placed Check Your Progress questions so the student
can keep track of what has been discussed.

Self - Learning
Material 1
 Structure of Indian

UNIT 1 STRUCTURE OF INDIAN Economy

ECONOMY
NOTES
Structure
1.0 Introduction
1.1 Objectives
1.2 Basic Features
1.3 Natural Resources—Land, Water, Forest and Mineral Resources
1.4 Demographic Features: Population Size, Sex, Rural-Urban Classification and
Population Distribution
1.5 Composition of Gross Domestic Product
1.6 India’s National Income
1.7 Answers to ‘Check Your Progress’
1.8 Summary
1.9 Key Terms
1.10 Self-Assessment Questions and Exercises
1.11 Further Reading

1.0 INTRODUCTION
An economic system is the structure, which guides production, allocation of
economic inputs, sharing of economic outputs and utilization of goods and services
in an economy. It is a set of institutes and their social relations. On the other hand,
it is the set of rules by which problems of economics are addressed, such as the
economic problem of insufficiency through allotment of finite productive resources.
In this unit the basic features of the Indian economy are discussed in detail.
The composition of GDP along with the national income concept in also discussed
here.

1.1 OBJECTIVES
After going through this unit, you will be able to:
 Understand the basic features of the Indian Economy
 Describe the land, water and forest cover of India
 Discuss the demographic features of India
 Describe the composition of Gross Domestic Product

1.2 BASIC FEATURES

The total population of India stands at more than 1.3 billion, which is further growing
at 1.55 per cent a year. With total GDP in 2019 of approximately $2.936 trillion,
India occupies a position as the world’s 6th largest economy—and the third largest
Self - Learning
Material 3
Structure of Indian in Asia following Japan and China. Services, industry and agriculture account for
Economy
54 per cent, 29 per cent, and 18 per cent of India’s GDP respectively. India is
making the most of its large numbers of qualified people who are skilled in the
English language in order to become a major exporter of software services and
NOTES software workers; however, more than half of the population is dependent on
agriculture for its livelihood. Approximately 700 million Indians live on $2 per day
or less, while a large and growing middle class comprising of more than 50 million
Indians are dependent on disposable income ranging from 200,000 to 1,000,000
rupees per year ($4,166-$20,833) for their livelihood. However, it is estimated
that the middle class will grow ten-fold by 2025.
Even though in a slow and halting manner, India continues to move ahead with
market-oriented economic reforms that started in 1991. Some of the reforms are:
 Increasingly liberal foreign investment and exchange regimes
 Industrial decontrol
 Reductions in tariffs and other trade barriers
 Opening and modernization of the financial sector
 Significant adjustments in government monetary and fiscal policies
 More safeguards for intellectual property rights.
Since 1997, India has consistently recorded growth rate of over 7% which
has helped reduce poverty dramatically.
Nevertheless, economic growth is restricted a number of factors such as:
 Inadequate infrastructure
 A cumbersome bureaucracy
 Corruption
 Labour market rigidities
 Regulatory and foreign investment controls
 The ‘reservation’ of key products for small-scale industries
 High fiscal deficits
The outlook for further trade liberalization is obscure. An important World
Trade Organization (WTO) Doha Ministerial Declaration in July 2008 was not
successful because of disparities between the US and India (as well as China)
over market access. In 2002, the Government of India abolished quotas on 1,420
consumer imports and has incrementally reduced non-agricultural customs duties
in recent successive budgets. However, the tax structure is complex, with
compounding effects of various taxes. In 2018, US-India bilateral merchandize
trade surpassed approximately $87 billion. Principle US exports include:
 Diagnostic or lab reagents
 Aircraft and parts
 Advanced machinery
 Cotton
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4 Material
  Fertilizers Structure of Indian
Economy
 Ferrous waste/scrap metal
 Computer hardware
Major US imports from India include: NOTES
 Textiles and ready-made garments
 Internet-enabled services
 Agricultural and related products
 Gems and jewellery
 Leather products
 Chemicals
Main Features of Indian Economy
The Indian economy is integrated with certain features, some of which are as
follows:
1. Low per capita income: One of the most characteristic features of an
under-developed economy is low per capital income. As opposed to the
advanced countries, India’s per capita income stands at a very low level.
Currently, there is a gradual increase in this trend of difference of per capita
income between under-developed and advanced countries. In India, not
only the per capita income is low, but the income is also distributed unequally,
which creates a wide gap between the rich and the poor. Due to this unequal
distribution of income and wealth, the problem of poverty in the country is
increasingly becoming more critical and acute, and is strongly acting as a
hurdle in the process of economic growth.
2. Heavy population pressure: Population explosion is another massive hurdle
to the economic growth of India. This is clearly seen from the total population
of India, which was 102.67 crore in 2001 census. After China, India occupies
the second position as the most populated country in the world. As in 2017,
India has a total population of around 133.92 crores. All the under-developed
countries are characterized by high birth rate, which stimulates the growth of
population. The fast rate of population growth further propels a higher rate of
economic growth in order to maintain the same standard of living. However,
the failure to maintain the standard of living makes the under-developed
countries poorer, thereby affecting the economic growth.
3. Pre-dominance of agriculture: Occupational distribution of population
in India evidently reflects the disparity in the economy. One of the basic
features of an under-developed economy is the major contribution of the
agriculture in the national income and the involvement of a very high
proportion of working population in agriculture.
4. Unemployment: Another feature of Indian economy is unemployment and
under-employment. Due to high population pressure, it is difficult to provide
productive employment to the entire population. Due to lack of job
opportunities in the market, there is a deficiency in capital formation. Self - Learning
Material 5
Structure of Indian 5. Low rate of capital formation: The rate of capital formation is also low in
Economy
India. Capital formation mainly depends on the ability and willingness of the
people to save. Since the per capita income is low and there is unequal
distribution of income and wealth, the ability of the people to save is very
NOTES low in developing countries which leads to low capital formation.
6. Poor technology: Technology plays a vital role in the growth of the economy
of a nation. However, Indian economy is not very well adept with
technological advancements. The country still holds a huge scope of
improvement when it comes to technology.
7. Backward institutional and social framework: The social and institutional
framework in India is highly under-developed, which significantly affects
the economy of the nation. This acts as a strong obstacle to any change in
the form of production. Moreover, social institutions, such as caste system
greatly affects the economic life of the people.
8. Under-utilization of resources: Due to lack of knowledge and unequal
distribution of resources, the country is not able to effectively utilize all its
resources.
9. Price instability: Price instability is a huge factor in the uneven growth of
the Indian economy. Shortage of essential commodities and gap between
consumption and production increase the price steadily. This further acts as
a deterrent in the growth of the nation.

Check Your Progress

1. Mention any two factors that restrict the economic growth of India.
2. What are the major US imports from India?

1.3 NATURAL RESOURCES—LAND, WATER,

FOREST AND MINERAL RESOURCES
In this section, you will learn about land, water and forest cover of India.
Land Resources in India
India occupying only 2.4 per cent of the world’s geographical area, supports about
16.2 per cent of the world’s human population. India also has only 0.5 per cent of
the world’s grazing area but supports 18 per cent of the world’s cattle population.
India is endowed with a variety of soils, climate, biodiversity and ecological regions.
About 228 mha (69 per cent) of its geographical area (about 328 mha) fall within
the dryland (arid, semi-arid and dry sub-humid) as per Thornthwaite classification.
The Thar Desert lies in the hot arid region of Western Rajasthan and is one of the
most densely populated deserts of the world. The country has been classified on the
basis of agro-climatic, agro-ecological and agro-meteorological zones for the purpose
of planning and implementing various programmes and measures. Agriculture is the
major sector of growth of the Indian economy. A large percent of the population is
Self - Learning
6 Material
still dependent on agriculture for its sustenance. Of the total cultivated area of 142 Structure of Indian
Economy
mha, major part of agriculture in the country is rainfed, extending to over 97 mha and
constituting nearly 68 per cent of the net cultivated area.
India has a wide range of soils, each type being particular of a specific NOTES
locality. Alluvial and black cotton soils are the two most important soil groups for
agricultural production. Alluvial soils cover about 78 mha (about 24 per cent) of
the total land and occur in the great Indo-Gangetic Plains, in the valleys of Narmada
and Tapti in Madhya Pradesh and the Cauvery in Tamil Nadu. These soils are
considered very good for the production of wheat, rice other cereals, pulses, oil
seeds, potato, sugarcane, etc. The black cotton soils cover about 51.8 mha. and
are found in the States of Maharashtra, Gujarat, Madhya Pradesh, Karnataka,
Andhra Pradesh, Tamil Nadu, Uttar Pradesh and Rajasthan. These are also
considered good for cultivation of cotton, cereals, pulses, oil seeds, citrus fruits,
vegetables, etc. In addition, Red soils have been estimated to occur in 51.8 mha
and are primarily found in Tamil Nadu, Karnataka, Kerala, Maharashtra, Andhra
Pradesh, Madhya Pradesh, Bihar and West Bengal. These are most suited for
rice, ragi (millet), tobacco and vegetable cultivation. Laterite and lateritic soils
occur in 12.6 mha. These are not considered good for agriculture. The area of
desert soils is about 37 mha. These are also not found suitable for agriculture.
Water Resources in India
India is endowed with a rich and vast diversity of natural resources, and water
occupies a significant position among them. The development and management of
water is very important in agriculture production. Integrated water management is
vital for reduction of poverty, sustenance of the environment and sustainable
economic development. According to National Water Policy, 2002, the water
resources of the country should be developed and managed in an integrated manner.
India receives annual precipitation of approximately 4000 km3, including
snowfall. The rainfall in India reflects very high spatial and temporal variability.
The irony of the situation is that Mousinram near Cherrapunji, which receives
the highest rainfall in the world, faces a shortage of water during the non-rainy
season, almost every year. The total average annual flow per year for the Indian
rivers is assessed to be 1953 km3. The total annual replenishable groundwater
resources are estimated as 432 km3. The annual utilizable surface water and
groundwater resources of India are estimated as 690 km3 and 396 km3 per
year, respectively. The pressure on the country’s water resources is increasing
with rapid growth of the population and the aim to improve the living standards.
Moreover, per capita availability of water resources is reducing gradually. India
suffers the problem of flood and drought syndrome due to spatial and temporal
variability in precipitation.
As groundwater is overly exploited, it is resulting in reduction of low flows
in the rivers, declining of the groundwater resources and salt water intrusion in
aquifers of the coastal areas. Over canal-irrigation in some of the important areas
has led to water-logging and salinity. Increasing pollutant loads from point and
non-point sources are severely affecting the quality of surface and groundwater
Self - Learning
Material 7
Structure of Indian resources. The climate change is expected to affect precipitation and water
Economy
availability. Up to now, adequate attention was not being given to the data collection,
processing, storage and dissemination. Hydrology Project Phase-I and the
development of the Decision Support System proposed under Hydrology Project
NOTES Phase-II have undertaken efforts, which are expected to bridge some of the gaps
between the developed advanced technologies of water resources planning,
designing and management and their field applications.
Out of the total (approximate) annual precipitation of 4000 km3, monsoon
rainfall in India is of the order of 3000 km3. Rainfall in India is dependent on the
south-west and north-east monsoons, on shallow cyclonic depressions and
disturbances and on local storms. However, it is the south-west monsoons which
play a major role in causing the maximum rainfall between June and September
except in Tamil Nadu, where it is under the influence of north-east monsoon
during October and November. India is endowed with a river system, which
includes more than twenty major rivers with several tributaries. Many of these
rivers are perennial, while some are seasonal. The rivers like Ganges,
Brahmaputra and Indus originate from the Himalayas and carry water throughout
the year. The snow and ice melt of the Himalayas and the base flow majorly
contribute to the flows of the river during the non-rainy season. More than 50
per cent of water resources of India are located in various tributaries of these
river systems. Average water yield per unit area of the Himalayan rivers is almost
double in comparison to the south peninsular rivers system. This clearly highlights
the importance of snow and glacier melt contribution from the high mountains.
Apart from the water available in the various rivers of the country, the groundwater
is also an important source of water for drinking, irrigation, industrial uses, etc.
It accounts for nearly 80 per cent of domestic water needs and more than 45
per cent of the total irrigation in the country. According to the international norms,
a country is categorized as water stressed if per-capita water availability is less
than 1700 m3 per year. Moreover, if it is less than 1000 m3 per capita per year,
then the country is classified as water scarce. The per capita surface water
availability in India during 1991 and 2001 were 2309 and 1902 m3 respectively.
These are projected to reduce to 1401 and 1191 m3 by the years 2025 and
2050 respectively. Therefore, it is very important that the government takes up
a proper planning, development and management of the greatest assets of the
country, viz., water and land resources for raising the standards of living of the
millions of people, particularly in the rural areas.
Forest Resources in India
The forest cover of the country, according to the current assessment is given in
Table 1.1 and also presented in the pie chart in Figure 1.1. Forest cover is shown
in three density classes viz., very dense forest (VDF), moderately dense forests
(MDF), and open forests (OF). Scrub areas have also been delineated. As
mentioned earlier, area under VDF, MDF and OF also includes mangrove cover
of the corresponding density class.
The forest cover of the country as per 2007 assessment is 69,899 km3
which is 21.02 per cent of the geographical area of country. Very dense forest
Self - Learning
8 Material
constitutes 83,510 km2 (2.54 per cent), the moderately dense forest 319, 012 Structure of Indian
Economy
km2 (9.71 per cent) and open forest constitutes 288,377 km2 (8.77 per cent) of
the geographical area. The scrub accounts for 41, 525 km2 (1.26 per cent).
Non-Forest NOTES
77.72%

Scrub
1.26%
Very Dense
Open Forest Forest
8.77% Moderately 2.54%
Dense Forest
9.71%

Fig. 1.1 Forest Cover of India

Table 1.1 Status of Forest Cover of India in 2007

Class Area km2 % of Geographical

Area
Forest Cover
Very Dense Forest 83,510 2.54
Moderately Dense Forest 319,012 9.71
Open Forest 288,377 8.77
Total Forest Cover* 690,899 21.02
Non-forest
Scrub 41,525 1.26
Non-forest** 2,554,839 77.72
Total Geographical Area 3.287,263 100.00

* Includes 4,639 km2 under mangroves

** Excludes scrubs and includes water bodies

State/UT wise forest cover

Forest cover of each state and UT of the country has been presented in the Table
1.1. Madhya Pradesh has the largest forest cover in the country followed by
Arunachal Pradesh, Chhattisgarh, Maharashtra and Orissa. In terms of per centage
of forest cover with respect to total geographical area, Mizoram leads the table
with 91.27 per cent, followed by Lakshadweep (82.75 per cent), Nagaland (81.21
per cent) Andaman & Nicobar Islands (80.76 per cent), Arunachal Pradesh (80.43
per cent), Manipur (77.40 per cent), Meghalaya (77.23 per cent) and Tripura
(76.95 per cent).
The total forest cover is 708,272 square km, which is 21.54 per cent of the
total area of the country. Between 2015-2017, India has added 6778 square km
of forest cover.

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Material 9
Structure of Indian Forest cover in hill districts
Economy
Forest cover in hilly terrain is important from the ecological considerations.
Recognizing this fact, the National Forest Policy (1988) aims at maintaining two
NOTES thirds of the geographical area in hills of the country under forest and tree cover.
The hill districts identified for the forest cover analysis are the ones identified
by the Planning Commission for hill areas and Western Ghats Development
Programme. As per their criterion, a hill taluka is the one which has an altitude of
more than 500 m from the mean sea level. A hill district is one whose total area of
hill talukas is more than half of the geographical area of the district.
There are 124 hill districts spread over 16 states and UTs as per the above
definition. Table 1.1 gives a state-wise summary of forest cover in the hill districts
of the country.
The forest cover in the hill districts of the country is 281,841 km2, which is
39.82 per cent of the total geographical area of these districts. Though the entire
geographical area of these districts does not constitute the hilly terrains, but the
forest cover figures shown in the above table do provide a good basis to monitor
the policy guidelines.
All the districts of the states of Arunachal Pradesh, Himachal Pradesh,
Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand are
hilly districts. The percentage of forest cover in these nine states is 66.07 per cent
Out of 124 hilly districts, 55 have over two thirds of geographical area
under forest cover; 37 have between one third and two thirds; and 32 have less
than one third. Moreover, forest cover is less than 10 per cent of geographical
area in 8 hilly districts.
In the hilly districts of the country, comparison of forest cover of 2007 with
that of 2005 (revised) shows a net gain of 663 km2 of the forest cover.
Forest cover in tribal districts
Forest are central to the cultural and economic life of tribal people, who have lived
in forests in harmony since ages. It is important to monitor and analyse the forest
cover situation in the tribal areas. The tribal districts for purpose of this section are
those as identified by the Government of India under the integrated Tribal
Development Programme.
All the districts of the states of Arunachal Pradesh, Manipur, Meghalaya,
Mizoram, Nagaland, Sikkim, Tripura; the UTs of Dadar & Nagar Haveli and
Lakshadweep are tribal districts.
The total forest cover in the tribal districts is 412,625 km2, which is 37.32
per cent of the geographical area of these districts.
The tribal districts constitute only 33.64 per cent geographical area of the
country, though the forest cover in these districts is 59.72 per cent of the total
forest cover of the country. All the North-Eastern states have over 75 per cent
geographical area under forest cover, except Assam (23.95 per cent). Overall,
these figures indicate the richness of forest resources in the tribal districts in general,
Self - Learning and in North-East region in particular.
10 Material
 The comparison of forest cover in the tribal districts with respect to 2005 Structure of Indian
Economy
assessment (revised) shows a net gain of 690 km2 of forest cover.
Forest cover in the north-eastern states
The North-East region of the country comprising 7 states namely, Arunachal NOTES
Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland & Tripura is endowed
with rich forest resources. The region, which covers only 7.76 per cent of the
geographical area of the country, accounts for nearly one fourth of its forest cover.
This region is also rich in biodiversity and has been identified as one of the 19
biodiversity hot spots of the world. The region is inhabited by many important
tribes, which constitute about 27 per cent of the population. One distinct feature
of land use in this region is the prevalence of shifting cultivation, which has
traditionally been the main source of livelihood of the tribal people of this region.
Over the years, population of the tribal people has been growing significantly and
as a result, the cycle of shifting cultivation has come down to less than 5 years in
general, leading to degradation of forests.
The total forest cover in the region is 170,423 km2, which is 66.81 per cent
of the geographical area as against the national average of 21.02 per cent. Very
dense, moderately dense and open forests constitute 16.64 per cent, 43.42 per
cent and 41.94 per cent of the total forest cover of the region respectively. As
compared to 2005 assessment (revised), a gain of 598 km2 of forest cover has
been observed in the region. The main reason for the gain is the regeneration in
shifting cultivation areas.

Self - Learning
Material 11
Structure of Indian
Economy
Check Your Progress
3. What are the two most important soil groups for agricultural production?
NOTES 4. Which region receives the highest rainfall in the world?
5. Which state has the largest forest cover in the country?

1.4 DEMOGRAPHIC FEATURES:

POPULATION SIZE, SEX, RURAL-URBAN
CLASSIFICATION AND POPULATION
DISTRIBUTION
According to the Census of 2011, India’s population is 1.21 billion. One of
the features of Indian demographic behaviour which has been the cause for
considerable concern is the steady decline in the sex ratio. The factors
responsible for this continued declination are as of now not clearly identified.
However, it is well recognized that the adverse sex ratio is a reflection of
gender disparity and appropriate steps to correct this trend need to be taken.
While demographic transition reflects quantitative and qualitative changes in
the population profile, the on-going changes in disease burden is producing a
major health transition. The growth rate of the population between the ages of
15–60 is considerably higher than that of population as a whole. Since this is
the age group which is actively seeking employment, the need for expanding
work opportunities is considerably higher than before. However, the total
dependency ratio has been significantly declining. This occurs through a sharp
reduction in the dependency ratio pertaining to the young, with that of the old
remaining more or less constant. Therefore, if gainful employment can be
provided to the entire labour force, the economic conditions of the households
would improve significantly faster than before. The rural–urban composition
of Indian population and its occupational distribution show that India is gradually
moving towards urbanization and modernization. The rural population of the
country has decreased from 82.7 per cent in 1951 to 68.2 per cent in 2011,
while the urban population of the country has increased from 17.3 per cent to
31.8 per cent in the same period.
Broad Demographic Features
Demographic transition is the transition from a stable population with high mortality
and fertility to a stable population with low mortality and fertility. During the transition,
population growth and changes in the age structure of the population are inevitable.
In India the demographic transition has been relatively slow but steady. As a result,
the country was able to avoid adverse effects of rapid changes and age structure
of the population on social and economic development.

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12 Material
Challenges Structure of Indian
Economy
 To meet all the needs of rapidly growing adolescent and young adult
population.
 To cater to their increasing expectations for improved quality, spectrum and NOTES
access to services.
 To accelerate demographic and socio-economic transition.
 Invest adequately in Human Resource Development (HRD)/skill
development.
 Provide appropriate employment with adequate emoluments to a huge work
force.
Paradigm shifts needed
 Utilize human resources to accelerate socio-economic growth and
improvement in quality of life.
 Bring about convergence and synergy between ongoing programmes to
hasten demographic, socio-economic and educational transitions to achieve
rapid population stabilization.
 Consider demographic transition and difference in age structure of the
population while making social and economic plan for the development of
the nation.
Opportunities
 Utilize human resources to accelerate socio-economic growth.
 Malnutrition and Infant Mortality Ratio (IMR) are high in Madhya Pradesh,
Orissa, Uttar Pradesh and Bihar.
 Though there is no statistically significant difference in the degree of
malnutrition between boys and girls, undernutrition is usually more prevalent
among girls.
 Low birth weight, poor dietary intake, poor caring practices, lack of access
to safe drinking water, infection due to poor environmental sanitation, lack
of access to health care are some of the factors responsible for prevailing
under-nutrition among children.
 There is a pressing need for contraception in all states and among all segments
of population, but the magnitude varies from state to state.
 Andhra Pradesh has the lowest unmet need for contraception despite young
age at marriage, low female literacy, problems in accessing health care in
some regions.
 Unmet need for contraception is highest in the four states with high child
birth ratio. It is imperative that all the unmet needs for contraception are
met through improved quality and coverage of services.
 It is essential to provide integrated health, nutrition and contraceptive care
to achieve rapid improvement.

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Material 13
Structure of Indian  Women’s literacy is one of the critical factors that determines and enables
Economy
them to achieve their reproductive goals.
 Literacy improves awareness and enables women to access services; this
improves their own well-being, survival of their offspring, and access to
NOTES
contraception.
 Over the years, there has been a steady increase in the population of the
nation. Furthermore, the number of people living below poverty line has
also been increasing.
 States with largest percentage of BPL families have high CBR; which in
turn further reduces per capita income.
Table 1.2 shows the growth in India’s population as well as the compound
annual growth rate of India’s population from 1891.
Table 1.2 Growth of India’s Population from 1891-2008

Census Year Population Increase Percentage

in million or decrease Increase or
(in millions) Decrease
1891 236
1901 236 0.0 0.0
1911 252 +16 +5.7
1921 251 –1 –0.3
(1891–1921) +15 +0.19
1931 279 +28 +11.0
1941 319 +40 +14.2
1951 361 +42 +13.3
(1921–1951) +110 +1.22
1961 439 +78 +21.6
1971 548 +109 +24.8
1981 683 +135 +24.7
(1951–1981) +322 +2.14
1991 846 +161 +23.9
2001 1,029 +183 +21.5
2011 1,210 +181 17.64
(1981–2011)
Compound annual growth rate of population
1891–1921 0.19
1921–1951 1.22
1951–1981 2.15
1981–1991 2.11
1991–2001 1.93
2001–2011 1.64
Source: Census of India 2001, Series 1, Paper 1 of 2001, Provisional Population
Source: Census of India 2001, Series 1, Paper 1 of 2001, Provisional Population Totals.
Economic Survey, 2009-10, Census 2011 (Provisional Population Tools).

Sex Composition

‘Gender equality is more than a goal in itself. It is a precondition for meeting the
challenges of reducing poverty, promoting sustainable development and building
good governance’
— Kofi Annan

Population enumeration by gender composition is one of the basic demographic

characteristics and provides meaningful demographic analysis. Indian census has the
Self - Learning
14 Material
tradition of bringing out information by gender composition on various aspects of the Structure of Indian
Economy
population. Changes in gender composition largely reflect the underlying social,
economic and cultural patterns of the society in different ways.
Sex ratio is defined as the number of females per 1000 males in the population
NOTES
and is an important social indicator to measure the extent of prevailing equity
between males and females in a society at a given point of time. It may be noted
that the sex ratio is expected to be almost at parity in nature. According to experts,
sex differential in mortality, sex selective outmigration and skewed sex ratio at
birth are the major contributory factors that influence changes in sex ratio.
In India, sex ratio is skewed in favour of males and has continued to rise
and expand in various forms. This has drawn wide attention of policy makers and
planners to reverse the trend to bring it back to parity.
As per the provisional results of Census 2011, total population of India is
1,21,01,93,422 which comprises of 62,37,24,248 males and 58,64,69,174
females with the sex ratio of 940 females per 1000 males. The sex ratio in India
from the year 1901 to 2011 is given in Table 1.2. As per Census 2011, top five
states/Union territories which have the highest sex ratio are Kerala (1,084) followed
by Puducherry (1,038), Tamil Nadu (995), Andhra Pradesh (992) and Chhattisgarh
(991). Five states which have the lowest sex ratio are Daman & Diu (618), Dadra
& Nagar Haveli (775), Chandigarh (818), NCT of Delhi (866) and Andaman &
Nicobar Islands (878).
Table 1.3 Sex Ratio in India

Year Females per 1000 males

1901 972
1911 964
1921 955
1931 950
1941 945
1951 946
1961 941
1971 930
1981 934
1991 927
2001 933
2011 940

Distribution of Population
 Uttar Pradesh has the highest population followed by Maharashtra, Bihar,
West Bengal and Andhra Pradesh.
 Top ten states together have about 76 per cent of the total population of
India.
 Population is very less in the states like Jammu & Kashmir, Arunachal Pradesh
and Uttarakhand even though they are large states.
 Rajasthan, Jharkhand and peninsular states have moderate to high proportion
of population.
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Material 15
Structure of Indian Uneven distribution of population in India reflects a close relationship
Economy
between population and physical, socio-economic and historical factors.
1. Physical factors including climate, terrain and availability of water affect
and determine the pattern of the population distribution. Some examples of
NOTES
this are as follows:
 The North Indian Plains, deltas and Coastal Plains have higher proportion
of population because of suitable climate for agriculture and fertile plains.
 Mountainous and forested regions of southern and central Indian states,
Himalayan states and some of the north-eastern states are less
populated.
 Development of irrigation (Rajasthan), availability of mineral and energy
resources (Jharkhand) and development of transport network (peninsular
states) have resulted in moderate to high proportion of population.
2. Socio-economic and historical factors also impact and determine the
distribution of population of India. Some examples are:
 Traditional settled agriculture and early human settlement has resulted in
large population in the river plains and coastal areas of India.
 Development of transport and better agricultural development has resulted
in large population in North Plains.
3. The industrialization and urbanization also influenced the distribution of
population.
Example 1: The urban regions of Delhi, Mumbai, Kolkata, Bengaluru, etc. have
high concentration of population due to industrial development and urbanization.
A large number of rural-urban migrants come to these towns.
Rural-Urban Migration
In India, there is a high incidence of internal migration of poor labourers. The poor
migrants end up working as casual labourers in the informal sector. This population
is also the one that is more susceptible to diseases and stands the risk of not
getting access to health services.
Around 14.4 million Indians migrated within India for work purposes either
to cities or areas with higher expected economic gains during the 2001 census
period. 25 lakh migrants are engaged in plantations or farms, construction sites,
brick-kilns, quarries, and fish processing (NCRL, 2001). Many migrants also
work as casual labourers in the informal manufacturing units, services or transport
sectors. They work as head loaders, rickshaw pullers and hawkers.
Among the migrants who are vulnerable, the Internally Displaced People
(IDPs) are estimated to be around 6 lakhs (IDMC, 2006). Internal displacement
is caused due to conflicts of not just ethnic or religious nature but also of political
nature, natural disasters, development projects, etc.
There is separate migration data for males & females, migrant households,
return-migrants, the structure of the residence of the migrants’ households before

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16 Material
& after migration, status of the migrants before and after migration and other details Structure of Indian
Economy
on migration.
Only 1.1 per cent of rural households and 2.2 per cent of urban households
are classified as migrant households, which have moved to their “current” place of
NOTES
residence during the year preceding the date of survey.
The rate of migration for ST households is higher than the rate for other
groups in both the sectors. The difference is more pronounced in rural India than
urban India.
At All India level, movements within state account for 77.5 per cent of total
migrant households in urban India & 85.5 per cent in rural India.
The rate of migration of households from rural India is less than the
corresponding rate for urban India.
Movement of households is mainly guided by the employment angle. It
accounts for 67.5 per cent of the household migration to rural India & 60.2 per cent
of the household migration to urban India. Another important reason of migration of
households is ‘Study’ which accounts for 10.6 per cent of the household migration
to rural India and 24.6 per cent of the household migration to urban India.
There is an inverse relationship between the land possessed and migration
of the household.
Industrial Distribution
Several economists have analysed the changes in industrial distribution of the work
force over the entire period from 1961–2000 and have presented their study to
the government. Their findings are as follows:
 According to a study done by K. Sundaram (July, 2001), for the total work
force, there is a 16 per cent decline in the share of the agriculture, forestry
and fishing sector. This decline is greater than the 10 per cent decline in the
share of this sector in the rural work force and reflects the effect of a shift in
the rural-urban composition of the work force towards the latter.
 Of this 16 per cent decline in the share of the agriculture sector, less than
3 percent represents the gain in the share of the manufacturing (and repair
services) sector. The construction sector recorded a 3 per cent gain in its
share in the work force.
 The service sector, as a group, recorded a 10 per cent gain in its (collective)
share in the work force. Half of this was accounted for by the trade, hotels
and restaurants sector. The transport, storage and communications, and,
the community, social and personal services sectors gained 2 per cent each
in their (respective) shares in the work force.
 With respect to female work force, starting from a much higher share (861
per 1000) instead of (759 per 1000), the decline in the share of the agriculture
(and allied activities) sector over the thirty-nine year period has been
significantly less (108 points per 1000 instead of 160 points per 1000) than
was recorded for the total work force. In the same way, the profits of the
other sectors too have been marked less. Self - Learning
Material 17
Structure of Indian  During the 1990s, the rate of decline in the share of the agriculture sector in
Economy
the total work force has been faster. It has been about twice as fast as that
realized over the thirty-three years period between 1961 and 1994. Similarly,
the profits in the shares of the other sectors have also occurred at an equally
NOTES high pace in 1999. However, in case of manufacturing (and repair services
sector), this pace has been much less marked (from 0.6 per cent per annum
between 1961 and 1994 to 0.8 per cent per annum in the 1990s).
 In terms of total number of workers together in the agriculture and allied
activities sector, the decline in the number of workers is seen to be more
moderate (0.9 million). In rural areas and among male workers, the number
of workers in this industry has increased between 1993-1994 and 1999-
2000.
 Within the agriculture and allied activities sector, crop production has
recorded a reduction in the size of its work force of 1.5 million in the
aggregate but not in the rural areas - where, in fact, there have been a
marginal increase in the number of workers in crop production.
Considerably, both in the broader agricultural and allied activities sector
and in the crop production sub-sector, the reduction in the number of
female workers has been much greater than in the total work force. The
reduction in the size of the work force in the livestock sector is high among
female workers but is somewhat more evenly split across the rural-urban
divide.
 The addition of a little over 5 million to the work force of the manufacturing
and repair services sector between 1994 and 2000 is more or less evenly
split across the rural-urban divide. However, across the gender divide, female
workers in this sector comprise of only 20 per cent of the additional work
force.
 In contrast to the rising share of the manufacturing sector as a whole, a
major sub-sector, namely, textiles and textile products has suffered a sizeable
decline in its workforce.
Problem of Overpopulation
India is suffering from innumerable problems due to overpopulation. The current
population is over a billion, but India does not have a large land mass that China
has to support its rapidly increasing populace. India is experiencing major problems
with decline in water bodies due to over-extraction beyond sustainable yield. It is
developing desalination plants to solve this issue. However, according to some
analysts, as India has the same population density as Japan, underdevelopment,
and not overpopulation, is the cause of India’s poverty.
Some problems associated with or intensified by human overpopulation are as
follows:
1. Lack of adequate drinking water and as well as water for sewage treatment
and effluent discharge. Some countries use desalination to solve the problem
of water shortages.
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18 Material
 2. Depletion of natural resources, especially fossil fuels, increased levels of air Structure of Indian
Economy
pollution, water pollution, soil contamination and noise pollution. Once a
country has industrialized and become wealthy, a combination of government
regulation and technological innovation causes pollution to decline
substantially, even as the population continues to grow. NOTES
3. The persistent failure of many of these countries to escape from the
‘Malthusian trap’ through economic growth exceeding population growth.
Many Third World countries simply lack the economic or infrastructural
base to provide a rising standard of living for most of their people, especially
in Africa, the Arab world and parts of Latin America.
4. Changes in atmospheric composition and consequent global warming.
5. Irreversible loss of arable land and increase in desertification.
Deforestation and desertification can be reversed by adopting property
rights, and this policy is successful even while the human population
continues to grow.
6. Illegal (and legal) immigration to the developed world on an unparalleled
scale, resulting in an unprecedented demographic and political problem in
Europe and the US. Even the controlled and legal migration of talented and
well-educated people from the Third World to the developed world denudes
it of its limited skills base. Mass species extinctions from reduced habitat in
tropical forests due to slash-and-burn techniques that sometimes are practiced
by shifting cultivators, especially in countries with rapidly expanding rural
populations; present extinction rates may be as high as 140,000 species
lost per year. The IUCN Red List lists a total of 698 animal species having
gone extinct during recorded human history.
7. High infant and child mortality. High rates of infant mortality are caused by
poverty. Rich countries with high population densities have low rates of
infant mortality.
8. Increased incidence of haemorrhagic fevers and other infectious diseases
from crowding, lack of adequate sanitation and clean potable water and
scarcity of available medical resources.
9. Starvation, malnutrition or poor diet with ill health and diet-deficiency
diseases (e.g., rickets). Famine is aggravated by poverty. Rich countries
with high population densities do not have famine.
10. Poverty coupled with inflation in some regions and a resulting low level of
capital formation. Poverty and inflation are aggravated by bad government
and bad economic policies. Many countries with high population densities
have eliminated absolute poverty and keep their inflation rates very low.
11. Low birth weight due to the inability of mothers to get enough resources to
sustain a foetus from fertilization to birth. Low life expectancy in countries
with fastest growing populations.
12. Unhygienic living conditions for many based upon water resource depletion,
discharge of raw sewage and solid waste disposal.
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Material 19
Structure of Indian 13. Increased crime rate due to drug cartels and increased theft by people
Economy
stealing resources to survive.
14. Conflict over scarce resources and crowding, leading to increased levels of
warfare.
NOTES
15. Over-utilization of infrastructure, such as mass transit, highways and public
health systems.
16. Higher land prices.
Population Policy of Government
Historically, India has struggled to meet the demands of a rapidly growing population.
As early as 1920s, Indian officials posited that population growth would threaten
economic development and overwhelm the public health system. Likewise,
developed nations (such as the U.S.) feared that a growing Indian population
would increase demand for foreign aid. In 1952, India responded to these concerns
by adopting the world’s first National Family Planning Program (NFPP). The
program aimed to curb fertility rates by providing access to maternal healthcare
and contraceptives. However, implementation fell short of the program’s objectives.
In the rush to achieve demographic targets, NFPP resorted to coercive measures.
Indian families were subject to aggressive outreach efforts and mass sterilization
campaigns. Ultimately, the program sacrificed reproductive health and family
preferences in the name of population control. Half a century later, the National
Population Policy (NPP-2000) has been heralded as the solution to poor
implementation. Reproductive healthcare was a top priority of NPP-2000.

Check Your Progress

6. Define sex ratio.
7. Which state in India has the highest sex ratio?

1.5 COMPOSITION OF GROSS DOMESTIC

PRODUCT
Broadly, the methodology for compiling the estimates of GDP consists in dividing
the whole economy into various sectors comprising primary, secondary and
tertiary activities. The estimates of GDP in respect of agriculture, forestry and
logging, fishing, mining and quarrying, registered manufacturing (establishments
registered under Factories Act, 1948) and construction are based on production
approach. Income approach is used in the estimation of GDP originating in un-
registered manufacturing (establishments not registered under Factories Act),
electricity, gas and water supply, trade, hotels and restaurants, transport, storage,
communication, banking and insurance, real estate, ownership of dwellings,
business services, public administration and defence and other services. The
estimates of various services in the public sector are compiled by analysing the
budget documents and annual reports of departmental and non-departmental
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20 Material
commercial undertakings, those of the organised (registered) manufacturing sector Structure of Indian
Economy
are made using data from the Annual Survey of Industries, the estimates relating
to the unorganised sectors in various economic activities are made using the
figures of per worker value added available from the results of follow-up surveys
of the Economic Census and the labour force in the activity. Generally, the NOTES
unorganised sectors estimate of GDP is compiled for the base year or the bench
mark survey year and estimates of subsequent years are obtained by moving the
base year estimate with the help of appropriate physical indicators. The extent
of this type of indirect estimation in the compilation of annual GDP estimates is
indicated in various Annexes. Table 1.4 gives the list of items, sector-wise,
estimates for which are compiled by indirect methods.
Table 1.4 Sector-wise Items of Output/Input/GDP, Compiled as Indirect Estimates
Sector For Benchmark Year For Subsequent Years
1 2 3
1. Agriculture Others (oilseeds, sugar, fibres, Others (oilseeds, sugar, fibres, indigo,
indigo, drugs & drugs&
narcotics, condiments & spices), narcotics, condiments & spices), misc.
misc. crops, by-products, kitchen crops, by-products, kitchen
garden, meat, hair & bristles, inc. in garden, meat, hair& bristles, inc. in
livestock, inputs: organic livestock, inputs: organic
manure, repair & maintenance, feed manure, repair & maintenance, feed of
of livestock, market charges, livestock, market charges,
diesel oil diesel oil
2. Forestry Fuel-wood, inputs Fuel-wood, inputs
3. Fishing Inputs Inputs
4. Mining
5. Registered
Manufacturing
6. Un-registered DC (SSI) part Entire sector
Manufacturing
7. Electricity Gas, non-conventional Gas, non-conventional
8. Construction Kutcha construction of households 'Other materials' in the commodity
flow approach and
kutcha construction of households
9. Trade Other than public sector
10.Hotels & Other than public sector
restaurants
11. Railways
12. Other transport Private Water transport Other than public sector

13. Storage Other than public sector

14. Communication Private Communication Private Communication
15. Banking & Unorganised banking services Unorganised banking services
Insurance
16. Real estate, etc Inputs Entire sector

17. Public
Administration
18. Other services Recreational services Other than public sector

Check Your Progress

8. What is the full form of GDP?
9. Mention the three broad divisions of the activities of an economy.

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Material 21
Structure of Indian
Economy 1.6 INDIA’S NATIONAL INCOME
Before discussing the concept of national income, you should first understand the
NOTES meaning of macroeconomics. Macroeconomics deals with the study of aggregates
like, the aggregate price level, inflation, unemployment, interest rates and foreign
exchange rate, etc. Various economists have given different definitions of
macroeconomics. The word ‘macro’ is a Greek word, and its meaning is ‘large’.
In other words, macroeconomics deals with the economics of large. It is the study
of aggregates. Or in other words, macroeconomics is the study of the whole
economy; some of the important definitions of macroeconomics are given below,
which clearly bring out the meaning and the scope of macroeconomics.
According to Prof. Marshall, ‘Macroeconomics is the study of mankind in
the ordinary business of life; it examines the part of individual and social action
which is most closely connected with the attainment and with the use of the material
requisites of well-being.’
In the words of Dornbusch, Fischer and Startz,‘Macroeconomics is
concerned with the behaviour of the economy as a whole- with booms and
recessions, the economy’s total output of goods and services, the growth of output,
the rate of inflation and unemployment, the balance of payments and exchange
rates. Macroeconomics deals with both long run economic growth and the short
run fluctuations that constitute the business cycle.’
According to Prof. Mankiw, ‘Macroeconomics is the study of the economy
as a whole – including growth in incomes, change in prices and the rate of
unemployment. Macroeconomics attempts both to explain economic events and
to devise policies to improve economic performance.’
According to Prof. Ackley, ‘Macroeconomics deals with economic affairs
‘in the large’, it concerns the overall dimensions of economic life.’
Now with the help of above discussion, we can say that macroeconomics
deals with the aggregates which can affect the economy, like the study of national
income, unemployment, economic growth and development, business or trade cycles,
interest rate and balance of payments. In the coming parts of this book, we shall
discuss all the aggregates in detail, and we shall also discuss their effects on economy
and the way to improve them. In our study, we shall also discuss the interrelationship
among various aggregates and also their causation and determinants.
Meaning of National Income
Total income of a country is known as ‘national income’ it shows the overall
economic performance of an economy. This economic performance can be
measured in terms of national income.
According to Prof. D. M. Mithani, ‘National income is the flow of goods
and services produced in an economy in a year or a particular period of time.’
We should clearly understand the difference between stock and flow.
According to Prof. Mankiw, ‘A stock is a quantity measured at a given point of
time, whereas a flow is a quantity measured per unit of time.’
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22 Material
 According to the National Income Committee, ‘A National Income estimate Structure of Indian
Economy
measures the volume of commodities and services turned out during a given period,
counted without duplication.’
So, we can say that national income is the monetary value of the goods and
NOTES
services produced within a country. In other words, national income measures the
flow of goods and the services within a country.
As contrasted with national wealth which measures the stock of commodities
held by the nationals of a country at a point of time, national income measures the
productive power of an economy in a given period to turn out goods and services
for the satisfaction of the human wants of a particular economy.
You can easily understand the difference between flow and stock with a
very simple example, the amount of water in a tub is a stock; it is the amount of
water in the tub at a given point of time. As against it, the amount of water coming
out of the faucet is a flow; it is the quantity of water being added to the tub per unit
of time.
In national accounting system, the concept of national income can be divided
into three parts: (1) national product, (2) national dividend and (3) national
expenditure.
National product
It includes the monetary value of the goods and the services produced within a
country. However, it does not include the goods and services which are not paid
or in other words non-SNA (non-paid) activities, like the cooking done by mother,
charitable work, hobbies and a number of other activities which are not paid.
National dividend
It includes the income of all the individuals in terms of cash and kind. In other
words, it is the payment to all the factors of production for generating the national
product. The national income measured by national product is just equal to the
national income measured by national dividend during the year.
National expenditure
It includes all the expenditures of the community on the goods and services; it is
just opposite to national dividend. In national dividend, you measure the income
of the community and here you are measuring the expenditures of the community.
But one thing should be noted that, one man’s expenditure is another man’s income.
So, you can say that the national expenditure is just equal to the national income.
You can use any method from the above three, but the result will be the
same, or you can say that,
National Income = National Dividend = National Expenditure
Gross Domestic Product (GDP)
If you include the monetary value of all the goods and the services produced
within a country, it is known as Gross Domestic Product (GDP). Such a total

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Material 23
Structure of Indian (sum) represents the gross value of the final products, produced within a country
Economy
in a year. Few things should be noted about GDP:
1. The word ‘gross’ tells us that the value of depreciation because of production
NOTES has not deducted from the monetary value of the goods and services.
2. The word ‘domestic’ tells us that GDP is the monetary value of the goods
and the services produced within the boundaries of a country. The value of
trade in terms of money (export and import) with other countries is not
included in this.
3. The value of final product should be taken for the measurement of national
income. It is necessary to avoid the duplication in the accounting of national
income, for example, if we have taken the monetary value of mangoes, but
some quantity of is used for juice, then we should deduct the monetary
value of those mangos from national income, and should add the monetary
value of juice produced.
Gross National Product (GNP)
Gross national product (GNP) is the monetary value of the goods and the services
produced in a country, and the value of net export.
In equation form,
GNP = C + I + G + (X – M) + (R – P)
where C stands for consumer goods, I stands for capital goods, and (X – M)
represents net exports; where X stands for exports and Y stands for imports. (R –
P) represents the net income, where R stands for income receipts and P stands for
payments.
For example, if consumption (C) = 715, investment (I) = 373, government
purchases (G) = 197, then net export (X – M) = + 97, net income (R – P) = +12
and gross national product (GNP) = 1,394.
In GNP, the value of each finished goods and services is multiplied by their
prices. The relative prices of the products show the relative importance of each
particular product. Such a total (discussed above) represents the actual gross
value of the final products produced by the whole economy in a year. The word
‘gross’ indicates that the value of depreciation has not deducted from the value of
GNP.
Net National Product (NNP)
NNP = GNP – D, where D = Depreciation allowance
The meaning of the term ‘depreciation’ is ‘wear and tear of the machines’.
As we know that when we regularly use the machine, the value of the machines
decreases with the passage of time. After some years when the value of the machines
became zero, the machines have to be replaced. The same methodology is
applicable on other fixed assets, for example, building and tools, etc. So, when we
subtracted the value of depreciation from GNP, we get net national product (NNP).
However, national income, in its technical sense, is obtained by deducting
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indirect taxes from the net product measured at current market prices. Such a
24 Material
figure is also called NNP at factor cost, as it represents payments made to the Structure of Indian
Economy
factors of production during the production process.
National Income at Market Price and National Income at Factor Cost
There is a difference between national income at market price and national income NOTES
at factor cost. National income at market price defines the national income on the
basis of market prices of different goods and service. One thing should be noted
that in market price, two things are common, indirect tax and subsidy.
Indirect tax
Consider the following example of wine. The market price of a bottle of wine
varies from hundreds to thousands. For example, the price of a bottle is 500, but
for the social welfare, it has an indirect tax of 200. In this condition, if you are
calculating the national income at factor cost, you should increase our national
income by 300. But on the other hand, if you are calculating the national income at
market price, you should increase the national income by 500.
Subsidy
On the other hand, for the welfare of the society, government also provides the
subsidy on various products. As you know, kerosene oil is mostly used by the
poor people of our country, the government gives some subsidy on kerosene
oil. For example, the actual price of the kerosene oil may be 20 per litre, but the
government charges only 10 per litre. The remaining amount of 10 per litre is
borne by the government. In this situation, if you are measuring the national
income at market price, you should increase the national income by 10; but if
you calculate the national income at factor cost, you should increase the national
income by 20.
Now you can say that,
National Income at Market Price = National Income at Factor Cost +
Taxes – Subsidies – Depreciation.

Check Your Progress

10. State the definition of macroeconomics.
11. What is national income?
12. Define Gross National Product (GNP).

1.7 ANSWERS TO ‘CHECK YOUR PROGRESS’

1. Inadequate infrastructure and corruption are the two factors that restrict the
economic growth of India.
2. The major US imports from India are textiles and ready-made garments,
Internet-enabled services, agricultural and related products, gems and
jewellery, leather products and chemicals.
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Material 25
Structure of Indian 3. Alluvial and black cotton soils are the two most important soil groups for
Economy
agricultural production.
4. Mousinram near Cherrapunji receives the highest rainfall in the world.
NOTES 5. Madhya Pradesh has the largest forest cover in the country.
6. Sex ratio is defined as the number of females per 1000 males in the population
and is an important social indicator to measure the extent of prevailing equity
between males and females in a society at a given point of time
7. Kerala has the highest sex ratio in India.
8. The full form of GDP is Gross Domestic Product.
9. The economy is divided into various sectors comprising the primary,
secondary and tertiary activities.
10. Macroeconomics is the study of mankind in the ordinary business of life; it
examines the part of individual and social action which is most closely
connected with the attainment and with the use of the material requisites of
well-being.
11. National income is the flow of goods and services produced in an economy
in a year or a particular period of time.
12. Gross national product (GNP) is the monetary value of the goods and the
services produced in a country, and the value of net export.

1.8 SUMMARY
 The total population of India stands at more than 1.3 Billion, which is further
growing at 1.55 per cent a year.
 With a total GDP in 2019 of approximately $2.936 trillion, India occupies
a position as the world’s 6th largest economy.
 Services, industry and agriculture account for 54 per cent, 29 per cent and
18 per cent of India’s GDP respectively.
 Approximately 700 million Indians live on $2 per day or less, while a large
and growing middle class comprising of more than 50 million Indians are
dependent on disposable income ranging from 200,000 to 1,000,000 rupees
per year for their livelihood.
 Even though in a slow and halting manner, India continues to move ahead
with market-oriented economic reforms that started in 1991.
 One of the most characteristic features of an under-developed economy is
low per capital income.
 India occupying only 2.4 per cent of the world’s geographical area, supports
about 16.2 per cent of the world’s human population.
 India is endowed with a rich and vast diversity of natural resources, and
water occupies a significant position among them.

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26 Material
  The forest cover of the country as per 2007 assessment is 69,899 km3 Structure of Indian
Economy
which is 21.02 per cent of the geographical area of country.
 Forest are central to the cultural and economic life of tribal people, who
have lived in forests in harmony since ages. It is important to monitor and
NOTES
analyse the forest cover situation in the tribal areas.
 According to the Census of 2011, India’s population is 1.21 billion. One of
the features of Indian demographic behaviour which has been the cause for
considerable concern is the steady decline in the sex ratio.
 Sex ratio is defined as the number of females per 1000 males in the population
and is an important social indicator to measure the extent of prevailing equity
between males and females in a society at a given point of time.
 In India, there is a high incidence of internal migration of poor labourers.
The poor migrants end up working as casual labourers in the informal sector.
 India is suffering from innumerable problems due to overpopulation. The
current population is over a billion, but India does not have a large land
mass that China has to support its rapidly increasing populace.
 Broadly, the methodology for compiling the estimates of GDP consists in
dividing the whole economy into various sectors comprising primary,
secondary and tertiary activities.
 Macroeconomics deals with the study of aggregates like, the aggregate
price level, inflation, unemployment, interest rates and foreign exchange rate,
etc.
 If you include the monetary value of all the goods and the services produced
within a country, it is known as Gross Domestic Product (GDP).
 Gross national product (GNP) is the monetary value of the goods and the
services produced in a country, and the value of net export.

1.9 KEY TERMS

 Economy: An economy is an area of the production, distribution and trade,
as well as consumption of goods and services by different agents.
 Bureaucracy: Bureaucracy refers to both a body of non-elected government
officials and an administrative policy-making group.
 Natural resources: Natural resources are resources that exist without
actions of humankind. This includes all valued characteristics such as
magnetic, gravitational, electrical properties and forces, etc.
 Demography: Demography is the statistical study of populations, especially
human beings. Demography encompasses the study of the size, structure,
and distribution of these populations, and spatial or temporal changes in
them in response to birth, migration, aging, and death.

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Material 27
Structure of Indian
Economy 1.10 SELF-ASSESSMENT QUESTIONS AND
EXERCISES
NOTES
Short-Answer Questions
1. List the basic features of Indian economy.
2. What are the market-oriented reforms adopted by India?
3. Which factors restrict the economic growth of India?
4. Why does population pressure acts as hurdle in the economic growth of
India?
5. Write a short note on the sex composition of India.
Long-Answer Questions
1. Discuss the main features of Indian economy.
2. What is the orientation of land and water resources in India? Elucidate.
3. What are the broad demographic features of India? Discuss the challenges
they pose for the nation.
4. Discuss the major problem caused by overpopulation.

1.11 FURTHER READING

Mankar, V. G. 1995. Economic Policy and Planning. Delhi: New Age
International Publishers.
Patel, I.G. 2003. Glimpses of Indian Economic Policy. New Delhi: Oxford
University Press.
Soubbotina, Tatyana P. 2004. Beyond Economic Growth: An Introduction to
Sustainable Development. Washington: World Bank.
Van den berg, Hendrik. 2001. Economic Growth and Development. Ohio:
McGraw-Hill.
Banik, Nilanjan. 2015. The Indian Economy: A Macroeconomic Perspective.
New Delhi: Sage Publishing India.
Kapila Uma. 2009. Indian Economy Since Independence. New Delhi: Academic
Foundation
Rama P. Kanungo, Chris Rowley, Anurag N. Banerjee. 2014. Changing the
Indian Economy: Renewal, Reform and Revival. Netherlands: Elsevier.
Bimal Jalan. 2004. Indian Economy. United Kingdom: Penguin.
Nilanjan Banik. 2015. The Indian Economy: A Macroeconomic Perspective.
New Delhi: SAGE Publishing House.
K. R. Gupta, J. R. Gupta. 2008. The Indian Economy, Volume I. New Delhi:
Atlantic Publishers.

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28 Material
 Agriculture in India

UNIT 2 AGRICULTURE IN INDIA

Structure NOTES
2.0 Introduction
2.1 Objectives
2.2 Agriculture: Nature and Importance
2.3 Land Use Pattern
2.4 Changes in Cropping Pattern of Madhya Pradesh
2.5 Trends in Agriculture Production and Productivity
2.6 Green Revolution
2.7 Agricultural Marketing
2.7.1 India’s Food Policy
2.7.2 Agricultural Mechanisation
2.8 Answers to ‘Check Your Progress’
2.9 Summary
2.10 Key Terms
2.11 Self-Assessment Questions and Exercises
2.12 Further Reading

2.0 INTRODUCTION
Even though the share of agriculture in the total national income has been coming
down due to the development of the secondary and tertiary sectors the contribution
of agriculture remains very significant. It has gone from 57 per cent in 1950 to
around 16 per cent of GDP now. It is a known fact that the more developed a
country is the lesser is the contribution of agriculture. Today almost 60 per cent 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. Agriculture provides raw materials to
leading industries such as cotton textiles and sugar industries. Not only this, the
workers in industries depend on agriculture for their food. Agriculture also provides
the market for a variety of goods.

2.1 OBJECTIVES
After going through this unit, you will be able to:
 Understand the nature and importance of agriculture in India
 Discuss the various land use patterns in India
 Describe the changes in cropping pattern of Madhya Pradesh
 Elucidate the trends in agriculture production and productivity
 Learn about green revolution
 Explain the various aspects of agriculture marketing

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Agriculture in India
2.2 AGRICULTURE: NATURE AND
IMPORTANCE
NOTES A number of agricultural commodities like tea, coffee, spices and tobacco constitute
our main items of export. This amounts to almost 15 per cent 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. 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 the bulk of their business by the
movement of agricultural goods. State governments get a major part of their revenue
in terms of land revenue, irrigation charges, agricultural income tax etc. The 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.
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.
Agriculture plays an important role in internal trade. It is because of the fact that
90 per cent of our population spends 60 per cent of their income on the purchase
of the items like food, tea, milk, etc.
Agriculture has been a way of life and continues to be the single most important
livelihood of the masses. Agricultural policy focus in India across decades has been
on self-sufficiency and self-reliance in food-grains production. Considerable progress
has been made on this front. Food grains production rose from 52 million tonnes in
1951-52 to 244.78 million tonnes in 2010-11. In 2017-18, total food grain
production was estimated at 275 million tonnes. Table 2.1 provides the key indicators
of the agricultural sector in India.
Table 2.1 Agriculture Sector: Key Indicators
(per cent)
Sl. Item 2009-10@ 2010-11* 2011-12 **
No.
1. GDP – share and growth (at 2004-05
prices) Growth in GDP in agriculture &
allied sectors 1.0 7.0 2.5
Share in GDP - Agriculture and allied
sectors 14.7 14.5 13.9
Agriculture 12.4 12.3
Forestry and logging 1.5 1.4
Fishing 0.8 0.7
2. Share in total Gross Capital Formation in
the Country (per cent at 2004-05 prices)
Share of agriculture & allied sectors in
total
Gross Capital Formation 7.1 7.2
Agriculture 6.6 6.6
Forestry and logging 0.1 0.1
Fishing .05 0.5
3. Employment in the agriculture sector as
share of total workers as per census 2001 58.2
Source: Central Statistics Office (CSO) and Department of Agriculture and Cooperation.
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30 Material
Notes: @ Provisional Estimates * Quick stimates ** Advance Estimates
 For five consecutive years, from 2004-2005 to 2008-2009, food-grains Agriculture in India

production recorded an increasing trend in India. However, it declined to 218.11

million tonnes in 2009-2010 due to severe drought conditions in various parts of
the country. Normal monsoon in the subsequent year, 2010-11, helped the country
reach a significantly higher level of 244.78 million tonnes of food-grains production. NOTES
Table 2.2 Agricultural Production (Kharif) (Million Tonnes)

Crops 2010-2011 2011-2012 Percentage

nd
(2 Advance increase
Estimates)
Rice 95.98 102.75 7.1
Coarse cereals 43.68 42.08 -3.7
Pulses 18.24 17.28 -5.3
Oilseeds 32.48 30.53 -6.0
Sugarcane 342.38 347.87 1.6
Cotton (Million bales of 170 kgs each) 33.00 34.09 3.3
Jute and Mesta (Million bales of 180 kgs each) 10.60 11.61 9.3

As per First Advance Estimates, the estimated production of major crops during
Kharif 2019-20 is as under:
 Foodgrains – 140.57 million tonnes.
o Rice – 100.35 million tonnes.
o Nutri / Coarse Cereals – 32.00 million tonnes.
o Maize – 19.89 million tonnes.
o Pulses – 8.23 million tonnes.
o Tur – 3.54 million tonnes.
 Oilseeds – 22.39 million tonnes.
o Soyabean – 13.50 million tonnes
o Groundnut – 6.31 million tonnes
 Cotton – 32.27 million bales (of 170 kg each)
 Jute & Mesta - 9.96 million bales (of 180 kg each)
 Sugarcane – 377.77 million tonnes

Check Your Progress

1. Write the names of agricultural commodities which are the main items of
export in India.
2. Which country produces the maximum tea in the world?

2.3 LAND USE PATTERN

The definition of ‘land use planning’ by the United Nation’s Food and Agriculture
Organization (UNFAO) and the United Nations Environment Programme (UNEP)
published in 1999 reflects consensus among the international organizations. Land
use planning is understood as a systematic and iterative procedure carried out in Self - Learning
Material 31
Agriculture in India order to create an enabling environment for sustainable development of land
resources which meets people’s needs and demands. It assesses the physical,
socio-economic, institutional and legal potentials and constraints with respect to
optimal and sustainable use of natural resources and land and empowers people
NOTES to make decisions about how to allocate those resources.
Another definition of ‘land use planning’ is the process of evaluating land
and alternative patterns of land use and other physical, social and economic
conditions for the purposes of selecting and adopting those kinds of land use and
course of action best suited to achieve specified objectives. Land use planning
may be at the national, regional, state, district, watershed, city, village or other
local levels.
There is a lack of comprehensive and integrated land use planning system in
the country, which enables rationale and optimal land utilization. The current land
use planning system in the country is inadequate and does not cover all the local,
regional as well as state levels. There is a need for a systematic and scientifically
based land use planning system.
The Constitution (Seventy-fourth Amendment) Act, 1992 provides for
District Planning and Metropolitan Area Planning that consolidates plans of both
panchayats and municipalities having regard to spatial (land use) planning. The
District Plans prepared currently, in general, do not cover spatial (land),
environmental as well as urban concerns.
Since district level spatial land use plans do not generally exist, the regional
development triggered by urbanization or industrialization, or the regional
development that needs to be regulated due to the presence of large eco sensitive
zones call for initiating land use planning of such (urban or industrial or eco sensitive)
areas so as to ensure sustainable development.
If no immediate actions are taken, the unplanned and haphazard development
has potential to cause adverse impacts, including land use conflicts with neighbouring
land uses, particularly with agricultural areas, rural uses, natural resource areas
and environmentally sensitive and fragile ecosystem, as well as of losses of
productive land and ecosystem services.
Major Issues
Let us study the major issues faced in land use planning and policy in India.
1. Competing and conflicting land uses are a major concern: Competing
and conflicting land uses are a major concern. ‘Competing land uses’ are
those that compete for the same parcel of land for their location. Such land
uses competing in rural areas with agriculture could be, for example, cash
crops or food crops; industrial or agro-industrial uses; Special Economic
Zones (SEZs) or Special Investment Regions; highways; peri-urban
development or outgrowth, integrated townships or theme cities, and mega
projects (for example, industrial corridors/power plants/ports).
‘Conflicting land uses’ are those that are in conflict with the existing land
use. Certain land uses cause impacts on other land uses nearby. Such
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32 Material
 in forest areas, highways in eco-sensitive areas, polluting industries in rural Agriculture in India

or eco-sensitive areas, urban/industrial development on agriculture lands,

agriculture encroaching into forest lands, and urban waste disposal in peri-
urban areas. The basic concern is the negative impact that such land uses
cause on other land uses. For example, an industrial area can cause impacts NOTES
on the neighbouring areas due to air pollution, or an urban expansion can
lead to destruction of the ecosystem service of natural drainage thereby
impacting the existing lakes and water bodies. Indiscriminate land use changes
in eco-sensitive zones could directly affect wildlife habitat and thereby
impacts local and global biodiversity.
Both competing and conflicting land uses frequently are also the reason for
social conflicts between the local population and the authorities and
prospective investors.
Between 1950-1951 and 2007-2008, land utilization in India underwent
significant changes. While the lands under net sown area, forests and non-
agricultural uses have increased, the lands under ‘other areas’ uses have
almost halved from 40.7 per cent to 22.6 per cent meaning that for future
land demands, the forest lands and agricultural lands may have to be used.
Also, the per capita amount of agricultural land has reduced by 67 per cent
from 1951 (0.48 Ha) to 2007-2008 (0.16 Ha). Arable land in India was
reported at 0.11952 is 2015.
2. Degradation of soil and land: Degradation of soil and land due to soil
erosion and other degradation processes is a severe problem in many regions
in India. As per available estimates, total degraded land in the country is
about 120.40 million Ha. Land degradation leads to decline in soil fertility,
creates problems of alkalinity/salinity/acidity and water logging.
The degraded soils are often used by marginal farmers and the tribal
population. According to studies, the economic losses of reduced productivity
of these lands count for approximately 285,000 million, which is about 12
per cent loss of total value of productivity of these lands.
Water resource projects are frequently being planned and implemented in a
fragmented manner without giving due consideration to optimum utilization of
water resources, environmental sustainability and holistic benefit to the people.
The natural water bodies and drainage channels are being encroached upon
and diverted for other purposes. The groundwater recharge zones are often
blocked. There is growing pollution of water sources, especially through
industrial effluents, which is affecting the availability of safe water besides
causing environmental and health hazards. In many parts of the country, large
stretches of rivers are both heavily polluted and devoid of adequate flows to
support self-purification, aquatic ecology, cultural needs and aesthetics. The
characteristics of catchment areas of streams, rivers and recharge zones of
aquifers are changing as a consequence of land use and land cover changes
thereby affecting water resource availability and quality.
Due to climate change, there are increasing temperatures and issues of
drought and flooding. Land use changes, such as conversion of forest lands Self - Learning
Material 33
Agriculture in India to agriculture or industrial use can be a factor in increasing CO2 (carbon
dioxide) (a dominant greenhouse gas) atmospheric concentrations, thereby
contributing to climate change.
3. Growing urbanization and industrialization: Due to growing
NOTES
urbanization and industrialization, as well as usage of chemicals for
agriculture, there are threats of pollution and disasters. There are potential
impacts from handling, storage and transportation of hazardous chemicals/
materials and wastes, emission of pollutants including toxic emissions,
discharge of effluents, especially those that are not easily biodegradable
and toxic, pollution of groundwater, streams, rivers, lakes, oceans, or
other bodies of water, industrial disaster risks and natural disaster risks.
There are also growing risks to biodiversity with loss of species and threat
to ecosystem services.
India’s territory includes 3.287 million sq. km. (328.73 million Ha) with
west to east extent of approx. 3,000 km and north to south extent of approx.
3,200 km. Numerous developmental activities demand land and in the process
of progression of development, land use changes take place with time. If not
regulated such changes can become detrimental in the long run for sustainable
development. During the period 1950-1951 to 2007-2008, the net sown areas
in the country have increased from 41.8 per cent to 46.1 per cent. The forest
areas have increased from 14.2 per cent to 22.8 per cent, and the areas under
non-agriculture uses, which include industrial complexes, transport network,
mining, heritage sites, water bodies and urban and rural settlements has increased
from 3.3 per cent to 8.5 per cent.
These increases of land use have led to a reduction in land use elsewhere.
During the same period (1950-1951 to 2007-2008), the ‘other areas’ that include
barren and uncultivable land, other uncultivated land excluding fallow land have
drastically decreased by nearly half from 40.7 per cent to 22.6 per cent.
The mining areas are about 0.17 per cent of the total land of India, the
urban areas are about 2.35 per cent and the industrial areas are much less than 1
per cent. However, with rapid industrialization and urbanization, the associated
infrastructure development, the lands under these uses will further increase. These
increases of demands of land will require land to be taken away from other uses.
So far, the land under ‘other areas’ were being used. However, these lands may
no further be usable as they maybe under steep hills or other such terrains or uses
that constrain their use for developmental purposes. In such cases, the demands
for additional lands will be resorted to from agricultural uses or forests uses which
would be detrimental.
There is a need to strategize utilization of land and its management so that
the land use changes are not detrimental to sustainable development of India.
Due to growing population in India, the per capita availability of land has
reduced from 0.89 Ha in 1995 to 0.27 Ha in 2007-2008. It is estimated that by
2030, India will become the most populated country on earth with 17.9 per cent
of the world’s total population. With this, the per capita land availability will further
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reduce.
34 Material
 Such reducing per capita land availability will have a direct bearing on the Agriculture in India

land requirements for various developmental purposes and community

development. The concerns become severe when the land availability is reduced
directly in the areas that support human life or natural resources such as water or
ecosystems including flora and fauna and agricultural areas. NOTES
As per the 2011 Census, 68.84 per cent of the country’s population lives in
6,40,867 villages and the remaining 31.16 per cent lives in 7,935 urban centres.
Although agriculture presently accounts for only about 14 per cent of the Gross
Domestic Product (GDP), it still is the main source of livelihood for the majority of
the rural population, and provides the basis of food security for the nation.
Therefore, fertile agriculture land and clean water resources need to be protected
effectively for providing and ensuring livelihood to rural population and food security
for the nation.
Currently, India produces about 245 million tonnes of food grains while for
2020 it is estimated that the demand for food grains shall rise by 25 per cent to
307 million tonnes. The agricultural productivity is currently half of what it is in
many other countries. The solution for food productivity and security may not lie in
stopping diversion of agriculture land in all circumstances, but also in increasing
food production through higher productivity. However, the increasing use of soil
can cause threat to its productivity, as it was experienced in several other countries.
Hence, the stark question is whether soils will be productive enough to sustain a
population of one billion by the end of the century at higher standards of living than
those prevailing now.
There is a need for long-term plans to meet the food security as well as
livelihood issues. For this purpose, reasonable restrictions on acquisition and
conversion of at least certain types of agricultural land should be introduced. As
per the National Policy for Farmers, 2007 (NPF 2007), prime farmland must be
conserved for agricultural use and except under exceptional circumstances the use
should not be altered. There is a need to protect agricultural areas that are essential
for food security including the prime agricultural lands, command areas of irrigation
projects, and double cropped land. There is also a need to protect agricultural
lands that are essential for livelihood of rural and tribal population.
India comprises seven climate regions in three groups: (a) tropical wet-
humid group with tropical wet (humid or monsoon climate, and tropical wet and
dry or savannah climate; (b) dry climate group with tropical semi-arid (steppe)
climate, sub-tropical arid (desert) climate and sub-tropical semi-arid (steppe)
climate; (c) sub-tropical humid climate group with sub-tropical humid (wet) with
dry winters climate and the mountain, or highland, or alpine climate.
India comprises nine bio-geographic regions. India is one of the twelve
mega-biodiversity countries in the world, comprising over 91,000 animal and
45,500 plant species. Nearly 6,500 native plants are still used prominently in
indigenous healthcare. Furthermore, India is recognized as one of the eight so
called ‘Vavilovian Centres of Origin and Diversity of Crop Plants’, having more
than 300 wild ancestors and close relatives of cultivated plants still growing and
evolving under natural conditions.
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Agriculture in India India has a wide range of soil, classified into 27 broad soil classes. Alluvial
soil, black cotton soil, and red soil covering a total of approximately 56 per cent of
the total land area, which are considered suitable for a wide range of crops. Laterite
and lateritic soil and desert soil covering another 15 per cent of the land are not
NOTES suitable for agriculture. India’s water resources are limited and scarce. The country
has only 4 per cent of the world’s renewable water resources at its disposal.
Furthermore, these limited resources are distributed unevenly over time and space.
In addition, there are challenges of frequent floods and droughts in one or the
other part of the country.
The total area of the recorded forests in the country (2003) is 77.47 million
Ha, or 23.57 per cent of the country’s geographic area. Of the forest areas, 51.6
per cent are notified reserved forests, 30.8 per cent are notified protected forests
and the remaining 17.6 per cent are un-classed forests. The National Forest Policy
of 1988, the Indian Forest Act and various other State legislations on the matters
pertaining to forests provide for the guiding principles, and ways and procedures
through which legally declared forests are to be utilized and administered. These
legislations not only affect the way forest lands are to be utilized, these have profound
impact on the utilization of non-forest lands as well.
India is rich in ample resources of a number of minerals and has the geological
environment for many others. India produces 89 minerals out of which 4 are fuel
minerals, 11 metallic, 52 non-metallic and 22 minor minerals.
The level of urbanization in India has increased from 17 per cent in 1951 to
31 per cent in 2011. According to the world population prospects by the United
Nations, 55 per cent population of India will be urban by the year 2050. With this
pattern of urbanization, the urban population of 377 million as in 2011 will be 915
million by the year 2050. There is need for proper planning of urban areas and the
regions around.
The creation of a large number of SEZs as per the Special Economic Zone
Act of 2005, involving large extent of fertile agricultural land have added substantially
to already aggravated land relations in India. An SEZ may bring far reaching changes
in the local economy. However, people lose access to farmlands, grazing grounds
water bodies and other common resources. The agrarian protests against the SEZs
are prevalent everywhere in India. These protests have resulted in a paradigm
shift in the government policy like, putting a cap of 5,000 Ha of land for each SEZ
and an important decision that governments will not invoke its powers under
‘eminent domain’ and ‘public purpose’ to acquire land for SEZs. However, these
policy changes may not prove adequate to address the core issues unless there is
accompanying land use planning strategy, particularly because of large requirements
of land. The requirements of lands for SEZs which are given ‘in–principle approval’
stands at 2,00,000 Ha, which, as per the estimates of the Committee on State
Agrarian Relations and Unfinished Task in Land Reforms, is capable of producing
around 1 million tonnes of food grains. There is a need for appropriate land utilization
and management strategy and land use planning to cater to the growing
industrialization needs.

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36 Material
Need for Policy Framework Agriculture in India

There is a need for a policy framework to be formulated at the national level

incorporating concerns of various sectors and stakeholders so as to ensure optimal
utilization of land resource through appropriate land use planning and management. NOTES
Such a policy should provide guiding framework for the States to adopt
and formulate their own policies incorporating their State specific concerns. The
States should develop land use policies by consulting all stakeholders and ensuring
appropriate legal backing. Further, detailed land use strategies and plans should
be developed in accordance with these policies so as to achieve sustainable
development.
A ‘National Land Use Policy Guideline and Action Points’ (1988) was
prepared by the Government of India, Ministry of Agriculture after intensive
deliberations. In the said policy, framing of suitable legislation and its sincere
enforcement were stressed by imposing penalties, of violation thereof. The said
policy guidelines were placed before the ‘National Land Use and Wasteland
Development Council’ under the chairmanship of Prime Minister and its first meeting
was held on 6 February 1986. The Council agreed to the adoption of policy and
circulated the same throughout the country for adoption after suitable considerations
at the State level. However, the policy did not make the desired impact.
The proposed policy framework at national level is hereinafter referred
to as the ‘National Land Utilization Policy’. The policy seeks to order and
regulate land use in an efficient and rational way, thus, taking care of the needs
of the community while safeguarding natural resources and minimizing land
use conflicts.
There are several existing policies relating to land use. These include the
National Water Policy 2013, the National Land Use Policy Outlines 1988, the
National Forest Policy 1988, the Policy Statement of Abatement of Pollution 1992,
the National Livestock Policy Perspective 1996, the National Agricultural Policy
2000, the National Population Policy 2000, the National Policy and Macro-level
Strategy and Action Plan on Biodiversity 2000 and the National Environmental
Policy 2006 and so forth.
Land use/land cover classification system
Recent changes in time and increasing demand of availability of information related
to land use and land cover has put forward the urgent need of designing a standard
classification system. There are various categories and procedures that provide
land data and mapping techniques comprising different scales related to States
and Union Territories.
Growing need of updated information along with land cover maps comprising
land cover classification system involves suitable mapping consisting of a scale
1:250,000 as developed by the National Remote Sensing Agency (NRSA). The
classification system provided a conceptual framework that became the basis of
discussion for over 40 institutions and departments out of which the twenty-two-
fold classification system was adopted nationwide for land cover and land use
analysis. Self - Learning
Material 37
Agriculture in India Land Use/Land Cover Analysis
The multi-date satellite data was analysed that helped in identifying the map details
related to crop land with reference to seasonal crops such as kharif and rabi. This
NOTES also included land cover analysis related to different lands like fallows, forests and
water bodies.
NRSA is actively involved in collecting information along with
collaborating with other agencies through the use of hybrid methodology along
with visual and digital methods. The data obtained included 442 districts of
the country, out of which 274 were analysed through visual techniques, while
remaining 168 districts were covered using digital techniques. For the purpose
of digital analysis, the project required different software modules that were
developed and integrated through the images that were commercially available
using the analysis software.
Reconciliation of area statistics generated by remote sensing and
other techniques
The statistics derived from the satellite data on the district level for the time period
1988 to 1989 were used to draw comparison with the figures published by the
government agencies involved in it. The data obtained was analysed for consistency
and compatibility.
At the first instance, the comparison was made through the technique of
matching different data pertaining to different land use classes that comprised of
one-to-one common group. The second criterion included comparisons drawn
between explanations related to different classes related to nine-fold classification.
Nine-Fold Classification of Land Use
Statistics on land use are collected at present in the form of a nine-fold classification
on a yearly basis. Out of a geographical area of 329 million hectares (reporting
area) statistics are available only from 305 million hectares (non-reporting area),
which makes some areas to the extent of 7 per cent still not covered or classifiable
under the nine-fold classification. The reporting area is classified into the following
nine categories:
(i) Forests: This includes all lands classed as forest under any legal enactment
dealing with forests or administered as forests, whether state-owned or
private, and whether wooded or maintained as potential forest land. The
area of crops raised in the forest and grazing lands or areas open for grazing
within the forests should remain included under the forest area.
(ii) Area under non-agricultural uses: This includes all lands occupied by
buildings, roads and railways or under water, for example, rivers and canals
and other lands put to uses other than agriculture.
(iii) Barren and uncultivable land: It includes all barren and uncultivable land
like mountains, deserts and so forth. Land which cannot be brought under
cultivation except at an exorbitant cost should be classed under uncultivable
land whether such land is in isolated blocks or within cultivated holdings.
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38 Material
 (iv) Permanent pastures and other grazing lands: This include all grazing Agriculture in India

lands whether they are permanent pastures and meadows or not. Village
common grazing land is included under this head.
(v) Land under miscellaneous trees, crops and others: This includes all
NOTES
cultivable land which is not included in ‘net area sown’ but is put to some
agricultural uses. Land under Casuarina trees, thatching grasses, bamboo
bushes and other groves for fuel and others which are not included under
‘Orchards’ should be classed under this category.
(vi) Cultivable waste land: This includes lands available for cultivation, whether
not taken up for cultivation or taken up for cultivation once but not cultivated
during the current year and the last five years or more in succession for one
reason or other. Such lands may be either fallow or covered with shrubs
and jungles, which are not put to any use. They may be assessed or may lie
in isolated blocks or within cultivated holdings. Land once cultivated but
not cultivated for five years in succession should also be included in this
category at the end of five years.
(vii) Fallow lands other than current fallows: This includes all lands, which
were taken up for cultivation but are temporarily out of cultivation for a
period of not less than one year and not more than five years.
(viii) Current fallows: This represents cropped area, which are kept fallow
during the current year. For example, if any seeding area is not cropped
against the same year it may be treated as current fallow.
(ix) Net area sown: This represents the total area sown with crops and orchards.
Area sown more than once in the same year is counted only once.

Check Your Progress

3. Define land use planning.
4. What does the Constitution (seventy-fourth amendment) Act, 1992
provide for?

2.4 CHANGES IN CROPPING PATTERN OF

MADHYA PRADESH
Madhya Pradesh is the second largest Indian State in size with an area of 308,000
sq. km. Madhya Pradesh has remarkable agrarian diversity having a wide range
of climatic backcloth within and between different crop seasons, variety of soil
types ranging from light textured soil to very heavy rich clay vertisols, each with
their own inherent problems, and cropping patterns. The State is divided into ten
agro-climatic zones.
The main crops grown in kharif season are Soybean, Paddy, Maize, Bajara
and Tur etc. and in rabi season Wheat, Gram, Mustered, Cotton, Jowar and
vegetables. Along with this Sugarcane, Custard apple and Banana also grown in
some districts. Madhya Pradesh is highest producer of pulses, Gram and Soybean
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Material 39
Agriculture in India contributing 21.38%, 40.33% and 59.92%, respectively and is second in oil seed
production; Jowar, Masoor contributing 22.10, 14.11, and 22.30%, respectively
to the total production of India.
The growth in agricultural sector in Madhya Pradesh was around 9.7 per cent
NOTES
per annum during the 2005- 2015. This is the highest growth rate that has ever been
registered in agriculture by any major state of India over a period of a decade.
Several measures have been taken by the state government to boost the
agriculture sector in the state. Out of these, three interventions have played a crucial
role i.e., a strong procurement system for wheat along with bonus over MSP for
wheat, expanded irrigation and all-weather roads to make the commute of farmers
easier to the markets. The irrigation coverage through tube-wells was put well in
place by the state government and expanded with an initial strategy to provide good
quality power supply to farmers during the irrigation season of wheat. Financial
resources were also utilized to provide canal irrigation to the farmers, thereby
completing a number of major and medium irrigation projects that had been under
construction for several years. With the expansion of irrigation cover for wheat
cultivation, production and acreage under the crop showed significant improvements.
Cropping Pattern
Primarily a food grain growing state with around 62 percent of the gross cropped
area (GCA) in Madhya Pradesh is dedicated exclusively to food grain and 32 per
cent to oil seeds in TE 2014-2015. A larger apportion of the food grains is devoted
to cereals (39.4 per cent of GCA) in comparison to pulses (23 per cent). The most
important cereal grown in the state is wheat with around 24 per cent of GCA devoted
to the crop. With around 13 percent of GCA devoted to gram, it is the most important
pulses grown in the state, which is followed by arhar (2 percent of GCA and 10
percent of the pulse area). During the rabi season, the major crop grown in the state
is wheat which is intercropped with gram in the Kharif season. With a 25.4 percent
of FCA devoted to it, Madhya Pradesh mostly grows oilseeds specifically soybean.
Despite the fact that Madhya Pradesh is one of the major food grains producing
states of the country, there has been a significant boon in the cultivation of horticultural
crops as cash crops. From 2005-2015, the area covered under the horticultural
crops has jumped from 2 percent to 6 percent. Around 43 per cent of the total
horticulture area is devoted to vegetables, 37 per cent to spices, 3 15 per cent to
fruits and 5.3 percent to medicinal and aromatic plants and flowers.
The area covered under vegetables has also significantly increased in Madhya
Pradesh after 2010-2011. Vegetable acreage increased from 284 thousand hectares
in 2010-11 to 507 thousand hectares in 2011-12, a growth rate of around 78 per
cent. This has almost doubled the share of area under vegetables in GCA from 1.3
per cent in 2010-2011 to 2.3 per cent in 2011-2012. While the expansion of area
under vegetables was sudden and took place after 2010-2011, in the case of fruits,
the expansion began as early as 2008-09. The area under fruit cultivation increased
from 47 thousand hectares in 2007-08 to 92 thousand hectares in 2008-2009.
Another important characteristic of Madhya Pradesh is that it is possible to grow
different crops in different parts of the state during different seasons, allowing for
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40 Material
uninterrupted agricultural activities throughout the year. Broadly, the state can be Agriculture in India

divided into following five distinctive crop zones:

(i) Wheat/Jowar: Wheat/jowar crop zones are predominant in the northern
strip of the state. Some southern areas of the state also have the potential to NOTES
grow these crops.
(ii) Cotton/Jowar: Cotton/jowar crops can be grown in the western, north-
western and south western parts of MP, where medium and deep soils are
prevalent
(iii) Rice Zone: This zone is confined to the eastern part of the state where
black soil type is present.
(iv) Wheat/Rice Zone: This crop zone is present in the eastern part of MP
where the soil type is black
(v) Wheat Zone: This crop zone is the central part of the state.

Check Your Progress

5. Which is the second largest Indian state in size?
6. What are the main crops grown in kharif season?

2.5 TRENDS IN AGRICULTURE PRODUCTION

AND PRODUCTIVITY
The Department of Agriculture and Cooperation under the Ministry of Agriculture
is the nodal organization responsible for development of the agriculture sector. It is
responsible for formulation and implementation of national policies and programmes
aimed at achieving rapid agricultural growth through optimum utilization of land,
water, soil and plant resources of the country.
Agriculture being a State subject, it is the responsibility of the State
Governments to ensure growth and development of the sector within their respective
State. Accordingly, separate departments have been set up in several states.
Several significant initiatives have been taken in recent years by the
Government Rashtriya Krishi Vikas Yojana (RKVY), National Policy for Farmers,
2007, Expansion of Institutional Credit to Farmers, National Rural Health Mission,
National Food Security Mission, Rashtriya Krishi Vikas Yojana to incentivise the
states to invest more in agriculture, Integrated Food Law, Legislative Framework
for Warehousing Development and Regulation, Protection of Plant Varieties and
Farmers’ Rights (PPVFR) Act, 2001, National Bamboo Mission, etc.
The rapid growth of agriculture is essential not only for self-reliance but also
for meeting the food and nutritional security of the people, to bring about equitable
distribution of income and wealth in rural areas as well as to reduce poverty and
improve the quality of life. Growth in agriculture has a maximum cascading impact
on other sectors, leading to the spread of benefits over the entire economy and the
largest segment of population.
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Material 41
Agriculture in India India’s total geographical area is 328.7 million hectares, of which 141 million
hectares is the net sown area, while 190 million hectares is the gross cropped
area. The net irrigated area is 57 million hectares with a cropping intensity of 134
per cent. The total irrigation potential in the country has increased from 81.1 million
NOTES ha in 1991- 92 to 102.8 million ha in 2006-07.
The overall production of foodgrains was estimated at 217.3 million tonnes
in 2006- 07. Between 1950-51 and 2006-07, production of foodgrains increased
at an average annual rate of 2.5 per cent compared to the growth of population
which averaged 2.1 per cent during this period. As a result, India almost became
self-sufficient in foodgrains and there were hardly any imports during 1976-77 to
2005-06, except occasionally.
The increase in foodgrain production in 2006-07 was largely because of higher
production of wheat by 6.5 million tonnes (9.3 per cent) and of pulses by 0.8 million
tonnes (6 per cent). There was a decline in production of oilseeds (3.7 million tonnes
or 13 per cent) compared to the production in 2005-06. The production of non-
food crops, particularly sugarcane, cotton and jute (including Roselle), in 2006-07,
however, exceeded both the targets and the levels achieved in the previous year.
During the year 2006-07 (up to 30 September 2006), the value of agricultural
exports was worth 28,157.52 crore as compared to 21673.25 crore during
April-September 2005. The share of agricultural exports in total export was more
than 10 per cent during April- September 2006. Agricultural imports registered a
decline during April-September, 2005. The share of agricultural imports in India’s
total imports showed a decline from 3.70 per cent to 2.88 per cent during the
corresponding period. India is the third largest producer and consumer of fertilizers
in the world after China and the USA, and contributes about 11.4 and 11.9 per
cent to the total world production/ consumption of NPK nutrients respectively.
Per hectare consumption of fertilizers has increased from 69.8 kg in 1991-92 to
113.3 kg in 2006-07 at an average rate of 3.3 per cent.
Several significant initiatives have been taken in recent years by the Government in
order to reverse the downward trend in agricultural production. Some of these
important initiatives include:
 Bharat Nirman
 National Rural Employment Guarantee Programme
 National Horticulture Mission
 Expansion of Institutional Credit to Farmers
 Establishment of the National Bee Board
 Establishment of the National Rainfed Area Authority
 Establishment of the National Fisheries Development Board (NFDB)
 Watershed Development and Micro Irrigation Programmes
 Reforms in Agricultural Marketing and Development of Market Infrastructure
 Revitalisation of Cooperative Sector
 Agri-business Development through Venture Capital Participation by the
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42 Material
  Agri-business Consortium Agriculture in India

 Reform and Support for Agriculture Extension Services

 National Rural Health Mission
 National Food Security Mission NOTES
 Rashtriya Krishi Vikas Yojana to incentivise the states to invest more in
agriculture
 Integrated Food Law
 Legislative Framework for Warehousing Development and Regulation
 Protection of Plant Varieties and Farmers Rights (PPVFR) Act, 2001
 National Bamboo Mission
 Knowledge Connectivity through Common Service Centres (CSC) and IT
initiatives
Rashtriya Krishi Vikas Yojana (RKVY)
It was launched to incentivise the States to increase the share of investment in
agriculture in their State plans. It aims at achieving the 4 per cent annual growth in
the agriculture sector during the Eleventh Five Year Plan period by ensuring a
holistic development of agriculture and allied sectors. It is a State Plan Scheme
and the eligibility for assistance under the scheme depends upon the amount provided
in the State budgets for agriculture and allied sectors, over and above the baseline
percentage expenditure incurred on agriculture and allied sectors. The funds under
the RKVY are to be provided to the States as 100 per cent grant by the Central
Government. The main objectives of the schemes are to:
 Incentivise the States to increase public investment in agriculture and allied
sectors
 Provide flexibility and autonomy to the States in planning and executing
agriculture and allied sector schemes
 Ensure the preparation of plans for the districts and the States based on
agro-climatic conditions, availability of technology and natural resources
 Ensure that the local needs/crops/priorities are better reflected
 Achieve the goal of reducing the yield gaps in important crops, through
focused interventions
 Maximize returns to the farmers
National Food Security Mission (NFSM)
It is a centrally-sponsored scheme, launched with the objective of increasing the
production of rice, wheat and pulses by 10, 8 and 2 million tonnes, respectively,
over the benchmark levels of production, by the end of the Eleventh Five Year
Plan period. The Mission aims at increasing foodgrains production of the above
crops through area expansion and productivity enhancement; restoring soil fertility
and productivity; creating employment opportunities; and enhancing farm level
economy to restore confidence of farmers of targeted districts. It is being
implemented in 305 districts of 16 States of the country. Various activities of NFSM Self - Learning
Material 43
Agriculture in India relate to demonstration of improved production technology, distribution of quality
seeds of HYVs and hybrids, popularization of newly released varieties, support
for micronutrients, and training and mass media campaign including awards for
best performing districts. The identified districts are given flexibility to adopt any
NOTES local area specific interventions as are included in the Strategic Research and
Extension Plan (SREP) prepared for the agriculture development of the district.

National Policy for Farmers, 2007

Government of India has approved the National Policy for Farmers, 2007 taking into
account the recommendations of the National Commission on Farmers and after
consulting the State Governments. The National Policy for Farmers, among other
things, has provided for a holistic approach for development of the farm sector.
The primary focus of this policy is on 'farmer' defined holistically and not merely on
agriculture. In that sense, it is much more comprehensive than an Agriculture Policy.
The objective is, inter alia, to improve the economic viability of farming through
substantially improving net income of farmers. Needless to say, there is emphasis on
increased productivity, profitability, institutional support, and improvement of land,
water and support services apart from provisions of appropriate price policy, risk
mitigation measures and so on. The major goals of the National Policy for Farmers are
to:
 Improve economic viability of farming by substantially increasing the net income
of farmers and to ensure that agricultural progress is measured by advances made
in this income
 Protect and improve land, water, bio-diversity and genetic resources essential for
sustained increase in the productivity, profitability and stability of major farming
systems by creating an economic stake in conservation
 Develop support services including provision for seeds, irrigation, power,
machinery and implements, fertilizers and credit at affordable prices in adequate
quantity for farmers
 Strengthen the bio-security of crops, farm animals, fish and forest trees for
safeguarding the livelihood and income security of farmer families and the health
and trade security of the nation
 Provide appropriate price and trade policy mechanisms to enhance farmers' income
 Provide for suitable risk management measures for adequate and timely
compensation to farmers
 Complete the unfinished agenda in land reforms and to initiate comprehensive
asset and Aquarian reforms
 Mainstream the human and gender dimension in all farm policies and programmes
 Pay explicit attention to sustainable rural livelihoods
 Foster community-centred food, water and energy security systems in rural India
and to ensure nutrition security at the level of every child, woman and man
 Introduce measures which can help attract and retain youths in farming and
processing of farm products for higher value addition by making it intellectually
stimulating and economically rewarding
 Make India a global outsourcing hub in the production and supply of the inputs
needed for sustainable agriculture, products and processes developed through
biotechnology and Information and Communication Technology (ICT).
 Restructure the agricultural curriculum and pedagogic methodologies for enabling
every farm and home science graduate to become an entrepreneur and to make
agricultural education gender sensitive
 Develop and introduce a social security system for farmers.
 Provide appropriate opportunities in adequate measure for non-farm employment
Self - Learning for the farm households.
44 Material
 Agriculture in India

Check Your Progress

7. Which organization is responsible for development of the agricultural
sector? NOTES
8. How much is India’s total geographical area?
9. Why was Rashtriya Krishi Vikas Yojana (RKVY) launched?

2.6 GREEN REVOLUTION

The Green Revolution was a programme launched by the Government of India for
agricultural modernization. It was largely funded by international agencies and
focused on providing high-yielding variety (HYV) or hybrid seeds along with
pesticides, fertilizers and other inputs to farmers. The Revolution was based on
the biochemical innovations that include high-yielding varieties, chemical fertilizers
and pesticides.
Basics of Green Revolution
The term ‘Green Revolution’ is mainly applicable to a period of Indian agriculture
from 1967–1978. The efforts at achieving food self-sufficiency, made between 1947
and 1967, were not entirely successful. The efforts till then largely concentrated on
expanding the farm lands but starvation deaths were still being reported in the
newspapers. In a perfect case of Malthusian economics, the population was growing
at a much faster rate than that of food production and this required drastic action to
increase yield. The solution came in the form of the Green Revolution. However, it
must be noted that the term ‘Green Revolution’ is a general one that is applicable to
successful agricultural experiments in various countries and is not specific to India.
The Green Revolution programmes were introduced only in areas that had
assured irrigation because sufficient water was necessary for the new seeds and
methods of cultivation. It was targeted mainly at the wheat and rice-growing areas.
As a result, only certain states such as Punjab, western Uttar Pradesh, coastal
Andhra Pradesh and parts of Tamil Nadu received the first wave of the Revolution.
There are a number of components of this approach, which are as follows:
1. Use of seeds with improved genetics, that is, improved technology in the
form of new high-yielding varieties (HYVs) of crops
2. Various practices consisting of appropriate application of chemical fertilizers,
pesticides and irrigation facilities which are necessary for the technology to
be effective
3. An overall strategy including government policies for the provision and
subsidy on inputs, remunerative prices for output and availability of credit
4. Continued expansion of farming areas
5. Double-cropping on existing farmland
This has been the broad strategy for agricultural growth followed by India
since the mid 1960s. Self - Learning
Material 45
Agriculture in India Factors Responsible for Adopting New Programmes in Agriculture
The factors that led to the adoption of new programmes in agriculture are as
follows:
NOTES  Food shortage: India was facing food shortages from the mid-1950s
to the mid-1960s. This created a national crisis, despite the very
creditable growth of agricultural output between 1949 and 1965 of about
3 per cent per annum. During this period, agricultural growth had begun
to stagnate. The massive jump in population growth after Independence
from about 1 per cent in the previous fifty years to about 2.2 per cent
per annum, the slow rise in the per capita income and the huge (and
rising with each Five Year Plan) outlay towards planned industrialization
put long-term pressures on Indian agriculture. This, for example, created
a demand for food which the Indian markets were not able to meet
fully. From the mid-1950s, food prices experienced an upward push.
To meet the food shortage and to stabilize prices, India was forced to
import increasing amounts of food.
 Controversial agreements under the PL-480 scheme: The controversial
agreements made by India to import food from the United States of America
under the PL-480 scheme started in 1956. Nearly three million tonnes of
food grains were imported under this scheme in the very first year and the
volume of imports kept rising thereafter, reaching more than four and a half
million tonnes in 1963. During this period came the two wars with China
(1962) and Pakistan (1965) and two successive drought years in 1965-66
leading to the decline of agricultural output by 17 per cent and food output
by 20 per cent. Food prices shot up, rising at the rate of nearly 20 per cent
per annum between 1965 and 1968. India was forced to import more than
ten million tonnes of food grains in 1966. It is in this moment of crisis, with
famine conditions emerging in various parts of the country, especially in
Bihar and Uttar Pradesh, that the US threatened to renege on commitments
of food exports to India.
 Policy of economic self-reliance and self-efficiency: Given this scenario
of the mid-1960s, economic self-reliance and particularly food self-
sufficiency became the top priority objectives of the Indian economic policy
and for that matter, of the foreign policy.
The New Agricultural Strategy began to be implemented in right earnest.
The Prime Minister then, Lal Bahadur Shastri, Food Minister C. Subramaniam
and Indira Gandhi (who followed Shastri in 1966 after his brief tenure) all fully
supported and crafted this basic transition in the strategy for developing Indian
agriculture. The World Bank-appointed Bell Mission recommended such a
transition and the US pressed in its favour, but they, appear to have been ‘leaning
on open doors’, as a considerable consensus in favour of such a change had
emerged within India.
Critical inputs like the high- yield variety (HYV) seeds, chemical fertilizers
and pesticides, agricultural machinery like tractors and pump sets, soil-testing
Self - Learning facilities, agricultural education programmes and institutional credit were
46 Material
concentrated on areas which had assured irrigation and other natural and Agriculture in India

institutional advantages. Around 32 million acres of land, about 10 per cent of

the total cultivated area, was, thus, initially chosen for receiving the programme
benefits on top priority.
NOTES
Phases of the Green Revolution
In the first phase of the Green Revolution, 1962–65 to 1970–73, an all India
compound growth rate of 2.08 per cent per year was achieved but it was mainly
in certain regions such as the north-western region of Punjab, Haryana and western
Uttar Pradesh (UP). Punjab registered a stupendous rate of growth at 6.63 per
cent.
In the second phase, 1970–73 to 1980–83, with the extension of HYV
seed technology from wheat to rice, the Green Revolution spread to other parts of
the country, notably eastern UP, Andhra Pradesh (particularly the coastal areas),
parts of Karnataka and Tamil Nadu and so on. Regions like Maharashtra, Gujarat
and Andhra Pradesh now grew much faster than the all-India growth rate of 2.38
per cent per year.
The third, and the most recent phase of the Green Revolution, 1980–83
to 1992–95, shows very significant and encouraging results. The Green
Revolution now spread to the erstwhile low-growth areas of the eastern region
of West Bengal, Bihar, Assam and Orissa, with West Bengal achieving an
unprecedented growth rate of 5.39 per cent per annum. Other regions, particularly
the southern region and Madhya Pradesh and Rajasthan of the central region
grew rapidly as well. In fact, for the first time, the southern region registered a
higher rate of growth than the north-western region. By the end of the third
phase, the coefficient of variation of the output growth levels and yield (per
hectare) levels between the various states had fallen substantially compared to
earlier decades. This period, therefore, saw not only a marked overall (all India)
acceleration of the growth of agricultural output touching an unprecedented
growth rate of 3.4 per cent per year but also witnessed a much more diversified
growth pattern, considerably reducing regional inequality by increasing the spread
of rural prosperity.
Between 1967–68 and 1970–71, food grain production rose by 35 per
cent. Again, between 1964–65 and 1971–72 aggregate food production increased
from 89 to 112 million tonnes, calculated to be a 10 per cent per capita increase.
Net food imports fell from 10.3 million tonnes 1966 to 3.6 million in 1970, while
food availability increased from 73.5 million tonnes to 99.5 million tonnes over the
same period.
It has been believed that if it were not for the new agricultural strategy,
India would have to import a minimum of about 8–10 million tons of wheat
yearly, at a cost of $600–800 million. Food availability continued to increase
sharply to 110.25million tonnes in 1978 and 128.8 million tonnes in 1984, putting
an end to India’s woes related to food shortage. By the 1980s, not only was
India self-sufficient in food with buffer food stocks of over 30 million tonnes but
it was even exporting food to pay back earlier loans or providing loans to food
deficit countries. Self - Learning
Material 47
Agriculture in India Impact of the Green Revolution
The strategy using which the Revolution spread and its impact in various regions
of India has been explained ahead in detail.
NOTES  Increased food production: From the mid-1960s to the 1970s, there
was a period during which the production of food grains grew by about
2.21 per cent per annum and the total agricultural output grew by about
2.29 per cent per annum. Unlike the first phase of the Green Revolution,
agricultural growth in this phase was largely a result of growth in agricultural
yields at a time when the scope for further expansion of area under cultivation
was limited.
Given the nature of this developmental strategy, agricultural growth in the
second phase was unequal across regions. The north and the north-western
states grew much faster than the eastern and southern parts of India.
 Agriculture became broad-based: In the 1980s, agriculture became
broad-based primarily owing to the spread of Green Revolution to eastern
India. Over the decade, food grain production grew at a rate of 2.9 per
cent per annum and total agricultural output grew at the rate of about 3.43
per cent per annum.
In this period, while agricultural yields stagnated in most of the early
Green Revolution areas like Punjab, eastern India showed a marked
acceleration in the growth of agricultural output. In particular, in West
Bengal, the ‘agricultural success story of the 1980s’ was witnessed and
agricultural output grew at more than 6 per cent per annum. The
agricultural strategy between the mid-1960s and 1980s was based on
public provisioning of infrastructure, credit, agricultural research and
extension. At the same time, institutional mechanisms were built for the
government to intervene in the agricultural markets to ensure that on the
one hand the farmers got remunerative prices for their produce and on
the other food prices in the economy remained low enough to keep
inflation in check.
 Market mechanism to fuel growth: In the 1990s, the fourth phase of
the Green Revolution, the agricultural development strategy shifted to
primarily relying on the market mechanism to fuel growth and the
withdrawal of a range of other supports that were being provided by the
government.
Various policy initiatives also led to greater integration of the domestic
agriculture with the world markets. These changes resulted in a marked
decline in agricultural growth. This phase witnessed the lowest growth rate
since Independence.
 Achievements for the Government and Scientists of India: The Green
Revolution has been considered to be a major achievement of the government
and of the scientists who contributed to the Revolution.
 Welfare of farmers: In most of the areas which have been influenced by
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the Green Revolution, farmers have switched from a mono-crop system
48 Material
 to a multi-crop system one. This has increased their profits as well. A Agriculture in India

loosening of traditional bonds between landowners and bonded labourers

has occurred. India has also witnessed a shift from payment in kind (grain)
to payment in cash. New job opportunities have also come up in the
agricultural sector. NOTES
 Rapid social and economic transformations: Several transformations
took place in rural areas (in terms of social relations) in those regions that
underwent the Green Revolution. These included an increase in the use of
agricultural labour as cultivation became more intensive.
Negative Effects of the Green Revolution
In spite of all the benefits, there were certain negative social effects and
environmental problems emerged due to the use of new technology in high cultivating
areas. These are as follows:
 Increased inequalities in rural society: The crops in the Green Revolution
were highly profitable, mainly because they yielded more produce. The
farmers who were well-off and had access to land, capital, technology and
know-how and those who could invest could increase their production and
earn more money. However, those who did not have these resources or the
capacity to influence the means of production lost the opportunity to increase
their income in the social system and became poorer in terms of the social
hierarchy.
 Masses were not benefitted: The input for new technology was so
expensive that it was beyond the reach of the small farmers and only the
medium and large land-holding farmers were able to benefit from the
technology.
 Displacement of tenant cultivators: The Green Revolution, basically,
led to commercialization of agriculture and in many cases, it led to the
displacement of tenant cultivators. Landowners began to take land back
from their tenants and cultivate it because the produce was very profitable.
This made the rich farmers better off and worsened the condition of the
landless and marginal land holders.
 Displacement of the service castes: The introduction of machinery such
as tillers, tractors, threshers and harvesters (in areas such as Punjab and
parts of Madhya Pradesh) led to displacement of the service castes who
used to carry out these agriculture-related activities. This process of
displacement also increased the pace of rural–urban migration.
 Heightened regional inequalities: The areas that underwent this
technological transformation became more developed (Punjab, Haryana
and western UP) while other areas stagnated (Bihar, Bengal and eastern
UP).
 Side-effects of modern methods: A number of scientists have proved
that the high-yielding varieties have adverse effects on the health of
consumers. Various farmers’ movements now suggest a return to the
traditional and more organic methods of cultivation. Self - Learning
Material 49
Agriculture in India

Check Your Progress

10. Which years are covered under the Green Revolution of India?
NOTES 11. Name the areas which benefitted the most because of Green Revolution
in India.

2.7 AGRICULTURAL MARKETING

Agricultural marketing is a central parameter in the context of agricultural growth.
Timely and remunerative sale of agricultural products motivates the farmers to
make strong efforts in all areas of farming. In fact, a rational farmer keeps one eye
on the plough and the other on the market. Unfortunately, in India, the agricultural
marketing suffers from certain serious drawbacks. Farmers often fail to get fair
price for their produce. More often than not, they are the victim of ‘Paradox of
Plenty’: greater the production, lesser the revenue; as prices tends to crash owing
to bulk sales in the market.
Accordingly, farming in India is more like a gamble in futures rather than an
avenue of secured income. In the context of the Indian agriculture, one can say
that marketing is a menace and a serious threat to the inducement to invest. Supply
price response is extremely limited in agriculture, because of which farming has
failed to emerge as a profit-yielding enterprise. Most farming population in India
continues to consider farming merely as a source of subsistence. Exposure of
farming to the market forces of supply and demand remains grossly limited owing
to the continuation of a primitive marketing structure. To quote Royal Commission
Report ‘Problem of agricultural growth cannot be fully solved unless agricultural
marketing is improved.’
Meaning and Importance of Agricultural Marketing
Agricultural marketing does not simply refer to the sale of agricultural production.
It is a very wide term encompassing all such activities that are related to the
procurement, grading, transporting and finally selling of agricultural produce. In
the words of Faruque, ‘Agricultural marketing comprises all operations involved
in the movement of farm produce from the producer to ultimate consumer.’
Broadly, agricultural marketing includes the following operations, besides the sale
of agricultural production:
 Arrangements regarding collection of agricultural produce
 Arrangement for grading and standardizing the product
 Processing of the products, if required
 Warehousing facility for storage
 Cold storage facility for the perishable products
 Transportation facility
 Credit facility to cope with cash requirement prior to sale or marketing of
Self - Learning the produce
50 Material
 Once marketing structure gets developed, marketable surplus starts Agriculture in India

responding to the relative price structure and the agriculture starts like other business
enterprises.
Different Sources of Marketing Agencies NOTES
In the context of agricultural production, there are diverse outlets of marketing in
India. Following are the notable ones:
Sale in local markets: Farmers in India tend to sell the bulk of their produce in
the unorganized local markets. According to an official estimate, in Bihar and Bengal,
89 per cent and 72 per cent (respectively) of the total rice output is sold in the
local markets. The All India Rural Survey Committee observes that, on an average,
an Indian farmer sells nearly 35 per cent of his produce in the village itself and 24
per cent of it to the traders and commission agents in the rural areas. In the local
markets, the agricultural produce is sold in three different ways:
 In the rural fairs/bazaars
 Directly to the Mahajans or moneylender
 To the mobile traders of the urban areas
Local sale does not fetch any competitive price. It is more like desperate
sale at desperate price.
Sale in urban markets: Urban markets in India are of two types:
 Unregulated markets
 Regulated markets
In the unregulated markets, the bulk of the farmers’ produce is purchased
by the commission agents who also happen to be moneylenders. However, the
number of unregulated markets is gradually reducing. Most of the markets are
being regulated offering fair price to the farmers under the direct supervision of the
market committee.
Other outlets of sale: There are various other outlets of sale. They include the
following:
 Sale through co-operative societies
 Direct sale to the government
Direct sale to the government is facilitated through Food Corporation of
India, Jute Corporation, Cotton Corporation of India and various other institutes.
Serious Deficiencies of Agricultural Marketing in India
Agriculture marketing in India has certain serious deficiencies. As a result, farmers
are often deprived of fair price for their produce. Following are some notable
deficiencies:
Lack of finance: Marketing is closely linked with finance. For their financial
needs, the small farmers invariably depend on the traders and money lenders.
The traders and moneylenders often give loans on the condition that the produce
is sold to them directly. Accordingly, the farmers become vulnerable to
exploitation. Self - Learning
Material 51
Agriculture in India Distressed sale: An average Indian farmer seldom sells his produce under the
distress of poverty. The compulsion to sell produce immediately after the harvest
arises on following account:

NOTES  Pressure of repayment of loans to the Mahajans and banks

 Domestic needs of the farmers
 Poor holding capacity of the farmer
Often the farmer has to sell his produce at an unfavourable time and on
unfavourable terms.
Lack of collective bargaining: Indian farmers lack collective bargaining. There
are millions of small and marginal producers who would hardly form a united
front. Often, they bring their produce to the market as individual competitors. The
obvious consequence of which is low price and loss of revenue. Royal Commission
on Agriculture observed that, ‘So long as the farmer does not learn the system of
marketing himself or in co-operation with others, he can never bargain better with
the buyers of his produce who are often very shrewd and well informed.’
Lack of grading: Farmers in India do not appreciate the significance of grading
the produce. Qualitatively good and bad crops are not separated. Mixed with
poor quality grain, even the good quality grain fetches a low price.
Lack of proper storage facility: There is a lack of proper storage facility in the
rural areas. Crops are often dumped in the underground pits that are vulnerable to
pests and insects. This often forces the farmer to sell his produce at times when
there is a glut in the market and the price is low.
Multiplicity of intermediaries: Multiplicity of intermediaries is an equally serious
defect in the marketing system in India. There is a long chain of intermediaries
between the farmer and the final consume, who appropriate the bulk of profit that
otherwise would have accrued to the farmers. It is estimated that the farmer gets
just 55 paise out of a rupee worth sale of rice, and just 50 paise out of a rupee
worth sale of wheat. On an average, farmer receives just 60 per cent of the price
paid by the final consumer, the rest 40 per cent goes to the intermediaries.
Lack of market knowledge: Farmer usually lack knowledge of prevailing market
conditions. They are solely dependent upon commission agents for the price of
their produce. Often they sell their produce at low prices in the nearby markets
dominated by commission agents and Mahajans.
Transport bottlenecks: There is a general lack of economical and fast means of
transport between the rural and urban areas. Transportation of crop is often done
by means of bullock carts. This is a very slow means of transport and is vulnerable
to the weather. High transport cost is the net consequence that comes to nearly 20
per cent of the value of output.
Malpractices: Malpractices in the markets is a common feature. These relate to
weights and measures, and clandestine fixation of the price of the produce by the
brokers and commission agents. Royal Commission on Agriculture very rightly
observed, ‘Fraudulent practices in the markets are nothing short of day light
robberies.’
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52 Material
Strategies to Combat Deficiencies Agriculture in India

To combat deficiencies of agricultural marketing system in India the Government

has initiated various measures. Some of the important ones are as follows:
Price support: The government offers price support to the farmers with a view to NOTES
regulate their income. The government offers to buy any quantity of the produce at
the stipulated price. The prices are fixed by the Commission for Agricultural Costs
and Prices. Support price is annually reviewed with a view to insulating the farmers
against the uncertainties of the market.
Standardization of weights and measures: With a view to ensuring uniform
weights and measures in different parts of the country, the government introduced
the metric system of weights and measures in 1958. In 1966, old weights and
measures were completely abolished. Weight inspectors were appointed to supervise
the use of metric weights. This has surely reduced exploitation of the farmers in the
markets to some extent.
Means of transport: Means of transport have been significantly developed during
the last three Five Year Plans. Presently, roads are being developed under the 20-
year Hyderabad plan. According to this plan, no village in India should remain at a
distance of more than 4 km from the metalled roads.
Development and grading of agricultural produce: Agricultural Produce, Grading
and Marketing Act, 1937 was passed with a view to improving the grading of the
agricultural produce. It was amended in 1986. Various ‘AGMARK’ centre have
been opened for the standardization of agricultural products. On the recommendation
of the Planning Commission in 1952, classification of agricultural produce (for exports)
was made compulsory. Central Quality Control Laboratory as well as sixteen regional
labs have been established for the standardization of agricultural products. So far
nearly 164 products have been classified and standardized.
Storage facilities: To improve storage facilities for the farmers, the government
has accorded high priority to the construction of godowns like National Cooperative
Development Warehousing Corporation was established in 1956, National
Cooperative Development Corporation was established in 1963 and Central
Warehousing Corporation was established on March 18, 1962. This corporation
constructs godowns for the use of Food Corporation of India. Sixteen state
Warehousing Corporations have been set up in different parts of the country. Food
Corporation of India has the total storage capacity of 235 lakh tonnes. Godowns
of the State Corporation have a total capacity of 114 lakh tonnes. Indian Grain
Storage Institute has been established in Hapur. This institute offers a variety of
scientific information related to grain saving. Rural Development Corporation has
established 3,354 godowns in the rural areas. National Co-operative Development
Corporation has established 247 cold storages of the capacity of 7.4 lakh tonnes.
In 2003, there were 3,546 cold storages in India. The total storage capacity in
India was 429 lakh tonnes. During the Eighth Plan, 424 crore has been spent on
the expansion of storage capacity in India.
Cooperative marketing societies: Co-operative marketing societies have been
established in order to be helpful in the context of agricultural marketing. The
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Material 53
Agriculture in India societies organize for the collective sale of the produce of their members. The
farmers are thus, freed from the clutches of the middle men. These cooperative
societies also have their own storage facilities.

NOTES These also offer credit facilities to their members. A notable progress has
been registered to these societies in the States of Punjab, Haryana, U.P.,
Maharashtra and Gujarat. These societies have shown an audible growth from the
Second Five Year Plan onwards. In the year 2001, there were 6,980 primary
cooperative marketing societies; 186 central cooperative marketing societies and
nineteen state cooperative marketing societies.
The National Agricultural Cooperative Marketing Federation was
established in 1964 with the view to coordinate the activities of various societies
as well as to encourage the international trade. The societies also work for food
corporations in different parts of the country. In 2001, these societies recorded
marketing of crops worth 13,600 crore.
Marketing intelligence: The government has arranged for the distribution of
marketing information for the benefit of the farmers. The All India Market News
Service has been launched specifically for this purpose. Prices in different markets
of the country are broadcasted everyday through the All India Radio.
Regulated markets: Regulated markets have been established in different parts
of the country beginning with the one in Hyderabad in 1943. Some of the important
features of these markets are as follows:
 Market committee supervises the marketing operations.
 Producers, traders and representatives of the local self-government are
members of marketing committees.
 Traders and brokers are required to obtain licenses for their work.
 Commission and brokerage are determined by the market committees only
 Weights and measures are used under the strict supervision of the committees
 The committees disseminate information regarding the prevailing prices in
the market
 For the coordination between the marketing committees of Punjab and
Haryana, the government of these states has established State Agricultural
Marketing Boards.
Agricultural marketing organization: Directors of Marketing and Inspection
has been established with a view to improving agricultural marketing. It focuses on
the following activities:
 Research
 Development
 Grading
The Directorate also supervises sale and purchase activities. It has established
a Marketing Extension Cell. It publishes marketing newsletter, marketing extension
newsletter and agricultural marketing for the benefit of the farmers. It also offers
Self - Learning
marketing training to the farmers.
54 Material
Cooperative Marketing Agriculture in India

Agricultural marketing plays a crucial role in the context of agricultural development

in India. Success of any policy related to agricultural growth hinges upon an efficient
system of marketing. The cooperative agricultural marketing system is of special NOTES
significance in this respect. In the words of Prof. V. Jesons, ‘Cooperative marketing
means working together for mutual benefit in solving marketing problems’ and
cooperation of the farmers for their own common good, relating to the sale of their
produce and purchase of various inputs.
Objectives of cooperative marketing
Some of the principal objectives of cooperatively marketing are as follows:
 These societies sell the products of their members at the appropriate price
and at appropriate time.
 These societies offer storage facility to the members.
 Loans are offered to the member farmers in times of need.
 Information related to market prices is offered to the members
 The societies purchase and procure all the necessary inputs (seeds, fertilizes,
etc.) for their members
Organization and Types of Cooperative Marketing Societies in India
Prior to 1954, cooperative marketing societies in India confined themselves solely
to the activity of marketing the products of the member farmers. These were separate
from the credit societies. The marketing societies become multipurpose societies
after the All India Rural Credit Survey Report. Following are the important types
of co-operative marketing societies in India:
 Primary cooperative marketing societies: These societies operate at
the village level. They are formed not just to handle the marketing problems
of their members, but also to monitor their credit needs besides the need for
seeds, fertilizers and other inputs. These are nearly 6,980 such societies in
India.
 Central cooperative marketing societies: Central cooperative societies
are formed like a federation of the various primary societies in a particular
area. These address issues/problems commonly experienced by primary
societies. These are based both in the rural as well as urban areas. There
are nearly 186 such societies in India.
 State cooperative marketing societies: These are the apex cooperative
institutions in different states of the country. They bolster activities of the
primary societies through the central cooperative societies. These are
generally located in the state capitals, and are nearly nineteen in number.
 National Agricultural Cooperative Marketing Society (NAFED): It
works at the national level to coordinate the activities of various marketing
societies in India, as well as to stimulate domestic and international trade,
related to agricultural products.
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Material 55
Agriculture in India Progress of Cooperative Marketing in India
Cooperative marketing societies have made a noticeable progress over time.
In 2002, there were 6,980 primary marketing societies, 186 central cooperative
NOTES societies and nineteen state cooperative societies, besides the national
federation of cooperative societies working at the national level. Progress of
these societies has been particularly evident in the States of Maharashtra,
Gujarat, A.P., Tamil Nadu, Punjab, Haryana and Bihar. In 1951, the
cooperative societies handled the sale of agricultural produce worth 47 crore.
In 1981, this value increased to 1,950 crore, and to 13,400 crore in the
year 2002. These societies are rendering useful services in the process of
procurement of staple crops like wheat and rice and commercial crops like
cotton and jute.
Merits of cooperative societies: Following observations highlight the merits of
cooperative societies:
 Elimination of middlemen: Thanks to cooperative societies, a chain of
middlemen between the farmer and the final purchaser has been eliminated.
This has helped combat in unwarranted price-rise, ensuring at the same
time that the farmers get remunerative price for their produce.
 Reduction in marketing cost: Marketing expenses have gone down due
to the collective sale. It also saves the farmer from various customary
deductions relating to weighing and vigilance.
 Collective bargaining and remunerative price: Cooperative societies
have succeeded in reaping the advantages of collective bargaining because
of collective sale of the farmers’ produce. Individually, the farmer has very
poor bargaining power in India. Collectively, the farmers are able to exercise
their bargaining power and appropriate gains in terms of a remunerative
price for their produce.
 Relief from distressed sale: By offering periodic loans to the members,
the cooperative societies have reduced vulnerability of the small and marginal
farmers to the rural moneylenders. The availability of loans from the societies
has reduced the incidence of distressed sale.
 Grading and storage: Facility of grading offered by the society helps in
standardization of the produce. The societies also provide storage facility
that enhances holding capacity of the farmers. Consequently, income of the
farmers also gets enhanced.
 Procurement facility: With a view to facilitate procurement of the members’
produce, the cooperative societies set up collection centres at convenient
locations. It saves farmers’ cost of transportation. Also, it alleviates stress
on the scarce means of transport in the rural areas.
 Gluts are avoided: The societies regulate the flow of sales in the market,
avoiding situations of glut and price crash.

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56 Material
Demerits of cooperative societies: Following observations may be noted in Agriculture in India

this context:
 Inactive societies: There is a large number of inactive societies in the
country. Nearly 40 per cent of the inactive societies do not handle trade NOTES
worth even 5 lakhs. These societies have yet to achieve a breakthrough in
their operations.
 Lack of so-ordination: There is a lack of coordination among the primary,
central and state co-operatives. Accordingly, the farmers tend to make
independent sale of their produce directly in the market. Perhaps, the traders
and commission agents continue to be a convenient source of credit for the
farmers.
Suggestions for improvement: Organization and functioning of the cooperative
marketing societies show a considerable scope for their improvement. Following
are some notable suggestions:
 Multi-purpose societies: Cooperative marketing societies should merge
with other societies operating in rural areas to form multi-purpose societies.
Such societies should be more useful in fostering not only marketing but all
parameters of agricultural growth and development.
 Direct relation with consumers: Cooperative marketing societies should
establish direct relation with the consumers. This will fetch the farmer the
maximum possible price for his produce, while the consumer will pay the
minimum possible, in the absence of all middlemen.
 A vision beyond grading and storage: Cooperative societies should
develop a broad vision beyond grading and storage. They should widen
their activity network by handling some processing jobs like of separating
the fibre and seeds of cotton. This would further enhance effectiveness of
the co-operatives and profit margins of the farmers.
 Government agency: The societies should function as a Government
agency. For instance, the societies should ensure that the Food
Corporation of India procures foodgrains only through the cooperative
centres, not directly from the markets. Farmers will, thus get appropriate
price for their produce; this would also enhance trust of the farmers in
the societies.
2.7.1 India’s Food Policy
Despite commendable achievement in agricultural production in India, many people
still starve in the country. Food security is a major concern of the government.
Public Distribution System (PDS) has been established by the Government of
India to distribute subsidised food and non-food items to India’s poor. Major
commodities distributed include staple food grains, such as wheat, rice, sugar and
kerosene, through a network of fair price shops established in several states across
the country. The Food Corporation of India, a government owned corporation,
procures, maintains and issues food grains to the state. Self - Learning
Material 57
Agriculture in India The Problem of Food Security
Food security implies access by all people at all times to sufficient quantities of
food to lead an active and healthy life. As noted by P.V. Srinivasan, an economist,
NOTES this requires not just adequate supply of food at the aggregate level but also enough
purchasing capacity with the individual/household to demand adequate levels of
food. As far as the question of ‘adequate supply’ is concerned, it involves the
following dimensions:
 The quantitative dimension (in the sense that the overall food availability in
the economy should be sufficient to meet the demand)
 The qualitative dimension (in the sense that the nutritional requirements of
the population are properly looked after)
As far as the question of ‘enough purchasing capacity’ is concerned, it involves
the introduction of employment generation programmes so that the income and
purchasing power of the people increases. To tackle the quantitative and qualitative
aspects of the food security problem, the Government of India relies on the following
food-based safety nets:
 Public Distribution System (PDS)
 Integrated Child Development Services (ICDS)
 Mid-Day Meals Programme (MDM)
As far as the issue of providing purchasing power to the people is concerned,
various employment programmes have been introduced from time to time.
The nature of the problem: Due to the chronic food shortages that the country
faced in the years following independence, the focus of food policy became to
achieve self-sufficiency. Green Revolution has enabled the economy to overcome
the problems of food grains shortages and build up large stocks of food grains to
counter any scarcity conditions.
In fact, as noted by R. Radhakrishna, India achieved self-sufficiency in food
grains in the 1970s and has sustained it since then. It improved its capacity to
cope with year-to-year fluctuations in food production by building up large buffer
stocks through the agency of FCI (Food Corporation of India) and supplying
these stocks to the people through the PDS. During some of the recent years, the
buffer stocks considerably exceeded the minimum norms causing the problem of
‘excess stocks’. In July 2002, the actual stocks of food grains were as high as
63.0 million tonnes (the highest level attained) while the buffer stock norms were
24.3 million tonnes.
As a result, the ‘excess stocks’ were as much as 38.7 million tonnes.
However, stocks have subsequently declined. In fact, stocks of food grains stood
at 18.8 million tonnes on January 1, 2006, lower than not only the stock of 21.7
million tonnes on January 1, 2005 but also the buffer stock norms of 20 million
tonnes. The main reason for the decline in stocks was the lower stock of wheat.
The Government of India had pressed the panic button and in a bid to bolster
Self - Learning wheat stocks had increased the procurement price of wheat to 850 per quintal in
58 Material
2007–2008 on the one hand, and had asked State Trading Corporation to import Agriculture in India

3 million tonnes of wheat to bridge any shortfall in production (in 2006– 2007
also, State-run firms and private traders had imported 6.5 million tonnes of wheat
after production fell to 68.6 million tonnes).
NOTES
There are more issues of concern. Analysts point out that while
population growth and shift in food habits away from coarse grains with the
rise in incomes, will push up the consumption of wheat considerably in years
to come, the production is not likely to rise as neither area under wheat is
likely to increase nor area any further increases in productivity in evidence.
As far as rice is concerned, its production has been more than consumption
except 2002–2003. However, rice output has not grown strongly with yields
stagnating at 2,000 kgs per hectare since the late 1990s. Even area under
rice has tended to fall (it was 45.2 million hectares in 1999–2000 and 41.9
million hectares in 2004–2005 through it rose again to 43.5 million hectares
in 2005– 2006). Accordingly, many observers believe that rice production
is also beginning to plateau. As far as vegetable oils and pulses are concerned,
India already imports their large quantities. For instance, vegetable oil imports
were 49.85 per cent (i.e., half) of total consumption in 2004–2005 while
pulses imports were 8.83 per cent of total consumption in that year.
The vegetable oils imported in July 2019 comprises, 1,347,882 tons of
edible oils and 64,119 tons of non-edible oils.
Even more worrisome is the qualitative aspect of the problem as the following
facts clearly come out:
 According to the Global Hunger Index, 2019, India ranked 102 in a group
of 117 developing countries.
 According to the World Food Programme, nearly 50 per cent of the world’s
hungry people live in India.
 About 35 per cent of India’s population–over 350 million is food-insecure,
consuming less than 80 per cent of the minimum energy requirement.
 Nearly 9 out of 10 pregnant women between 15 and 49 years are
malnourished and anaemic.
 Anaemia in pregnant women causes 20 per cent of infant mortality.
 More than 50 per cent children under five are moderately or severely
undernourished.
 Almost 2.5 million children under five years die every year in India. Uttar
Pradesh alone contributes to 28 per cent of these deaths.
The National Family Health Survey-III (NFHS-III)–the largest ever health survey
done simultaneously in twenty-nine states during 2005 and 2006, presents the
following startling results:
 42.4 per cent of undernourished children
 37 per cent of stunted children
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Agriculture in India  17 per cent of wasted children
 51 per cent of children not fully immunized
 77 per cent of children suffering from anaemia
NOTES This shows that three in four children in India are anaemic and one in three
are stunted.
The nutritional status of children is the worst in Uttar Pradesh. This is clear from
the following facts:
 52 per cent of children under three years of age in Uttar Pradesh are
undernourished,
 The State has a high infant mortality rate (IMR) of 72/1,000 live births
 UP contributes to 26.3 per cent of all infant deaths that occur in India.
Public Distribution System in India: Objectives and Expansion of PDS
The basic objective of the public distribution system in India is to provide essential
consumer goods at cheap and subsidized prices to the consumers so as to insulate
them from the impact of rising prices of these commodities and maintain the minimum
nutritional status of our population. To run this system, the government resorts to
levy purchases of a part of the marketable surplus with traders/millers and
producers at procurement prices. The grain (mainly wheat and rice) thus procured,
is used for distribution to the consumers through a network of ration/fair price
shops and/or for building up buffer stocks.
In addition to food grains, PDS has also been used in India for the distribution
of edible oils, sugar, coal, kerosene and cloth. The most important items covered
under PDS in India have been rice, wheat, sugar and kerosene. Together these
four items have accounted for 86 per cent of the total PDS sales. Coarse grains
(Jawar, Bajra, maize etc.) virtually do not figure in the PDS as their combined
sales have amounted to less than 1 per cent of the total PDS sales. Pulses that
constitute an important source of protein for the poor have had a share of less than
0.2 per cent in total PDS sales. PDS in India covers the cards to all those
households that have proper registered residential addresses. The number of fair
price shops (FPS) has increased over the year from 0.47 lakhs at the end of 1960
to 3.12 lakhs in 1984 and is presently 4.74 lakh. PDS distributes commodities
worth more than 30,000 crore annually to about 160 million families and is perhaps
the largest distribution network of its kind in the world.
The quantities supplied through the PDS outlets remained below five million
tonnes by mid-1960s. Throughout the 1970s the quantities remained around 10
million tonnes and during the 1980s, the average was around 16 million tonnes.
The offtake from PDS outlets reached a peak level of 19.0 million tonnes in
1991–1992 but, thereafter, tended to decline. In fact, the gap between allocation
and offtake from the PDS increased considerably both for rice and wheat but
more particularly for wheat. In 1991–1992, the combined allocation of rice and
wheat under PDS was 21.92 million tonnes while offtake was 19.0 million tonnes.
Self - Learning Thus, the offtake was 86.7 per cent of allocation. In 2001–2002, against the
60 Material
combined allocation of rice and wheat of 30.37 million tonnes under PDS, the Agriculture in India

offtake was merely 13.84 million tonnes. Thus, offtake was only 45.6 per cent
of allocation. This reduced offtake became a serious cause of concern as the
unsold stocks in the PDS led to heavy handling and storage costs for the
government agencies. NOTES

The wide gap between allocation and offtake from the PDS noticed in
1990s was basically due to the reason that the issue prices of rice and wheat
had been raised substantiality with the result that the gap between the open
market price and the price charged for supplies through PDS (the issue price)
got reduced considerably. For example, the issue price of rice was revised four
times between 1990 and 1994 with the result that the 1994 price level was
more than double the price in 1989 for rice and nearly doubles the 1989 level
for superfine rice.
The central issue price (CIP) fixed by the government in February 1994
remained unaltered up to May 1997 when a dual pricing structure was introduced
under the Targeted Public Distribution System (TPDS). In this system, issue prices
for families below the poverty line (BPL) were fixed at 50 per cent of the economic
cost while issue prices for families above the poverty line (APL) were fixed equal
to the economic cost. Since the issue prices for APL families were very close to
the market price, there was no incentive for them to buy from the PDS.
Consequently, food grain stocks with the government increased considerably. To
tackle this problem, the government had to reduce the issue price for APL families
by 30 per cent in July 2001. Thus, issue price for APL families was reduced to 70
per cent of economic cost.
State intervention in food grains and FCI
The main agency providing food grains to the PDS is the Food Corporation of
India (FCI) set up in 1965. The primary duty of the Corporation is to undertake
the purchase, storage, movement, transport, distribution and sale of food grains
and other foodstuffs. It ensures on the one hand that the farmers get remunerative
prices for their produce and on the other hand the consumers get food grains from
the central pool at uniform prices fixed by the Government of India.
The Corporation has also been entrusted with the responsibility of maintaining
buffer stocks of food grains on behalf of the government. With the increasing
production of wheat and rice in recent years and the increasing demands on the
PDS, the role of FCI has also increased as it is the sole repository of food grains
meant for the PDS. FCI has the following achievements to its credit:
 Ever since FCI started its procurement operations, the levels of procurement
have increased considerably enabling the government to build up adequate
buffer stocks on the one hand, and to meet the requirements of the PDS on
the other.
 With the increase in the domestic procurement of food grains by the FCI,
dependence on imports of food grains has declined considerably enabling
the country to save valuable foreign exchange. Self - Learning
Material 61
Agriculture in India  Since a major part of the FCI’s procurement operations is in the nature of
price support purchase, the FCI has arrested price declines to
unremunerative levels.
NOTES  By supplying food grains through the PDS at ‘affordable’ price, the FCI
has helped in reducing the inflationary pressures on the one hand, and has
enabled the low-income groups to meet, their food grains requirements on
the other hand.
 The FCI has played an important role in building up scientific storage capacity
in the country. This has not only enabled the country to build up buffer
stocks, it has also helped in reducing losses on storage.
Weaknesses of food security system
The following are the weaknesses of food security system:
 PDS results in price increases: Some economists have pointed out that
the operations of the PDS have, in fact, resulted in an all-round price increase.
This is due to the reason that large procurement of food grains every year
by the government actually reduces the net quantities available in the open
market. Taking advantage of the low supplies in the market, the traders
have indulged in speculation raising the food grains prices in the open market
to unusually high levels. This dual market system – the PDS and the open
market – operates to the disadvantage of the poor. As noted earlier, the
PDS meets only a fraction of the requirements of the poor. Therefore, they
are compelled to make purchases in the open market where prices are
high. Thus, PDS not only does not meet significant requirements of the
poor but also operates against their interest by pushing up the open market
prices. People not serviced by the PDS at all like casual labourers on daily
wages, migrant workers and those without proper residential addresses
are doubly disadvantaged because they are not only not covered by the
PDS but also have to pay higher prices for their entire purchases in the
open market.
 Limited benefit to the poor from PDS: Many empirical studies have shown
that the rural poor have not been benefited much from the PDS as their
dependence on the open market has been much higher than on the PDS for
most of the commodities. In a similar way, urban poor have so depended to
a substantial extent on the open market to meet their consumption requirements.
In a study on the effectiveness of PDS in reaching the poor, Kirit S. Parikh
says, ‘The cost effectiveness of reaching the poorest 20 per cent of households
through PDS cereals is very small. For every rupee spent less than 22 paise
reach the poor in all States, excepting in Goa, Daman and Din where 28
paise reach the poor. This is not to suggest that PDS does not benefit the
poor at all, but only to emphasize that this support is provided at high cost.’ In
this context it would also be pertinent to point out that ration cards are issued
only to those households who have proper registered residential addresses.
This means that a large number of poor who are homeless and others without
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62 Material
 proper residential address (for example, migrant labourers) are automatically Agriculture in India

left out of the food security system.

 The question of urban bias: A number of economists have pointed out
that PDS remained limited mostly to urban areas for a considerable period NOTES
of planning while the coverage of rural areas was very insufficient. In fact, in
an article published in 1984, P.S. George estimated that the offtake in the
urban areas was about 85 per cent of the total offtake from the public
distribution system. However, using data available from the 42nd round of
NSS, S. Mahendra Dev and M.H. Suryanarayana indicated that for most
of the States, with the exception of West Bengal, the urban bias may not be
present. In fact, based on certain criteria they argued that the PDS is rural
biased at the all-India level for rice and coarse cereals.
 Leakages for PDS: Another criticism of PDS relates to the problem of
leakages from the system in the form of losses in the transport and storage
and diversion to the open market. The major part of the leakage is due to
diversion of food grains to the open market because of the widespread
prevalence of corrupt practices. Instead of selling ration at subsidized rates,
shopkeepers sell them in the open market at higher prices, pocketing the
difference.
According to a study conducted by Tata Consultancy Services, the all-
India diversion makes bogus entries in the ration cards. S. Mahendra Dev
gives the example of a village in Dahanu taluka in Maharashtra where the
tribal people had not even tasted sugar for more than a year. Yet, the ration
card of one undernourished tribal family had on entry for June 1995 stated
that it had bought 26 kgs of sugar on a single day. The situation is similar in
other Dahanu villages. The delivery systems in rural areas are very poor.
Even if the fair price shop exists, foodgrains are not available in many places.
 Regional disparities in PDS benefits: There are considerable regional
disparities in the distribution of PDS benefits. For example, in 1995, the
four Southern States of Andhra Pradesh, Karnataka, Karala and Tamil Nadu
accounted for almost one-hall (48.7 per cent) of total PDS offtake of food
grains in the country while their share in all India population below the poverty
line in 1993–1994 was just 18.4 per cent. As against this, the four Northern
States of Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh (or
BIMARU States) having as much as 47.6 per cent of the all India-population
below the poverty line in 1993–1994 accounted for just 10.4 per cent of all
India offtake of food grains from PDS in 1995. A more accurate picture of
differences across states and regions emerges when you examine the
distribution of per capita quantities, i.e., after adjusting for population size.
A recent study has shown that in poor states like Bihar, Madhya Pradesh,
Uttar Pradesh and Rajasthan with a high incidence of poverty, the per capita
monthly purchases of cereals from PDS was lower than half a kg while it
was 4.6 kg in Kerala, 3.3 kg in Tamil Nadu and 2.3 kg in Andhra Pradesh,
which have a low incidence of malnutrition. Self - Learning
Material 63
Agriculture in India
2.7.2 Agricultural Mechanisation
Strategies and programmes have been directed towards replacement of traditional
and inefficient implements by improved ones, enabling the farmers to own tractors,
NOTES power tillers, harvesters and other machines, availability of custom hire services,
support services of human resource development, testing, evaluation and research
& development. A huge industrial base for manufacturing of the agricultural machines
has also been developed. Introduction of technologically advanced equipment
through extension and demonstration besides institutional credit has also been
taken up. Equipment for resource conservation have also been adopted by the
farmers.
Under various government sponsored schemes like Macro Management of
Agriculture, Technology Mission for Oilseeds, Pulses and Maize, Technology
Mission on Horticulture, Technology Mission on Cotton and National Food Security
Mission, financial assistance is provided to the farmers for the purchase of identified
agricultural implements and machines.
Farm Machinery Training & Testing Institutes
Farm Machinery Training & Testing Institutes (FMT&TIs) have been established
at Budni (Madhya Pradesh), Hissar (Haryana), Garladinne (Andhra Pradesh) and
at Biswanath Chariali (Assam). The institutes have been capacity to train 5600
personnel annually on various aspects of agricultural mechanization. These institutes
also undertake testing and performance evaluation of agricultural machines including
tractors in accordance with National and International Standards. Since inception
1,10,712 personnel have been trained and about 2584 machines tested by these
institutes till 31 March 2009. During 2008-09 these institutes have trained 5894
personnel and tested 163 machines.
Demonstration of newly developed agricultural/horticultural equipment
With the objective of induction of improved/new technology in the agricultural
production system, demonstration of newly developed agricultural equipment
including horticultural equipment has been undertaken. The component envisages
conduct of demonstrations of improved/newly developed agricultural/horticultural
equipment at farmers’ field to acquaint them about their use and utility for production
of different types of crops. 100% grant in aid is given to the implementing agencies
for procurement and demonstration of identified equipment. For implementation
of schemes, funds are released to States and two organizations (viz. ICAR &
SFCI) on the basis of proposals received for assistance under the scheme. During
the year 2008-09, 11214 demonstrations of new equipment were conducted
benefiting 1,52,364 farmers.
Outsourcing of Training
This is a new component approved from the Tenth Plan in order to train large
number of farmers at nearby places and implemented w.e.f. 2004-05. The training
programme have been arranged through the identified institutions by each state
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64 Material
namely State Agricultural Universities (SAU’s), Agricultural Engineering Colleges/ Agriculture in India

Polytechnics etc. During the year 2008-09, funds amounting to 27.20 lakh have
been provided for conducting training programmes at the identified institutions.
Post-Harvest Technology and Management NOTES
“Reforming Agricultural Markets & Promoting Post Harvest Technology” has been
identified as one of the thrust areas for the Ministry of Agriculture by the Prime
Minister’s Office. Accordingly, the Department implemented a new scheme on
‘Post Harvest Technology and Management during XI Plan period w.e.f. March
2008 with an approved outlay of 40.00 crores. Under the scheme the technologies
developed by ICAR, CSIR and those identified from within the country and abroad
for primary processing, value addition, low cost scientific storage/transport of
cereals, pulses, oilseeds, sugarcane, vegetables and fruits and the crop by-product
management was given thrust. Under this scheme during the year 478.00 lakh
were released for distribution of post-harvest equipment through subsidy, organizing
demonstration and training on post-harvest technologies.
State Agro Industries Corporations
The Government of India had advised the State Governments in the year 1964, to
set up State Agro Industries Corporations (SAICs) in the public sector to act as
catalysts in providing access to industrial inputs for farmers, for their use in
agriculture. Thus, 17 SAICS were set up in the joint sector with equity participation
of the Government of India and respective State Governments, namely Andhra
Pradesh, Assam, Bihar, Gujarat, Haryana, Himachal Pradesh, Jammu and Kashmir,
Karnataka, Kerala, Madhya Pradesh, Maharashtra, Odisha, Punjab, Rajasthan,
Uttar Pradesh, Tamil Nadu and West Bengal during 1965 to 1970. Many of the
State Governments have increased their equity participation as a result of which
the Government of India, at present, is a minority shareholder. So far, the
Government of India’s shares in SAICs of Gujarat, Karnataka, Uttar Pradesh,
Tamil Nadu, Rajasthan and West Bengal have been transferred to the State
Governments concerned.
Legislative Framework
The Dangerous Machines (Regulation) Act 1983- External website that opens in
a new window, came into force with effect with effect from 14 December 1983.
The Act provides for the regulation of trade and commerce and production, supply
and use of products of any industry producing dangerous machines with a view to
securing the welfare of persons operating any machine and for payment of
compensation for death or bodily injury suffered while operating any such machine.
Power threshers used for threshing of the agricultural crops have been under the
ambit of this Act. The power operated chaff cutter and power operated sugarcane
crusher have also been brought under the purview of the Dangerous Machines
(Regulation) Act 1983 by way of Notification No. G.S.R. 505(E) and also the
Dangerous Machines (Regulation) Rules 1984 have been amended vide
Notification No. G.S.R. 506(E) dated 24th July 2007.
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Material 65
Agriculture in India

Check Your Progress

12. What does agricultural marketing comprise of?
NOTES 13. When was the National Agricultural Cooperative Marketing Federation
established?

2.8 ANSWERS TO ‘CHECK YOUR PROGRESS’

1. Agricultural commodities like tea, coffee, spices and tobacco constitute the
main items of export in India.
2. India produces the maximum tea in the world.
3. Land use planning is understood as a systematic and iterative procedure
carried out in order to create an enabling environment for sustainable
development of land resources which meets people’s needs and demands.
4. The Constitution (Seventy-fourth Amendment) Act, 1992 provides for
District Planning and Metropolitan Area Planning that consolidates plans of
both panchayats and municipalities having regard to spatial (land use)
planning.
5. Madhya Pradesh is the second largest Indian state in size.
6. The main crops grown in kharif season are Soybean, Paddy, Maize, Bajara
and Tur.
7. The Department of Agriculture and Cooperation under the Ministry of
Agriculture is the nodal organization responsible for development of the
agriculture sector.
8. India’s total geographical area is 328.7 million hectares.
9. Rashtriya Krishi Vikas Yojana (RKVY) was launched to incentivise the
States to increase the share of investment in agriculture in their State plans.
10. The term ‘Green Revolution’ is mainly applicable to a period of Indian
agriculture from 1967–1978.
11. Punjab, Haryana and western UP benefitted the most because to Green
Revolution in India.
12. Agricultural marketing comprises all operations involved in the movement
of farm produce from the producer to ultimate consumer.
13. The National Agricultural Cooperative Marketing Federation was
established in 1964.

2.9 SUMMARY
 Even though the share of agriculture in the total national income has been
coming down due to the development of the secondary and tertiary sectors
Self - Learning the contribution of agriculture remains very significant.
66 Material
 A number of agricultural commodities like tea, coffee, spices and tobacco Agriculture in India

constitute our main items of export.

 Agriculture has been a way of life and continues to be the single most
important livelihood of the masses. NOTES
 The definition of ‘land use planning’ by the United Nation’s Food and
Agriculture Organization (UNFAO) and the United Nations Environment
Programme (UNEP) published in 1999 reflects consensus among the
international organizations.
 Water resource projects are frequently being planned and implemented in a
fragmented manner without giving due consideration to optimum utilization
of water resources, environmental sustainability and holistic benefit to the
people.
 The mining areas are about 0.17 per cent of the total land of India, the
urban areas are about 2.35 per cent and the industrial areas are much less
than 1 per cent.
 India comprises seven climate regions in three groups: (a) tropical wet-
humid group; (b) dry climate group; (c) sub-tropical humid climate group.
 There is a need for a policy framework to be formulated at the national level
incorporating concerns of various sectors and stakeholders so as to ensure
optimal utilization of land resource through appropriate land use planning
and management.
 Madhya Pradesh is the second largest Indian State in size with an area of
308,000 sq. km.
 Primarily a food grain growing state with around 62 percent of the gross
cropped area (GCA) in Madhya Pradesh is dedicated exclusively to food
grain and 32 per cent to oil seeds in TE 2014-2015.
 Even though the share of agriculture in the total national income has been
coming down due to the development of the secondary and tertiary sectors
the contribution of agriculture remains very significant.
 The Department of Agriculture and Cooperation under the Ministry of
Agriculture is the nodal organization responsible for development of the
agriculture sector.
 The Green Revolution was a programme launched by the Government of
India for agricultural modernization. It was largely funded by international
agencies and focused on providing high-yielding variety (HYV) or hybrid
seeds along with pesticides, fertilizers and other inputs to farmers.
 The term ‘Green Revolution’ is mainly applicable to a period of Indian
agriculture from 1967–1978.
 Agricultural marketing is a central parameter in the context of agricultural
growth. Timely and remunerative sale of agricultural products motivates the
farmers to make strong efforts in all areas of farming.
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Material 67
Agriculture in India  Strategies and programmes have been directed towards replacement of
traditional and inefficient implements by improved ones, enabling the farmers
to own tractors, power tillers, harvesters and other machines, availability of
custom hire services, support services of human resource development,
NOTES testing, evaluation and research & development.

2.10 KEY TERMS

 Agricultural marketing: Agricultural marketing covers the services
involved in moving an agricultural product from the farm to the consumer.
These services involve the planning, organizing, directing and handling of
agricultural produce in such a way as to satisfy farmers, intermediaries and
consumers.
 Urbanization: Urbanization refers to the population shift from rural areas
to urban areas, the gradual increase in the proportion of people living in
urban areas, and the ways in which each society adapts to this change
 Industrialization: Industrialization is the period of social and economic
change that transforms a human group from an agrarian society into an
industrial society, involving the extensive re-organization of an economy for
the purpose of manufacturing.
 Biodiversity: Biodiversity is the variety and variability of life on Earth.
Biodiversity is typically a measure of variation at the genetic, species, and
ecosystem level.

2.11 SELF-ASSESSMENT QUESTIONS AND

EXERCISES

Short-Answer Questions
1. Write a short note on the nature and importance of agriculture.
2. What is the condition of land use planning in India?
3. How has the creation of Special Economic Zones (SEZs) helped the
agricultural sector?
4. What is the nine-fold classification of land use?
5. What are the five distinctive crop zones of Madhya Pradesh?
6. Write a short note on National Food Security Mission.
Long-Answer Questions
1. Discuss the major issues faced in the land use planning and policy in India.
2. How has the cropping patterns changed in Madhya Pradesh over the years?
Explain.

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68 Material
 3. What are the initiatives taken by the government of India in order to reverse Agriculture in India

the downward trend in agricultural production? Discuss.

4. Discuss Green Revolution. What are the factors responsible for adopting
new programmes in agriculture? NOTES
5. Explain the meaning and importance of agricultural marketing.
6. What are the merits and demerits of cooperative societies? Discuss.

2.12 FURTHER READING

Mankar, V. G. 1995. Economic Policy and Planning. Delhi: New Age
International Publishers.
Patel, I.G. 2003. Glimpses of Indian Economic Policy. New Delhi: Oxford
University Press.
Soubbotina, Tatyana P. 2004. Beyond Economic Growth: An Introduction to
Sustainable Development. Washington: World Bank.
Van den berg, Hendrik. 2001. Economic Growth and Development. Ohio:
McGraw-Hill.
Banik, Nilanjan. 2015. The Indian Economy: A Macroeconomic Perspective.
New Delhi: Sage Publishing India.
Kapila Uma. 2009. Indian Economy Since Independence. New Delhi: Academic
Foundation
Rama P. Kanungo, Chris Rowley, Anurag N. Banerjee. 2014. Changing the
Indian Economy: Renewal, Reform and Revival. Netherlands: Elsevier.
Bimal Jalan. 2004. Indian Economy. United Kingdom: Penguin.
Nilanjan Banik. 2015. The Indian Economy: A Macroeconomic Perspective.
New Delhi: SAGE Publishing House.
K. R. Gupta, J. R. Gupta. 2008. The Indian Economy, Volume I. New Delhi:
Atlantic Publishers.

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Material 69
 Industrial Policies of

UNIT 3 INDUSTRIAL POLICIES OF India

INDIA
NOTES
Structure
3.0 Introduction
3.1 Objectives
3.2 Industrial Policy of 1956 and 1991 and Changes Therein
3.3 Role of Public Sector in Industrialization
3.4 Industrial Policy of Madhya Pradesh
3.5 Concept of Small-Scale Industries (SSI) and Cottage Industries
3.5.1 Problems and Prospects of SSI in Indian Economy
3.6 Start-up India and Make in India
3.7 Answers to ‘Check Your Progress’
3.8 Summary
3.9 Key Terms
3.10 Self-Assessment Questions and Exercises
3.11 Further Reading

3.0 INTRODUCTION
At the time of Independence, the Indian economy was facing severe problems of
illiteracy, poverty, low per capita income, industrial backwardness, and
unemployment. After India attained its Independence in 1947, a sincere effort was
made to begin an era of industrial development. The government adopted rules
and regulations for the various industries. With time, various industrial policies
came into being which shaped the outlook of the nation.
This unit discusses the various industrial policies and the role of public sector
in industrialisation. It also discusses the concept of small scale industries and cottage
industries.

3.1 OBJECTIVES
After going through this unit, you will be able to:
 Discuss the industrial policy of 1956 and 1991
 Understand the role of public sector in industrialization
 Describe the highlights of industrial policy of Madhya Pradesh
 Learn the concept of small-scale industries and cottage industries
 Understant the concept of start-up India and Make in India

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Material 71
Industrial Policies of
India 3.2 INDUSTRIAL POLICY OF 1956 AND 1991
AND CHANGES THEREIN
NOTES The 1956 industrial policy had six objectives: (i) to accelerate economic growth
and industrial development of the country, (ii) to expand the public sector, (iii) to
prevent the growth of monopolies and the concentration of economic powers in
the hands of a few people, (iv) to develop a large cooperative sector, (v) to develop
heavy and machine-made industries, and (vi) to reduce disparities in wealth and
income.
1. The industrial policy of 1956 divided industries into three categories having
regard to the part which the State would have to play in each of them. It
should be remembered that this demarcation was not rigid and it was always
open to the State to undertake any types of industrial production.
The First Category included industries, the future development which would
be the exclusive responsibility to the State. There were 17 industries in this
category. All the new units in these industries would be set up only by the
state.
The Second Category consisted of industries which would be progressively
State-owned and in which the State would generally take initiative in
establishing new units but in which private enterprise would also be expected
to supplement the effort of the State. This category comprised 12 industries
which were less important than those included in the first category.
The Third Category included all the remaining industries and their future
development would, in general, be left to the initiative and enterprise of the
private sector. Even in this category it would be open to the State to start
any new industry. Thus no field was safe from Government encroachment.
It would be the policy of the State to facilitate and encourage the development
of these industries in the private sector in accordance with the programme
formulated in successive Five-Year Plans. In special cases, the State might
grant financial assistance to the private sector.
Industrial undertakings in the private sector have necessarily to fit into the
framework of the social and economic policy of the State and will be subject
to control and regulation in terms of Industries (Development and Regulation)
Act and other relevant legislation.
2. The industrial policy statement stressed the role of cottage and village and
small scale industries in the development of the national economy for they
provide immediate large-scale employment, offer a method of ensuring a
more equitable distribution of the national income and facilitate an effective
mobilisation of capital and skill which might otherwise remain unutilised.
Moreover, the establishment of small industries all over the country will
secure a balanced development of the economy and will avoid problems
connected with unplanned urbanisation.

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 3. It has been reiterated that the maintenance of industrial peace is one of the Industrial Policies of
India
prime requisites of industrial progress. In a socialist democracy labour is a
partner in the common task of development and should participate in it with
enthusiasm. There should be joint consultation and workers should be
associated progressively in management. Enterprises in the public sector NOTES
have to set an example in this respect.
4. In order that industrialisation may benefit the country as a whole, it is important
that disparities in levels of industrial development between different regions
be progressively narrowed down, and for this purpose the State should
provide the required facilities to those areas which are lagging behind
industrially or where there is greater need for providing opportunities for
employment : only by securing a balanced and co-ordinated development
of the industrial and the agricultural economy in each region, can the entire
economy attain higher standards of living.
5. The programme of industrial development as envisaged in our Five-Year
Plans will make large demands on the country’s resources of technical and
managerial personnel and to meet the needs, proper managerial and technical
cadres in the public services should be established.
The most important difference between the 1948 and the 1956 policy
statements is with regard to the policy of nationalisation. In the first policy, it was
laid down that industries in the second category would be permitted to operate for
10 years, at the end of which the Government would decide whether to nationalise
them or not. This provision discouraged private enterprise and created uncertainty
in the industrial field. The 1956 policy statement removed the threat of nationalisation
from the minds of private entrepreneurs operating in the predominantly public
sector. Thus private enterprise was given a new opportunity to justify its existence
in a socialist democracy.
Industrial Policy of July 1980: While sticking to the spirit of 1956 Industrial
Policy Resolution, the Congress Government announced on July 23, 1980 the
new industrial policy which included major relaxations and concessions benefiting
the small, medium as well as large-scale sector with the triple objects of
modernisation, expansion and spread to backward areas. The thrust of the
concessions is in doubling the investment limit of tiny, small and ancillary sectors,
regularisation of the excess capacity and permitting automatic expansion facilities
for large units in the priority sector and setting up of several nucleus industrial
centres in industrially backward areas.
The following are the highlights of the New Industrial Policy:
(i) In order to promote the development of small-scale industries and ensure
their rapid growth, the Government has decided to increase the limit of
investment in case of tiny units from 1 lakh to 2 lakh. In the case of small-
scale units the limit has been raised from 10 lakh to 20 lakh and from 15
lakh to 25 lakh in the case of ancillary units.
In March 1985 investment limit for small-scale industries was raised further
from 20 lakh to 35 lakh. For ancillary units the investment limit is 45
lakh. Self - Learning
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Industrial Policies of (ii) The Government decided to pursue a goal of vibrant, self-reliant and modern
India
economy in which all sectors had a positive role to play. Therefore the
Government recognised that it was desirable to allow private sector
undertakings to grow in consonance with targets and objectives of national
NOTES plans and policies but would not permit growth of monopolistic tendencies
or concentration of economic powers and wealth in a few hands.
(iii) The Government has decided to revive the efficiency of public sector
undertakings. Industrial undertakings in this sector will be closely examined
on a unit-by-unit basis and corrective action will be taken in terms of a time
bound programme wherever necessary.
(iv) As regards automatic growth, the Government feels that no avoidable
restrictions should be placed on the fullest utilisation of the existing industrial
capacities. In 1975 the Government had permitted the facility for automatic
expansion in respect of only 15 industries. The extent of increased capacity
permitted in these industries was limited to 5 per cent per annum or 25 per
cent in a Five-Year Plan period and could be undertaken in one or more
stages. The Government announced that this facility would be extended to
other industries also.
(v) The “district industrial centre” idea which was introduced by the Janata
Government has not received full support from the 1980 Industrial Policy
Statement. On the district industrial centre programme, the 1980 policy
points out that the scheme has not produced benefits commensurate with
the expenditure incurred. The Government therefore, decided to initiate
more effective schemes.
(vi) In the context of development of backward areas, the New Policy Statement
has mentioned nucleus plants which should radiate industrial impulses all
round. The so-called concept of nucleus plants when implemented, is
expected to concentrate mainly on assembling the products of ancillary
units falling within their orbit.
(vii) The 1980 policy refers to considerable simplification and streamlining of
licensing procedures and concedes that there is scope for further
improvement in reducing the time taken for disposal of applications for the
creation of new capacities, proposal for substantial expansion and
production of new items. It is proposed to speed up the process of
examination and decision-making in the sphere of industrial licensing.
(viii) The Government would endeavour to ensure that the process of
modernisation percolated down to small units and the villages. For this
purpose, the incentives available to the large-scale sector might also be
made available to the decentralised sector.
(ix) Industrial processes and technologies which would aim at optimal utilisation
of energy or the exploitation of alternative sources of energy would be
given special assistance, including finance on concessional terms. The
Industrial Policy of July 1980 hits hard at the Janata Party’s policy statement
of December 1977 and its record in promoting industrial growth. But on
Self - Learning close examination it will be found that the 1980 Industrial Policy has made
74 Material
 no serious departure from the earlier policies. For instance, though the 1980 Industrial Policies of
India
policy deplores the artificial divisions between the small and large-scale
sectors promoted by the Janata Government, it also wants to continue the
policy of reservation of items for the small-scale sector. It has also retained
the distinction between the tiny and the small-scale sectors though the NOTES
investment limits for both have been doubled. Moreover, the nucleus plants
idea is good but it will be difficult to achieve. As we get it in the 1980 policy
statement, it appears to be a just another new appealing word.
The so-called excess capacities and excess production above licensed limits
are expected to be regularised for more industrial units. This is encouraging and
boosts the industrial growth. Induction of new technology is to be encouraged by
allowing additional capacities to be created, if necessary, in more cases. This is
certainly a step in the right direction.
Elements in the Industrial Policy of Rajiv Gandhi’s Government: We give
below the elements of Rajiv Gandhi’s Government’s Liberalised Industrial Policy,
as enunciated from time to time by ex-Prime Minister late Rajiv Gandhi himself or
his senior cabinet ex-colleagues:
(i) Upward revision of asset limit of MRTP companies from 20 crores to
100 crores. In the Union Budget for 1985-86, the Finance Minister
announced a steep upward revision in the threshold limit of MRTP Companies
from 20 crores to 100 crores.
(ii) Automatic Expansion Permission is currently being granted for expansion
of existing industrial units up to 1/3rd of their capacity in case the industries
have already utilised 93 per cent of their installed capacity.
(iii) Upward revision in delicensing of investments under the Industries
(Development and Regulation) Act, 1951 from 3 crores to 5 crores subject
to formal requirement of registration of such units. In April 1983 the
exemption limit for industrial licensing was raised from 3 crores to 5
crores.
(iv) Complete de-licensing of 25 industries in March 1985.
(v) Redefinition of investment criteria of small-scale and ancillary industries.
The investment limit of 20 lakh for small-scale industries has been raised
to 35 lakh and that of ancillary units has been enhanced from 25 lakh to
45 lakh. These limits have been further raised for small-scale industries to
60 lakh and for ancillary units to 75 lakh.
(vi) Industries exempt from Section 21 and 22 of MRTP Act for MRTP/FERA
companies for backward areas. The Government of India earlier delicensed
broad categories of industries along with 82 bulk drugs for non-MRTP and
non-FERA companies subject to production of items reserved for the small-
scale sector and certain locational considerations. Later, it was decided to
extend the scheme of delicensing also to MRTP and FERA companies in
respect to 22 out of 27 industries exempted under section 22A of the MRTP
Act provided such undertaking apply for locating these units in centrally
declared backward areas.
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Material 75
Industrial Policies of (vii) Setting up of industries by MRTP companies in no-industry districts and
India
other backward districts: According to the earlier policy, MRTP and FERA
companies were permitted to set up industrial units in areas of high technology.
Their entry into other fields has been subject to export obligation of 60 per
NOTES cent with a view to industrialise backward regions within the country. The
level of export obligation was reduced to 50 per cent for categories B and
C districts and 30 per cent for category A districts in 1983. In order to give
an impetus to the industrialisation of backward areas it has now been decided
to reduce the level of export obligation to only 25 per cent for category B
and C districts and to totally dispense with export obligations in respect of
category A backward districts.
(viii) Revision of foreign exchange limits for imports of new materials and
components for the purpose of exemption from licensing: Industrial
undertakings with investment below 5 crores are not required to obtain
any industrial license under the Industries (Development and Regulation)
Act but one of the conditions of the exemption from licensing was that the
foreign exchange requirement for import of raw materials and components
in such cases should not exceed 15 per cent of the ex-factory value of
industrial production or 40 lakh, whichever was less. If the import
requirement exceeded this limit, even units with investments below 5 crores
would require an industrial license. On account of rise in cost of raw materials
it has now been decided to raise the limit to 75 lakh subject to a ceiling of
15 per cent of the cost of ex-factory value of industrial production. This
limit would not however, apply in case of industries in respect of which
specific phased manufacturing programmes have been approved by the
Government.
New Industrial Policy, 1991
Jawaharlal Nehru laid the foundations of modern India. The aims and objectives
set out for the nation by Nehru on the eve of independence were rapid agricultural
and industrial development of the country, rapid expansion of opportunities for
gainful employment, progressive reduction of social and economic disparities,
removal of poverty and attainment of self-reliance. These remain as valid as at the
time Nehru set them before the nation. Any industrial policy must contribute to the
realisation of these aims and objectives. Though the present statement of industrial
policy is inspired by these concerns, actually it bids farewell to Nehruvian socialism
and brings the public sector at par with the private sector in several areas. Hence
in core areas like steel, power and several other industries, the public sector will
have to climb down from the commanding heights to street level commercialism
where it has to compete with private enterprise.
In 1948, the Government adopted the industrial policy resolution which
emphasised the importance to the economy of securing a continuous increase in
production and ensuring its equitable distribution. After the adoption of the
Constitution and the socio-economic goals, the industrial policy was revised and
adopted in 1956. To meet new challenges from time to time, it was modified
through statements in 1973, 1977 and 1980.
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76 Material
 The 1956 policy resolution had as its objective the achievement of a socialist Industrial Policies of
India
pattern of society. In 1956, capital was scarce and the base of entrepreneurship
not strong enough. Hence, the 1956 industrial policy resolution gave primacy to
the role of the state to assume a predominant and direct responsibility for industrial
development. NOTES
The industrial policy statement of 1973 identified high priority industries
where investment from large industrial houses and foreign companies would be
permitted.
The industrial policy statement of 1977 laid emphasis on decentralisation
and on the role of small-scale, tiny and cottage industries.
The industrial policy statement of 1980 focussed attention on the need for
promoting competition in the domestic market, technological upgradation and
modernisation. The policy laid the foundation for an increasingly competitive export
base and for ensuring foreign investment in high technology areas. These policies
created a climate for rapid industrial growth in the country. Basic industries had
been established. New growth centres of industrial activity had emerged as had a
new generation of entrepreneurs. A number of policy and procedural changes was
introduced in 1985 and 1986 under the leadership of late Prime Minister Rajiv
Gandhi, which aimed at increasing productivity, reducing costs and improving
quality. The public sector was freed from a number of constraints and given a large
measure of autonomy.
In the 1950s and 1960s the principal instrument for controlling the
commanding heights of the economy was investment in the capital of key industries.
Today the state has other instruments of intervention, particularly fiscal and monetary
instruments. The state also commands the bulk of the nation’s savings. Bank and
financial institutions are under state control. Where state intervention is necessary,
these instruments will prove more effective.
The Government will fully protect the interests of labour, enhance their welfare
and equip them to deal with the inevitability of technological change. Labour will
be made an equal partner in progress and prosperity. Workers’ participation in
management will be promoted.
The Government will continue to visualise new horizons. The major objectives
of the new industrial policy will be to build on the gains already made, correct the
distortions that may have crept in, maintain a sustained growth in productivity and
gainful employment and attain international competitiveness. The government’s
policy will be in continuity with change.
Industrial Licensing Policy
With the above objectives in view, the government will take a series of initiatives in
respect of the policies relating to the following areas:
(i) Industrial Licensing.
(ii) Foreign Investment and Technology Agreements.
(iii) Public Sector Policy.
(iv) MRTP Act. Self - Learning
Material 77
Industrial Policies of A package for the small and tiny sectors of industry was announced separately.
India
1. Industrial Licensing Policy: Industrial licensing will henceforth be
abolished for all except a few industries (18 sectors) which need regulation
NOTES because of security and strategic concerns, social reasons, chemical hazards,
environmental protection and curbing elitist consumption. Among these
industries are cars, sugar, cigarettes, colour TV and VCRs, white goods
like air-conditioners, refrigerators and electronic washing machines.
All registration scheme including of DGTD are to be abolished, entrepreneurs
only have to file an information memorandum on new projects and
expansions.
Eight areas where strategic and security concerns predominate continue to
be reserved for public sector.
The exemption from licensing will be particularly helpful to the many dynamic
small and medium entrepreneurs who have unnecessarily been hampered
by the licensing system. As a whole, the Indian economy will benefit by
becoming more competitive, more efficient and modern and will take its
rightful place in the world of industrial progress.
No industrial approvals will be required for putting up plants in locations
other than cities with a population of more than one million. Where the
population is more than one million, industries (with the exception of
electronics, computer software and printing) will have to set up units outside
a 25-km radius, except in prior designated industrial areas.
As per the industrial policy statement, the mandatory convertibility clause
will no longer be applicable for term loans from financial institutions for new
projects by large houses.
With the sweeping liberalisation measures, the existing procedures have
been streamlined accordingly. All existing registration schemes have been
abolished.
2. Foreign Investment and Technology Agreements: While freeing Indian
industry from official controls, opportunities for promoting investments in
India should also be fully exploited. Foreign investment would bring attendant
advantages of technology transfer, marketing expertise, introduction of
modern managerial techniques and new possibilities for promotion of
exports. This is particularly necessary in the changing global scenario of
industrial and economic cooperation marked by mobility of capital. The
government will therefore, welcome foreign investment, which is in the interest
of the country’s industrial development.
In order to invite foreign investment in high priority industries requiring large
investment and advanced technology, it has been decided to provide approval
for direct foreign investment up to 51 per cent foreign equity in 34 groups
of high priority industries. These include commercial vehicles and two-
wheelers, inorganic fertilizers, chemicals, man-made fibres, drugs and
pharmaceuticals, paper, tyres, portland cement, hotels, many food-
processing industries, soya products and industrial and agricultural machinery.
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78 Material
 There shall be no bottlenecks of any kind in this process. This change will Industrial Policies of
India
go a long way in making Indian policy on foreign investment transparent.
Such a framework will make it attractive for companies abroad to invest in
India.
NOTES
Foreign equity up to 51 per cent in trading companies primarily engaged in
export; these companies to be treated on par with domestic trading and
export houses as per the import-export policy.
Special Empowered Board to be set up to negotiate with large international
firms for direct investment in select areas; aim is to attract substantial
investment that would provide access to high technology and world markets.
With a view to injecting the desired level of technological dynamism in Indian
industry, the Government will provide automatic approval for technology
agreements related to high priority industries within specified areas, subject to
certain conditions. Similar facilities will be available for other industries as well
if such agreements do not require the expenditure of free foreign exchange.
Indian companies will be free to negotiate the terms of technology transfer
with their foreign counterparts according to their own commercial judgement.
3. Public Sector Policy: The public sector has been central to our philosophy
of development. Public ownership and control in critical sectors of the
economy has played an important role in preventing the concentration of
economic power, reducing regional disparities and ensuring that planned
development serves the common good.
The industrial policy resolution of 1956 gave the public sector a strategic
role in the economy. Massive investments have been made over the past
five decades to build public sector which has a commanding role in the
economy. Recently a number of problems have begun to manifest themselves
in many of the public enterprises. In addition, public enterprises have shown
a very low rate of return on the capital invested. Many of the public enterprises
have become a burden rather than being an asset to the Government. The
original concept of the public sector has also undergone considerable dilution.
The most striking example is the takeover of sick units from the private
sector. This category of public sector units accounts for almost one-third of
the total losses of central public enterprises.
It is time that the Government adopted a new approach to public enterprises.
The priority areas for growth of public enterprises in the future will be as
follows:
(a) Essential infrastructure goods and services;
(b) Exploration and exploitation of oil and mineral resources;
(c) Technology development and building of manufacturing capabilities in
areas which are crucial in the long-term development of the economy
and where private sector investment is inadequate;
(d) Manufacture of products where strategic considerations predominate
such as defence equipment. At the same time the public sector will not
be barred from entering areas not specifically reserved for it.
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Material 79
Industrial Policies of The Government will strengthen those public enterprises which fall in the
India
reserved areas of operation or are generating good or reasonable profits.
Such enterprises will be provided a much greater degree of management
autonomy through the system of memorandum of understanding. Competition
NOTES will be induced in these areas by inviting private sector participation. In the
case of selected enterprises, part of government holdings in the equity share
capital of these enterprises will be disinvested in order to provide further
market discipline to the performance of public enterprises. There is a large
number of chronically sick public enterprises incurring heavy losses and
serving little public purpose. These need to be attended to.
New Public Sector Policy: The low rate of return on capital invested has
reduced the ability of the public enterprise to regenerate themselves in terms
of new investments as well as in new technology development. This has
resulted in many of the public enterprises becoming a burden rather than an
asset to the Government. The new Industrial Policy of 1991 has redefined
the role of the public sector. Public sector in the future will be restricted to
essential infrastructure goods and services, exploration of oil and mineral
resources and manufacture of products where strategic considerations
predominate such as defence equipment.
The number of industries reserved for the public sector has been reduced
to 8. The scrapping of Schedule B, which contained a list of 12 industries
where public sector was to play a dominant role is also an important policy
change.
The Government is thinking of throwing open to the private sector most of
the industries reserved for the public sector. In other words, monopoly in
any sector has to be abolished.
4. MRTP Act: The principle objectives sought to be achieved through the
MRTP Act are as follows:
(i) prevention of concentration of economic power to the common
detriment
(ii) control of monopolies,
(iii) prohibition of monopolistic and restrictive and unfair trade practices.
With the growing complexity of industrial structure and the need for achieving
economies of scale for ensuring higher productivity and competitive advantages in
the international market, the interference of the government through the MRTP
Act in investment decision of large companies has become deleterious in its effects
on Indian industrial growth. The pre-entry scrutiny of investment decisions by so-
called MRTP Companies will no longer be required. The provisions relating to
merger, amalgamation, and takeover will also be repealed. Similarly, the provisions
regarding restrictions on acquisition of and transfer of shares will be appropriately
incorporated in the Companies Act.
Thus, the Government have decided to undertake a series of measures to
unshackle the Indian industrial economy from the cobwebs of unnecessary
bureaucratic control.
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80 Material
Evaluation: Captains of industry and apex trade bodies have welcomed the new Industrial Policies of
India
industrial policy, particularly the decisions to do away with licensing for most
industries, liberalisation of foreign investment and lifting of the threshold limit for
MRTP. The new industrial policy is a major step in ushering the country into a new
era of development and progress. The new policy will change the structure of NOTES
Indian industry. It is directed towards making Indian industry internationally
competitive. According to the FICCI President, many retrograde restrictions have
been either removed or amended and conditions created for a market friendly
system, which will enable India to join the international mainstream on the basis of
efficiency and competitiveness. The President of the Associated Chamber of
Commerce and Industry described the policy as a landmark in the opening up of
the Indian Economy. He complemented the Government for replacing the command
and controlled economy which has been discarded all over the world with
competitive and market economy. Market is more important than Marx.
The new policy is pragmatic, bold, innovative, and growth-oriented and the
onus now lies with the industry to take advantages of these changes and rise to the
occasion before demanding further liberalisation.
On the other hand, the new industrial policy come in for some sharp criticism
by opposition leaders all over the country. The general reaction was that, the
policy was a sell out to the IMF and the World Bank and hit the common man.
Former Prime Minister Chandrashekhar assailed the new policy and described it
as a total drift from the Gandhian path. He feared the policy would generate more
unemployment. Former Finance Minister Madhu Dandavate said that, by abolishing
the limits on MRTP companies, the Government had put the small-scale sector in
a tight corner. This would seriously affect employment potential and poverty
alleviation.

Check Your Progress

1. How many objectives did the 1956 industry policy have?
2. What are the principle objectives sought to be achieved through MRTP
Act?

3.3 ROLE OF PUBLIC SECTOR IN

INDUSTRIALIZATION
The public sector or public enterprises include all governmental activities including
public industrial or commercial enterprises. Public enterprise occupies a strategic
and crucial position in the Indian economy. It is no exaggeration to say that the
economy would sink or swim depending upon the efficiency with which these
enterprises operate.
Concept: The modern Indian economy is the creation of the Congress party and
its leaders, Mahatma Gandhi and Nehru, who referred to India as a ‘Socialist’
economy. Socialism is largely a misnomer in the case of India, except for
Government ownership in industry and commerce. India is still primarily an Self - Learning
Material 81
Industrial Policies of agricultural country and the distribution of income depends mainly on the distribution
India
of agricultural property. Although there have been some attempts to distribute
land to the peasants, land remains unequally distributed although there is evidence
that the range of income inequality has been reduced. The tax system continues to
NOTES be regressive, direct taxes are rarely levied on land and high urban income taxes
are marked by evasion. The pre-tax income distribution figures sum up the failure
to establish a more equitable distribution of income. In 1960, the bottom 10 per
cent of families accounted for less than one per cent of all income, while the top 10
per cent accounted for over one-third. This income distribution is less equitable
than in industrialised capitalist countries. Rather than seeking to achieve ‘Socialist’
objectives through income redistribution, the architects of modern Indian economy
emphasised State ownership in industry. The feeling was that socialism could be
achieved through State control of industry which would serve as a surrogate for
social change.
Public enterprises are expected to be the principle agents for rapid economic
and social transformation by developing infrastructure and the core sector and by
closing the gaps in the industrial structure. Its dominant position in the financial
field is intended to control and guide the private sector, wherever necessary. Lastly,
the economic growth through public enterprise will ensure social justice.
In developing countries, public enterprises are largely a necessity and not a
matter of choice. In India, though the Congress government was clearly committed
to expanding the public sector, it did not go into areas where private enterprise
was operating. Nationalisation of the existing enterprises has been generally resorted
to where the public interest was involved or where it was imperative to put the
industry on a sound footing and regulation and control were not found sufficiently
effective. The vast majority of public enterprises is in areas which were hitherto
untouched or unexplored by the private sector.
In the Industrial Policy Statement of 1956, it was emphasised that public
enterprise was designed to control the ‘commanding heights’ of the economy. But
in recent years the trends towards increasing liberalisation are very much in evidence
in India and one gets the impression that the private sector is designed to play an
important role in the economy in the coming era.
The public sector in the industrial field has expanded rapidly since
Independence. In 1951 there were only 5 non-departmental public undertakings
with an investment of 29 crore. On March 31, 2004, the total capital employed
in public undertakings amounted to 5,86,140 crore.
The public enterprises comprise:
(i) Public utilities, e.g. the Railways, Posts and Telegraphs and Irrigation
projects.
(ii) Departmental undertakings of the Government, Central as well as State,
e.g. Posts and Telegraphs, Integral Coach Factory.
(iii) Other industrial undertakings which derive their finance from the Government
of India in the form of equity capital and loan, e.g. Durgapur Steel Plant,
Hindustan Fertilizers.
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82 Material
Public sector units generally are of four kinds: Industrial Policies of
India
(i) National monopolies like the railways that have downward sloping unit cost
curves. These are hard to assess, being monopolies.
(ii) Entrepreneurial ventures that, at the start and for many years thereafter, are NOTES
monopolies or near monopolies. These are generally large units with
sophisticated technologies and long gestation periods that produce basic
products. Many of the Indian public sector manufacturing units are of this
type.
(iii) Sick units in the private sector that have been taken over to maintain
employment etc.
(iv) Units taken over or formed to acquire the ‘commanding heights’ or for
other ideological reasons.
The State Trading Corporation is a case in point.
Evolution of the public sector
The entry of the public sector in a big way in the economic sphere is a post-
Independence development. Prior to 1947, public sector investment was limited
to the railways, the post and telegraphs department, the ordinance factories and a
few state-managed factories like the quinine factories, salt factories, etc. It was
the Industrial Policy Resolution of the Government of India in 1948 that brought
the public sector into the limelight. It declares that a dynamic national policy must
be directed to a continuous increase in production by all possible means, side-by-
side with measures to secure its equitable distribution. The problem of State
participation in industry and the conditions in which private enterprise should be
allowed to operate must be judged in this context. Since then the expansion of the
public sector has been very rapid.
The idea that in the economic development of the country the State enterprises
would play a predominant role took root with the adoption of a socialist pattern of
society in the second Plan.
The growth of public enterprises in India has taken place in two ways: (a)
by nationalising existing enterprises and (b) by starting new enterprises. The State
Bank of India, LIC, the Air India, nationalisation of 20 banks, etc. are included in
the first category, while the Hindustan Steel Ltd., the Fertilizer Corporation of
India, etc. fall in the second category.
The enormous growth of public sector investments has taken place against
a political and ideological background which is peculiar to Indian political
development.
Philosophy: The Indian National Congress had traditionally expressed its socio-
economic aspirations in radical terms. The 1929 Lahore Resolution had declared
that in order to remove poverty and misery of the Indian people and to ameliorate
the conditions of the masses, it was essential to make revolutionary changes in the
present economic and social structures of society and to remove gross inequalities.
The subsequent Karachi Resolution declared that the State shall own or control
key industries and services, mineral resources, railways, waterways, shipping and
other means of public transport.
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Material 83
Industrial Policies of Objectives: The objectives of establishing new enterprises and reasons for
India
nationalising some existing ones are varied and often different from case to case
and from time to time. Perhaps the only generalisation possible in this regard is that
public enterprise for us is more a matter of necessity than of choice. It is not so
NOTES much the ideology as the compulsion of the situation that has led to the growth of
public enterprise in India.
A brief statement about the need and role of public enterprise in India is
contained in the statement of former Prime Minister Indira Gandhi that we advocate
a public sector for three reasons: to gain control of the commanding heights of the
economy: to promote critical development in terms of social gain or strategic value
rather than primarily on considerations of profit; and to provide commercial
surpluses with which to finance further economic development.
Rationale for the Public Sector
1. Socialist Pattern of Society: The public sector was meant to socialize
the means of mass production and benefit the masses, as is typically the
case in a socialistic pattern of society. The commanding heights of the
economy—the core sector comprising investment, production, distribution
and consumption—were State owned, so as to promote national
development as opposed to considerations of private profit. In such a
situation, the so-called public sector needs to expand rapidly, cover areas
where the private sector is unwilling or unable to participate, and play a
dominant role in shaping the economy. Some of these areas are power,
communications, mass transportation, information and broadcasting, mines
and defence production. Initially, the public sector took the lead in developing
basic and capital goods industries, laying the foundations for national growth
unhindered by narrow considerations of profit as would arguably be seen in
a laissez faire economy dominated by private enterprise, where motives of
personal profit would presumably supersede national priorities. In time,
however, some of these monolithic establishments exhausted their early
dynamism and metamorphosed into complacent, inefficient, cash-strapped,
over-staffed, over-unionized islands of mediocrity that generated aught but
huge losses—dinosaurs that had run out of time and relevance.
2. Socio-economic Objectives: Reduction of inequalities of wealth and
income is the most important socio-economic objective, going hand in hand
with the need to eliminate poverty and establish an egalitarian society by
redistributing wealth and earning potential equitably. Another important
objective of a socialistic system is to help the underprivileged, realise their
dormant potential by liberating them from economic serfdom and to give
them all an opportunity to attain social justice. Although rarely declared in
so many words, the giant public sector organizations were also meant to
serve this purpose by providing upliftment to these neglected sectors, by
means of reserving a certain percentage of jobs for weaker sections of
society including the physically handicapped. Nationalized banks rendered
yeoman service by extending concessional loans under the ‘Differential Rates
of Interest’ scheme, that allowed cheap finance to reach District Consultative
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84 Material
 Committee sponsored beneficiaries drawn from such sections of the local Industrial Policies of
India
populace—something a purely profit-driven banking system would never
dream of undertaking.
3. Balanced Regional Development: One of the major goals of planning is
NOTES
to try and correct regional disparities by spreading the benefits of economic
development as evenly as possible across the country. It is vital for humane
as well as for security reasons to ensure that the fruits of prosperity percolate
throughout the nation, for civil unrest is usually born of discontent with a
system of wealth distribution that serves but to defeat the very purpose of
adopting a socialistic type of governance. This is particularly true of the
sensitive north and north-eastern States, many of which are economically
under-developed and hence vulnerable to ideologies incompatible with our
peaceful, non-violent, democratic system of governance run on socialist
principles. Industrial development of these areas is a top priority; Bhilai,
Rourkela and Durgapur are well known examples, but more such success
stories are needed, and quickly.
4. Need for Rapid Economic Development: The need of the hour is rapid
economic development. The private sector has neither the desire nor the
resources to undertake the massive programme of industrialisation. Hence
dependence on the private sector will only slow down economic
development. Expansion of public enterprise will speed up the rate of
economic growth.
5. Pattern of Resource Allocation: The main reason for the expansion of
the public sector lies in the pattern of resource allocation decided upon
under the plans. In the first Plan, the major emphasis was on agriculture but
in the second Plan the emphasis was shifted to basic and capital goods
industries. During the First Plan period, the private sector was dominant in
the field of industrial activities. But with changed emphasis it was inevitable
that the public sector must grow not only absolutely but also relatively to the
private sector.
6. Building Infrastructure: Infrastructure provides certain basic facilities for
rapid economic growth. In the economic infrastructure, there are facilities
like power, irrigation, transport and communication, banking, training, etc.
Social infrastructure includes education, health, sanitation, drinking water
facilities, etc. The development of infrastructure is not possible through efforts
of private individuals since its benefits go to socity as a whole and not to
individuals. It is therefore mainly the responsibility of the State. The
infrastructure has accounted for 95.1 per cent of the public outlays in the
First Plan and nearly 75 per cent in the subsequent plans.
Recent Policy Towards Public Sector and Disinvestment Policy
The major aim of economic reforms is to improve the public sector so that the rate
of return improves. To remedy the situation, it was necessary that overstaffing of
the public sector undertakings be reduced. The government has already taken
steps in this direction by its voluntary retirement scheme. It set up the National
Renewal Fund to provide compensation for voluntary retirement and also arranged Self - Learning
Material 85
Industrial Policies of for retraining and redeployment of workers. As a result of the VRS, the employee
India
strength of PSUs has been reduced by 8 per cent.
Another step taken by the government was disinvestment in PSUs. The
NOTES government has been offering equity of 31 selected public sector enterprises, varying
from 5 per cent to 20 per cent to Mutual Funds and Financial Institutions. This is
only a token privatisation and the government was able to raise 9793 crore
during the four-year period (1991–92 to 1994–95).
Critics describe disinvestment as deficit privatisation because the proceeds
of disinvestment are being used to reduce the budget deficit. The Common
Minimum Programme of the NDF Government stipulated that the proceeds of
disinvestment would be used in two vital areas—health and education.
On the whole, the reforms of PSUs have not gathered as much momentum
as expected. Disinvestment has been piecemeal, and the funds so raised are being
used to reduce budget deficits rather than strengthen the PSUs. In addition, labour
problems, political and bureaucratic interference have not been effectively used.
Since it is not possible to privatise a large component of the public sector, it would
be advisable to reform it.
Large dose of Foreign Capital to help Indian Economy: The reforms process,
especially its emphasis on globalisation, was intended to accelerate the growth
process by attracting a larger dose of foreign capital. However, the efforts of the
state met with only partial success. The data reveal that during 1991–92 to 1995–
96, total investment flows of the order of 1,174 billion were made, out of which
portfolio investment was of the order of 8.05 billion and direct foreign investment
accounted for barely $ 3.69 billion.
Critics point out that mainly 39 per cent of foreign investment is in the non-
priority sector. The entry of multinationals in consumer goods only displaces Indian
labour and capital employed in the production of these commodities.
Reform Process and the Foreign Trade Scenario: The reform process has
led to growth of exports but simultaneously, it has also led to a larger growth of
imports. As a result, the trade gap has not been reduced.

Check Your Progress

3. What does the Industrial Policy Resolution of the Government of India
1948 declare?
4. What is the major aim of economic reforms?

3.4 INDUSTRIAL POLICY OF MADHYA

PRADESH
Madhya Pradesh government announced its long awaited industry policy in 2010.
It makes it mandatory for upcoming industries to reserve 50 per cent direct job to
locals. It took almost two years for the state machinery to frame rules and
Self - Learning regulations that make the policy an overhauled version over the existing one.
86 Material
 “The policy offers incentives, grants and sops to the new investment Industrial Policies of
India
provided they offer jobs to local people,” said Industry Minister Kailash
Vijayvergiya. Some of the provisions of the policy are unlikely to fetch any result
as they seem hypothetical. “Those who will make investment of less than 25
crore but provide direct jobs to 1000 locals will be considered as mega NOTES
investment and will be offered sops and concessions accordingly,” the minister
said. At present an investment is considered under mega category if it is 25
crore or more.
A special zone for labourers was also be created to avoid creation of slums
in upcoming industrial areas, 50 per cent concession on diversion of land for those
industries that will privately acquire land. A special package for non-resident Indians
was also planned for foreign direct investment provided they ensure 25 crore or
more investment.
State government made provisions to abolish dual taxation system (taxes
levied by local industrial department arms and local administrative bodies) but this
provision requires constitutional revision as 74th amendment does not grant powers
for state to strip local bodies’ power to levy taxes.
The new policy also covers the destitute and handicapped to available benefits
like interest grant (maximum 25 lakh) on investment.

3.5 CONCEPT OF SMALL-SCALE INDUSTRIES

(SSI) AND COTTAGE INDUSTRIES
The Small-Scale Industries Sector has acquired an important position in the
economic structure of the country. As per the published Report of the Development
Commissioner, Small Scale Industries (DCSSI), the sector encompasses about
32 lakh units, during 1998-99 which produce over 7500 different items for domestic
as well as foreign markets, contributing to about 40per cent of the value added to
the manufacturing sector and its share in national exports stands at over 34per
cent. The Sector accounts for about 95per cent of industrial units in the country
and provides a gainful employment to about 175 lakh persons.
The spectrum of industries extends from the organised large and medium
industries to modern Small-Scale Industries and unorganised traditional industries.
The last two (i.e. modern Small-Scale Industries and unorganised traditional
industries) are commonly called as Village and Small Industries (VSI). The VSI
sector is divided into seven sub-sectors namely, Handicrafts, Handlooms, Khadi
and Village Industries, Coir, Sericulture, Power Looms and Small-Scale Industries
not falling in any of these categories, which are referred to as residuals. The first
five sub-sectors are often referred to as “traditional sector” whereas the power
looms and residual Small-Scale Industries are known as the “modern” Small Scale
Sector. For the purpose of administration and development of these sub-sectors,
there are supervisory bodies or boards at the Central level. These bodies are
Development Commissioner for Handicrafts, Development Commissioner for
Handlooms, Khadi and Village Industries Commission, Coir Board, Central Silk
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Material 87
Industrial Policies of Board, Textile Commissioner and the Development Commissioner for Small Scale
India
Industries (DCSSI).
A brief account on the Cottage Industries in India
NOTES The Cottage Industry is a form of unorganised industry in which people are engaged
in craftsmanship works such as handicraft, pottery, knitting, handloom, etc. They
are generally set up at the individual’s home or a nearby place and the workers use
traditional equipment. This type of industry is associated with Community
Development Programmes, Poverty Alleviation Programmes and Integrated Rural
Development.
Milk-based industry, handloom and power loom industry, oilseed industry
and food processing in Gujarat; Stone-cutting carpet-making and handicraft
industry in Rajasthan; Handloom and power loom, milk-products (mainly Tarai
region) in Uttar Pradesh; Food-processing, handloom and power loom, milk
products etc. in outskirts region of metropolitans.
Important Facts about Indian Cottage Industries
1. Central Silk Industry Research Institute has been established at Behrampur
(Kolkata) for the purpose of silk related research.
2. There are four types of Silk produced in India i.e. Mulberry, Tassar, Munga
and Eri.
3. More than 50% of the Gur & Khandsari of the country produced by
the Uttar Pradesh.
4. Cottage Industry Board was established in 1948.
5. Central Silk Board was established in 1949.
6. All India Handloom Board was established in 1950.
7. All India Handicrafts Board was established in 1953.
8. All India Khadi & Gramodyog Board was established in 1954.
9. Small Industry Board was established in 1954.
10. Central Sales Organisation was established in 1958.
It is noteworthy that the large-scale industries those have created a wide gap
between capitals and labour, whereas Cottage Industry increases the attachment
labour for their family which develops better sentiments. Hence, we can say that
development of Cottage Industry is parallel important as the development of small,
medium and large industries because it gives more rural employment.
3.5.1 Problems and Prospects of SSI in Indian
Economy
The phenomenal growth of industries in the small-scale sector has been the striking
feature in the economic development of the country since independence. It has
contributed to the overall growth or the Gross Domestic Product as well as in
terms of employment generation and export.
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88 Material
 One of the measures of the policy support for promoting small-scale industries Industrial Policies of
India
is the policy of reservation of economically viable and technically feasible items for
exclusive manufacture in the small-scale sector. The policy of reservation initiated in
1967 primarily as promotional and protective measure vis-avis the large-scale sector,
grants protection to small scale sector, the only exception being the case of large NOTES
units which undertake minimum level of exports as 75 per cent of their total production.
The IDR Act was amended in March, 1984 empowering Government to reserve
items for the small scale sector. Reservation/De-reservation of items for manufacture
in the small-scale sector is a continuing process regularly monitored by an Advisory
committee on Reservation constituted under the IDR Act at present the total number
of items reserved for small scale sector are 799 as on 29 June 2001.
The small-scale sector has acquired a prominent place in the socio-economic
development of the country during the past four and a half decades. It has
contributed to the overall growth of the gross domestic product as well as in terms
of employment generation and export. Performance of the small-scale sector, which
forms a part of total industrial sector, therefore, has direct impact on the growth of
the national economy.
There has been a steady increase in the number of SSI units, their production,
employment and exports over the years from 19,58,000 units in 1990-91, the
number of units has increased to 33, 70,000 units in the year 2000-01. On the
production front also, there has been a steady increase over the past years ranging
between 7 per cent-10 per cent during the period 1990-91 to 1994-95, the increase
was 11.4 per cent and 11.3 per cent in 1995-96 and 1996-97 respectively. In
1997-98 the increase over the previous year was registered at 8.43 per cent. The
increase in the year 1998-99 & 1999-2000 were 7.7 per cent, and 8.16 per cent
respectively. The increase for 2000-01 was 8.09 per cent.
As of Dec, 2019, total SSI sector comprises 1,05,21,190 units, spread
across the country.
The main issues related to small-scale industries are listed as follows:
1. Most production processes are old and outdated
2. The workers are not technically sound.
3. The location of the units is not very convenient.
4. The units are not always economically viable because the cost of inputs is
high, the size of the projects is uneconomic, financial requirements are not
estimated properly and there is always an overestimation of demand.
5. Capacity is underutilized; quality control is poor; inventory management
and maintenance is inadequate;
6. There is high wastage.
7. Handling of labour problems is inefficient
8. Manpower may be in excess but there is a death of skilled labour.
9. There is always a dependence on a single or small group of customers
10. Pricing policy is inappropriate. Self - Learning
Material 89
Industrial Policies of 11. There is a lack of market research.
India
12. The working capital is inadequate.
13. Management is incompetent mainly due to lack of feedback to the higher
NOTES ups and lack of professionalism
Other than the problems listed above, there are also external factors that pose
problems for small-scale industries.
1. The supply of raw materials is not regular.
2. Transport issues arise frequently due to long distances, poor quality of roads,
natural disasters and weather issues.
3. Change in the policies of the government and price controls bring work to
a standstill.
4. There are market limitations in terms of saturation and technological
advancements causing existing products to become obsolete.
5. Multiplicity of labour unions as well as instability in terms of political situations
can hinder work.
The Small Scale Industry Sector has emerged as India’s engine of growth in
the New Millennium. By the end of March 2000, the SSI sector accounted for
nearly 40 per cent of gross value of output in the manufacturing sector and 35 per
cent of total exports from the country. Through over 32 lakh units, the sector
provided employment to about 18 million people.
The ongoing programme of Economic Reforms based upon the principle
of liberalization, globalization and privatization and the changes at the international
economic scene including the emergence of World Trade Organisation (WTO),
have brought certain challenges and several new opportunities before the SSI
Sector. The most important challenge faced by the sector is that of growing
competition both globally and domestically. At the same time sector has also
been facing some problems which relate to credit, infrastructure, technology,
marketing, delayed payment hassles on account of so many rules and regulations
etc. In order to enable this sector to avail the opportunities and play its role as
an engine of growth, it is essential to address to these problems effectively and
urgently.
With a view to provide more focused attention on the development of SSI,
the Government of India created a new Ministry of Small-Scale Industries & Agro
and Rural Industries in October 1999. Immediately after the formation of the
Ministry, a Mission for the Millennium giving a blue print for small scale and village
industries was announced. To carve out a road map for this sector in the New
Millennium, the Hon’ble Prime Minister constituted a Group of Ministers under
the Chairmanship of Shri L.K. Advani the Home Minister of India in June 2000.
The background material for the consideration of the Group of Ministers was
provided by the Interim Report of the S.P. Gupta Study Team constituted by the
Planning Commission.
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90 Material
Policy support: The investment limit for the Tiny Sector will continue to be 25 Industrial Policies of
India
lakhs. The investment limit for the SSI sector will continue to be at 1 crore. The
Ministry of SSI & ARI will bring out a specific list of hi-tech and export-oriented
industries which would require the investment limit to be raised upto 5 crores to
admit of suitable technology upgradation and to enable them to maintain their NOTES
competitive edge. The Limited Partnership Act will be drafted quickly and got
enacted. Attempt will be made to bring the Bill before the next session of the
Parliament.
Fiscal support: To improve the competitiveness of Small-Scale Sector, the
exemption for excise duty limit raised from 50 lakhs to 1 crore.
Credit support: The composite loans limit raised from 10 lakhs to 25 lakhs.
The Small-Scale Service and Business (Industry Related) Enterprises (SSSBEs)
with a maximum investment of 10 lakhs will qualify for priority lending. In the
National Equity Fund Scheme, the project cost limit will be raised from 25 lakhs
to 50 lakhs. The soft loan limit will be retained at 25 per cent of the project cost
subject to a maximum of 10 lakhs per project. Assistance under the NEF will be
provided at a service charge of 5 per cent per annum.
Table 3.1 gives the Performance of Small-Scale Sector.
Table 3.1 Performance of Small-Scale Sector
Year No. of units (lakh) Production ( Crore) Employment Exports
Regd. Unregd. Total (at current (at constant in lakh ( crore)
prices) prices)*
1994-95 19.44 6.27 25.71 2,98,886 2,66,054 146.56 29,068

(7.66) (23.69) (10.10) (5.15) (14.86)

1994-95 11.61 67.99 79.60 1,22,210 1,09,116 191.40 29,068
(4.1) (23.7) (10.4) (4.8) (14.9)
1995-96 11.57 71.27 82.84 1,48,290 1,21,649 197.93 36,470
(4.1) (21.3) (11.5) (3.4) (25.5)
1996-97 11.99 74.22 86.21 1,68,413 1,35,380 205.86 39,248
(4.1) (13.6) (11.3) (4.0) (7.6)
1997-98 12.04 77.67 89.71 1,89,178 1,47,824 213.16 44,442
(4.1) (12.3) (9.2) (3.5) (13.2)
1998-99 12.00 81.36 93.36 2,12,901 1,59,407 220.55 48,979
(4.1) (12.5) (7.8) (3.5) (10.2)
1999-2000 12.32 84.83 97.15 2,34,255 1,70,709 229.10 54,200
(4.1) (10.0) (7.1) (3.9) (10.7)
2000-01 13.10 88.00 101.10 2,61,289 1,84,428 239.09 69,797
(4.1) (11.5) (8.0) (4.4) (28.8)
2001-02 13.75 91.46 105.21 2,82,270 1,95,613 249.09 71,244
(4.1) (8.0) (6.1) (4.2) (2.1)
2002-03 14.68 95.42 110.10 3,11,993 2,10,636 261.38 86,013
(4.6) (10.5) (7.7) (4.9) (20.7)
2003-04 15.54 99.68 115.22 3,48,059 2,26,392" 273.97 N.A.
(4.7) (11.6) (7.5) (4.8)

* : 1993-94 prices.
**: Based on growth rate of 7.48% achieved in first 9 months of 2003-04 i.e. April-December,
2003.
Note: Figures in brackets indicate percentage growth over previous years.
Source: Ministry of Small Scale Industries.
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Material 91
Industrial Policies of Small Medium and Micro Scale Industries
India
A notable sector of the Indian economy, the small scale industry (SSI) emerged
during the 1980s. At present, it accounts for nearly 35 per cent of the gross value
NOTES of output in the manufacturing sector and over 40 per cent of the total exports
from the country. It also provides employment opportunities to around 12 million
people.
The primary objective of the SSI policy of the Government of India is to
impart more vitality and growth-impetus to the sector and enable it to contribute
its might fully to the economy, particularly in terms of growth of output, employment
and exports. The sector has been substantially delicensed. Further efforts are being
made to deregulate and de-bureaucratize the sector with a view to remove all
fetters on its growth potential, reposing greater faith in small and young
entrepreneurs.
Policies for the Development of Micro, Small and Medium
Enterprises (MSME) Sector
The Indian government has adopted many policies and programmes for the
development of Micro, Small and Medium Enterprises (MSME) sector, which
may be discussed under the following heads:
Reservation policy
Reservation of products for exclusive manufacture in the small scale sector was
introduced for the first time in 1967 with the reservation of forty-seven items.
Reservation affords support to SSIs against competition from medium/large/
multinational companies. Reservation/de-reservation is a continuous process. As
of 20 July 2010, twenty items were reserved for exclusive manufacture in the
small scale sector.
Licensing policy
The major impact of liberalisation and globalization of economy, which started in
India in July 1991, aimed at doing away with the system of Compulsory Licensing.
As of now, four industries are reserved for the Public Sector such as Arms and
ammunition and allied items of defence equipment, defence aircraft and warships,
atomic energy and the railways; and six industries fall under the compulsory licensing.
These comprise breweries and distilleries, tobacco industry, electronic aerospace
and defence equipment of all types, industrial explosives such as detonating fuses,
safety fuses, gunpowder, hazardous chemicals, pharmaceuticals and others. Small
units that employ less fifty workers and less than hundred workers are not required
to obtain any license under Compulsory Licensing Provisions.
Trade policy
Exports from the small scale sector over a period of time have acquired great
significance in India’s foreign trade. The MSME sector today constitutes a very
important segment of India’s economy and it accounts for nearly 40 per cent of
Self - Learning the gross value of output in the manufacturing sector and about 50 per cent of the
92 Material
total exports from the country. Direct exports from the MSME sector account for Industrial Policies of
India
35 per cent of the total exports.
Export Promotion from the small scale sector has been accorded a high
priority in the India’s export promotion strategy. The small industries due to their NOTES
inherent strengths of low capital investment, high employment generation, maximum
utilization of capacity, flexibility in operation, etc. are highly conducive for rapid
Industrialization and generation of export surpluses.
Export-Import Policy for Small Scale Sector
Recognition of export houses/trading houses, etc: The EXIM Policy in 1997–
2002 policy has laid down certain criterion in order to recognize established
exporters so that the marketing infrastructure can be further accentuated. The
eligibility criteria for such recognition is based either on the basis of Free on Board
(FOB) or Net Foreign Exchange value of exports of goods and services made
directly by the exporters during the preceding three licensing years or the preceding
licensing year. In an attempt to encourage exports from the small scale sector, the
exports made by small scale sector manufacturer-exporters are given triple
weightage for the purpose of recognition as EH/TH/STH/SSTH.
Special import licence (SIL): Exporters recognized as Export Houses, Star
Trading House, Trading Houses, etc. are eligible for grant of Special Import Licence
(SIL) at certain percentage of their FOB value of exports/NFE.
Promotional schemes
To meet the challenges of international competition and to promote exports of
MSME products, following promotional schemes are also being implemented:
(i) Technology development and modernization fund scheme
Small Industries Development Bank of India (SIDBI) implemented a scheme of
technology development and modernization of MSME units with effect from April
1995. Under this scheme assistance is available for meeting the expenditure on
purchase of capital equipment, acquisition of technical know-how, upgradation of
process technology and products with thrust on quality improvement, improvement
of packaging and cost of TQM and acquisition of ISO-9000 series certification.
The coverage of the scheme has been enlarged from export-oriented units to non-
exporting units also in September 1997. Under this Scheme a sum of 152 crores
had been sanctioned for 245 units by April, 1999.
(ii) Quality awareness scheme
Small Industries Service Institutes often organize Workshops on ISO-9000 on
certification and awareness of quality.
Subsidy for obtaining ISO-9000 quality Certification
Under the scheme of promoting ISO-9000 certification MSMEs are given financial
support by way of reimbursing 75 per cent of their expenditure to obtain ISO-
9000 certification subject to a maximum of 75,000. Self - Learning
Material 93
Industrial Policies of National small industries corporation
India
The National Small Industries Corporation (NSIC) through its export development
programme is playing a vital role to promote the MSME sector in exporting their
NOTES products/projects in international, markets by providing following assistance to
the small enterprises. Various ways by which NSICs could be marketed and
promoted are as follows:
 Organizing International Exhibitions and Buyers-Sellers meet
 Providing information related to sales opportunities available in international
market
 Advertising and publicity in various countries through Indian High
Commissions and the Internet
 Publication of Exporters Directory
 Participating in Global Tenders
 Providing assistance in deemed exports
 Organization of Seminars and Workshops to upgrade and update MSME
with regard to international developments
Foreign Direct Investment (FDI) Approval:
 An industrial undertaking, i.e., a company with interests in industry can
invest up to 24 per cent equity in an SSI unit.
 If the equity goes beyond 24 per cent, the industrial unit loses its SSI status.
 There is no restriction on the extent of equity that can be held by a Non-
resident Indian (NRI) as an individual/partner in an SSI unit.
 Investors need to file an application with the Reserve Bank of India (RBI)
in the prescribed format and approval is ordinarily granted within 15 days.
 For foreign investment outside the automatic route, clearance has to be
obtained from Foreign Investment Promotion Board (FIPB).
 Applications for setting up a 100 per cent Export Oriented Unit are also
required to be filed with the SIA.
 For setting up a unit in an Export Processing Zone (EPZ), application has
to be filed with the Development Commissioner of the concerned EPZ.
 Under automatic procedures, foreign technology agreements are being
permitted in respect of industries that are designated as high priority
industries.
 The use of foreign brand names and / or trade mark of goods is also now
being permitted freely.
Credit Policy
Of all the elements that go into a business, credit is perhaps the most crucial.
The best of plans can come to a naught, if adequate finance is not available at
the right time. MSMEs need credit support not only for running the enterprise
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94 Material
and operational requirements but also for diversification, modernization/ Industrial Policies of
India
upgradation of facilities, capacity expansion and so on. With respect to MSMEs,
the problem of credit becomes all the more critical whenever any episodic event
occurs such as a large order, rejection of consignment, inordinate delay in
payment and so on. In general, MSMEs operate on tight budgets, often financed NOTES
through owner’s own contribution, loans from friends and relatives and some
bank credit.
Government of India recognized the need for a focused credit policy for
MSMEs in the early days of promotion of MSMEs. This in turn led to a credit
policy with the following components:
Priority sector lending
Credit to the MSE sector is ensured as part of the priority sector lending by
banks. Banks are required to compulsorily ensure that specified percentage
(currently 40 per cent for domestic commercial banks and 32 per cent for foreign
banks) of their overall lending is made to priority sectors as classified by
Government. These sectors include agriculture, small enterprises, retail trade and
the like. Institutional Arrangement
Small Industries Development Bank of India (SIDBI) is the principal financial
institution for promotion, financing and development of the MSME sector. Apart
from extending financial assistance to the sector, it coordinates the functions of
institutions engaged in similar activities. SIDBI’s major operations are in the areas
of (i) refinance assistance (ii) direct lending and (iii) development and support
services. The commercial banks are important channels of credit dispensation to
the sector and play a pivotal role in financing the working capital requirements,
besides providing term loans (in the form of composite loans). State Financial
Corporations (SFCs) and twin-function State Industrial Development Corporations
(SIDCs) at the State level are the main sources of long-term finance for the MSME
sector.
Labour Policy
Comprehensive laws as propounded by the government govern the Labour Policies
for Small Scale Industries. The following laws and policies are applicable for Small
Scale Industries in India:
 Apprentices Act, 1961
 The Beedi and Cigar Workers (Conditions of Employment) Act, 1966
 Bonded Labour System (Abolition) Act, 1976
 Child Labour (Prohibition & Regulation) Act, 1986
 The Children (Pledging of Labour) Act, 1933
 The Contract Labour (Regulation & Abolition) Act, 1970
 The Employees Provident Funds and Misc. Provisions Act, 1952
 Employees State Insurance Act, 1948
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Material 95
Industrial Policies of  Employers Liability Act, 1938
India
 Employment Exchange (Compulsory Notification of Vacancies) Act, 1959
 Equal Remuneration Act, 1976
NOTES  The Factories Act, 1948
 The Industrial Disputes Act
 The Industrial Employment (Standing Orders) Act,1946
 The Inter-state Migrant Workmen (Regulation of Employment and
Conditions of Service) Act, 1979
 Labour Laws (Exemption from Furnishing Returns & Maintaining Registers
by Certain Establishments) Act, 1988
 Maternity Benefit Act, 1961
 The Minimum Wages Act, 1948
 The Payment of Bonus Act, 1965
 The Payment of Gratuity Act, 1972
 The Payment of Wages Act, 1936
 The Sales Promotion Employees (Conditions of Service) Act, 1976
 The Shops and Establishments Act, 1953
 The Trade Union Act, 1926
 Workmen’s Compensation Act, 1923
 The Weekly Holidays Act, 1942

Check Your Progress

5. How are the village and small industries sector divided?
6. What are cottage industries?

3.6 START-UP INDIA AND MAKE IN INDIA

Let us begin by discussing Startup India.
Startup India
Startup India is a flagship initiative of the Government of India, intended to catalyse
startup culture and build a strong and inclusive ecosystem for innovation and
entrepreneurship in India.
Launched on 16th January 2016, the Startup India Initiative has rolled
out several programs with the objective of supporting entrepreneurs, building a
robust startup ecosystem and transforming India into a country of job creators
instead of job seekers. These programs are managed by a dedicated Startup
India Team, which reports to the Department for Industrial Policy and Promotion
Self - Learning
(DPIIT).
96 Material
Make in India Industrial Policies of
India
Make in India is a major new national programme of the Government of India
designed to facilitate investment, foster innovation, enhance skill development,
protect intellectual property and build best in class manufacturing infrastructure in NOTES
the country. The primary objective of this initiative is to attract investments from
across the globe and strengthen India’s manufacturing sector. It is being led by the
Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce
and Industry, Government of India. The Make in India programme is very important
for the economic growth of India as it aims at utilising the existing Indian talent
base, creating additional employment opportunities and empowering secondary
and tertiary sector. The programme also aims at improving India’s rank on the
Ease of Doing Business index by eliminating the unnecessary laws and regulations,
making bureaucratic processes easier, making the government more transparent,
responsive and accountable.
The focus of Make in India programme is on 25 sectors. These include:
automobiles, aviation, chemicals, IT & BPM, pharmaceuticals, construction,
defence manufacturing, electrical machinery, food processing, textiles and garments,
ports, leather, media and entertainment, wellness, mining, tourism and hospitality,
railways, automobile components, renewable energy, biotechnology, space, thermal
power, roads and highways and electronics systems.
The dedicated website for this initiative (www.makeinindia.com) not only
showcases the 25 sectors but also puts focus on the live projects like industrial
corridors and policies in the area of foreign direct investment, national manufacturing,
intellectual property and new initiatives. The Investor Facilitation Cell is an integral
part of this website, which aims at providing all information/data analysis to investors
across sectors.

Check Your Progress

7. What is Startup India?
8. Mention the primary objective of Make in India.

3.7 ANSWERS TO ‘CHECK YOUR PROGRESS’

1. The 1956 industry policy has six objectives.
2. The principle objectives sought to be achieved through the MRTP Act are
as follows:
 prevention of concentration of economic power to the common
detriment
 control of monopolies,
 prohibition of monopolistic and restrictive and unfair trade practices.
3. Industrial Policy Resolution of the Government of India declares that a
dynamic national policy must be directed to a continuous increase in
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Material 97
Industrial Policies of production by all possible means, side-by-side with measures to secure its
India
equitable distribution.
4. The major aim of economic reforms is to improve the public sector so that
NOTES the rate of return improves.
5. The Village and Small Industries sector are divided into seven sub-sectors
namely, Handicrafts, Handlooms, Khadi and Village Industries, Coir,
Sericulture, Power Looms and Small-Scale Industries.
6. The Cottage Industry is a form of unorganized industry in which people are
engaged in craftsmanship works such as handicraft, pottery, knitting,
handloom, etc. They are generally set up at the individual’s home or a nearby
place and the workers use traditional equipment.
7. Startup India is a flagship initiative of the Government of India, intended to
catalyse startup culture and build a strong and inclusive ecosystem for
innovation and entrepreneurship in India.
8. The primary objective of Make in India initiative is to attract investments
from across the globe and strengthen India’s manufacturing sector.

3.8 SUMMARY
 The 1956 industrial policy has six objectives: (i) to accelerate economic
growth and industrial development of the country, (ii) to expand the public
sector, (iii) to prevent the growth of monopolies and the concentration of
economic powers in the hands of a few people, (iv) to develop a large
cooperative sector, (v) to develop heavy and machine-made industries, and
(vi) to reduce disparities in wealth and income.
 In order to promote the development of small-scale industries and ensure
their rapid growth, the Government has decided to increase the limit of
investment in case of tiny units from 1 lakh to 2 lakh
 Jawaharlal Nehru laid the foundations of modern India.
 The aims and objectives set out for the nation by Nehru on the eve of
independence were rapid agricultural and industrial development of the
country, rapid expansion of opportunities for gainful employment, progressive
reduction of social and economic disparities, removal of poverty and
attainment of self-reliance.
 In 1948, the Government adopted the industrial policy resolution which
emphasised the importance to the economy of securing a continuous increase
in production and ensuring its equitable distribution.
 In the 1950s and 1960s the principal instrument for controlling the
commanding heights of the economy was investment in the capital of key
industries.

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98 Material
  The public sector or public enterprises include all governmental activities Industrial Policies of
India
including public industrial or commercial enterprises. Public enterprise
occupies a strategic and crucial position in the Indian economy.
 The entry of the public sector in a big way in the economic sphere is a post- NOTES
Independence development.
 The public sector was meant to socialize the means of mass production and
benefit the masses, as is typically the case in a socialistic pattern of society.
 The major aim of economic reforms is to improve the public sector so that
the rate of return improves.
 Madhya Pradesh government announced its long awaited industry policy. It
makes it mandatory for upcoming industries to reserve 50 per cent direct
job to locals.
 The Small-Scale Industries Sector has acquired an important position in the
economic structure of the country.
 The phenomenal growth of industries in the small-scale sector has been the
striking feature in the economic development of the country since
independence.
 Startup India is a flagship initiative of the Government of India, intended to
catalyse startup culture and build a strong and inclusive ecosystem for
innovation and entrepreneurship in India.
 Make in India is a major new national programme of the Government of
India designed to facilitate investment, foster innovation, enhance skill
development, protect intellectual property and build best in class
manufacturing infrastructure in the country.

3.9 KEY TERMS

 Small-scale industry: Small scale industries (SSI) are those industries in
which manufacturing, providing services, productions are done on a small
scale or micro scale.
 Public sector: The public sector is the part of the economy composed of
both public services and public enterprises.

3.10 SELF-ASSESSMENT QUESTIONS AND

EXERCISES

Short-Answer Questions
1. Write a short note on 1956 industrial policy.
2. What are the highlights of industrial policy of July 1980?
3. What are the different kinds of public sector organizations?
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Industrial Policies of 4. How has the industrial policy of Madhya Pradesh evolved?
India
5. Give a brief account of the cottage industries in India.
Long-Answer Questions
NOTES
1. How has the industrial policy of India changed since 1950s? Discuss some
of the major industrial policies.
2. Discribe the role of public sector in industrialization.
3. Discuss the recent policies of the government of India for the public sector.
4. What are the problems faced by small scale industries in India? Elucidate.
5. Discuss the major promotional policies that have been implemented to
develop the micro, small and medium enterprises (MSME) sector.

3.11 FURTHER READING

Mankar, V. G. 1995. Economic Policy and Planning. Delhi: New Age
International Publishers.
Patel, I.G. 2003. Glimpses of Indian Economic Policy. New Delhi: Oxford
University Press.
Soubbotina, Tatyana P. 2004. Beyond Economic Growth: An Introduction to
Sustainable Development. Washington: World Bank.
Van den berg, Hendrik. 2001. Economic Growth and Development. Ohio:
McGraw-Hill.
Banik, Nilanjan. 2015. The Indian Economy: A Macroeconomic Perspective.
New Delhi: Sage Publishing India.
Kapila Uma. 2009. Indian Economy Since Independence. New Delhi: Academic
Foundation
Rama P. Kanungo, Chris Rowley, Anurag N. Banerjee. 2014. Changing the
Indian Economy: Renewal, Reform and Revival. Netherlands: Elsevier.
Bimal Jalan. 2004. Indian Economy. United Kingdom: Penguin.
Nilanjan Banik. 2015. The Indian Economy: A Macroeconomic Perspective.
New Delhi: SAGE Publishing House.
K. R. Gupta, J. R. Gupta. 2008. The Indian Economy, Volume I. New Delhi:
Atlantic Publishers.

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 Infrastructure of Indian

UNIT 4 INFRASTRUCTURE OF INDIAN Economy

ECONOMY
NOTES
Structure
4.0 Introduction
4.1 Objectives
4.2 Power and Transportation
4.3 Communication
4.4 Composition and Direction of India’s Foreign Trade
4.5 Balance of Payment
4.6 Role of FDI and MNCs
4.6.1 Multinational Corporations in India
4.7 Answers to ‘Check Your Progress’
4.8 Summary
4.9 Key Terms
4.10 Self-Assessment Questions and Exercises
4.11 Further Reading

4.0 INTRODUCTION
For a sustained economic growth of a country, a well-known and coordinated
system of transport plays a significant role. India’s present transport system involves
numerous modes of transport, such as railways, road, shipping, air transport, etc.
Over the years, transportation in India has recorded a considerable growth —
both in spread of network and in output of the system.
The other components of the Indian infrastructure are power, communication,
banking and finance, etc. In this unit we will also learn about FDI and the role of
MNCs.

4.1 OBJECTIVES
After going through this unit, you will be able to:
 Discuss the role of infrastructure in Indian economy
 Understand the evolution of communication in India
 Describe the composition and direction of India’s foreign trade
 Learn about the role of FDI and MNCs in the Indian economy

4.2 POWER AND TRANSPORTATION

Let us discuss the transportation sector by examining the Indian road sector.
Road Sector
Road transport is vital to the economic development and social integration of the
country. Easy accessibility, flexibility of operations, door-to-door service and
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Infrastructure of Indian reliability have earned road transport an increasingly higher share of both passenger
Economy
and freight traffic vis-à-vis other transport modes. India has one of the largest
road networks in the world, aggregating to about 33 lakh kilometres at present.
The country’s road network consists of National Highways, State Highways, major/
NOTES other district roads and village/rural roads (Table 4.1). Though the National
Highways, which is the responsibility of the Central Government, has about 70,548
km length and comprises only 2 per cent of the total length of roads, carries over
40 per cent of the total traffic across the length and breadth of the country.
Table 4.1 National Highways, State Highways, Major and
Other District Roads and Rural Roads

National Highways/Expressways 70,548 KM

State Highways 128,000 KM
Major and other District Roads 470,000 KM
Rural Roads 2,650,000 KM

Source: www.india.gov.in
Road transport has emerged as the dominant segment in India’s transportation
sector with a share of 4.8 per cent in India’s GDP in comparison to railways that
has a mere 1.5 per cent share in 2018–19. Road transport has gained in importance
over the years despite significant barriers to inter-state freight and passenger
movement compared to inland waterways, railways and air which do not face
rigorous en route checks/barriers.
Both freight and passenger movement by road is expected to rapidly expand
in the coming years. In particular, freight movement by road transport is expected
to show robust growth over the medium term due to a number of factors (a)
substantial investment in improvement in national highway network which will
facilitate speedy, reliable and door to door services; (b) freight movement by road
transport offers a complete logistic solution that minimizes the cost of transport,
logistics and inventories; and (c) rising volumes of exports and imports. More
importantly, the growth in exports is expected to increase the demand for inland
transport for moving cargo from production centres in the gateway ports – both
air and sea.
Railways Sector
The Railways in India provide the principle mode of transportation for freight and
passengers. It brings together people from the farthest corners of the country and
makes possible the conduct of business, sightseeing, pilgrimage and education. It
has bound the economic life of the country and helped in accelerating the
development of industry and agriculture. The Railways were introduced in India in
1853 and with their expansion through the twentieth century, company managed
and state-owned several railway systems grew up. To enforce standardisation
and co-ordination amongst various railway systems, the Indian Railway Conference
Association (IRCA) was set up in 1903 followed by the Central Standards Office
(CSO) in 1930, for preparation of designs, standards and specifications. However,
till independence, most of the designs and manufacture of railway equipments was
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phenomenal growth in country’s industrial and economic activities leading to increase Infrastructure of Indian
Economy
in the demand for rail transportation, there was a complete shift in emphasis in the
field of design & manufacture. Consequently, a new organization called Railway
Testing and Research Centre (RTRC) was set up on 1st September, 1952 with its
headquarter at Lucknow for testing and conducting indigenous applied research in NOTES
railway technology. Later on, Central Standards Office (CSO) and the Railway
Testing and Research Centre (RTRC) were merged into a single unit and thus in
1957, Research Designs and Standards Organization (RDSO) came into being as
an attached office of Railway Board.
RDSO is the sole R&D organization of Indian Railways and functions as the technical
advisor to Railway Board, Zonal Railways and Production Units. Basically, its
major functions involve:
 Development of new and improved designs.
 Development, adoption, absorption of new technology for use on Indian
Railways.
 Development of standards for materials and products specially needed by
Indian Railways.
 Technical investigation, statutory clearances, testing and providing consultancy
services.
 Inspection of critical and safety items of rolling stock, locomotives, signalling
& telecommunication equipment and track components.
RDSO also offers international consultancy services in matters pertaining to
design, testing and inspection of railway equipments as well as survey for
construction of new lines. The significant accomplishments of RDSO in the sphere
of research and development have always attracted worldwide attention.
Table 4.2 provides the growth in core industries and infrastructure services
(in per cent)
Table 4.2 Growth in Core Industries and Infrastructure Services (in per cent)

SI. 2011-12
No. Sector 2007-08 2008-09 2009-10 2010-11 (April-Dec.)
1. Power 6.3 2.5 6.8 5.7 9.3
2. Coal 6.0 8.2 8.0 0.0 -2.7
3. Finished steel 6.8 13.2 3.2 9.6 5.7
4. Fertilizers -8.6 -2.6 13.2 1.0 -0.5
5. Cement 7.8 7.6 10.1 4.3 5.1
6. Petroleum:
(a) Crude oil 0.4 -1.8 0.5 11.9 1.9
(b) Refinery 6.5 3.0 -0.4 3.0 4.1
(c) Naturai gas 2.1 1.4 44.8 9.9 -8.8
7. Railway revenue-earning 9.0 4.9 6.6 3.8 4.7
freight traffic
8. Cargo handled at major ports 12.0 2.2 5.7 1.6 0.4
9. Civil aviation:
(a) Export cargo handled 7.5 3.4 10.4 13.4 -1.1
(b) Import cargo handled 19.7 -5.7 7.9 20.6 1.4 Self - Learning
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Infrastructure of Indian
Economy (c) Passengers handled at 11.9 3.8 5.7 11.5 7.2
international terminals
(d) Passengers handled at 20.6 -12.1 14.5 16.1 17.5
domestic terminals
NOTES 10. Telecommunications; Cell phone 38.3 80.9 47.3 18.0 -51.0
connections
11. Roads: Upgradation of highways*
(i) NHAI 164.6 30.9 21.4 -33.3 8.9
(ii) NH(O) & BRDB 12.5 17.3 4.0 -6.8 -36.5

Source: Ministry of Statistics and Programme Implementation (MOSPI).

* Includes Widening to four lanes & two lanes and Strengthening of existing weak
pavement only.
# provisional
Notes: NH(O) stands for National Highways Organization and BRDB for the Border Roads
Development Board (BRDB).
Performance of broad sectors and sub-sectors in key infrastructure areas
in the current year presents a mixed picture. There was an improvement in growth
in power, petroleum refinery, cement, railway freight traffic, passengers handled at
domestic terminals, and upgradation of highways by the National Highways
Authority of India (NHAI). Coal, natural gas, fertilizers, handling of export cargo
at airports, and the number of cell phone connections showed negative growth.
Steel sector witnessed moderation in growth.
Energy
Energy is the prime mover of economic growth. Availability of sufficient and efficient
energy is key to sustainable development of a country. Commercial energy has
also a direct impact and influence on the quality of service in the fields of education,
health and, in fact, even food security. Inadequacy of energy supply would obviously
affect very adversely these vital and essential requirements of any society. There
is, therefore, an urgent need to enhance substantially the energy availability at a
rapid pace so that aspirations of those who have remained insulated from such
important inputs and services are fulfilled and they are enabled to have a reasonable
access.
Three main sources of energy in India are thermal, hydro and nuclear. Table
4.3 gives power generation by utilities (billion KWh)
Table 4.3 Power Generation by Utilities (Billion KWh)

Category 2009-10 2009-10 April-December Growth

2010-11 2011-11 (percent)

Power generation 771.551 811.143 598.244 653.446 9.23

Hydroelectric # 106.680 114.257 90.169 107.51 19.23
Thermal 640.876 665.008 484.860 517.116 6.65
Nuclear 18.636 26.266 17.854 23.79C 33.24
Bhutan import 5.358 5.610 5.360 5.02C -6.19

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 Electricity generation by power utilities during 2011-12 increased by 5.4 Infrastructure of Indian
Economy
per cent to reach 855 billion units. Growth in power generation during April-
December 2011 was 9.2 per cent as compared to 4.6 per cent during April-
December 2010. Nuclear, hydro, and thermal generation registered a growth of
33.2 per cent, 19.2 per cent, and 6.7 per cent respectively. In the first nine months NOTES
76 per cent of the generation target has been achieved. Power generation from
thermal, hydel and nuclear plants is expected to grow 6.5% this fiscal year, nearly
double of last year’s rise of 3.5%. Total generation is estimated to be 1,330 billion
in 2019-20, of which 85% would be from thermal plants.
Figure 4.1 depicts the trend of the national average of PLF of thermal plants.
Plant Load Factor (PLF) is the measure of the efficiency of thermal power stations.

Fig. 4.1 Trend of the National Average of PLF of Thermal Plants

Development and Role of Thermal Energy

In India, thermal power plants account for 65 per cent of the installed capacity in
the country. A thermal power plant is usually a steam-driven power plant. There
are variations in the functioning of different types of thermal power plants depending
on the kind of fuel they use. The most frequently used fuel for thermal power
plants in India is coal.
Major Thermal Power Plants in India
 Durgapur Thermal Power Station, Durgapur, West Bengal
 Indraprastha PS, Delhi, NCT Delhi
 National Capital TPP, Vidyutnagar, Uttar Pradesh
 Rajghat PS, Delhi, NCT Delhi
 Rajiv Gandhi CCPP, Kayamkulam, Kerala
 Mundra Thermal Power Station, Kutch, Gujarat
 Vindhyachal Super Thermal Power Station, Singrauli, Madhya Pradesh
 Talcher Super Thermal Power Station, Angul, Orissa
 Amravati Thermal Power Plant, Amravati, Maharashtra
 Korba Super Thermal Power Plant, Korba, Chattisgarh
 NTPC Ramagundam, Karimnagar, Andhra Pradesh
 Mejia Thermal Power Station, Bankura, West Bengal
 Farakka Super Thermal Power Station, Murshidabad, West Bengal
 Simhadri Super Thermal Power Plant, Visakhapatnam, Andhra Pradesh Self - Learning
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Infrastructure of Indian  NTPC Dadri, Gautam Budh Nagar, Uttar Pradesh
Economy
 Ambala Diesel Power Station, Haryana
 Gangtok Diesel Power Station, Gangtok, Sikkim
NOTES  Utran Gas Based CCPP, Surat Gujarat
In the thermal category, growth in generation from coal, lignite, and gas-
based stations in the 2011 fiscal (April-December) was of the order of 9.2 per
cent, 3.8 per cent, and - 4.0 per cent respectively. The overall plant load factor
(PLF), a measure of efficiency of thermal power stations, at 72.1 per cent during
April-December 2011 was marginally lower than the PLF of 72.9 per cent achieved
during April-December 2010.
The sector-wise and region-wise break-up of the PLF from 2008-9 to
2011-12 (April to December 2011) shows wide variation across regions and
sectors. In the current year, while the PLF of the central-sector utilities moderated,
private-sector utilities witnessed an improvement. The PLF of utilities in the state
sector remained lower than that of private- and central-sector utilities. In terms of
regional spread, moderation in PLF in the current year was across all the regions.
Utilities in the eastern and north-eastern region continued to have a lower PLF.
Development and Role of Hydro Energy
India was the first nation to establish hydro-electric power plants. The foremost
Hydro power plants in India were set up at Shimsha in 1902 and Darjeeling in
1898. The installed competence of Indian hydro power plants in the FY 2008-09
was 36877.76 approximately. Enhancing the level of energy consumption,
particularly in less developed and developing countries, is a global challenge. 20
per cent of world population living in industrialised countries consume 60 per cent
of energy and remaining 80per cent of population have to manage within 40 per
cent of total energy. This has obviously resulted in wide disparities between the
standard of living and quality of life of high energy consuming countries on the one
hand and those who do not have the opportunities of adequate access to energy
on the other. It is precisely for this reason that development of different sources of
energy and increase in its consumption has become a priority agenda of all the
developing countries.
In the context of electric power, as an important form of energy, the thermal
and hydroelectric power on a global basis, have occupied the largest proportion.
In the last 30 years, the proportion of hydroelectric capacity in the Indian power
system has considerably reduced. It dropped from about 46 per cent in 1970 to
40 per cent in 1980, 29 per cent in 1990 and 25 per cent in 2003. By 2017, it had
reduced to 13.5%. In spite of the great hydroelectric potential in India, which is
now estimated to be of the order of 150,000 MW, the exploitation has been of the
order of 44,594 MW as of April 2017.
Major Hydro Power Plants in India
 Srisailam Dam: Andhra Pradesh
 Nagarjunasagar: Andhra Pradesh
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  Sardar Sarovar: Gujarat Infrastructure of Indian
Economy
 Baspa-II: Himachal Pradesh
 Nathpa Jhakri: Himachal Pradesh
 Bhakra Dam: Himachal Pradesh NOTES
 Dehar: Himachal Pradesh
 Baira Suil: Himachal Pradesh
 Chamera-I: Himachal Pradesh
 Chamera-II: Himachal Pradesh
 Pong : Himachal Pradesh
 Uri Hydroelectric Dam: Jammu & Kashmir
 Dulhasti: Jammu & Kashmir
 Salal: Jammu & Kashmir
 Sharavathi: Karnataka
 Kalinadi: Karnataka
 Idukki: Kerala
 Omkareshwar: Madhya Pradesh
 Indira Sagar: Maharashtra
 Loktak: Manipur
 Koyna: Maharashtra
 Rangeet: Sikkim
 Teesta-V: Sikkim
 Tanakpur: Uttarakhand
 Dhauliganga-I: Uttarakhand
 Loharinag: Uttaranchal
 Tehri: Uttarakhand
Development and Role of Renewable Energy
Renewable energy has been an important component of India’s energy planning
process since quite some time. The importance of renewable energy sources in
the transition to a sustainable energy base was recognized in the early 1970s. At
the Government level, political commitment to renewable energy manifested itself
in the establishment of the first Department of Non-Conventional Energy Sources
in 1982, which was then upgraded to a full-fledged Ministry of Non-Conventional
Energy Sources (MNES) in 1992 subsequently renamed as Ministry of New and
Renewable Energy (MNRE). This is the only such Ministry in the world. MNRE
is the nodal Ministry of the Government of India at the Federal level for all matters
relating to new and renewable energy. The Ministry has been facilitating the
implementation of broad spectrum programmes including harnessing renewable
power, renewable energy to rural areas for lighting, cooking and motive power,
use of renewable energy in urban, industrial and commercial applications and Self - Learning
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Infrastructure of Indian development of alternate fuels and applications. In addition, it supports research,
Economy
design and development of new and renewable energy technologies, products
and services.

NOTES In April 2002, renewable energy based power generation installed capacity
was 3475 MW which was 2 per cent of the total installed capacity in the country.
As on 31.12.2010, it had reached 18,655 MW, which is about 11 per cent of the
total installed capacity of 1, 68,945 MW and corresponds to a contribution of
about 4.13 per cent in the electricity mix.
Development and Role of Nuclear Energy
After India attained independence in 1947, the Atomic Energy Commission was
set up in 1948 for framing policies in respect of development of atomic energy in
the country. The Department of Atomic Energy was established in 1954 with Dr.
Bhabha as Secretary to implement the policies framed by the Atomic Energy
Commission. Sir J.R.D Tata was one of the longest serving members in the Atomic
Energy Commission and played a significant role in shaping the policies related to
atomic energy program in the country.
The atomic energy program, which was initiated in a modest manner initially,
has now grown as a wide spectrum, multi-dimensional multidisciplinary with 63
organizations under DAE. The spectrum of these significant activities include R&D
in Nuclear Sciences and Engineering, Exploration & Mining of Radioisotopes,
Nuclear energy development and implementation, application of Nuclear Energy,
Bio-Agricultural Research, Medical Sciences, etc.
Atomic energy activities in the country are governed by the Atomic Energy
Act. The commercial nuclear power program of the first stage (comprising of
PHWRs and imported LWRs) is being implemented by Nuclear Power Corporation
of India Limited (NPCIL), and the second stage (comprising of Fast Breeder
Reactors) by Bharatiya Nabhikiya Vidyut Nigam Limited (BHAVINI), both
companies owned fully by the union government in accordance with the provisions
of the act.
In India, nuclear energy development began with the objectives of peaceful
uses of atomic energy in improving the quality of life of the people and to achieve
self-reliance in meeting the energy needs. The commercial nuclear power
programme, started in 1969 with the operation of TAPS 1&2 (BWR), currently
shares about 3 per cent of country’s installed capacity.
Incidentally, India is not a very energy resource rich country. Currently,
India’s energy resource base status suggests the optimal mix of all the available
energy resources to meet its growing demand of electricity which is projected to
be about 800GWe by 2032 and 1300GWe by 2050.
Pressurized heavy water reactors and fast breeder reactors
The Indian nuclear programme was conceived based on, unique sequential three-
stages and associated technologies essentially to aim at optimum utilization of the
indigenous nuclear resource profile of modest Uranium and abundant Thorium

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resources. This sequential three-stage program is based on a closed fuel cycle, Infrastructure of Indian
Economy
where the spent fuel of one stage is reprocessed to produce fuel for the next stage.
The closed fuel cycle thus multiplies manifold the energy potential of the fuel and
greatly reduces the quantity of waste generated.
NOTES
The first stage comprises of Pressurized Heavy Water Reactors fuelled
by natural uranium. Natural uranium contains only 0.7 per cent of Uranium-235,
which undergoes fission to release energy (200Mev/atom). The remaining 99.3
per cent comprises Uranium-238 which is not fissile however it is converted in
the nuclear reactor, to fissile element Pu-239. In the fission process, among
other fission products, a small quantity of Plutonium-239 is formed by
transmutation of Uranium-238.
The second stage, comprising of Fast Breeder Reactors (FBRs) are fuelled
by mixed oxide of Uranium-238 and Plutonium-239, recovered by reprocessing
of the first stage spent fuel. In FBRs, Plutonium-239 undergoes fission producing
energy, and producing Plutonium-239 by transmutation of Uranium-238. Thus the
FBRs produce energy and fuel, hence termed Breeders. FBRs produce more fuel
than they consume. Over a period of time, Plutonium inventory can be built up by
feeding Uranium-238.
Thorium-232, which constitutes world’s third largest reserves in India, is
not fissile therefore needs to be converted to a fissile material, Uranium-233, by
transmutation in a fast breeder reactor. This is to be achieved through second
stage of the program, consisting of commercial operation of Fast Breeder Reactors
(FBRs).
In the second stage, once sufficient inventory of Plutonium-239 is built up,
Thorium-232 will be introduced as a blanket material to be converted to Uranium-
233. Considering the sequential nature of the indigenous nuclear power program,
and the lead time involved at each stage, it is expected that appreciable time will
be taken for direct thorium utilization. Therefore, innovative design of reactors for
direct use of thorium is also in progress in parallel to three stage program. In this
context, the frontier technologies being developed include the Accelerator Driven
Systems (ADS) and Advanced Heavy Water Reactor (AHWR). The ADS
essentially is a sub-critical system using high-energy particles for fission. One of
the significant advantages of this system is small quantity of waste production. The
quantity of waste in this system is greatly reduced in comparison to the existing
reactors as Actinides produced in ADS are ‘burnt’ out.
The AHWR is another innovative concept, which will act as a bridge between
the first and third stage essentially to advance thorium utilization without undergoing
second stage of the three stage program. It uses light water as coolant and heavy
water as moderator. It is fuelled by a mixture of Plutonium-239 and Thorium-232,
with a sizeable amount of power coming from Thorium-232.
India is also an active partner in the international experimental initiative on
harnessing fusion power for the future, the ITER project. India is supplying several
components for this experimental reactor.

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Infrastructure of Indian Integrated Energy Policy
Economy
The Government of India has recently come out with the Integrated Energy Policy,
which aims to bridge the prevailing gap in the demand and supply of energy in
NOTES short, medium and long term perspective. Recognizing the role of both private and
public sector participation in meeting the energy needs of the country, the policy
strikes a right balance by stating that ‘wherever possible energy market should be
competitive. However, competition alone has been shown to have its limitation in
a number of areas of the energy sector and independent regulation becomes even
more critical in such instances’.
The approach of Integrated Energy Policy is summarized as follows:
 Till market matures in independent regulation across the energy streams is a
necessity.
 Pricing and resource allocation to be determined by market forces under
an effective and credible regulatory oversight.
 Transparent and targeted subsidies.
 Improved efficiencies across the energy chain.
 Policies that reflect externalities of energy consumption.
 Incentives/disincentives to regulate market and consumer behaviour.
 Management reforms to foster accountability and incentives for efficiency.
The Eleventh Five Year Plan initially envisaged a capacity addition of 78,700
MW, of which 19.9 per cent was hydro, 75.8 per cent thermal, and the rest
nuclear. At the time of the Mid Term Appraisal (MTA) of the Eleventh Plan, the
target was revised to 62,374 MW with thermal, hydro, and nuclear segments
contributing 50,757 MW, 8,237 MW and 3,380 MW respectively. A capacity
addition of 46,669.7 MW has so far been achieved until 15 January 2012. Projects
with a capacity of 7,645 MW are under construction for commissioning during the
remaining period. Capacity addition during the Eleventh Plan is, therefore, expected
to be about 50,000 to 52,000 MW.
In the thermal sector, capacity addition continued to keep its momentum
throughout the Plan period, except in the second year. During 2007-8, the first
year of the Eleventh Five Year Plan, 9,263 MW thermal capacity was added. In
2008-9, as against a target of 7,530 MW, a capacity of only 3,454 MW could
be added. Capacity addition during 2009-10 and 2010-11 was 9,585 MW and
12,160 MW respectively. In the current fiscal year, i.e., 2011-12, capacity
addition of 17,601 MW has been planned and till 15 January 2012, 12,207.7
MW had already been added. This is the highest capacity addition ever achieved
in a single year.

Check Your Progress

1. When was the Indian Railway Conference Association (IRCA) set up?
2. What is RDSO?
3. Mention any two major thermal power plants in India.
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 Infrastructure of Indian
4.3 COMMUNICATION Economy

Indian Telecom industry has emerged as the fastest growing telecom market in the
world. The opening of the telecom sector to the foreign investors has not only led NOTES
to rapid growth in subscriber base but also helped a great deal towards maximization
of consumer benefits, particularly in terms of price discovery following the moderate
approach in tariffs. The success of the Indian telecommunications sector has become
the cynosure of the world and has made the country a truly attractive investment
destination. Presently, India has one of the lowest tariffs and one of the fastest
growing telecom markets in the world.
The penetration of internet and broadband has also improved. The
Government of India approved a project for creation of National Optical Fibre
Network for connecting 2.5 lakh Gram Panchayats with support from Universal
Service Obligation Fund (USOF). The proposed National Telecom Policy, under
finalization in consultation with various stakeholders is a step forward for bringing
rapid and equitable growth of this sector.
The number of telephone subscribers in India increased to 965.52 million at
the end of June, 2012 from 960.90 million at the end of May 2012, thereby
registering a growth rate of 0.48 per cent. The share of urban subscribers has
declined to 64.40 per cent from 64.65 per cent whereas share of rural subscribers
has increased to 35.60 per cent in the month of June 2012. With this, the overall
tele-density in India reaches to 79.58 at the end of June, 2012 from 79.28 of the
previous month.
Subscription in urban areas increased from 621.21 million in May, 2012 to
621.76 million at the end of June, 2012. Subscription in rural areas increased
from 339.69 million to 343.76 million during the same period. The monthly growth
rate of urban and rural subscription is 0.09 per cent and 1.20 per cent, respectively.
The overall urban tele-density has decreased from 169.17 to 169.03 and rural
tele-density increased from 40.21 to 40.66.
By 2019, the total number of telephone subscribers in India had reached
1195.24 million as on 30 September 2019. The number of wireless subscribers
were 1173.75 million and the number of wireline subscribers are 21.49 million.
The country’s telecom regulator is Telecom Regulatory Authority of India (TRAI)
Communication in India
Electronics and Information Technology is one of the fastest growing segments of
the Indian Industry. Along with the liberalisation in foreign investment and export-
import policies, this sector is attracting considerable interest.
Digital infrastructure and services are increasingly emerging as key enablers
and critical determinants of a country’s growth and well-being. With significant
capabilities in both telecommunications and software, India, more than most
countries, stands poised to benefit from harnessing new digital technologies and
platforms to unlock productivity, as well as to reach unserved and underserved
markets; thus catalysing economic growth and development, generating new- age
jobs and livelihoods, and ensuring access to next generation services for its citizens. Self - Learning
Material 111
Infrastructure of Indian Digital India is already unfolding. India’s digital profile and footprint is one of
Economy
the fastest growing in the world. With over a billion mobile phones and digital identities
and half a billion internet users, India’s mobile data consumption is already the highest
in the world. Over 200 million Indians regularly use social media and in the last year
NOTES alone, over 200 million Indians took to mobile banking and digital payments. At the
current pace of digitisation and digitalisation, it is estimated that India’s digital economy
has the potential to reach one trillion USD by 2025. The rapid and unprecedented
proliferation of the mobile phone, the internet, social media platforms, and the rapid
expansion of digital payments, data consumption and generation across India indicate
that the data economy and digital technologies and services are no longer the
prerogative of the privileged few; but that they have indeed evolved into widespread
instruments of access and empowerment for more than a billion Indians.
The National Digital Communications Policy, 2018 seeks to unlock the
transformative power of digital communications networks - to achieve the goal of
digital empowerment and improved well-being of the people of India; and towards
this end, attempts to outline a set of goals, initiatives, strategies and intended policy
outcomes.
The National Communications Policy aims to accomplish the following Strategic
Objectives by 2022:
 Provisioning of Broadband for all
 Creating 4 Million additional jobs in the Digital Communications sector
 Enhancing the contribution of the Digital Communications sector to 8% of
India’s GDP from ~ 6% in 2017
 Propelling India to the Top 50 Nations in the ICT Development Index of
ITU from 134 in 2017
 Enhancing India’s contribution to Global Value Chains
 Ensuring Digital Sovereignty

Check Your Progress

4. What does the National Digital Communications Policy, 2018 seek to
unlock?
5. What are emerging as key enablers and critical determinants of a
country’s growth and well-being?

4.4 COMPOSITION AND DIRECTION OF

INDIA’S FOREIGN TRADE
A country’s trade policy refers to the set of policies which govern the external
sector of its economy. In a country like India, trade policy is one of the many
economic instruments which is used to suit the requirements of economic growth.
The main objectives of India’s trade policy have been to promote exports and
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112 Material
restrict the level of imports to the level of foreign exchange available to the Infrastructure of Indian
Economy
government. During the middle of the Second Plan, the importance of exports in
the context of developmental planning was first recognized.
The role of foreign trade in the national economy can be adjudged by the NOTES
proportion of foreign trade to national income. As a proportion of national income,
exports were about 8 per cent in 1951–52 which fell to 4.4 per cent in 1971–72
but rose again to around 8 per cent in the 1970s and 1980s due to faster growth
of exports. Imports as a percentage of national income have also declined from
10.7 per cent in 1951-52 to 4.9 per cent in 1971-72 but stood at 9–10 per cent
in the 1970s.
In 1993-94, exports as a percentage of national income stood at 8.7 per
cent while the corresponding percentage for imports was 9.1 per cent. This data
signifies that, first, now India is less dependent on the world economy than it was
in the earlier decades. From the year 1951-1990, world trade grew at a faster
rate than that of India’s trade. The declining share in world trade is a common
phenomenon for all developing countries which implies thereby that world trade
has only benefited the developed countries and not others.
Trade Philosophy
First, the export philosophy was designed with a view to conserve the limited
supplies of some essential commodities for domestic consumption and hence their
exports were restricted. Second, export of certain goods which are of strategic
importance like defence goods are prohibited. Third, exports to certain countries
like South Africa and East Africa are not permitted for political reasons. India has
aimed at the promotion of exports, keeping in view the limitations so that sufficient
foreign exchange is available to pay for the requisite imports and also for facilitating
the servicing of foreign debt and for building a buffer stock of reserves.
Import policy is an adjunct to the export policy and both are broadly
coordinated so as to keep the receipts and payments in balance. While the export
policy aims at the promotion of exports, the import policy encourages import
substitution so that there is minimum withdrawal of foreign exchange reserves.
Import controls aim at restricting unwanted import of goods to conserve
the limited foreign exchange reserves. Of the imports permitted, capital goods that
are not produced at home, and raw materials are prioritized. Of the rest, priority
among imports is assigned to food grains, scarce consumer goods like oils, sugar,
etc., or to agricultural inputs like fertilizers. A substantial chunk of our import bill is
accounted for by crude oil and petroleum, imports of which cannot be dispensed
due to inadequate supplies here. Import controls are widespread in India and
both tariff and non-tariff barriers are used to control imports. A licence is required
for any item of export or import unless it is specifically permitted under the ‘Open
General Licence’ category of items.
Framework of Trade
Before Independence, India had trade surpluses and there was regular gold inflow
into the account to pay for the surplus. But almost the whole of trade was
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Infrastructure of Indian concentrated in the hands of British companies, and foreign shipping lines facilitated
Economy
British colonial interests rather than Indian interests. But during the war period,
India accumulated huge sterling balances due to the surplus on trade account and
war supplies to the United Kingdom. The war-time controls on trade were
NOTES regularized later by passing The Import and Export (Control) Act of 1947 as
‘Controlled’ trade became the order of the day in the post-war period. Protection
granted to the Indian companies necessitated a wide network of controls on trade.
With the inception of planning in 1951, the trade policy had shifted its emphasis
from a positive trade balance to the immediate needs of development according
to the priorities of the plan. Both imports and exports were low during 1951–56,
due to the prevailing trade controls. But some export promotion councils and
commodity boards were set up, export quotas were increased, and the export
policy in general was liberalized. During the Second Plan 1956-61, in addition to
export promotion, import substitution was also pursued. Import restrictions were
tightened and a policy of imports on a deferred payment basis was initiated and an
institutional framework for exports was strengthened by setting up of a Foreign
Trade Board in 1957 which was later replaced by the Board of Trade in 1962.
Nineteen Export Councils with an apex body federation of the export organizations
and seven Commodity Boards were set up. Seven Development Councils were
also organized to promote the export of heavy and light electrical, leather goods,
art silk, drugs, and some non-traditional items.
During the Third Plan period (1961–66), the export promotion programme
was further strengthened in terms of the institutional structure, incentives, and other
policy measures. The Mudaliar Committee (1965) recommended that a selective
approach should be adopted in respect of export incentives, fixation of minimum
and maximum prices, quality controls, inspection, etc., designed to promote exports
as a long-term strategy.
The institutional support to export promotion was strengthened during
the tenure of the Fourth to Sixth Plan period. The Trade Development Authority
(TDA) was set up to help the medium and small-scale entrepreneurs to develop
their export potential. Package assistance was provided to them by TDA,
starting with market information and extending up to the execution of export
orders. Similar assistance was provided to small scale entrepreneurs by the
State Trading Corporation of India Ltd. (STC) under a single window. It should
be noted here that STC and MMTC are canalizing agencies for a number of
import and export items and have been entrusted with export promotion
activities.
Structural Changes in India’s Foreign Trade Policy
The structural changes as made in the trade policy of India since Independence
can be accounted for by the following factors:
(a) Change of hands from foreign nationals to Indian nationals in respect of the
export houses, industrial houses, and companies.
(b) British and foreign shipping were replaced by Indian shipping lines. The
importance of foreign shippers has declined in India’s trade.
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 (c) Banking and insurance have been taken over by Indian hands and have Infrastructure of Indian
Economy
since been nationalized in the interest of the country.
(d) Industrialization in the country and the diversification of our industrial base
has led to diversification in the trade pattern. Despite the importance of
NOTES
agriculture in our economy, growth of industrialization in the post-war period
had brought about some structural changes in the trade pattern, both in
exports and imports.
Exim (Foreign Trade) Policy
In pursuance of its liberalization programme launched in 1991 with the introduction
of the New Industrial Policy and other economic trade reforms, the government
extended the validity of the Policy from three years to five years with the
announcement of the five-year long Export-Import Policy, on 31 March 1992,
coinciding with the Eighth Five Year Plan (1992–97). The basic objective of a
five-year policy was two-fold. It reflects the priorities for development of the
economy as set out in the five-year plans. The third five-year EXIM Policy (2002–
07) which coincided with the Tenth Five Year Plan, and which was valid up to
March 2007, was terminated mid-length and replaced with the Foreign Trade
Policy with effect from August 2004 up to 31 March 2009 on the assumption of
power by the UPA Government. The current Foreign Trade Policy (2015–20) in
force is effective from 1 April 2015 up to 31 March 2020.
Exim policy or foreign trade policy is a set of guidelines and instructions in
matters related to the imports and exports of good, in India.
AIMS and Objectives
The country witnessed a robust growth in exports in the last five years mainly on
account of the twin objectives, set out in the first Foreign Trade Policy 2004–09,
namely (i) to double the country’s percentage share of global merchandise trade
within five years, and (ii) use trade expansion as an effective instrument of economic
growth and employment generation. The exports in the past years registered more
than two-fold increase from USD 63 billion in 2003-04 to USD 168 billion in
2008-09, thereby increasing our share in global merchandise trade to 1.45 per
cent in 2008 from 0.83 per cent in 2003 (WTO estimates). Our share of global
commercial services exports too rose from 1.4 per cent to 2.8 per cent during the
same period. On the employment front, nearly 14 million jobs were created directly
or indirectly as a result of augmented exports during the period.
The year 2009, however, witnessed one of the most severe global recessions
in the post-war period which affected almost all the countries and hitting all the
major economic indicators of industrial production, trade, capital flows,
unemployment, per capita investment and consumption. Consequently, the WTO
and the IMF have estimated a projected global trade decline by 9 per cent and
over 11 per cent in volume terms. India has not been an exception to the
unprecedented economic slow-down faced by the entire world.
To arrest and reverse the declining trend of exports and to provide additional
support especially to those sectors which have been hit badly by recession in the
developed world, and also to double our share in global trade by 2020, the Foreign Self - Learning
Material 115
Infrastructure of Indian Trade Policy 2009 –14 came up with short term and long-term objectives. The
Economy
short-term objective of the Policy was to achieve an annual export growth of 15
per cent with an annual export target of USD 200 billion by March 2011, while for
the remaining three years, i.e. up to 2014 the annual export growth of 25 per cent
NOTES per annum had been envisaged. Besides, it was expected to double our exports of
goods and services by 2014. The long-term objective of the Policy was to double
India’s share in global trade by 2020.
To meet these objectives of achieving the projected target, a mix of the following
policy measures would be adopted by the government:
 Fiscal incentives
 Institutional changes
 Procedural rationalization
 Enhanced market access across the world and diversification of export
markets
 Improvement in infrastructure related to exports
 Bringing down transaction costs
 Providing full refund of all indirect taxes and levies
 Goods and Services Tax (GST) to rebate all indirect taxes and levies on
exports
Major Changes in the Foreign Trade Policy, 2009–14
 DEPB (Duty Entitlement Pass Book) Scheme to continue up to December
2010.
 Income tax benefits under Section 10(A) for IT industry and under Section
10(B) for 100 per cent EoUs extended till 31 March 2011.
 Enhanced insurance coverage and exposure for exports through ECGC
schemes ensured till 31 March 2010.
 Interest subvention scheme to continue.
 15 per cent value addition stipulated on imported inputs under Advance
Authorization to encourage value addition in manufactured exports.
 Enhancement of incentive rates for exports to emerging markets of Africa,
Latin America, Oceania and CIS countries. Duty credit scrips for FMS
increased from 2.5 per cent to 3 per cent and for FPS from 1.25 per cent
to 2per cent.
 Additional resources made available under the MDA and MAI schemes.
 Six or more ‘Made in India’ shows to be organized across the world every
year to promote Brand India.
 For the first time EPCG at Zero Duty introduced for certain sectors
(engineering and electronic products, basic chemicals and pharmaceuticals,
apparels and textiles, plastics, handicrafts, chemicals and allied products
and leather and leather products) to facilitate technology upgradation for
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exporters to be globally competitive.
116 Material
  Status holders to import capital goods duty free (through Duty Credit Scrips Infrastructure of Indian
Economy
equivalent to 1 per cent of their FOB value of exports in previous year) of
specified product groups.
 Additional focused support and incentives to units in ‘Towns of Export
NOTES
Excellence’ for upgradation of export infrastructure.
 Encouragement to production and export of ‘green products’ through
measures such as phased manufacturing programme for green vehicles, zero-
duty EPCG scheme, and incentives for exports.
 Setting up of the Directorate of Trade Remedy Measures to facilitate
MSMEs in availing their rights through trade remedy instruments under the
WTO framework.
 Reduction in the transaction cost and institutional bottlenecks.
 Time-bound implementation of e-trade projects.
 EDI to be extended to additional ports/locations.
 Inter Ministerial Committee to serve as a single window mechanism for
resolution of trade-related grievances.
Highlights of the Foreign Trade Policy, 2009–14
1. Higher support for market and product diversification
 Twenty-six new markets have been added under the Focus Market Scheme.
These include sixteen new markets in Latin America and ten in Asia-Oceania.
 The incentive available under the Focus Market Scheme (FMS) and the
Focus Product Scheme (FPS) raised from 2.5 – 3 per cent and from 1.25
–2 per cent respectively.
 A large number of products from various sectors have been included for
benefits under the FPS. These include engineering products (agricultural
machinery, parts of trailers, sewing machines, hand tools, garden tools,
musical instruments, clocks and watches, railway locomotives, etc.), plastic
(value-added products), jute and sisal products, technical textiles, green
technology products (windmills, wind turbines, electric-operated vehicles,
etc.), project goods, vegetable textiles and certain electronic items.
 The Market Linked Focus Product Scheme (MLFPS) has been greatly
expanded by inclusion of products classified under as many as 153 ITC (HS)
Codes at 4-digit level. Some major products include pharmaceuticals, synthetic
textile fabrics, value-added rubber products, value-added plastic goods, textile
made-ups, knitted and crocheted fabrics, glass products, certain iron and
steel products and certain articles of aluminium, among others. Benefits to
these products will be provided, if exports are made to thirteen identified
markets (Algeria, Egypt, Kenya, Nigeria, South Africa, Tanzania, Brazil,
Mexico, Ukraine, Vietnam, Cambodia, Australia and New Zealand).
 MLFPS benefits are also extended for export to additional new markets
for certain products. These products include auto components, motor cars,
bicycle and its parts and apparels, among others.
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Infrastructure of Indian  A common simplified application form has been introduced for taking benefits
Economy
under FPS, FMS, MLFPS and VKGUY.
 Higher allocation for Market Development Assistance (MDA) and Market
Access Initiative (MAI) schemes is being provided.
NOTES
2. Technological upgradation
 To aid technological upgradation of our export sector, the EPCG Scheme
at Zero Duty had been introduced. This Scheme was available for engineering
and electronic products, basic chemicals and pharmaceuticals, apparels and
textiles, plastics, handicrafts, chemicals and allied products and leather and
leather products (subject to exclusions of current beneficiaries under the
Technological Upgradation Fund Schemes (TUFS), administered by the
Ministry of Textiles and beneficiaries of the Status Holder Incentive Scheme
in that particular year).
3. Towns of export excellence
 Jaipur, Srinagar and Anantnag have been recognized as ‘Towns of Export
Excellence’ for handicrafts; Kanpur, Dewas and Ambur have been
recognized as ‘Towns of Export Excellence’ for leather products; and
Malihabad for horticultural products.
4. EPCG scheme relaxations
 To increase the life of existing plant and machinery, export obligation on
import of spares, moulds, etc. under the EPCG Scheme, has been reduced
to 50 per cent of the normal specific export obligation.
 Taking into account the decline in exports, the facility of Re-fixation of Annual
Average Export Obligation for a particular financial year in which there is
decline in exports from the country, had been extended for the five-year
policy period 2009 –14.
5. Support for green products and products from the North East
 The Focus Product Scheme benefit extended for export of ‘green products’;
and for exports of some products originating from the North East.
6. Status holders
 To accelerate exports and encourage technological upgradation, additional
duty credit scrips shall be given to status holders at the rate of 1 per cent of
the FOB value of past exports. The duty credit scrips can be used for
procurement of capital goods with Actual User condition. This facility shall
be available for sectors of leather (excluding finished leather), textiles and
jute, handicrafts, engineering (excluding iron and steel and non-ferrous metals
in primary and intermediate forms, automobiles and two-wheelers, nuclear
reactors and parts, and ships, boats and floating structures), plastics and
basic chemicals (excluding pharma products) [subject to exclusions of current
beneficiaries under Technological Upgradation Fund Schemes (TUFS)].
This facility was available till 31 March 2011.
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  Transferability for the duty credit scrips being issued to status holders under Infrastructure of Indian
Economy
VKGUY Scheme has been permitted. This is subject to the condition that
transfer would be only to status holders and scrips would be utilized for the
procurement of cold chain equipment only.
NOTES
7. Stability/continuity of the Foreign Trade Policy
 To impart stability to the Policy regime, Duty Entitlement Passbook (DEPB)
Scheme was extended beyond 31 December 2009 till 31December 2010.
 Interest subvention of 2 per cent for pre-shipment credit for seven specified
sectors had been extended till 31 March 2010 in the Budget 2009-10.
 Income tax exemption to 100 per cent EOUs and to STPI units under
Section 10B and 10A of the Income Tax Act, had been extended for the
financial year 2010-11 in the Budget 2009-10.
 The Adjustment Assistance Scheme initiated in December 2008, to provide
enhanced ECGC cover at 95 per cent to the adversely affected sectors,
was continued till March 2010.
8. Sector-specific initiatives
(i) Marine sector
 Fisheries had been included in the sectors which are exempted from
maintenance of average EO under the EPCG Scheme, subject to the
condition that fishing trawlers, boats, ships and other similar items shall
not be allowed to be imported under this provision. This would provide
a fillip to the marine sector which had been affected by the present
downturn in exports.
 Additional flexibility under the Target Plus Scheme (TPS)/Duty Free
Certificate of Entitlement (DFCE) Scheme for status holders has been
given to the marine sector.
(ii) Gems and jewellery sector
 To neutralize duty incidence on gold jewellery exports, it has now been
decided to allow duty drawbacks on such exports.
 In an endeavour to make India an international trading hub in diamonds,
it is planned to establish ‘Diamond Bourse(s)’.
 A new facility to allow import on consignment basis of cut and polished
diamonds for the purpose of grading/certification purposes has been
introduced.
 To promote the export of gems and jewellery, the value limits of personal
carriage had been increased from US$ 2 million to US$ 5 million in case
of participation in overseas exhibitions. The limit in case of personal
carriage, as samples, for export promotion tours, had also been increased
from US$ 0.1 million to US$ 1 million.
(iii) Agriculture sector
 To reduce transaction and handling costs, a single window system to
facilitate export of perishable agricultural produce had been introduced.
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Infrastructure of Indian The system will involve creation of multi-functional nodal agencies to be
Economy
accredited by the APEDA.
(iv) Leather sector
NOTES  Leather sector was allowed re-export of unsold imported raw hides
and skins and semi-finished leather from public bonded warehouses,
subject to payment of 50 per cent of the applicable export duty.
 Enhancement of FPS rate to 2 per cent would also significantly benefit
the leather sector.
(v) Tea
 Minimum value addition under advance authorization scheme for export
of tea had been reduced from the existing 100 – 50 per cent.
 DTA sale limit of instant tea by EOU units has been increased from the
existing 30 – 50 per cent.
 Export of tea has been covered under the VKGUY Scheme benefits.
(vi) Pharmaceutical sector
 The export obligation period for advance authorizations issued with 6-
APA as input had been increased from the existing six months to thirty-
six months, as is available for other products.
 The pharma sector extensively covered under the MLFPS for countries
in Africa and Latin America; some countries in Oceania and Far East.
(vii) Handloom sector
 To simplify claims under FPS, the requirement of ‘Handloom Mark’ for
availing benefits under FPS had been removed.
9. EOUs
 EOUs were allowed to sell products manufactured by them in DTA upto a
limit of 90 per cent instead of the existing 75 per cent, without changing the
criteria of ‘similar goods’, within the overall entitlement of 50 per cent for
DTA sale.
 To provide clarity to the customs field formations, DOR issued a clarification
to enable procurement of spares beyond 5 per cent by granite sector EOUs.
 EOUs will be allowed to procure finished goods for consolidation along
with their manufactured goods, subject to certain safeguards.
 During this period of downturn, the Board of Approvals (BOA) to consider,
extension of block period by one year for calculation of the net foreign
exchange earning of EOUs.
 The EOUs will now be allowed CENVAT credit facility for the component
of SAD and Education Cess on DTA sale.
10. Thrust to value-added manufacturing
 To encourage value-added manufactured export, a minimum 15 per cent
value addition on imported inputs under the Advance Authorization Scheme
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120 Material
  Coverage of project exports and a large number of manufactured goods Infrastructure of Indian
Economy
under the FPS and the MLFPS.
11. DEPB
 The DEPB rate shall also include factoring of custom duty component on NOTES
fuel where fuel is allowed as a consumable in standard input-output norms.
12. Flexibility provided to exporters
 Payment of customs duty for Export Obligation (EO) shortfall under Advance
Authorization/DFIA/EPCG Authorization has been allowed by way of debit
of duty credit scrips. Earlier, the payment was allowed in cash only.
 Import of restricted items, as replenishment, shall now be allowed against
transferred DFIAs, in line with the erstwhile DFRC scheme.
 Time limit of sixty days for re-import of exported gems and jewellery items,
for participation in exhibitions has been extended to ninety days in case of
USA.
 Transit loss claims received from private approved insurance companies in
India will now be allowed for EO fulfilment under the export promotion
schemes. At present, the facility has been limited to public sector general
insurance companies only.
13. Waiver of incentives recovery on RBI specific write-off
 In cases, where the RBI specifically writes off the export proceeds realization,
the incentives under the FTP shall now not be recovered from the exporters
subject to certain conditions.
14. Simplification of procedures
 To facilitate duty-free import of samples by exporters, the number of samples/
pieces has been increased from the existing 15 – 50. Customs clearance of
such samples shall be based on declarations given by the importers with
regard to the limit of value and quantity of samples.
 To allow exemption for up to two stages from payment of excise duty in lieu
of refund, in case of supply to an advance authorization holder (against
invalidation letter) by the domestic intermediate manufacturer. It would allow
exemption for supplies made to a manufacturer, if such manufacturer in turn
supplies the products to an ultimate exporter. At present, exemption is
allowed up to one stage only.
 Greater flexibility has been permitted to allow conversion of shipping bills
from one export promotion scheme to another scheme. Customs shall now
permit this conversion within three months, instead of the present limited
period of only one month.
 To reduce transaction costs, dispatch of imported goods directly from the
port to the site has been allowed under the Advance Authorization Scheme
for deemed supplies. At present, the duty-free imported goods could be
taken only to the manufacturing unit of the authorization holder or its
supporting manufacturer. Self - Learning
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Infrastructure of Indian  Disposal of manufacturing wastes/scrap will now be allowed after payment
Economy
of applicable excise duty, even before fulfilment of export obligation under
the Advance Authorization and EPCG Scheme.
 Regional authorities have now been authorized to issue licence for import of
NOTES
sports weapons by ‘renowned shooters’, on the basis of NOC from the
Ministry of Sports and Youth Affairs. Hence, there will be no need to
approach the DGFT (Hqrs.) in such cases.
 The procedure for issue of Free Sale Certificate has been simplified and the
validity of the certificate has been increased from 1 – 2 years. This will
solve the problems faced by the medical devices industry.
 Automobile industry, having their own R&D establishment, would be allowed
free import of reference fuels (petrol and diesel), up to a maximum of 5 KL
per annum, which are not manufactured in India.
 Acceding to the demand of trade and industry, the application and redemption
forms under EPCG scheme have been simplified.
15. Reduction of transaction costs
 No fee shall now be charged for granting incentives under the schemes.
Further, for all other authorizations/licence applications, the maximum
applicable fee is being reduced to 100,000 from the existing 1,50,000
(for manual applications) and 50,000 from the existing 75,000 (for EDI
applications).
 To further EDI initiatives, export promotion councils/commodity boards
have been advised to issue RCMC through a Web-based online system.
 Electronic message exchange between customs and DGFT in respect of
incentive schemes have become operational by 31 December 2009. This
will obviate the need for verification of scrips by customs facilitating faster
clearances.
 For EDI ports, with effect from December 2009, double verification of shipping
bills by customs for any of the DGFT schemes shall be dispensed with.
 In cases, where the earlier authorization has been cancelled and a new
authorization has been issued in lieu of the earlier authorization, application
fee paid already for the cancelled authorization will now be adjusted against
the application fee for the new authorization subject to payment of minimum
fee of 200.
 An inter-ministerial committee will be formed to redress/resolve problems/
issues of exporters.
 An updated compilation of Standard Input Output Norms (SION) and
ITC (HS) Classification of Export and Import Items has been published.
16. Directorate of ‘Trade Remedy Measures’
 To enable support to Indian industry and exporters, especially the MSMEs,
in availing their rights through trade remedy instruments, a ‘Directorate of
Trade Remedy Measures’ shall be set up.
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Foreign Trade Policy (FTP) 2015-20 Infrastructure of Indian
Economy
The Foreign Trade Policy (FTP) 2015-20 was unveiled by the Government of
India on April 1, 2015. Following are the highlights of the FTP:
 FTP 2015-20 provides a framework for increasing exports of goods and NOTES
services as well as generation of employment and increasing value addition
in the country, in line with the ‘Make in India’ programme.
 The Policy aims to enable India to respond to the challenges of the external
environment, keeping in step with a rapidly evolving international trading
architecture and make trade a major contributor to the country’s economic
growth and development.
 FTP 2015-20 introduces two new schemes, namely ‘Merchandise Exports
from India Scheme (MEIS)’ for export of specified goods to specified
markets and ‘Services Exports from India Scheme (SEIS)’ for increasing
exports of notified services.
 Duty credit scrips issued under MEIS and SEIS and the goods imported
against these scrips are fully transferable.
 For grant of rewards under MEIS, the countries have been categorized
into 3 Groups, whereas the rates of rewards under MEIS range from 2 per
cent to 5 per cent. Under SEIS the selected Services would be rewarded
at the rates of 3 per cent and 5 per cent.
 Measures have been adopted to nudge procurement of capital goods from
indigenous manufacturers under the EPCG scheme by reducing specific
export obligation to 75per cent of the normal export obligation.
 Measures have been taken to give a boost to exports of defense and hi-
tech items.
 E-Commerce exports of handloom products, books/periodicals, leather
footwear, toys and customised fashion garments through courier or foreign
post office would also be able to get benefit of MEIS (for values up to INR
25,000).
 Manufacturers, who are also status holders, will now be able to self-certify
their manufactured goods in phases, as originating from India with a view to
qualifying for preferential treatment under various forms of bilateral and regional
trade agreements. This ‘Approved Exporter System’ will help manufacturer
exporters considerably in getting fast access to international markets.
 A number of steps have been taken for encouraging manufacturing and
exports under 100 per cent EOU/EHTP/STPI/BTP Schemes. The steps
include a fast track clearance facility for these units, permitting them to share
infrastructure facilities, permitting inter unit transfer of goods and services,
permitting them to set up warehouses near the port of export and to use
duty free equipment for training purposes.
 108 MSME clusters have been identified for focused interventions to boost
exports. Accordingly, ‘Niryat Bandhu Scheme’ has been galvanised and
repositioned to achieve the objectives of ‘Skill India’.
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Infrastructure of Indian  Trade facilitation and enhancing the ease of doing business are the other
Economy
major focus areas in this new FTP. One of the major objectives of new FTP
is to move towards paperless working in 24x7 environment.

NOTES
Check Your Progress
6. What do you understand by a country’s trade policy?
7. What does import controls aim at?
8. Which towns have been recognized as ‘Towns of Export Excellence’?

4.5 BALANCE OF PAYMENT

No country is self-sufficient and the interdependence of countries is reflected in
the international economic and commercial transactions. An economic transaction
is an exchange of value or transfer of a title to a good or an asset. A commercial
transaction refers to the exchange of a good or service for money which results in
the payment of currency or monetary assets, thus leading to financial flows. Resource
flows from one country to another due to the purchase and sale of financial claims,
are referred to as financial transactions. The international exchange of goods for
goods, services for services, and goods and services for money are all referred to
as international economic and commercial transactions.
Balance of payments of a country has been defined as a ‘systematic record
of all economic transactions between the residents of the reporting country and
residents of foreign countries. It includes both visible and invisible transactions’.
The fundamental reason why foreign trade benefits an economy is due to
the so-called principle of comparative advantage. If different countries concentrate
on providing products and services in which they have comparative advantages
arising out of differences in resources, costs, or technology, then international trade
can be beneficial to all the countries, across the world. Positively concluding that
international trade benefits an economy, the question of external receipts and
payments has to be considered. It is customary to classify a country’s external
receipts and payments under two broad headings, Current account and Capital
account.
The current account is split under two heads—merchandise trade and
invisibles. Of the two, merchandise trade comprises export and import of goods.
The difference between the two is commonly referred to as the surplus or deficit
trade balance. It is customary to report imports on CIF (Cost, Insurance, and
Freight) and exports on an FOB (Free On Board) basis for calculating the trade
balance.
Invisibles comprise current international payments for items other than
merchandise exports or imports. Some of the more important items under the
head ‘invisibles’ comprise travel, transportation, interest and dividend payments,
etc. Merchandise trade and invisibles together comprise the current account of a
country and the difference gives the current account surplus or deficit.
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124 Material
 Transfers on capital account include external borrowings or repayments of Infrastructure of Indian
Economy
external borrowings, external investments or disinvestments, etc. The balance on
current account and capital together result in the country’s reserves of foreign
exchange going up or down correspondingly. A current account deficit may be
combined with a higher capital account surplus (i.e. external borrowings in excess NOTES
of repayments). It therefore reflects as an addition to the country’s reserves of
foreign exchange. Conceptually and arithmetically, the net difference between the
current and capital accounts must compensate the movement in reserves. The
balance of payments statistics of a country generally include a compensating term
‘statistical discrepancy’ or ‘errors and omissions’.
The current account deficit or surplus of a country can also be looked at in
another way. In macroeconomics, national accounting terms the current account
as a mirror image of the difference between domestic savings and domestic
investments. If domestic savings exceed domestic investments, a surplus on current
account gets created.
This accounting identity arises because of the manner in which the Gross
National Product (GNP) of a country is calculated. GNP calculations can be
made either by following the ‘flow of product’ approach or by the ‘earnings and
cost’ approach. The former method includes an item termed ‘foreign investment’,
being the excess of exports of goods and services over imports. In national
accounting terms, the GNP of a country by both approaches has to be identical.
Starting with this equation, it is easy to establish the accounting identity between
the balance on current account and the gap between domestic savings and domestic
investments.
The items included in the balance of payments of any country are payments
for merchandise imports and receipts for merchandise exports, loans to and
investments in foreign countries and enterprises, foreign investments in domestic
enterprises, borrowings from foreign countries, tourist expenditures—both by
domestic tourists abroad and foreign countries, tourist expending country, money
paid to foreign carriers, and receipts for foreign goods carried in national bottoms,
cable and telegraph payments to foreign banks, expenses on foreign embassies
established in the home country, interest and dividend payments, and other similar
items. The two sides of a balance of payments must always balance, i.e., payments
to be made to outsiders must equal the receipts from outsiders. The reason is to
be found in the simple fact that for everything one gets, he can expect to receive
something in return. Ordinarily, balance of payments is prepared for a period of
one year, but a quarterly balance of payments is also common.
The main purpose of balance of payments is to inform the government of
the international position of the nation and to help it in its formulation of monetary,
fiscal, and trade policies. Like GDP (Gross Domestic Product), a nation’s balance
of payments is a system that accounts for the flow of income and expenditures.
Unlike GDP, however, balance of payments includes the flow of financial assets.
Governments also regularly consult the balance of payments of important trade
partners for making policy-decisions. The information contained in a nation’s balance
of payments is indispensable to banks, firms, and individuals directly or indirectly
involved in international trade and finance. Self - Learning
Material 125
Infrastructure of Indian Monetary authorities of the reporting country should know the receipts and
Economy
payments as between the reporting country and others so as to assess the impact
of such flows on domestic money supply and on the savings of the economy.
Besides, economists use this data to study the impact of foreign transactions on
NOTES the national income of the reporting country—their impact on the current income
and expenditure (current account) and on the assets and liabilities of the country
(capital side).
The monetary and fiscal policies and the foreign exchange policy are
formulated or reformulated on the basis of this data. It can thus be concluded that
the balance of payments data is very useful from the point of view of formulation
and operation of the domestic economic policy.
Features of the Balance of Payments
The features of the balance of payments need to be described in this regard.
1. Economic transactions
The statement is a summary of the economic transactions of the country with the
outsiders. An economic transaction arises when values are exchanged or moved
between nations. These may arise due to the following:
(i) Movement of goods in the form of exports and imports
(ii) Rendering services abroad and using foreign services
(iii) Gifts/grants from one country to another
(iv) Investments made abroad or received from abroad
(v) Income on investments received from abroad or remitted abroad
(vi) Increase or decrease in the international reserves of the country
Transactions between residents and non-residents
Generally, transactions which take place between the residents of a country with
the residents of other countries are recorded in the balance of payments. Residents
may refer to the individuals, institutions, corporate bodies, government departments,
etc., domiciled in the country. Units or branches of multinational companies
domiciled in the country are also known as residents and their transactions with
their parent or branches abroad are reflected in the balance of payments. If the
economic transaction is between residents only, it is not included in the balance of
payments. For instance, the sale of gold in the domestic market will not find a
place in the balance of payments. There are, however, certain exceptions to the
resident–non-resident basis of balance of payments. If the gold is sold to the central
bank of the country, the monetary gold of the country increases. It appears in the
balance of payments. Similarly, foreign assets exchanged between residents may
be included in the balance of payments.
2. A flow statement
A balance of payments is a compilation of the flow of economic transactions of
the country during the period and not a statement of the position as on a particular
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date. It is more like the funds flow statement of a company, rather than a balance
126 Material
sheet. For instance, if the balance of payments shows US $400 million as a plus Infrastructure of Indian
Economy
in the non-resident deposits, it means the balances held by the non-residents of
the country with banks in India has changed during the period by US $400
million; it does not mean that the aggregate of such balances is US $400 million.
NOTES
3. Periodicity
Normally, the balance of payments statement is prepared covering a period of one
year. However, depending upon the requirement of the government, the statement
may be prepared for shorter periods also such as six months, a quarter or even a
month.
4. Components
The balance of payments statement consists of three major components:
(i) Current account
(ii) Capital account
(iii) Official reserves account
Earlier, the balance of payments used to be divided into two accounts–
current account and capital account. The present trend is to divide the capital
account further into two accounts and show the details of the official reserves
account separately.
5. Current Account
The current account of the balance of payments refers to the transactions pertaining
to goods and services, income, and current transfers. In other words, it covers all
transactions between residents and non-residents, and other financial items.
6. Merchandise Trade
Item (I) in the statement, merchandise, represents the export and import of
commodities from/into India. The credit item represents exports and the debit
item represents imports. The net balance, being the difference between exports
and imports is known as the balance of trade.
The values of exports are shown at FOB prices, i.e., excluding the cost of
transportation from abroad. Imports represent CIF payment, i.e., including freight
and insurance paid for imports. However, where freight and insurance on imports
are paid separately to foreigners, these are included under ‘transportation’ and
‘insurance’.
7. Invisible
This item includes service, transfers, and investment income. It is titled invisible to
distinguish it from merchandise trade, also known as visible trade.
Travel covers all the receipts and payments on account of international
transportation services except for the freight on imports invoiced CIF/CFR as
included under import payments. The credits include expenses of foreign transport
companies in India, receipt of foreign earnings of Indian transport companies and
other receipts. The debits include expenses of Indian companies abroad, payments
to foreign transport companies, etc. Self - Learning
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Infrastructure of Indian Government is related to the receipts and payments on government account
Economy
which is not included elsewhere as well as receipts and payments on account of
maintenance of embassies and diplomatic mission and offices of international
institutions such as UNO, WHO, etc. Credits include the allocations made to the
NOTES US embassy expenditure in India out of the rupee proceeds of sales in India, of
the surplus US agricultural commodities as under the PL 480 agreement.
Miscellaneous items as included under this refer to the receipts and payments
with respect to services like agency services, professional services, technicians,
subscription for periodicals, royalties, etc.
Transfers of payments, also known as unilateral transfers refer to the receipts
and payments without a quid pro quo. The items included under this are aid and
grants received from foreign governments, repatriation of savings, remittances for
family maintenance, migrants’ transfer, contributions and donations to religious
organizations and charitable organizations, etc.
Investment income as included under this refer to the remittances, receipts
and payments due to profits, interest, dividends, and discounts, which are inclusive
of interest charges, and commitment charges on foreign loans including those from
the International Monetary Fund.
Balance of payment and balance of trade
For decision-making with respect to the economic policy, it is not the absolute
figure of exports/receipts or imports/payments that is required. It is the net difference
between the two that is seen to be the major deciding factor for policies and
procedures. Two important measures that are required for this purpose are, (i)
balance of trade, and (ii) balance of payments.
The term balance of trade refers to the difference between the values of
merchandise export and import and other visible items. When a country’s aggregate
exports are in excess of its aggregate imports, then it is said to have a favourable
or positive or surplus balance of trade. In case its aggregate imports are more than
its aggregate exports, there is said to be unfavourable or negative or deficit balance
of trade. The exports and imports of a country can never really be equal at any
given point in time so the balance of trade will never balance. It will always be
either favourable or unfavourable.
Balance of payments, on the other hand, is a more comprehensive term as
it not just includes the visible trade but even the invisible items. Thus, it includes not
just the figure of balance of trade but also that of the balance of invisibles. Since it
mostly includes the net balance of items included in the current account, it is also
known on ‘balance of payments on current account’. The total amounts receivable
and payable in the current account will either show a positive (surplus) balance or
a negative (deficit) balance.
8. Capital account
The capital account represents transfer of money and other capital items and
changes in the country’s foreign assets and liabilities resulting from the transactions
recorded in the current account. The capital account transactions are short-
Self - Learning term capital inflows and outflows for purposes, official purposes or banking
128 Material
purposes. Private flows of capital include private private company remittances Infrastructure of Indian
Economy
for working capital purposes to subsidiaries or branches of foreign companies
or short-term loans, grants, etc., from foreign banks, international financial
institutions, foreign government. etc. These short-term flows may be for
compensatory purposes on the government account. These can also be banking NOTES
funds for short-term purposes.
Long-term capital movements can be private or governmental in nature.
The private flows include loans and advances granted to private parties (buyer’s
credit), investment in shares, bonds, debentures, etc., by Indians abroad or by
foreigners in India, investment in joint ventures, consultancy, turnkey projects,
deferred payment credits, etc. Such flows on official account also take place
through government loans, credits, grants, etc., for private long-term purposes.
Foreign investment in India is the amount invested by non-residents in the equality
of entities in India. The difference between direct and portfolio investment reflects
the intention of the investor. Direct investment reflects a lasting interest of the
investor in the entity and his intention to take active part in the management of
the company.
Investments in equity by the direct investor and the amounts accruing on
the original investment but retained in the country fall under the category of direct
investment. Portfolio investment covers transactions in equity securities other than
direct investment. The investor does not intend to take part in the management of
the company. Foreign investment abroad is the amount invested by residents in
entities abroad.
Loans comprise external assistance, commercial borrowings, and short-
term loans. External assistance refers to the borrowings from multilateral
organizations like World Bank and from bilateral sources, mainly on confessional
terms. Commercial borrowings are debts owed to international banks, borrowings
in bond markets, credits from export credit agencies, and loans provided on
commercial terms by specialized multilateral or bilateral institutions like the
International Finance Corporation. Short-term credit refers to credit that is
repayable within one year. Banking capital covers the assets and liabilities of
commercial banks, non-resident deposit accounts, and other financial institutions.
The capital account reflects the changes in foreign assets and liabilities of
the country and affects its creditors/debtor position. An excess of foreign assets
over foreign liabilities indicates a net creditor position and vice versa. Net changes
in the current account are reflected by a corresponding and opposite change in the
capital account, changing the foreign assets and liabilities position of the country.
Current account is like an income and expenditure statement with surplus or deficit
in it transferred to the capital account which is like a balance sheet. If all these
accounts do not tally, errors and omissions are added to balance the corresponding
column of balance of payments. In the economic sense, a country has a surplus or
deficit in its balance of payments, when its transactions other than those merely
financing the real transactions are not in balance. Those merely financing are said
to be ‘below the line’ while others are ‘above the line’. The selection of items
below the line is generally decided by each country, depending upon its requirements
for the economic policy in the short-run and long-run. Self - Learning
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Infrastructure of Indian The last item in the balance of payments other than ‘errors and omissions’ is
Economy
the movement in foreign exchange reserves of the country, normally shown in the
capital account. These reserves are in the form of foreign currencies, foreign assets,
investments, and balances held abroad, or gold of the government, and official
NOTES monetary agencies of a country.
Current Scenario of India’s Balance of Payments
According to the RBI, the highlights of India’s BOP during April-June 2017 were
as follows:
 India’s current account deficit (CAD) at US$ 14.3 billion (2.4 per cent of
GDP) in Q1 of 2017-18 increased sharply from US$ 0.4 billion (0.1 per
cent of GDP) in Q1 of 2016 -17 and US$ 3.4 billion (0.6 per cent of GDP)
in Q4 of 2016-17.
 The widening of the CAD on a year-on-year (y-o-y) basis was primarily
on account of a higher trade deficit (US$ 41.2 billion) brought about by a
larger increase in merchandise imports relative to exports.
 Net services receipts increased by 15.7 per cent on a y-o-y basis mainly
on the back of a rise in net earnings from travel, construction and other
business services.
 Private transfer receipts, mainly representing remittances by Indians
employed overseas, at US$ 16.1 billion increased by 5.3 per cent over the
corresponding quarter of previous year.
 In the financial account, net foreign direct investment at US$ 7.2 billion in
Q1 of 2017-18 almost doubled from its level in Q1 of 2016-17.
 Net portfolio investment recorded substantial inflow of US$ 12.5 billion in
Q1 of 2017-18, primarily in the debt segment, as compared with US$ 2.1
billion in Q1 of last year.
 Net receipts on account of non-resident deposits amounted to US$ 1.2
billion in Q1 of 2017-18; this was lower than US$ 1.4 billion a year
ago.
 In Q1 of 2017-18, there was an accretion of US$ 11.4 billion to the foreign
exchange reserves (on BoP basis) as compared with US$ 7.0 billion in Q1
of 2016-17 and US$ 7.3 billion in the preceding quarter.
Significance of Balance of Payments
The study of balance of payments has become a matter of great interest in the
recent years to businessmen, bankers, and economists. The financial statement of
a bank reveals the bank’s condition. Similarly, a country’s balance of payments
reveals its financial position vis-à-vis foreign countries. In fact, it is so important
that balance of payments is considered to be an economic barometer of a country’s
health. It can furnish the key to understanding a country’s economic problems. It
is of great value in forecasting a country’s business and economic conditions as
well.

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Accounting of Balance of Payments Infrastructure of Indian
Economy
Balance of payments is kept on a double entry book-keeping system with credits
and debits of equal size. For every transaction, there is a corresponding entry on
both the credit and the debit sides. Thus, if exports are made, there will be an NOTES
entry of credit for outflow of goods on current account, and a corresponding entry
of debit will be made for claim on a foreign company or country or increase in
foreign assets or claims on foreigners. Similarly, imports will appear as a debit
item for the inflow of goods, and the credit item, for which the payment is made, is
shown by an increase in foreign liabilities, reduction of foreign assets or outflow of
funds or claims. Thus, for every credit/debit entry on current account, there is a
corresponding entry on capital account to match the former. In cases of unilateral
transfers such as gifts and donations, there is no corresponding payment or change
in assets or liabilities. The entries are donations or gifts on the debit side; for the
credit, they are the flow of goods from out of the country. It is not always possible
to match all debits with credits due to differences in sources and timing of events.
A discrepancy might then arise, necessitating a balancing entry, namely, errors and
omissions.
Source of Compilation
In case of countries that do not have exchange controls, statistical recording of
balance of payments data is done by the government with the help of their statistical
office. This in turn depends upon a host of private and government agencies,
banks and companies. Each member country of the IMF (International Monetary
Fund) is compiling this data for onward transmission to the fund and for their own
records and use. In view of the crucial importance of such data for policy-making,
planning, compilation and timely availability, balance of payments are considered
to be of utmost importance.
The usual sources of compilation for any country are the government agencies
and the monetary authorities of the country. The data is collected either on a statutory
basis or on a voluntary basis from various private and government agencies, airways,
ports, banks and financial institutions where exchange controls operate.
In India, the data is more easily available with the agencies entrusted with
the operation of exchange controls, such as the monetary authority of the country
and the banks.
Limitations in Compilation
A few limitations in the process of compilation of balance of payments are as
follows:
(a) Not all transactions are reported through official channels, particularly those
where there are no exchange and trade transactions.
(b) A time-lag between an actual transaction and its reporting is possible, thus,
the balance of payments may not properly record the transactions during
the period.

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Infrastructure of Indian (c) There could be under-invoicing or over-invoicing of goods and services,
Economy
thus, they may not represent the true value of gain or loss to the country.
(d) Sufficient details of all transactions are not available in certain cases, as, for
example, in remittances, short-term capital inflows or outflows, gifts, and
NOTES
samples, particularly in respect of services or invisible items.
Errors and omissions are a major component of the balance of payments. If
such limitations are substantial then it is fully possible that debits and credits may
not tally during a particular period of time.
Balance of Payments Data
As referred earlier, there are continuous interactions between the domestic sectors
and the foreign sectors in every country. The movements in the balance of payments
influence the savings and investments in the economy and the national income and
expenditure of the country. The data is useful to estimate and plan for the following:
(a) Savings gap
(b) Foreign exchange gap
(c) Investment outlays
Each of the sectors has some savings and investments and while some are
net savers, others are not investors. In India, the foreign sector has been a net
saver for some time and this promotes investment by other sectors of the economy.
Such investment helps in the growth of income and employment in the economy.
Besides, these inflows relive the balance of payments constraint (or foreign exchange
gap) of the developing country. This is due to the absence of an adequate import
capacity. The inadequacy of foreign exchange reserves would stand in the way of
growth of income and employment of these countries. They further promote market
specialization and larger scale production in the world as a whole. The data is thus
useful for the formulation of savings and investment policy, planning for the growth
of the economy, internal monetary policy, fiscal policy, and more so in case of the
foreign exchange policy. The trends in balance of payments have repercussions on
the internal and international monetary scene and influence the foreign exchange,
monetary and fiscal policies of a country and the overall growth of its economy.
Mechanism of Adjustment
When entries are made on a double-entry basis, credits and debits must tally. It
means that the balance of payments must always balance. But this is only in the
accounting sense. In the economic sense, we need to understand the mechanism
of adjustment, i.e., how are the forces operating towards balancing the inflows
and the outflows of a country when there can be larger exports than imports (a
positive trade balance) or larger invisible exports over imports (or a positive invisible
trade balance) or a larger current account balance? Normally, a deficit in current
account can be made good (if not due to statistics errors or omissions) by the
outflow of monetary gold, short-term credits or a loss of foreign exchange assets
or an increase in foreign exchange liabilities. If the short-term credits and inflows
of funds are autonomous and not induced for financing a deficit on other accounts,
then these will be a part of regular the balance of payments. Leaving aside such
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132 Material
deliberate efforts in balancing due to induced flows of funds, the mechanism of Infrastructure of Indian
Economy
adjustment works automatically through price changes and income changes or
both.
Adjustment of Balance of Payments under the Gold Standard NOTES
A short term deficit can be met by any one or more of the following:
1. A decline in foreign balances
2. Export of gold
3. Sale of domestically held securities in an international market
4. Short-term borrowings
The first three sources are called international reserves. When the disturbances
are purely temporary, they can be met by drawing upon the country’s international
reserves, or by borrowing.
If the deficit continues, a nation cannot go on indefinitely drawing upon its
international reserves. After a relatively brief period, the country’s foreign balances
will fall to an irreducible minimum. Its gold reserves will approach exhaustion and
the sources of finance will not be willing to extend any further loans.
The initial contraction of money supply induced by the loss of gold and the
necessity of protecting the country’s reserves will affect the major items in the
balance of payments. The demand for goods will be reduced due to the decline in
business activity; prices would fall; exports will be stimulated; imports will become
less attractive; and gradually the rise in exports and the decline in imports will
rectify the adverse balance of payments and a new equilibrium will be reached.
With a surplus in balance of payments, the opposite mechanism would be set in
motion.
Deficit Country and Surplus Country
1. Deficit country
A deficit country can adjust its deficit on a short-term basis by adopting the following
measures:
1. Reduced foreign balances
2. Loss of gold
3. Higher interest rates
4. Short-term borrowings
If the deficit is to be adjusted on a long-term basis, the following measures can be
adopted:
1. Higher interest rates leading to:
(a) Decline in business activity
(b) Reduction in incomes
2. Fall in price leading to:
(a) Increase in exports
(b) Decline in imports (new equilibrium) Self - Learning
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Infrastructure of Indian 2. Surplus country
Economy
A surplus country can adjust the surplus on a short-term basis by adopting the
following measures:
NOTES 1. Increase in foreign balances
2. Inflow of gold
3. Lower interest rates
4. Short-term lending
It can adjust the surplus on a long-term basis by adopting the following measures:
1. Lower interest rates leading to:
(a) Increase in business activity
(b) Increase in incomes
2. Increase in prices leading to:
(a) Decline in exports
(b) Increase in imports (new equilibrium)
However, these adjustment processes affect the country’s economy rather
seriously. Modern economists and statesmen want international trade to be
regulated so that the adjustment of balance of payments does not lead to fluctuations
in the economy. Hence, there is a tendency on the part of most governments to
regulate foreign trade.
Income Adjustment
According to Hume’s law of no foreign savings, an increase in exports will increase
income at home which in turn would lead to larger imports, which would balance
the trade and payments. The amount by which an initial increase in exports would
lead to an increase in income is called foreign trade multiplier—equal to 1/
MPM where MPM is Marginal Propensity to import. This is the automatic
adjustment process through income changes over a period of time. If the accelerator
is also at work at home, then an increase in exports would lead to an increase in
investment and to a further rise in income. If the foreign effects are also operating,
then the original increase in exports may produce a larger increase in imports and
lead to an unfavourable balance of trade or the effect will be indeterminate.
Balance of Payments: A Measurement of Deficits
The total of credits and debits in the current and capital accounts may not always
balance. A surplus or deficit may take place which can be made good by a
corresponding balancing entry, namely, official financing items. These items can be
gold, IMF assistance or drawl on the country’s foreign assets.
For the purpose of economic analysis and policy formulation, there are
various types of balances arising out of credits and debits in the balance of
payments. A few such balances in this regard could be, (i) trade balance; (ii)
current A/c balance; (iii) basic balance; (iv) balance in regular transactions; and
(v) balance settled by official transactions.
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Role of Service in Balance of Payments Infrastructure of Indian
Economy
In the recent years, trade in services has come into greater focus for many reasons.
Firstly, the comparative advantage of trade in goods has reached a certain limit in
many developing countries while the need for imports and exchange earnings NOTES
continue to grow. It is in this context that these developing countries have to divert
their attention to the promotion of the services sector in international trade. As
regards the quantum of world trade in services, the value of trade has grown
enormously during the last two decades. Here, the term ‘services’ is defined to
include all current account items other than merchandise trade and pure transfer
payments. It has to be noted here that this trade in services is more concentrated
in industrialized and developed countries than the trade in merchandise items, and
it will take a long time before developing countries can capture any important
segment of world trade in this respect.
Non-Resident Inflows
Under invisibles, a substantial inflow took place in the recent years related to the
non-official flows into India. Since 1982, the government has been encouraging
these inflows through higher rates of interest on non-resident rupee accounts with
banks than on domestic deposits. The RBI has also kept the SLR requirements for
these deposits lower, at 25 percent as against the normal requirement against domestic
deposits at 31–38 per cent. Such deposits are exempt from wealth tax purposes
and interest income is also exempt for income tax purposes. The rates of interest on
foreign currency non-resident account were, however, kept lower than that on Indian
deposits due to the lower interest rates in the markets abroad for foreign currencies.
Allocation (Or Cancellation) of Special Drawing Rights (SDRs)
The allocation or cancellation of SDRs by the IMF involves the creation or extinction
of the reserve assets by the IMF which form the part of a country’s holdings of
official reserve assets. The allocation of SDRs result in an increase (debit) in the
SDR holdings while cancellation results in a decrease (credit). The SDR holdings
are a component of official reserve assets. In balance of payments, the offsetting
entry to mark an increase in SDR holdings is provided by the item allocation
(credit) while cancellation (debit) serves as an offsetting entry to mark a decrease
in SDR holdings.
Monetization /Demonetization of Gold
Gold is both a commodity and a financial asset. When it is held by the Central
Monetary Authority (in India, it is the Reserve Bank of India), as a part of its
international reserves, it is treated as a financial asset and it is referred to as monetary
gold. When it is held by any other party, including the government, it is treated like
any other commodity. When the Central Monetary Authority acquires gold with a
view to strengthen its international reserves, from a non-monetary sector, either
from a resident or from a non-resident, it is referred to as monetization of gold.
Demonetization refers to the reverse transfer of gold from a monetary sector to a
non-monetary sector. It occurs when the Central Monetary Authority releases

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Infrastructure of Indian monetary gold from the holdings of official reserve assets for non-monetary
Economy
purposes.
Unrequired Transfers
NOTES The unrequited transfers cover gifts, grants, migrants, transfers, taxes, etc., where
one party provides something of an economic value to another without a quid pro
quo, i.e., anything in return. The country receiving the grant or gift neither transfers
nor promises to transfer anything in exchange. The lack of economic values on
one side is compensated by an entry which is referred to as unrequited transfers.
In India’s balance of payments, the term ‘transfers’ is used in the same sense as of
unrequited transfers.
Double Entry System of Recording
The balance of payments is based on the double entry system of bookkeeping.
This is similar to the one used in business accounting. This is an internationally
accepted convention for the balance of payments compilation. Transactions in a
double entry accounting system are recorded in pairs of credit and debit entries of
equal value. In the accounting sense, a country’s balance of payments refers to the
transactions which have economic value, and in which the counterpart entries for
credits or debits are automatically paired.
Under the double entry system, credit entries are used to record unrequited
transfers, income receivable, and financial transactions involving either a decrease
in assets or an increase in liabilities.
Balance of Payments and International Economic Linkages
The analytical framework that links the international flow of goods, services, and
capital to domestic economic behaviour consists of a set of basic macroeconomic
accounting identities. These basic identities that link national economic activity
with the balance of payments account show that if a nation produces more than it
spends, it will save more than it invests, export would be more than its imports,
and thus wind up with a capital outflow. A nation that spends more than it produces
will invest more than it saves, import more than it exports, and wind up with a
capital inflow.

Check Your Progress

9. How is the balance of payments of a country defined?
10. What does transfers on capital account include?
11. What does the capital account represent?

4.6 ROLE OF FDI AND MNCs

Foreign direct investment or FDI is an investment in the form of a controlling
ownership in a business in one country by an entity based in another country. It is
thus distinguished from a foreign portfolio investment by a notion of direct control.
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Since liberalization policies of 1991, the Indian economy has been geared to attract Infrastructure of Indian
Economy
foreign investment so as to achieve the economic objectives of growth and creating
employment. India today has become one of the most attractive destinations of
foreign direct investment. In 2017, India attracted almost $62 billion worth of
FDI. The section will also discuss Multinational Corporations in India. A NOTES
Multinational Company or MNCs is an enterprise that operates in several countries
but it is managed from one (home) country. In today’s globalized world, MNCs
have come to dominate the world economy. We will discuss several aspects related
to MNCs in India.
Foreign Direct Investment
Foreign direct investment or FDI plays a significant role in the growth and economic
development of a nation. FDI is a source of capital, managerial skill and technical
knowledge.
Economies across the world are globalizing and the major force shaping
globalization is the growth of foreign direct investment. It has been playing a pivotal
role, through the Multinational Corporations (MNCs), in bringing together the
national economies and building an integrated international production system so
as to enhance the competitiveness and economic performances of host and home
countries. Considering the potential benefits of foreign direct investment for
economic development and growth, governments strive to create a favourable
climate to attract FDI, by establishing an enabling framework, knowing, however,
that other factors (such as market size, growth and macroeconomic stability) carry
the principal weight in investors’ locational decisions. Governments have done so
through the liberalization of their national FDI regimes by reducing or eliminating
restrictive measures on entry and establishment, local ownership and control
requirements, discriminatory operational conditions and screening or authorization
procedures. Many have adopted or agreed to general standards of treatment—
including national treatment, most-favoured-nation and fair and equitable treatment,
and treatment according to international law — and provided specific guarantees
in key areas such as the transfer of funds, expropriation and dispute settlement.
These trends, which are part of a broader liberalization process that encompasses
all types of international transactions, are in turn an extension of the general tendency
to pursue market-oriented policies, as a means to achieve greater economic
efficiency. During the past few decades, international trade and foreign direct
investment have been the two most important activities that are integrating the
world economy.
With the increase in the mobility of factors of production across countries,
FDI has become an integral part of a firm’s strategy to expand international business.
FDI is the largest source of external finance for developing countries. At present,
inward stock of FDI amounts to about one-third of the developing countries’
GDP, compared to merely 10 per cent in 1980.
FDI in recent years has become a global commodity and especially the
developing countries are in the race to attract more FDI. Empirical evidence reveals
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Infrastructure of Indian that to attract foreign investment, a large number of countries have introduced
Economy
drastic reforms in their economic, fiscal, industrial, and political structure since
1991. Some of the key reforms introduced by these countries in FDI laws and
regulatory framework include opening of industries previously closed to FDI,
NOTES streamlining or abolition of approval procedures, provision of incentives and
establishment of specialized liberalized schemes. Another development in the desire
of government to facilitate FDI flows is reflected in a dramatic increase in the
number of bilateral investment treaties (BITs) for the protection and promotion of
investment. Besides, the pattern of BITs has also changed considerably from intra-
developed and developed-developing to intra-developing and developing
underdeveloped countries as a partner.
The net FDI inflows to developing countries increased from an annual average
of US $5 billion in 1970–79 to US $13 billion in 1980–85, to US $25 billion
during 1985–90.
Global FDI inflows registered an increase of 141 per cent from US $638
billion in 2003 to US $1538 billion in 2007. Developed countries continue to
remain the major destination of FDI inflows with a global share of 65 per cent,
followed by developing countries with 28 per cent and transition economies with
7 per cent in 2007. The rapid increase in the reforms initiatives taken by nations
the world over has led to faster growth in the global FDI than world trade and
world output.
The FDI equity inflows rose 28% in the first quarter of 2019-20 to $ 16.3
billion from $ 12.7 billion in the previous year.
FDI plays a crucial role in the development process of host economies. It
also has a significant role in enhancing exports of the host country. It is estimated
that the sales from foreign-owned facilities are about double the value of world
trade. FDI not only serves as a source of capital inflow into host economies, but
also helps to enhance the competitiveness of the domestic economy through
transferring technology, strengthening infrastructure, raising productivity, and
generating new employment opportunities.
FDI has often been viewed as a threat by host countries due to the capacity
of transnational investing firms to influence economic and political affairs. Many
developing countries often fear FDI as a modern form of economic colonialism
and exploitation, similar to their previous unpleasant experiences with colonial
powers.
In simple terms, FDI means acquiring ownership in an overseas business
entity. It is the movement of capital across national frontiers, which gives an investor
control over the assets acquired. FDI occurs when an investor based in one country
(the home country) acquires an asset in another country (the host country) with
the intent to manage it. It is the management dimension that distinguishes FDI from
portfolio investment in foreign stocks and other financial instruments. Conceptually,
a firm becomes a multinational corporation (MNC) by way of FDI as its operations
extend to multiple countries.
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Determinants of FDI Infrastructure of Indian
Economy
A firm, while selecting countries as investment destinations must evaluate the country
on the following factors:
 Resource base: Availability of raw material, complementary factors of NOTES
production, physical infrastructure, availability of skilled workforce, and
availability of business-related services.
 Market conditions: Economic and political climate, taxation policies,
incentives, trade policy, market size, market growth, regional integration,
cost of capital input, wage rate, cost of logistics.
Benefits of FDI
The benefits that accrue to the host country from FDI include the following:
 Access to superior technology: Foreign firms bring superior technology
to the host countries while investing. The extent of benefits depends upon
the technology spill over to other firms based in the host country.
 Increased competition: The investing foreign firm increases industry output,
resulting in overall reduction in domestic prices, improved product or services
quality, and greater availability. This intensifies competition in host economies,
resulting in net improvement in consumer welfare.
 Increase in domestic investment: It is found that capital inflows in the
form of FDI increase domestic investment so as to survive and effectively
respond to the increased competition.
 Bridging host countries’ foreign exchange gaps: In most developing
countries, the levels of domestic savings are often insufficient to support the
capital accumulation to achieve growth targets. Besides, the level of foreign
exchange may be insufficient to purchase imported inputs. Under such
situations, the FDI helps in making available foreign exchange for imports.
Drawbacks of FDI
In most countries, public opinion towards foreign enterprises is not very favourable
and FDI is feared due to its impact on domestic firms, the economy, and culture.
The major drawbacks of FDI are as follows:
 Market monopoly: Multinational corporations are far more advanced than
domestic companies, owing to their large size and financial power. In some
sectors, this has led to MNC monopolies, thus impeding the entry of domestic
enterprises and harming consumers. An MNC’s ability to operate at a large
scale and invest heavily in marketing and advertising and R & D activities
differentiate their products and makes entry of new firms far more difficult
as they are unable to make similar investments in R & D and marketing
strategies.
 Crowding-out and unemployment effects: FDI tends to discourage entry
and stimulates exit of domestic entrepreneurs, often termed as the crowding-
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Infrastructure of Indian out effect. As FDI enterprises are often less labour intensive, their entry
Economy
results in higher unemployment and increased social instability.
 Technology dependence: MNCs often function in a way that does not
NOTES result in technology-sharing or technology-transfer, thereby making local
firms technologically dependent or technologically less self-reliant.
 Profit outflow: Foreign investors import their inputs and use the host country
as a processing base, with little value-added earnings in the host country. A
large proportion of their profits may be repatriated.
 Corruption: Large foreign investors often bribe government officials and
distort market forces.
 National security: With MNCs holding a dominant position in sensitive
industries, such as telecommunications, and the supply of core equipment
and software for the information technology (IT) industry, there is a danger
that the strategic interests of the host country may be compromised.
According to the Financial Times, in 2017, India overtook China and
the US as the top destination for the Foreign Direct Investment. In first half of
the 2015, India attracted investment of $31 billion compared to $28 billion
and $27 billion of China and the US respectively. FDI inflows in India increased
to USD 60 billion in 2016-17 indicating that the government’s effort to improve
ease of doing business and relaxation in FDI norms is yielding results. In the
next fiscal, foreign direct investment in India had increased to USD 61.96
billion.
4.6.1 Multinational Corporations in India
The emergence of the multinational private corporation as a powerful agent of
world social and economic change has been a signal development of the post-
War era. Its evolution has been regarded with mixed feelings by the host
countries.
A multinational corporation is an enterprise which owns or controls producing
facilities in more than one country such as factories, mines, oil refineries, distribution
channels, etc. The United Nations defined multinational corporations as ‘enterprises
which control assets—factories, mines, sales offices and the like—in two or more
countries’. According to another definition, a multi-company is one with sales
above $100 million with operations in at least six countries and with subsidiaries
accounting for at least 20 per cent of its assets.
Multinational Corporations account for one-fifth of the world’s output,
excluding socialist economies. Their production in recent years has been growing
at the rate of 10 per cent a year, nearly twice the growth rate of the world output
and half as much as the world trade. According to one report in 2016, out of the
top 100 economies in the world, 31 were countries and 69 were multinational
companies. Therefore, multinationals are gigantic in size.
Most of the multinationals enjoy predominantly oligopolistic market positions
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140 Material
product differentiation and heavy advertising which sustain their oligopolistic nature Infrastructure of Indian
Economy
by making the entry of competitors more difficult.
Almost every large enterprise has foreign involvement of some kind.
Whatever its home, it will send agents to other nations, establish representative
NOTES
offices abroad, import foreign materials, export some products, license foreign
firms to use its patents or know-how, employ foreign nationals, have foreign stock-
holders, borrow money from foreign banks and even have foreign nationals on its
board of directors. None of these, however, would make an enterprise multinational
because none would require a substantial direct investment in foreign assets nor
entail a responsibility for managing organizations of people in alien societies. Only
when an enterprise confronts the problems of designing, producing, marketing
and financing its products within foreign nations does it become truly multinational.
A domestic corporation may become multinational by establishing foreign
branches, by operating wholly or partially owned subsidiaries in other countries or
by entering into joint ventures with enterprises in other countries.
It is interesting to note the concentration of multinational corporations in
certain fields of industries. Taking the USA as the leader of such enterprise, we
find that 85 per cent of US investment is concentrated in the following industries:
vehicles, chemicals, mechanical and electrical engineering.
If we take the multinationals as a whole, we find that they have established
almost complete domination on such industries as rubber tyres, oil, tobacco,
pharmaceuticals and motor vehicles.
Concentration in Specific Areas
The geographical distribution of multinational corporations shows an interesting
pattern. If we consider the distribution by the origin of enterprise, we find that
in 1966, about 55 per cent of the multinationals were of US origin, 20 per
cent of British origin, while about 25 per cent were of European or Japanese
origin.
Multinational operations by private business corporations are
comparatively recent in the history of man. The companies of merchant traders
in medieval Venice and the English, Dutch and French trading companies of the
17th and 18th centuries were forerunners, but not true prototypes of today’s
multinational corporation. They were essentially trading rather than manufacturing
organizations, with comparatively little fixed investment. And they operated mainly
within the colonial territories rather than under the jurisdiction of foreign sovereign
states.
Historical Background
During the 19th century, foreign investment flowed extensively from Western Europe
to the underdeveloped areas of Asia, Africa and the Americas. In this age of empire
building, Victorian Britain was the great capital exporter, followed by France,
Germany and the Netherlands. Little of this capital flow was direct investment
outside imperial boundaries.
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Infrastructure of Indian The first substantial multinational corporate investment came in the mining
Economy
and petroleum industries during the initial years of the 20th century. A wide
geographical separation existed between the great mineral deposits of the world
and the consuming markets in the USA and Western Europe. Hence large oil
NOTES companies like British Petroleum and Standard Oil and mineral corporations like
International Nickel were among the first true multinationals. Coca-Cola, Singer,
Woolworth were early American multinationals.
Multinational corporate investment spread further in the years after World
War I, spurred by rising barriers to international trade and led by burgeoning
automobile and associated industries. After the Second World War, multinationals
flowered as American firms invested heavily abroad in a wide variety of
manufacturing and merchandising operations.
American corporations led the world trend towards business multinationalism.
The great size and wealth of the US economy generated capital for investment.
Companies were attracted by the relatively higher foreign rates of return on
investment. American capital outflow took the form of corporate direct investment
because of the superior organization of American capital markets and the larger
capabilities of American managers. American corporate investment abroad is
concentrated in the hands of the largest firms. Of a total investment of $65 billion
at the end of 1968, 500 largest American corporations had invested more than
$50 billion.
Direct investment in foreign manufacturing facilities is an alternative to
exporting home- made products. Why have manufacturers endure the harder tasks
and larger risks of foreign operations instead of shipping their products abroad?
Evidently, direct investment appeared to be more profitable.
The second reason for direct foreign investment is that entrepreneurs confront
foreign barriers to their exports. Nationalistic sentiments led most nations to build
their own industrial capabilities. By raising barriers against imports of manufactured
products, they induced foreign as well as local firms to establish domestic industries.
Large number of American corporations became multinationals simply to maintain
or expand markets in Canada or in E.E.C. that could not be as profitably served
by exports.
Third, business firms also multnationalise because their presence as a
producer in a foreign nation enables them to adapt their products to local demands
more effectively. Another reason for direct foreign investment is that the anti-
trust laws and keen competition at home tended to restrict the expansion of
dynamic American business, channelling corporate attention to opportunities
abroad.
Organizational Forms
A multinational business corporation may adopt one of the two basic organizational
forms—(i) a world corporation form in which domestic and foreign operations
are merged or (ii) an international division form in which foreign business is done
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142 Material
 Multinational corporations plough back their profits on a significant scale. Infrastructure of Indian
Economy
This removes, to some extent, the basis of the charge that they indulge in
economic drain. But some countries also feel that ploughing back of profits is
not a good solution because it increases the foreign stake in a country’s economy
and polity. NOTES

American corporate investment in developing countries has been gradually

shifting from an earlier emphasis on the mining, extractive and raw material industries
towards diversified manufacturing and merchandising operations. One important
consequence has been a great increase in American exports of technological and
managerial skills and knowledge to the recipient country. This shift will serve to
reduce the charge of foreign exploitation.
The potential contribution of multinationals to the development of poorer
countries is large. Its realization depends mainly on the development of stable
governments in those countries and their actions to encourage private investment.
Any developing country that offers political stability, respect for contracts, financial
responsibility and equitable taxation will attract investment, foreign and domestic.
The remarkable evolution of such regions as Hong Kong and Taiwan testify to this
truth.
Private business investment is superior to governmental aid as an
instrument of development because it combines transfer of managerial and
technical assistance with that of capital. General dissatisfaction with bilateral
governmental aid makes it important to expand the flow of business investment.
While measures to limit or to insure against risks will help to enlarge this flow,
they will not remove the root causes of international tensions. The foreign
subsidiary of the American corporation will still be charged with “exploitation”
of local resources and making too much profit. When it pays higher than prevailing
wages and benefits to its employees, their higher living standards will provoke
envy and resentment amongst others.
The political and social effects of multinational corporations in developing
countries are not as clear as their economic effects. The process of development
is inherently unsettling to a society. By producing shifts in the distribution of
income and wealth and by redistributing economic power among social classes,
development creates political stresses. Often these tensions can be relieved
by peaceful political reforms; not infrequently they are followed by more or
less violent upheavals. Indeed, being an agent of change, the foreign corporation
is seen in the developing country as a threat to privileged positions in the
traditional society. However, some leading development economists have
counselled Latin American countries that their best interests would be served
by compelling foreign firms to sell affiliates to local owners or to the government.
They argue that the foreign affiliates stunt the growth of local enterprise. While
nationalistic pride may be bolstered by such a policy, its cost in slower
development appears to be high.
The cultural consequences of American corporate penetration in the
developing countries can be plainly seen in the ready acceptance by natives of soft Self - Learning
Material 143
Infrastructure of Indian drinks, packaged foods, automobiles, electrical appliances and much of the
Economy
paraphernalia of American life. At a more fundamental level, it is likely that the
status and value systems, the social attitudes and behavioural patterns, the arts
and the essential cultural foundations of many of these countries will also undergo
NOTES profound changes. These should ultimately reduce barriers of communication
between peoples and lay a common basis for a stable world order.
Multinational corporations are carriers of new values and ideas that threaten
the old ways, which have served the people of developing countries well. A
multinational corporation introduces ‘the idea of meritocracy instead of aristocracy,
of rewarding talent instead of status, of distinguishing people by ability instead of
by colour or sex’.
Fear of ‘loss of control’ of their national destinies because of massive
foreign private investment has caused many developing countries to enact laws
for screening such investment in the future. The case for home country controls
is not necessarily based on charges of ‘abuses’ or ‘exploitations’ by multinationals.
The case for home country controls over multinational business enterprises is
based on the reality that the goals of the multinational firms and the goals of host
country are not identical.
A developing country should lay emphasis on exporting manufactures. This
view reflects the vision that a modern country needs industry and that the small
domestic markets of most developing countries will impose high costs unless
industrial products are exported. Developing countries complain frequently that
multinational firms usually prohibit exports by their foreign subsidiaries. For example,
in the 1960s in India, 43 per cent of all written collaboration agreements between
Indian firms and foreign firms from 1961 to 1964 contained clauses restricting
exports.
Much of the hatred against American multinationals is based on a mistaken
identification of the American multinational corporations with the imperialistic
enterprises of former colonial powers. The initial experience with foreign
corporations of most host countries in the developing regions of the world was
with the imperial monopolies of Britain, France, Holland and Spain. These early
companies were the ‘chosen instruments’ of their governments. They followed the
flags of the mother countries into their colonies to mine and harvest natural resources
and to sell manufactured goods at high profit margins. It was natural that these
early multinational corporations were regarded as instruments of imperialism by
the colonial peoples. These attitudes have been carried over to the more recent
American multinational corporations, which are viewed as an instrument of “neo
colonialism” and probably as an agent of CIA. But the US does not treat its
enterprises as “chosen instruments” of national policy.
Multinationals operate in India in two ways: (i) through branches established
in the country and (ii) through Indian companies which are subsidiaries of foreign
companies, which hold more than 50 per cent of the paid-up equity capital.

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 In 1977, there were 482 branches of multinationals operating in India. Of Infrastructure of Indian
Economy
these, 319 were branches of UK-based companies. The US-based companies
had the second largest number of branches – 88; Japanese, W. German, Swiss,
French and Canadian companies came next, with 21, 12, 11, 8 and 7 respectively.
After India’s liberalisation and globalisation policies in 1991, the number of MNCs NOTES
operating in India skyrocketed. As Foreign Direct Investment can be made in
almost any sector in India, the numbers of MNCs in India have grown to over
5,800 in 2017.
In 1973, the United Nations took note of the growing size of the multinationals
and recommended an in-depth study of the rise of multinationals and its impact on
trade and development of other countries. A group of eminent persons led by Mr
L.K. Jha submitted a report on the subject in 1974. Important points made in the
report are as follows:
1. International corporations are organizations largely beyond the control of
any single government;
2. Their overall goal is worldwide profits without regard for what is best for an
individual country;
3. The interests of the country where a subsidiary is established for the
development of export markets are subjected to the market interests of the
parent company;
4. Parent companies do not make the most modern technology available to
their subsidiaries; and
5. International corporations prevent the growth of locally owned enterprises
by aggressive and unfair competition.
Criticism of Multinationals
To begin with, there is hardly any reason to justify the term multinational because
in most cases only nationals of one country serve on the governing body or board.
They operate in several countries and may have employees from many nations,
but most policy and investment decisions as well as control are from one centre. It
is also pointed out that multinationals do not regard themselves obligated to the
interests of the region in which they are located. They neglect the training of the
local people for the top management position.
Second, there is also an inherent danger that at the time of crisis, these
corporations are capable of diverting vast sums of money from one area to another,
which could bring about the collapse of the economic system.
Third, the technology that multinational corporations transfer was invented
in an environment where capital was abundant and labour was scarce. The reverse
is true for the Third World countries which are long on labour and short on capital.
So the technology is not appropriate for the developing countries.
Fourth, Raul Prebisch and Hans Singer speak of the ‘enclave’ effect of
foreign investment in that the multinational tycoons never become part of the internal
economic structure of the less developed countries. Self - Learning
Material 145
Infrastructure of Indian Fifth, worse than the economic dominance is the cultural devastation of
Economy
host countries. Operations of these multinationals strike a resounding similarly to
the ways of the old imperialists which imposed their own culture on the colonies.
They create a small nucleus of parallel culture in the host countries through payment
NOTES of considerably higher salaries and perks to the local staff, thereby alienating them
from the mainstream.
Sixth, a French critic has said that governments cannot stop inflation partly
because they no longer can control huge multinational tycoons whose search for
profits and creation of consumer demands are at the base of the problems.
A President of General Motors declared, “What is good for General Motors
is good for America”. But what is good for America may not be good for the host
country.
Regulation of Multinationals
Foreign companies which undertake business activities in India or invest in Indian
businesses need to comply with certain Indian laws. For example, at the time of
making an investment in India or setting up an Indian office, the foreign company
needs to comply with the Foreign Exchange Management Act (FEMA). FEMA
also requires foreign companies in India to comply with certain procedural and
filing requirements on a periodic basis when they conduct operations in India.
Similarly, if the company sells products or services in India and has an office in
India, it will have to comply with Indian tax laws. Similarly, it will be required to
comply with local regulations if it has an office (such as a Shops and Establishment
Registration).
Understanding the definition of foreign company under Companies
Act, 2013
A foreign company is a company which is incorporated outside India but having
its place of business (including a share transfer or an office registered with a
regulatory authority) in India. Under the Companies Act 2013, a foreign company
means any company or body corporate incorporated outside India which has a
place of business in India, either of its own or if it conducts business through an
agent, physically / electronically or any other manner. However, all foreign
companies are not required to comply with the Companies Act, it is only applicable
to foreign companies where 50% or more of the paid-up share capital (calculated
by including preference shares) is held by Indian entities. Foreign companies must
comply with the provisions of the Companies Act, 2013 in respect to the business
as if it were a company incorporated in India.
Government Policy
The policy of the government is to ensure that operations of foreign companies as
also those of indigenous concerns conform to the overall socio-economic policy
of the country and their activities, including their size of operations are regulated
within the policy guidelines announced by the government from time to time.
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Indian Joint Ventures Abroad Infrastructure of Indian
Economy
Indian joint ventures abroad have shown encouraging performance in relation to
the twin policy objectives of extending co-operation to developing countries and
creating opportunities for this country in exports of capital goods, technology and NOTES
know-how.
The ventures have been contributing to the progress of import substitution
and industrialisation in the developing countries where they are primarily located.
In the process, they have resulted also in increased exports of technology-
intensive products from India. Even in terms of commercial profitability, the
performance of the joint ventures has shown improvement. The total profits
they earned doubled between 1974–75 and 1976–77. Also the losses have
declined during the period.
In 1978, there were a total of 329 joint venture proposals from Indian
entrepreneurs. The proposals involve projects in as many as 48 countries.
The trend towards higher investment indicates that Indian entrepreneurs
have now started embarking upon some ambitious and well-planned projects as
are capable of yielding handsome returns after a few years. Such projects also
speak volumes for India’s technological capability and competence.
A region-wise analysis of the ventures in production discloses a marked
preference by Indian entrepreneurs to invest in the neighbouring countries of
South-East Asia especially in ASEAN countries. They had invested 1518.2
lakh in actual Indian equity in 47 units in South-East Asia. The figures are in
comparison to 23.9 lakh in five units in South Asia, 30 lakh in eight units in
West Asia, 687.5 lakh in 19 unit in Africa and 68.3 lakh in 13 units in Europe
and America.
In South-East Asia, in the 1970s India had as many as 26 joint ventures
(actual and projected) in Malaysia alone, followed by Indonesia (7), Thailand
(5), Singapore (4), the Philippines (3) and Fiji (1). In South Asia there are
three Indian joint ventures in Sri Lanka and one each in Nepal and Afghanistan.
Elsewhere the position is as follows: West Asia: Iran (2), UAE (4), Oman (2).
Africa: Kenya (6), Mauritius (7), Nigeria (5) and Uganda (1). Europe and America:
France (1), UK (4), West Germany (1), Canada (2) and the USA (5).
After liberalisation, the magnitude and quality of foreign investment by
Indian companies have gone up substantially. There has also been a perceptible
shift in Overseas Investment Destination (OID) from the year 2000 onwards.
While in the first half of 2017, overseas investments were directed to resource
rich countries such as Australia, UAE, and Sudan, in the latter half, OID was
channelled into countries providing higher tax benefits such as Mauritius,
Singapore, British Virgin Islands, and the Netherlands. Indian firms invest in
foreign shores primarily through Mergers and Acquisition (M&A) transactions.
With rising M&A activity, companies will get direct access to newer and more
extensive markets, and better technologies, which would enable them to increase
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Infrastructure of Indian their customer base and achieve a global reach. India has emerged as one of the
Economy
strongest performers in the deal-street across the world in mergers and
acquisitions. M&A deal volume in India increased 14 per cent to 1,022
transactions, worth US$ 46.8 billion, in 2017.
NOTES
According to the data provided by Reserve Bank of India (RBI), India’s
outward Foreign Direct Investment (OFDI) in equity, loan and guaranteed issue
stood at US$ 784.28 million in the month of February 2018 as against US$ 866
million in January 2018 and US$ 1.35 billion in February 2017.
The Relevance of Swadeshi
According to Eichenberg in his lecture on 2 February 2000 on liberal international
relations theory, the promotion of free trade and the institution of democratic
principles is the key to peace. In late 1991, with the transfer of the Indian Parliament
into the hands of political and economic reformers, India began its quest towards
liberalization despite much opposition. The reform implemented liberal trade in the
largest democracy in the world.
Since India’s independence from British control in 1947, Indian foreign
policy can be characterized as fairly isolationist. During the Cold War period,
India retained a policy of nonalignment, which was uncommitted to either the West
or the East and stuck to ‘swadeshi’ ideology.
Swadeshi, which simply means ‘India first,’ is an extremely nationalistic
ideology that promotes self-sufficiency. Just under a decade ago, Indian foreign
policy has taken important measures towards liberalization. Under PM Narasimha
Rao India has faced important reforms in its domestic and foreign economic policy.
Under the administration of Rao, major changes in banking, interest rates and the
ability to fully convert rupees (India’s currency) in trade transactions took place.
However, towards the end of 1991, Rao took the most important step by opening
India’s doors to foreign investment. The new government tried to restructure the
‘ever-proliferating bureaucracy’ and the ‘license raj’. This reshaping broke the
barriers, which allowed foreigners to step into the Indian markets. Such barriers
included series of permits and licenses granted only by members of the Indian
Parliament or high-ranking bureaucrats. These complicated and inefficient policies
turned away potential foreign investors and, therefore, severely affected the Indian
economy.
Rao also implemented revolutionary changes as part of the reform plan.
According to the Asian Survey by Nalini Kant Jha, Rao limited the equity
participation to 40 per cent and removed the provision for the necessity of local
control of industry. India also removed restrictions on foreign trade, which
significantly inflated the export growth and notably reduced customs duties and
tariffs on imports.
The policy reforms in 1991 allowed India to step into a new era, an era of
liberalization. Firstly, India’s democracy is much different than the government
of any other developing in existence today. Political parties and public activists
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play a major role in the development and sustenance of governmental political Infrastructure of Indian
Economy
and economic policies. Amartya Sen in his work entitled, India: Economic
Development and Social Opportunity says, ‘The democratic framework of
the Indian polity permits this exercise (of public influence) in ways that are not
open in many other developing economies.’ As a result, the constituents of the NOTES
democratic state continue to be the major political actors in India’s international
relations.
Secondly, India’s new economic policy of a liberal trade is leading the
country to forge stronger and better relations with western nations, such as the
US. Before the initiation of this new liberal era, the Indo-US relations have been
quite unpleasant due to the nonalignment policy of India during the Cold War Era
and the swadeshi temperament of the Indian Parliament during that time.
When Rao took office in 1991, he tried to recuperate the relationship through
liberal ideology. He planned to improve the trade relations between the two largest
democracies of the world and, as a result, turn the existing tension into mutually
beneficial alliance.
During the 1990s, there was a continual increase of foreign investment in
India by many nations. Foreign interests in India increased exponentially and, as a
result, India moved far away from its swadeshi years to an age of global
interdependency. However, the reforms of 1991 were not been widely accepted
by all Indians. Much opposition was mainly led by the Bharatiya Janata Party
(BJP) and the Left parties. The BJP and the Left claimed that India was moving
towards the wrong direction. According to them, the country is moving towards a
mirage of liberalism only to realize that their developing nation is being exploited
by neo-imperialism. The BJP and other swadeshi advocates claimed that the
‘common man’ of India began to suffer due to increased prices in agricultural and
food products and decreased wages due to outside competition. However, when
the BJP came to power, they also undertook many reforms to welcome foreign
investment and FDI.
According to Eichenberg’s lecture on neo-imperialism on 23 February 2000, there
are two net results of the theory, which are:
 The limitation on domestic sovereignty
 Underdevelopment as a result of increased dependency on the global
economy
The reform of 1991 did not result in either of these two. During the last two
decades, as India has extended its hands to numerous and diverse foreign investors,
they are not extensively dependent on a single trading partner. As a result, India
could not, as Sen puts it, become an ‘economic prisoner in the international world
of open exchange.’ Thus, domestic sovereignty remains strong as the existence of
multiple international trading partners remain. Moreover, these trading partners
will continue to remain because of the huge market for all goods and services that
exists in India due to its increasingly large middle class. Hence, a high influx of
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Infrastructure of Indian foreign investment from numerous diverse investors will not lead to
Economy
underdevelopment, but, on the contrary, lead to strong development of the nation’s
economy.
NOTES As against the beliefs of the supporters of the swadeshi ideology, India is
not affected by liberalization, but is, in fact, the state’s best option. The Indian
economy is being continually strengthened by the new domestic and foreign
economic policies of the central government by allowing foreign investment to
enter the Indian market. This has further strengthened the global importance and
international recognition of the country. Consequently, India’s relations with the
US, Europe and the Far East have begun to improve through increased
interdependency, ideational similarities and global interests in the state, thereby
leading to a more peaceful international environment.

Check Your Progress

12. What is Foreign Direct Investment (FDI)?
13. Define multinational corporation.

4.7 ANSWERS TO ‘CHECK YOUR PROGRESS’

1. The Indian Railway Conference Association (IRCA) was set up in 1903.
2. RDSO is the sole R&D organization of Indian Railways and functions as
the technical advisor to Railway Board, Zonal Railways and Production
Units.
3. Two major thermal power plants in India are Durgapur Thermal Power
Station, Durgapur, West Bengal and Indraprastha PS, NCT Delhi.
4. The National Digital Communications Policy, 2018 seeks to unlock the
transformative power of digital communications networks.
5. Digital infrastructure and services are increasingly emerging as key enablers
and critical determinants of a country’s growth and well-being.
6. A country’s trade policy refers to the set of policies which govern the external
sector of its economy
7. Import controls aim at restricting unwanted import of goods to conserve
the limited foreign exchange reserves.
8. Jaipur, Srinagar and Anantnag have been recognized as ‘Towns of Export
Excellence’.
9. Balance of payments of a country has been defined as a ‘systematic record
of all economic transactions between the residents of the reporting country
and residents of foreign countries. It includes both visible and invisible
transactions’.
10. Transfers on capital account include external borrowings or repayments of
external borrowings, external investments or disinvestments, etc.
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11. The capital account represents transfer of money and other capital items Infrastructure of Indian
Economy
and changes in the country’s foreign assets and liabilities resulting from the
transactions recorded in the current account.
12. Foreign Direct Investment or FDI is an investment in the form of a controlling NOTES
ownership in a business in one country by an entity based in another country.
13. A multinational corporation is an enterprise which owns or controls producing
facilities in more than one country such as factories, mines, oil refineries,
distribution channels, etc.

4.8 SUMMARY
 For a sustained economic growth of a country, a well-known and coordinated
system of transport plays a significant role.
 Road transport is vital to the economic development and social integration
of the country.
 Easy accessibility, flexibility of operations, door-to-door service and reliability
have earned road transport an increasingly higher share of both passenger
and freight traffic vis-à-vis other transport modes.
 The Railways in India provide the principal mode of transportation for freight
and passengers. It brings together people from the farthest corners of the
country and makes possible the conduct of business, sightseeing, pilgrimage
and education.
 Energy is the prime mover of economic growth. Availability of sufficient and
efficient energy is key to sustainable development of a country.
 In India, thermal power plants account for 65 per cent of the installed
capacity in the country. A thermal power plant is usually a steam-driven
power plant.
 India was the first nation to establish hydro-electric power plants. The
foremost Hydro power plants in India were set up at Shimsha in 1902 and
Darjeeling in 1898.
 Indian Telecom industry has emerged as the fastest growing telecom market
in the world.
 The opening of the telecom sector to the foreign investors has not only led
to rapid growth in subscriber base but also helped a great deal towards
maximization of consumer benefits, particularly in terms of price discovery
following the moderate approach in tariffs
 A country’s trade policy refers to the set of policies which govern the external
sector of its economy.
 In a country like India, trade policy is one of the many economic instruments
which is used to suit the requirements of economic growth.

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Infrastructure of Indian  Before Independence, India had trade surpluses and there was regular gold
Economy
inflow into the account to pay for the surplus.
 An economic transaction is an exchange of value or transfer of a title to a
NOTES good or an asset.
 The study of balance of payments has become a matter of great interest in
the recent years to businessmen, bankers, and economists. The financial
statement of a bank reveals the bank’s condition.
 Foreign direct investment or FDI is an investment in the form of a controlling
ownership in a business in one country by an entity based in another country.

4.9 KEY TERMS

 MNC: A multinational corporation or worldwide enterprise is a corporate
organization that owns or controls production of goods or services in at
least one country other than its home country.
 Thermal power station: A thermal power station is a power station in
which heat energy is converted to electric power. In most places the turbine
is steam-driven.

4.10 SELF-ASSESSMENT QUESTIONS AND

EXERCISES

Short-Answer Questions
1. Write a short note on the role of railways sector in Indian economy.
2. What are the major functions of RDSO?
3. Which are the major hydro power plants in India?
4. What is the approach adopted by integrated energy policy?
5. Mention the main features of balance of payments.
Long-Answer Questions
1. Discuss the role of power and transportation in Indian economy.
2. ‘Indian telecom industry has emerged as the fastest growing telecom market
in the world.’ Comment on the statement with reference to the text.
3. How has communication sector evolved in India? Discuss.
4. What is the composition of India’s foreign trade? Discuss the structural
changes made in the trade policy of India since independence.
5. Describe the role of Foreign Direct Investment in a country’s trade.

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 Infrastructure of Indian
4.11 FURTHER READING Economy

Mankar, V. G. 1995. Economic Policy and Planning. Delhi: New Age

International Publishers. NOTES
Patel, I.G. 2003. Glimpses of Indian Economic Policy. New Delhi: Oxford
University Press.
Soubbotina, Tatyana P. 2004. Beyond Economic Growth: An Introduction to
Sustainable Development. Washington: World Bank.
Van den berg, Hendrik. 2001. Economic Growth and Development. Ohio:
McGraw-Hill.
Banik, Nilanjan. 2015. The Indian Economy: A Macroeconomic Perspective.
New Delhi: Sage Publishing India.
Kapila Uma. 2009. Indian Economy Since Independence. New Delhi: Academic
Foundation
Rama P. Kanungo, Chris Rowley, Anurag N. Banerjee. 2014. Changing the
Indian Economy: Renewal, Reform and Revival. Netherlands: Elsevier.
Bimal Jalan. 2004. Indian Economy. United Kingdom: Penguin.
Nilanjan Banik. 2015. The Indian Economy: A Macroeconomic Perspective.
New Delhi: SAGE Publishing House.
K. R. Gupta, J. R. Gupta. 2008. The Indian Economy, Volume I. New Delhi:
Atlantic Publishers.

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 Planning in India

UNIT 5 PLANNING IN INDIA

Structure NOTES
5.0 Introduction
5.1 Objectives
5.2 Objectives, Strategies, Achievements and Failures of Planning in India
5.2.1 NITI Aayog
5.3 Poverty and Unemployment
5.3.1 Unemployment
5.3.2 Poverty and Unemployment Eradication Programmes in India
5.3.3 Inflation
5.3.4 Black Money
5.3.5 Other Issues
5.4 Answers to ‘Check Your Progress’
5.5 Summary
5.6 Key Terms
5.7 Self-Assessment Questions and Exercises
5.8 Further Reading

5.0 INTRODUCTION
A planned economy is an economic system in which the economy is directed by
the state. It is an economic system in which the central government controls industry
by making major decisions regarding the production and distribution of goods and
services. The two major types of planning are central or centralized planning and
indicative planning. After the end of the British Raj, Independent India decided to
follow a centralized planning approach to its development. In this regard the Planning
Commission was set up.
In this unit, the objectives, strategies, achievements and failures of planning
in India have been discussed in detail. The problem of poverty and unemployment
is also discussed here.

5.1 OBJECTIVES
After going through this unit, you will be able to:
 Understand the objectives, strategies, achievements and failures of planning
in India
 Discuss the objectives of NITI Aayog
 Explain the concept of poverty and unemployment
 Describe the objectives of unemployment eradication programmes in India

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Planning in India
5.2 OBJECTIVES, STRATEGIES,
ACHIEVEMENTS AND FAILURES OF
NOTES
PLANNING IN INDIA
India’s first Prime Minister, Jawaharlal Nehru set up the Planning Commission with
a Government of India resolution in March 1950. The Planning Commission was set
up in pursuance of the declared objectives of the government, which was to promote
a swift rise in the standard of living of the people by the efficient utilization of the
resources of the country, increasing production and offering opportunities to all for
employment in the service of the community. Nehru was the first chairman of the
Planning Commission, a post that has been held by all subsequent prime ministers.
The charge of the Planning Commission was to assess all the resources of the country,
increasing deficient resources, formulating plans for the most effective and balanced
utilization of resources and determining priorities.
Table 5.1 provides you a summary of various five-year plans formulated
and executed by the Planning Commission of India since its inception. In this
section, we will focus on the ‘Nehru-Mahalanobis’ model in the five-year plans
which represented the Nehruvian view of state-led development. The state-led
development model was largely followed by India till 1991 when the balance of
payment crisis and subsequent pressure from monetary agencies like the World
Bank and the International Monetary Fund (IMF) made India liberalise its economy
and abandon the centralized planning approach.
The ‘Nehru-Mahalanobis’ model was formulated by Prof. P. C. Mahalanobis under
the guidance of Nehru. The ‘Nehru-Mahalanobis Model’ became the basis of the
second five-year plan and continued to be guiding principle of all subsequent plans
with small alterations until 1977 when the Janata Party came into power and conceived
of the Gandhian model. The emphasis of the model was on the rapid development of
heavy industry with the objective of creating an indigenous industrial base so as to
make India even more self-reliant into heavy industries and-goods sector. The
justification of the heavy industries strategies was stated in the framework of the
second five-year plan because “in long run, the rate of industrialization and the growth
of the national economy would depend upon the increasing production of coal,
electricity, iron and steel, heavy machinery, heavy chemicals and heavy industries
generally – which would increase the capacity for capital formation. One important
aim is to make India independent as quickly as possible of foreign imports of producer
goods so that the accumulation of capital would not be hampered by difficulties in
securing supplies of essential producer goods from other countries. The heavy industry
must, therefore, be expanded with all possible speed.” The Nehru–Mahalanobis
Model’s justifications for greater emphasis on heavy industry were given as follows:
(i) The British colonial government intentionally denied the development of
heavy industry in India and kept the country, primarily an agrarian economy,
as an appendage of the British colonial system.
(ii) The Indian industrial structure was mainly dependent on the consumer goods
industries. Therefore, it was necessary to broaden this base by developing
heavy industries and infrastructure. The argument was made that a diversified
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156 Material
 productivity. Such a situation would reduce the nation’s dependence on Planning in India
agriculture as a provider of employment.
(iii) Since the productivity of labour was higher in manufacturing than in
agriculture, a push towards industrialisation promised to bring about a swift
increase in national and per capita income. NOTES
(iv) The rapid development of the industrial sector was not only critical for the
development of agriculture, but also for the growth of all other sectors of
the Indian economy.
Although there was no denying the fact that foreign aid assisted in the
development of capital goods and the infrastructure sector, the ‘Nehru-Mahalanobis
Model’ stressed that the major burden of development would have to be borne by
domestic savings. Since foreign aid would largely come in the form of loans, the
model emphasised the growth of exports so as to pay for the bulk of imports by the
increase in exports. The model was also conscious of the fact that enormous
investments in heavy industry, although very important, would not increase employment
significantly, since such investments were capital-intensive. Therefore, in order to
generate employment and support the production of consumer goods, investment
had to be made in small scale industries. The emphasis of enormous investment in
heavy industry did not mean that the model did not give due importance to the role of
agriculture for developing the Indian economy. Nehru recognised how critical
agriculture was to the Indian economy stating, “We shall find that this industrial
progress cannot be achieved without agricultural advances and progress… Everyone
knows that unless we are self-sufficient in agriculture we cannot have the wherewithal
to advance in industries. If we have to import food, then we are doomed so far as
progress is concerned. We cannot import both food and machinery.”
Indian Planning Since Independence
A summary of various Five-Year Plans in India has been provided in Table 5.1 below:
Table 5.1 Summary of Five-Year Plans since Independence

Plan Aspects

First Plan  Based on the Harrod-Domar Model

(1951–56)  Community Development Program launched in 1952
 Focus on agriculture, price stability, power and transport
 Plan successful primarily because of good harvests in the final
two years of the plan
Second Plan  Also called the Nehru-Mahalanobis Plan
(1956–61)  Focus on rapid industrialization
 Advocated huge imports through foreign loans
 Shifted the emphasis from agriculture to industry
 Target Growth: 4.5 per cent
 Actual Growth: 4.27 per cent
 During this plan, prices increased by 30 per cent, against a
decline of 13 per cent during the first plan
Third Plan  At the inception of the third plan, it was felt that the Indian
(1961–66) economy had entered a take-off stage. Therefore, the aim of the
plan was to make India a 'self-reliant' and 'self-generating'
economy
 Based on the experience of first two plans, agriculture was given
top priority to support the exports and industry
 Target Growth: 5.6 per cent
 Actual Growth: 2.84 per cent
 The plan failed completely in reaching targets due to the
Chinese aggression of 1962, the India-Pakistan War if 1965 and
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Material 157
Planning in India Annual Plans The prevailing crisis in agriculture and a serious food shortage
(1966–69) necessitated the emphasis on agriculture during the Annual Plans
During these plans a completely new agricultural strategy was
implemented. It involved the wide-spread distribution of high-yielding
varieties of seeds, extensive use of fertilizers, exploitation of
NOTES irrigation potential and soil conservation
During the Annual Plans, the economy absorbed the shocks that
were generated during the third plan
The annual plans paved the path for the planned growth ahead
Fourth Plan  The main emphasis of the plan was on growth rate of agriculture
(1969–74) to enable other sectors to move forward
 Target Growth: 5.7 per cent
 Actual Growth: 3.30 per cent
 The first two years of the plan saw record production. The last
three years did not measure up due to poor monsoons
 The influx of Bangladeshi refugees before and after the 1971
Indo-Pak war was an important issue
Fifth Plan  D.D. Dhar prepared and launched the fifth five year plan
(1974–79)  The two main objectives of the plan was ‘Garibi Hatao’ (removal
of poverty) and the 'attainment of self reliance'
 The promotion of a high rate of growth, better distribution of
income and significant growth in the domestic rate of savings
were seen as key instruments of the plan
 The fifth plan was abruptly terminated in 1978 instead of 1979
after the Janata Party came to power at the centre
 Target Growth: 4.4 per cent
 Actual Growth: 3.8 per cent
Rolling Plan  There were two sixth five-year plans. The Janata party
(1978–80) government put forward a plan for 1978–1983. However, the
government lasted for only two years. The Congress returned to
power in 1980 and launched a different plan
Sixth Plan  The Congress government’s sixth five-year-plan focused on
(1980–85) increasing national income, modernising technology, ensuring
the continuous decrease in poverty and unemployment,
population control through family planning, etc
 Target Growth: 5.2 per cent
 Actual Growth: 5.66 per cent
Seventh Plan  The focus of the seventh plan was the rapid growth in food-
(1985–90) grains production, increased employment opportunities and
productivity within the framework of the basic tenants of
planning
 The plan was very successful with the economy recording 6 per
cent growth rate against the targeted 5 per cent
 Target Growth: 5.0 per cent
 Actual Growth: 6.01 per cent
Eighth Plan  The eighth plan was postponed by two years because of political
(1992–97) uncertainty at the Centre
 The Balance of Payment crisis and inflation during 1990–91
were the key issues during the launch of the plan
 The plan undertook drastic ‘structural adjustment policies’
enforced by the World Bank to combat the bad economic
situation and to undertake an annual average growth of 5.6 per
cent
 Some of the main economic outcomes during the eighth plan
period were rapid economic growth, high growth of the
agriculture and allied sector the manufacturing sector, the
growth in exports and imports, improvements in trade and the
current account deficit
Ninth Plan  The ninth five year plan was developed in the context of four
(1997–2002) important dimensions. The dimensions were quality of life,
generation of productive employment, regional balance and self-
reliance
 Target Growth: 6.5 per cent
 Actual Growth: 5.35 per cent

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 Planning in India
Eighth Plan  The eighth plan was postponed by two years because of political
(1992–97) uncertainty at the Centre
 The Balance of Payment crisis and inflation during 1990–91
were the key issues during the launch of the plan
 The plan undertook drastic ‘structural adjustment policies’
enforced by the World Bank to combat the bad economic
situation and to undertake an annual average growth of 5.6 per
NOTES
cent
 Some of the main economic outcomes during the eighth plan
period were rapid economic growth, high growth of the
agriculture and allied sector the manufacturing sector, the
growth in exports and imports, improvements in trade and the
current account deficit
Ninth Plan  The ninth five year plan was developed in the context of four
(1997–2002) important dimensions. The dimensions were quality of life,
generation of productive employment, regional balance and self-
reliance
 Target Growth: 6.5 per cent
 Actual Growth: 5.35 per cent
Tenth Plan  The objective of the tenth five year plan was to achieve 8 per
(2002–2007) cent GDP growth rate, reduce poverty by five percentage points
by 2007, provide universal primary healthcare by 2007, and to
provide sustained drinking water to all villages by 2012.
 The plan also aimed at providing high quality gainful
employment to the labour force over the plan period and aimed
at increasing literacy rate to 72 per cent within the plan period
and to 80 per cent by 2012
 Target growth:8.1 per cent
 Growth achieved:7.7 per cent
Eleventh  Accelerate GDP growth from 8% to 10 per cent, increase
Plan agricultural GDP growth rate to 4 per cent per year, create 70
(2007–2012) million new work opportunities and reduce educated
unemployment to below 5 per cent
 Raise real wage rate of unskilled workers by 20 per cent
 Reduce dropout rates of children from elementary school from
52.2 per cent in 2003–04 to 20 per cent by 2011–12 and
increase literacy rate for persons of age 7 years or above to 85
per cent
 Lower gender gap in literacy to 10 percentage point and
increase the percentage of each cohort going to higher
education from the present 10 per cent to 15 per cent
 Reduce infant mortality rate to 28 and maternal mortality ratio to
1 per 1000 live births
 Reduce Total Fertility Rate to 2.1
 Attain WHO standards of air quality in all major cities by 2011–
12
 Provide clean drinking water for all by 2009
 Increase forest and tree cover by 5 percentage points
 Reduce malnutrition among children between 0–3 years to half
its present level and reduce anaemia among women and girls by
50 per cent
 Raise the sex ratio for age group 0–6 to 935 by 2011–12 and to
950 by 2016–17
 Ensure that at least 33 per cent of the direct and indirect
beneficiaries of all government schemes are women and girl
children
 Ensure all-weather road connection to all habitation with
population 1000 and above (500 in hilly and tribal areas) by
2009, and ensure coverage of all significant habitation by 2015
 Treat all urban waste water by 2011–12 to clean river waters
 Connect every village by telephone by November 2007 and
provide broadband connectivity to all villages by 2012
 Increase energy efficiency by 20 percentage points by 2016–17

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Planning in India The 12th Five Year Plan (2012-2017)
Rather than project a single average growth rate over the five-year period,
the Twelfth Five Year Plan (2012-17) envisaged three scenarios termed as
NOTES ‘strong inclusive growth’, ‘insufficient action’ and ‘policy logjam’. The aim of
the 12th Five Year Plan was faster more inclusive and sustainable growth. The
Plan pegged the average annual growth rate of the Gross Domestic Product
(GDP) under the three scenarios at 8 per cent, 6 to 6.5 per cent and 5 to 5.5
per cent, respectively.
The Twelfth Plan document stated that the objective of 8 per cent annual
average growth of GDP can be achieved provided policies that take care of
weaknesses in the system are put in place. To emphasize the role of policies,
alternative scenarios were presented in the Plan. Scenario one is called ‘Strong
Inclusive Growth’ and presents what is possible if well-designed strategy is
implemented, intervening at key leverage points through the numerous policy
actions. The Twelfth Plan targeted growth rates of 4.0 per cent for agriculture, 7.6
per cent for industry and 9.0 per cent for services, thereby aiming at 8.0 per cent
growth in overall GDP.
There were three important revisions to the calculation of GDP in this
period: (i) The base year has been changed from 2004-05 to 2011-12; (ii)
more reliable data sources are used for the corporate, finance corporations and
autonomous institutions and (iii) GDP is now calculated at market prices (broadly
equivalent to consumer prices) instead of factor costs (broadly equivalent to
producer prices).
Because the GDP had been estimated under the old methodology only up
to the year 2013-14, we have the growth rates associated with both the old and
new methodology for years 2012-13 and 2013-14 only. When measured at factor
cost, the real GDP growth under the old methodology turns out to be 4.5 per cent
in 2012-13 and 4.7 per cent in 2013-14. Because the Twelfth Plan projections
were based on the old series, it may be reasonably concluded that at least in
2012-13 and 2013-14, India has performed worse than the ‘policy logjam’
scenario.
While the growth in industrial sector improved significantly over the years,
the rate of growth of GVA in Agriculture, forestry & fishing and Services showed
mixed trends. Increasing large share for services in total output at a relatively early
stage of development is not typical and a matter of concern as, in India, the structural
shift from agriculture to services is actually bypassing the industrial sector. The
Twelfth Five Year Plan is the last Five Year Plan. The Planning Commission was
replaced by the NITI Aayog.
5.2.1 NITI Aayog
The Government of India, in keeping with its reform agenda, constituted the NITI
Aayog to replace the Planning Commission instituted in 1950. This was done in
order to better serve the needs and aspirations of the people of India. An important
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160 Material
of the Government of India to bring States to act together in national interest, and Planning in India

thereby fosters Cooperative Federalism. The National Institution for Transforming

India, also called NITI Aayog, was formed via a resolution of the Union Cabinet
on January 1, 2015.
NOTES
At the core of NITI Aayog’s creation are two hubs – Team India Hub and
the Knowledge and Innovation Hub. The Team India Hub leads the engagement
of states with the Central government, while the Knowledge and Innovation Hub
builds NITI’s think-tank capabilities. These hubs reflect the two key tasks of the
Aayog.
Instead of the Five Year Plans, NITI Aayog has been tasked with preparing the
following documents:
(i) A vision document keeping in view the social goals set and/or proposed for
a period of 15years;
(ii) A 7-year strategy document spanning 2017-18 to 2023-24 to convert the
longer-term vision into implementable policy and action as a part of a ‘National
Development Agenda’; and
(iii) A 3-year Action document for 2017-18 to 2019-20 aligned to the
predictability of financial resources during the 14th Finance Commission
Award period. This is also to help translate into actions the goals of the
government to be achieved by 2019.
The decision to discontinue Five Year Plans has also meant that the distinction
between plan and non-plan expenditures conventionally made will no longer be
made in the future Budgets beginning 2017-18. This is a suggestion that has long
been made by economists. The principal distinction will now be between revenue
and capital expenditures.

Check Your Progress

1. What is a planned economy?
2. Who set up the Planning Commission in India?

5.3 POVERTY AND UNEMPLOYMENT

Generally, the poor is identified on the basis of their occupation and ownership of
assets. According to scholars, the rural poor mainly work as:
 Landless agricultural labourers
 Cultivators with very small landholdings
 Landless labourers who are engaged in a variety of non-agricultural jobs
 Tenant cultivators with small land holdings
The urban poor are majorly born out of the rural poor who had migrated to
urban areas in search of alternative employment and better livelihood, labourers
who do a variety of casual jobs and the self-employed who sell a variety of things
on roadsides and are engaged in various activities. Self - Learning
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Planning in India In post-independent India, several attempts have been made by the
government to define a mechanism in order to identify the number of poor in the
country. People are divided into two categories for the purpose of defining poverty-
the poor and the non-poor - and these two categories are further separated by the
NOTES poverty line. However, there are several kinds of poor, including the absolutely
poor, the very poor and the poor. Similarly, there are various kinds of non-poor,
including the middle class, the upper middle class, the rich, the very rich and the
absolutely rich.
Several factors, other than income and assets, are associated with poverty;
for instance, the accessibility to basic education, health care, drinking water and
sanitation. However, the mechanism to determine the poverty line does not consider
social factors that initiate and is responsible for causing poverty such as illiteracy,
ill health, lack of access to resources, discrimination or lack of civil and political
freedoms. The government should make sure that the aim of poverty alleviation
schemes should be to improve human lives by expanding the range of things that a
person could be and could do, such as to be healthy and well-nourished, to be
knowledgeable and participate in the life of a community. From this standpoint,
development means removing the obstacles to the things that a person can do in
life, such as illiteracy, ill health, lack of access to resources, or lack of civil and
political freedoms.
Therefore, population growth plays a significant role in resulting in very low
growth in per capita income terms. This further result in widening the gap between
the poor and the rich. The Green Revolution aggravated the inequalities regionally
and between large and small farmers. This was further aggravated by the
unwillingness and inability to redistribute land and thus very little land reforms.
More recently, economists now state that the benefits of economic growth rather
than reaching the poor, has resulted in greater inequality. In fact, the Gini coefficient,
the measure of income inequality in a country, has gone up in India in the last 20
years. This means that while a minority may have benefitted greatly by the reforms
process, the lives of the majority of people in India is no different than it was 20
years ago. Recognizing this, the Government has started to talk about creating
policies for ‘inclusive growth’. Whether the formulation of such policies will have
an impact in reducing the huge levels of poverty and inequality in India remains to
be seen.
Head Count Poverty Index
The Planning Commission, which is the nodal agency for estimating the number
and proportion of people living below the poverty line at national and regional
levels, separately for rural and urban areas; makes poverty estimates every five
years. The survey is based on a large sample survey of household consumption
expenditure carried out by the National Sample Survey Organization (NSSO)
after an interval of approximately five years. The Commission has been estimating
the poverty line and poverty ratio since 1997 on the basis of the methodology
spelt out in the report of the Expert Group on ‘Estimation of Number and Proportion
of Poor’ ( known as Lakdawala Committee Report). On the basis of NSS 61st
Round (July 2004 to June 2005) consumer expenditure data, the poverty ratio is
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estimated at 28.3 per cent in rural areas, 25.7 per cent in urban areas, and 27.5 Planning in India

per cent for the country as a whole in 2004–05 using uniform recall period (URP).
In URP, consumer expenditure data for all the items are collected for a 30-day
recall period. Based on mixed recall period (MRP) for the same period, the poverty
ratios are 21.8 per cent in rural areas, 21.7 per cent in urban areas, and 21.8 per NOTES
cent for the country as a whole. In MRP, consumer expenditure data for five non-
food items, namely clothing, footwear, durable goods, education, and institutional
medical expenses, are collected for a 365-day recall period and the consumption
data for the remaining items are collected for a 30-day recall period. The poverty
estimate in 2004–05 based on URP consumption (27.5) is comparable to that of
1993–94 (36). The poverty estimates in 2004–05 based on MRP consumption
(about 21.8) is roughly (but not strictly) comparable to that of 1999–2000 (26.1).
Poverty ratio for rural India is considerably higher than the poverty ratio for urban
areas on the basis of URP while it is almost the same on the basis of MRP.
The poverty headcount ratio at national poverty line in India was last reported
at 21.9% in 2011-12.
Reasons for Poverty in India
There are several reasons responsible for poverty in India. Some of them are
discussed below:
(i) Growth of population: One of the major problems of poverty in India is
the high growth rate of population especially among the poor. This is because
of their strong belief in traditions, illiteracy and also their preference for the
male child, which results in increase in population. With limited income, and
numerous mouths to feed, they are unable to make ends meet.
(ii) Low rate of economic development: Low rate of economic development
is another major cause of poverty. The rate of economic development in
India has been below the required level. It implies low per capita income,
leading to a low standard of living. The population in India has been increasing
at an annual average rate over 2 per cent during the plan period. Employment
opportunities increase slowly because of low growth rate in the economy.
This has kept the poor families in the state of poverty.
(iii) Unemployment: With more than 2 crores unemployed people (in 2003–
2004), India is in the grip of unemployment and underemployment. There is
less job opportunities compared to the number of job seekers. Though
efforts have been made to promote small and cottage industries to generate
employment; however, even these industries could not absorb sufficient
workforce so as to reduce poverty. Thus, the problem of unemployment
and indebtedness is responsible for making the problem of poverty more
acute.
(iv) Lack of education: Growth of population has long been associated with
the lack of education. Since the poor have limited access to education, they
usually end up with low-paid jobs. This in turn, results in low income. Since,
most underprivileged people are illiterate; they think that more the number
of members in the family, more it will help in acquiring wealth.
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Planning in India (v) Inflationary pressure: The constant rise in price has only added to the
miseries of the poor. Sharp rise in prices has led to fall in the real income of
fixed and low-income earners. Because of this, the poor reduced their
purchasing power. This in turn, has led to low standard of living.
NOTES
(vi) Socio-cultural factors: Socio-cultural set-up of the country also contributes
to poverty to a large extent. Usually, people belonging to lower castes and
tribal groups, comprise the poor. Illiteracy and limited chances of mobility
perpetuates poverty. Factors such as caste system, joint family system,
religious faith and beliefs, and law of inheritance have hindered the process
of economic growth.
(vii) Growth strategy: Various strategies designed in the government plans have
not been implemented properly. Some are yet to be developed. In fact, the
growth strategy has kept the poor out of the development process. Prof.
H. Meghnad Desai points out, ‘India’s poverty–creating programmes is
larger than its poverty removal programme.’
(viii) Inequalities in income: Inequalities of income in rural and urban areas of
the country is another cause of poverty. During the plan period, a large
proportion of increased income has been cornered by the affluent ones.
Due to inequalities in the distribution of income and assets, even a small rise
in per capita income could not affect the poor. Hence, the problem of poverty
has become acute.
(ix) Inadequate anti-poverty measures: In view of the large magnitude of
the problem of poverty in the country, the anti-poverty measures taken by
the government are far from adequate. Some of them have been implemented
half-heartedly and the ones, which have been implemented, have benefited
only selected sections of the populace. Despite implementation of measures,
the success in alleviating poverty has been limited.
(x) Capital deficiency: Capital formation is a very important factor that can
lead to economic growth and fall in poverty. There is a dearth of capital in
India which results in low productivity, low per capita income and the end
result happens to be poverty.
(xi) Globalization: Globalization has pushed many households below poverty
line. It is because production of some of the most important food crops
have declined as agricultural land is being used for production of export
crops after the inception of the globalization process. Liberalization has
also forced small farmers to compete in a global market where prices of
agricultural good are low.
(xii) Political factors: Political structure of the country is also one of the factors
accounting for the continued poverty. Political power is concentrated in the
hands of the upper strata of the society, both in the urban area and rural
areas. Economic policies are formulated to promote the interest of the richer
section of the society. Poor people, particularly peasants, landless labourers,
tribal people and slum dwellers suffer in the process.

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5.3.1 Unemployment Planning in India

The state of joblessness for an able man who is willing to work is known as
Unemployment. In India, unemployment is much higher in urban areas than in rural
areas. According to economists and social thinkers, unemployment can be both NOTES
voluntary or involuntary. Voluntary unemployment is the condition when a person
is out of job just for his own desire due to any reason. In Involuntary unemployment
a person is separated from remunerative work and devoid of wages inspite of
having all the capabilities.
Various problems like enormous increase in the population, age, vocational
unfitness and physical disabilities, technological and economic factors have caused
this problem. Other problems also contribute towards unemployment. Several
socio-economic problems like poverty, malnutrition, antisocial and criminal activities,
drug and substance abuse, etc., are the result of ill effects of unemployment.
According to the NSSO survey, the overall unemployment rate in India was
7.3 per cent in 1999– 2000 with the unemployment rate in rural areas being 7.2
per cent and that in urban areas being 7.7 per cent. Moreover, almost 30 per cent
of workers in India are occasional workers who only work when they get jobs
and remain unemployed for the rest of the time. Only 10 per cent of the workforce
in India is in regular employment.
Five year plans had introduced several employment generating schemes
and programs over the years but due to lack of proper implementation and
monitoring, these employment generating schemes have not achieved the required
targets. The recent National Rural Employment Guarantee program is a new and
praiseworthy effort by the UPA Government as it will provide employment to rural
people for minimum hours even during natural calamities like drought, floods, etc.
Table 5.2 shows all India rural and urban unemployment rates for NSS
66th Round.
Table 5.2 All-India Rural and Urban Unemployment Rates for NSS 66th Round

Sl No. Estimate Rural Urban Total Total

2009-2010 2009-2010 2004-2005 2009-2010
1 UPSS 1.6 3.4 2.0 2.3
2 CWS 3.3 4.2 3.6 4.4
3 CDS 6.8 5.8 6.6 8.2

Source: Key Indicators of Employment and Unemployment in India, 2009-10, NSSO.

5.3.2 Poverty and Unemployment Eradication

Programmes in India
The problem of poverty—a multidimensional challenge for India—needs to be
addressed seriously. Poverty alleviation and improvement in the standard of living
of the masses has been one of the most important objectives of planning in India.
However, the emphasis that is laid on the objective of poverty alleviation and
strategy to achieve this objective has changed over the years. The measures which
have been adopted by the government for the removal of poverty are as follows:
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Planning in India (i) Economic growth: Economic growth can be helpful in removing poverty
because of the trickle-down effect. It was thought that the benefits of
economic growth would trickle down to the underprivileged in the form of
more employment and more income because of the expansion of agricultural
NOTES and non-agricultural activities. There are several potential drivers of growth
that suggest it may be possible to accelerate GDP growth in the Twelfth
Plan beyond the 8.2 per cent level achieved in the Eleventh Plan. These
drivers include the impact of economic growth, development of a dynamic
private sector, good management skills, etc.
(ii) Population control: High growth rate of population among the lower strata
of the society is an important factor that is responsible for the perpetuating
problem of poverty. Jansankhya Sthirata Kosh (JSK) has been registered
as an autonomous society of the Ministry of Health and Family Welfare.
The Government has provided a ‘ 100 crore corpus fund to signify its
commitment to the activities of the Kosh. JSK has to use the interest on the
corpus and also raise contributions from organizations and individuals that
support population stabilization.
(iii) Agricultural development: Along with a substantial increase in plan
allocation and credit for agriculture proper, an ambitious Bharat Nirman for
rural infrastructure, the National Rural Employment Guarantee Act
(MGNREGA) to dovetail employment security with land and water
conservation, and the Backward Regions Grants Funds (BRGF) have
enabled Panchayati Raj institutions in poorer regions to make their own
plans. In addition to enhancing the scope of these initiatives, and making
modifications as suggested by the various working groups, the Eleventh
Plan introduced the Rashtriya Krishi Vikas Yojana (RKVY). This put in
effect the NDC resolution to ‘introduce a new scheme for Additional Central
Assistance to incentivize states to draw up plans for the agricultural sector
more comprehensively, taking agro-climatic conditions, natural resource
issues and technology into account, and integrating livestock, poultry and
fisheries more fully.’ The Twelfth Plan will consider all these issues, as well
as the weaknesses of existing schemes as brought out in the Mid-Term
Appraisal of the Eleventh Plan. Its thrust will be to move forward with the
RKVY and, in particular, focus more on the issues of sustainable
development.
(iv) Land reforms: The Government had worked on a combined Land
Acquisition and Rehabilitation & Resettlement Bill, 2011. The reason for
combining the two into a single legislation is that land acquisition and
resettlement and rehabilitation (R&R) need to be seen necessarily as two
sides of the same coin. The Bill seeks to balance the need for facilitating
land acquisition for various public purposes, including infrastructure
development, industrialization and urbanization, while at the same time
meaningfully addressing the concerns of farmers and those whose livelihoods
are dependent on the land being acquired.

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 (v) Development of cottage and small-scale industries: The small-scale Planning in India

industries have been given a special place in the industrialization programme.

Since these industries have played an important role in the generation of
employment and in ensuring a more equitable distribution of income; the
government has provided necessary incentives, support technical assistance NOTES
and infrastructure facilities to promote these industries.
(vi) Public Distribution System: The government has also launched a scheme
of Public Distribution System (PDS). The objective of this scheme is to
provide cheap and subsidized food grains to the poor. The PDS functions
through a wide network of fair price shops. Since June 1997, a new
scheme known as the Targeted Public Distribution System (TPDS) has
been adopted in order to provide subsidized food grains for the families
falling below the officially estimated poverty line at the rate of 10 kg per
month per family.
The government is considering the National Food Security Bill, 2013.
According to this Bill, every person belonging to ‘priority households’ are entitled
to receive five kilograms of food grains per person per month at subsidized prices
from the state government under the TDPS. The TPDS system today supports
over 40 crore Indians below the poverty line with monthly supply of subsidized
food grains. The system also provides gainful employment for 4.78 lakh Fair Price
Shops Owners, their employees and hired labour who work at the FCI and state
warehousing godowns.
Since the Fifth Five-Year Plan (1974–79), poverty alleviation has been adopted
as an explicit objective of our economic planning. Since then, a number of poverty
alleviation programmes have been launched with the specific objective of reducing
poverty. During the 1970s, a number of special programmes for the rural poor
were undertaken. Some of the important programmes were as follows:
 Small Farmers Development Agency (SFDA)
 Marginal Farmers and Agricultural Labourers Development Agency
(MFALDA)
 Drought-Prone Area Programme (DPAP)
 Crash Scheme for Rural Employment (CSRE)
The wage employment programmes started as pilot projects in the form
of Rural Manpower Programme (RMP) [1960-61], Crash Scheme for Rural
Employment (CRSE) [1971–72], Drought Prone Area Programme started as
Rural work Programme (RWP) [1972], Small Farmers Development Agency
(SFDA), Marginal Farmers & Agricultural Labour Scheme (MF&AL) for the
poorest of the poor. These experiments were translated into a full-fledged
wage-employment programme in 1977 in the form of Food for Work
Programme (FWP). In the 1980s, this programme was further streamlined
into the National Rural Employment Programme (NREP) and Rural Landless
Employment Guarantee Programme (RLEGP), Jawahar Rozgar Yojana
(JRY1993–94) and Employment Assurance Scheme (EAS). This programme
(RLEGP) begun in 1983.
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Planning in India In the 1980s and 1990s, the government undertook various programmes which
were more comprehensive and made a direct attack on rural and urban poverty.
The important programmes were as follows:

NOTES  National Rural Employment Programme (NREP)

 Rural Landless and Employment Generation Programme (RLEGP)
 Jawahar Rozgar Yojna (JRY)
 Integrated Rural Development Programme (IRDP)
 Scheme of Training Rural Youth for Self-Employment (TRYSEM)
 Self-Employment Programme for Urban Poor (SEPUP)
 Nehru Rozgar Yojna (NRY)
These special poverty alleviation programmes have been revamped, redesigned
and restructured to make these programmes more effective. The important poverty
alleviation programmes in operation in rural and urban areas are explained as
follows:
(i) National Social Assistance Programme (NSAP): The National Social
Assistance Programme (NSAP) which came into effect from 15 August
1995, represents a significant step towards the fulfillment of the Directive
Principles in Article 41 of the Constitution. The programme introduced a
National Policy for Social Assistance for the poor and aimed at ensuring
minimum national standards for social assistance in addition to the benefits
that the states are currently providing or might provide in future. NSAP, at
present, comprises the following:
 National Old Age Pension Scheme (NOAPS): Under this scheme,
helpless aged person of more than sixty-five years of age gets financial
assistance of 75 per person.
 National Family Benefit Scheme (NFBS): Under this scheme, the
family living below poverty line receives a lump-sum central grant in
case of death of the primary bread earner in the family.
 National Maternity Benefit Scheme (NMBS): Under this scheme,
a pregnant woman of more than nineteen years of age from a family
living below poverty line gets assistance for maternity care.
(ii) Indira Awaas Yojana (IAY): It is an important scheme whose main purpose
is the construction of houses for the poor people. Initially, it aimed at
providing houses free of cost to the poor families belonging to scheduled
castes and scheduled tribes and free bonded labourers. Later, the scheme
was extended to cover other underprivileged categories as well.
(iii) Shiksha Sahayog Yojana (SSY): This scheme was launched on 31
December 2001. It aims at providing monthly education allowance of ‘100
for children whose parents meet the criteria of living below the poverty
from the ninth to twelfth standard.
(iv) Pradhan Mantri Gramodaya Yojana (PMGY): PMGY was introduced
in 2000–01 with the objective of focussing on village level development
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 in five critical areas such as health, primary education, drinking water, Planning in India

housing and rural roads. PMGY includes the following three major
projects:
 Pradhan Mantri Gram Sadak Yojana (PMGSY): PMGSY was
NOTES
launched on 25 December with the objective of providing road
connectivity through good all-weather roads to all rural habitations.
 Pradhan Mantri Gramodaya Yojana (Gramin Awaas): This scheme
was implemented in April 2000 based on Indira Awaas Yojana having at
its heart the aim of sustainable habitat development in rural areas to
accommodate the increasing housing needs of the poor people living in
villages.
 Pradhan Mantri Gramodaya Yojana (Rural Drinking Water
Project): Rural Drinking Water Project was launched with the objective
of developing projects for providing water harvesting, water conservation
and drinking water to drought prone areas.
(v) Samagra Awaas Yojana (SAY): This scheme was undertaken in 1999–
2000 on pilot project basis to meet the housing needs in one block in each
twenty-five districts of twenty-four states and in one Union Territory with a
view to ensuring integrated provision of shelter, sanitation and drinking water.
(vi) Natural Food for Work Programme (NFWP): This programme was
initially launched in February 2001 for five months, and was further extended.
The programme aims at augmenting food security through wage employment
in the drought affected areas in eight states, namely, Gujarat, Chhattisgarh,
Himachal Pradesh, Madhya Pradesh, Maharashtra, Orissa, Rajasthan and
Uttarakhand. Under this scheme, wages are paid partly in kinds like food
grains and partially in cash. It is the responsibility of the state governments
to implement this scheme.
(vii) Krishi Shramik Samajik Suraksha Yojana (KSSSY): KSSSY came
into effect in July 2001 with an aim to provide social security benefit to
agricultural labourers, who were between the age of 18 and 60 years.
(viii) Annapurna: The Annapurna Scheme became effective from April 2000 as
an entirely Centrally Sponsored Scheme. The main purpose of this scheme
was to provide food security to meet the needs of senior citizens. The scheme
became effective in most Indian states and five Union Territories. This scheme
offered assistance to more than 6,08,000 families.
(ix) Jawaharlal Nehru National Urban Renewal Mission (JNNURM):
This scheme was launched in 2005–06 for a seven-year period. It has two
components—Basic Service to the Urban Poor Programmes (BSUPP) and
Integrated Housing and Slum Development programme (IHSDP).
(x) Valmiki Ambedkar Awaas Yojana (VAAY): This scheme was launched
in the year 2001. It facilitates the construction and upgradation of dwelling
units for slum dwellers. It also provides community toilets under Nirmal
Bharat Abhiyan.
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Planning in India (xi) Antodaya Anna Yojana (AAY): With the sole aim of offering food security
to the senior citizens under the National Old Age Pension Scheme, food
grains are given to the beneficiaries at subsidized rates of 2 per kg. This
scheme became effective from 1 April 2000 as an entirely Centrally
NOTES Sponsored Scheme. It has covered more than 6,00,000 people. As
announced in the Union Budget 2005–06, the AAY was further expanded
to cover 50 lakh below poverty line households, which extends its coverage
to 2.5 crore households.
(xii) Garibi Hatao: ‘Garibi hatao’, which means ‘eradicate poverty’ was the
slogan of the Sixth Five Year Plan of the Indira Gandhi Government.
Agricultural growth became the focus of the government and a number of
poverty alleviation schemes were undertaken.
(xiii) Food for work programme: A short run programme was initially launched
with effect from February 2001 for five months, but it was further extended.
The main objective of this programme was to augment food security by
making available wage employment in the drought affected rural areas in
eight states, namely, Gujarat, Chhattisgarh, Himachal Pradesh, Madhya
Pradesh, Maharashtra, Orissa, Rajasthan and Uttarakhand. The Central
Government is responsible for making available a sufficient amount of food
grains for free to each of the states that was affected by the drought. Wages
by the State government can be paid partially in kind (up to 5 kg of food
grains per Monday) and partially in cash. Assuring the notified minimum
wages, the workers are paid the minimum balance of wages in cash. This
programme stood extended up to 31 March 2002 in respect of notified
‘National Calamity Affected Districts’. This scheme was later merged in
NREGS since 2 February 2006.
5.3.3 Inflation
Wholesale price index (WPI) series with 2004-05 base was released on 14
September 2010. A representative commodity basket comprising 676 items has
been selected and weighting diagram derived for the new series. The total number of
price quotations has also increased from 1981 in the old series to 5482 in the new
series, indicating better representation of the prices in the wholesale markets. Sector-
wise price quotations have increased from the old to new series from 455 to 579 in
primary group and from 1391 to 4831 in the manufactured products group.
Some of the important items included in the new series basket are flowers,
lemons and crude petroleum in primary articles and ice cream, canned meat, palm
oil, readymade/instant food powder, mineral water, computer stationery, leather
products, scooter/motorcycle tyres, polymers, petrochemical intermediates, granite,
marble, gold and silver, construction machinery, refrigerators, computers dish antenna,
transformers, microwave ovens, communication equipment (telephone instruments),
TV sets, VCDs, washing machines and auto parts in manufactured products.
The rural population, particularly the rural labour in India, is faced with
many socio-economic problems such as unemployment/under employment, low
incomes, illiteracy and high incidence of indebtedness.
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General Wholesale Price Situation Planning in India

Economic survey 2011-12 showed increasing food prices on account of

unfavourable agricultural supply conditions coupled with the waning of base effect,
leading to sharp increase in inflation. Thereafter, the headline WPI inflation reached NOTES
10.23 per cent in March 2010.
The Financial year 2010-11 started with 11 per cent headline inflation in
April 2010. During 2010-11, the monsoon situation has been better than it was
last year. As per the second advance estimates, production of food grains in 2010-
11 is likely to be 232.07 million tonnes compared to 218.11 million tonnes last
year. However, demand pressures became visible in early 2010.
At disaggregate level, the price behaviour of three major commodities groups
has been in marked contrast to the previous year when inflation remained low on
account of global decline in commodity prices. From March to July 2010, headline
inflation remained in double digits. The major contributors to this primary articles
whose inflation hovered in the range of 14.7 per cent to 21.5 per cent and fuel
which recorded inflation in the range of 10.3 per cent of 14.4 per cent. However,
the inflation in manufactured products remained in the lower range of 4.5 to 6.4
per cent during the current year.
The government is committed to ensuring availability of cooking fuels to the
common man at affordable prices. In view of the importance of household fuels,
namely kerosene and domestic liquefied petroleum gas (LPG), the government
has decided that the subsidies on these products will be continued. The PDS
kerosene and domestic LPG Subsidy Scheme 2002 as well as the Freight Subsidy
(for Far-flung Areas) Scheme 2002 have been extended till 31 March 2014.
However, in order to reduce the burden of under-recoveries, it has been decided
to increase the retail price of public distribution system (PDS) kerosene to 14.29
and of domestic LPG to 410, in Delhi corresponding increases in other parts of
the country. Prices of petrol and diesel, both at the refinery gate and retail level,
will be market determined. However, it is proposed that increase in prices of
diesel will be staggered over time to minimize the overall impact on the poor and
vulnerable. It has also been decided that in case of a high rise and volatility in
international oil prices, government will suitably intervene in the pricing of petrol
and diesel.
Average Trends in WPI Inflation
The ten-year average of headline WPI inflation was around 5.3 per cent from
2000-01 to 2009-10; in this decade 2000-01, 2003-04, 2004-05, 2006-07 and
2008-09 had higher inflation relative to the decadal average. In the current financial
year, the average inflation (April-December 2010) of 9.4 per cent was also much
higher than the decadal rate. The ten-year average inflation in fuel was around 8.9
per cent. The major portion of that was contributed by the high inflation of 2008-
10. The years 2003-04, 2004-05, 2006-07 and 2008-09 also witnessed high
inflation in manufactured products mainly on account of high prices of raw materials,
such as basic metal alloys and metal products, non-metallic mineral products, and
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Planning in India machinery and machine tools. The year 2008-09 was different from the previous
three years as inflation in all the three sectors remained high on account of high
international fuel and commodity prices. The year 2009-10 was an abnormal one
due to global slowdown and unfavourable monsoon. Notwithstanding, the average
NOTES inflation in fuel. In the current financial year (2010-11), overall average inflation
from April-December 2010 at 9.4 pe rcent, is the highest recorded in the last ten
years.
Food Inflation of WPI
The food index consists of two sub components, namely primary food articles and
manufactured food products. The overall weight of the composite food index in
the WPI is 24.31 per cent, comprising primary food articles with a weight of
14.34 per cent and manufactured food products with a weight of 9.97 per cent. A
major concern in the domestic economy has been a sharp rise in food price inflation
during the year 2010-11. The WPI food inflation has moderated to 8.59 per cent
in December 2010 after reaching its peak of 20.22 per cent in February 2010. Of
its two components, primary food price inflation touched a historic high in the
revised series at 21.9 per cent in February 2010, thereafter declining to 9.4 per
cent in November 2010 and once again rising to 13.6 per cent in December
2010. However, manufactured food products exhibited a decline in inflation from
19.3 per cent in December 2009 to 0.4 per cent in December 2010. Among food
items, sharp rise in prices was observed in onions, fruits, eggs, meat and fish and
milk. The prices of food grains, however, remained low on the back of good
monsoons with a year-on-year inflation of – 2.6 per cent in December 2010.

Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to
get for five dollars when you had hair.
– Sam Ewing

Main Drives of Food Inflation

In 2010-11, inflation in primary food articles was mainly driven by rice, vegetables,
potatoes, onions, fruits, milk, eggs, meat and fish, condiments and spices, and tea.
However, the WPI of manufactured food products with 2004-05 base is in the
comfortable zone. It was 142.7 in December 2010 as against 142.2 in December
2009. This has marginally increased due to vanaspati oil, groundnut oil, sunflower
oil, rice bran extraction, tea and coffee process, and mail liquor.
Core inflation is a measure of inflation that excludes items that face volatile
price movement, notably food and energy. It is, therefore, a preferred tool for
framing long-term policy. Core inflation, which was 0.55 per cent in November
2009, reached its peak in April 2010 at 8.07 per cent. Thereafter, it has moderated
in response to monetary measures taken by Reserves Bank of India (RBI).
However, inflation in non-food manufactured products (weight 55.00 per cent)
had not increased much and remained in the range of 5.1 to 5.9 per cent in the
current financial year. Notwithstanding, year-on-year inflation in the composite
non-food index (weight 75.7 per cent) has increased to 8.36 per cent in December
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2010 after moderating to 7.96 per cent in September 2010 from 9.18 per cent in Planning in India

April 2010.
Main items of concern in non-food inflation are raw cotton, raw jute, raw
silk, copra, castor seed, sunflower, raw rubber, copper ore, zinc, iron ore, cotton
NOTES
textiles, petrochemical intermediate and industrial machinery and machine tools.
Annual Inflation as per Different Price Indices
The inflation in terms of the consumer price index for industrial workers (CPI-IW)
remained in double digits from July 2009 to July 2010. The inflation in terms of the
CPI-AL (Agricultural) maintained higher levels last year relative to the WPI, mainly
because of the larger weight assigned to food items. In consumer price indices,
food items contribute a weight of 46.20 per cent in the CPI-IW and 69.15 per
cent in the CPI-AL as against 24.31 per cent in WPI. The food inflation has
decelerated after reaching its peak in January 2010. As a result, CPI inflation rates
have gone down substantially.
Disaggregated Consumer Price Inflation
Analysis at this level has assumed importance in view of the fact that the current
phase of relatively high inflation is concentrated in food, pan, supari, tobacco and
intoxicants, and housing. Two major contributors of high CPI-IW inflation were
food and housing. The housing sector is the third major contributor after food and
the miscellaneous group, having a 15.3 per cent weight in the CPI-IW commodities
basket. However, the average inflation (April-December 2010) was lower than in
the corresponding period last year.
The non-food inflation in CPI-IW has increased during April-December
2010 to 11.64 per cent as against 8.78 per cent in the corresponding period
last year. During April-December 2010, food inflation has declined to 10.29
per cent as compared to 14.70 per cent during the corresponding period last
year. Inflation in the CPI-IW has increased in December 2010 to 9.47 per
cent as against 8.33 per cent in November 2010. Food inflation in the CPI-
IW has also increased to 7.98 per cent in December 2010 from 5.35 per cent
in November 2010.
Inflation in fruits and vegetables and onions based on the CPI-IW in
December 2010 was 15.3 per cent and 77.6 per cent respectively as against
22.77 per cent and 45.82 per cent respectively based on the WPI. State-wise
CPI-IW and year-on-year inflation in December 2010 for onions shows
unprecedented rise in inflation in the northern region, particularly Punjab.
Introduction of CPI-Urban and CPI-Rural
The Central Statistics Offices (CSO) has taken up a new initiative of compilation
of CPI (urban), CPI (rural) and CPI (rural+urban) for all states/UTs and all India
by considering all sections of the urban and rural population. These indices would
reflect the true picture of price behaviour of various goods and services consumed
by the urban and rural population.

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Planning in India
5.3.4 Black Money
The prevalence of corruption in civic life is a universal experience, but recently, it
has assumed alarming proportions in India. It has spread to each part of the
NOTES governmental bodies, and a more speedy growth of corruption has been observed
among the politicians, the political workers at all stages and even in the uppermost
ranks of political leadership, both at the levels of the state and the Centre. There
persists a massive public scepticism towards corruption, and there is a general
feeling of acceptance of corruption in civic life by people. It is felt that people
indicted of political corruption always go guiltless, and thus, accumulate more
power, status and wealth. All this has resulted in a state of affairs, where even the
most resolute efforts to fight the evil of corruption have failed dejectedly. It seems
that the government is already aware of its existence, and also knows the likely
manner in which it can be controlled, but is lacking the will required to implement
such measures successfully. J. Nye states that ‘corruption denotes the abuse or
misuse of public offices for personal gains.’ The English dictionary defines corruption
as ‘an inducement to wrong by bribery or other unlawful means: a departure from
what is pure and correct’.
The following are some of the characteristics of corruption in India:
 It damages the whole body politic, economic and social—whether individual
groups, establishments or business organizations.
 It means exercising more demands and influences by using the power of
money.
 It expands and spreads when unethical politicians, government officials and
powerholders get the power of making decisions and when they become
pliant.
 It makes effortless headway in a lane of financial inequalities, societal
backwardness and ethical decline.
 It has some major manifestations such as defection, factionalism and political
bargaining, red-tapism, nepotism, white-collar crimes, blue-collar crimes
and bureaucracy.
 It displaces all political systems but its offshoots mainly annihilate
democracies in developing countries.
 It demoralizes the whole fabric of the social order doomed in illiteracy,
poverty and backwardness.
 In India, corruption has emerged from the colonial and feudal order, which
can be seen even today in the conduct of the Indian political system. Despite
a drastic change in political elites and leadership, political corruption has
continued until date.
 The act of corruption involves the dereliction of duty, moral and legal lapses.
 Corruption involves the practice of receiving bribes not only for getting
wrong things done, but also getting right things done at the right time.
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Political Corruption Planning in India

Corruption in India has emerged as a social incident. It is extensive, and the cases
of corruption are increasing at an unbelievable pace. There is barely any area of
activity, which has remained totally free from the influence of corruption. As a NOTES
matter fact, corruption has now become a commonly accepted practice. In India,
taking bribes, under-the-table payments, gifts and commissions by the politicians
or bureaucrats are not frowned upon. To legitimize them as a part of normal life
activities, subtle ways have been found. In short, such an ethos has been generated
in the society that corruption has stopped to be considered as a crime any longer.
In simple terms, corruption is defined as the behaviour of public officials who
deviate from accepted norms in order to serve private ends. In more sophisticated
terms, corruption is a form of behaviour which deviates from the formal duties of
a public role.
However, on the aspects of political corruption in the country, people are very
much familiar with the following issues:
 The getting hold of (through fake and illegal means) large areas of farmland
by the senior bureaucratic officials and political leaders
 The abuse and misuse of official position to enrich themselves directly or
indirectly by employing their relations as proxies
 Granting of favours to members of their caste by superseding the due
procedure, and overlooking the claim of others by using favoured officials
as instruments
 The use of political position to overcome the purpose of judicial process
 Preservation of corrupt but well-entrenched political bosses to avoid the
loss of power in case of a political party
 Misuse of governmental machinery for the political party purposes
 Starting businesses with the support of government and then enriching
themselves
 Conducting business with the government offices in the name of firms owned
by them but supposedly managed by their wives
 Exploitation of public funds managed by statutory bodies to bolster business
concerns that act as financiers of public parties
 Embezzlement of public funds or the inability of governments to render
accounts for public expenditure
Therefore, political corruption is a kind of wide range, multi-dimensional
corruption. Political corruption refers to corrupting the political life of a country at
all levels. In its broader sense, it searches for politicizing all walks of life and in its
narrower aspect, it legitimizes unworthy political actions for benefiting vested
interests whether they are institutional or personalized.

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Planning in India Various Forms of Political Corruption
The whole infrastructure in the contemporary Indian society is built on the structure
of corruption. It has come down from the top level to the bottom. Many a times,
NOTES political corruption in the country happens in conspiracy with the bureaucracy in
the form of huge kickbacks in big nationalized and global deals, which go
unpunished for understandable reasons. In India, the link between corruption
and the worsening of the basic administrative system has not been sufficiently
understood and focussed upon. Corruption in post-independent India can be
said to have begun with the Jeep scandal in 1948. V.K. Krishna Menon, who
was the High Commissioner for India in London at that time was involved in a
deal with a foreign company, and bought jeeps amounting to ‘80 lakh for the
Indian Army in Kashmir without following normal procedure. At the level of
states also, there are a number of such cases. The significant ones are the Fodder
Scandal case in addition to the purchase scam in the Health Department of
Bihar. These cases involved several hundred crores of rupees, which resulted in
the collapse of Laloo Prasad Yadav’s government as he was accused in both
these cases. The Jharkhand Mukti Morcha Scam was another scam that
institutionalized corruption because the MPs were involved in this scam, and
not the bureaucrats. In 1993, the MPs belonging to the Janata Dal and JMM
allegedly received bribes to defeat a no-confidence motion moved in the Lok
Sabha against the minority government of P.V. Narasimha Rao. Apart from openly
taking money or gifts in kind or favours, political corruption in the country has
been apparent in various ways. Political corruption in our country has been seen
to occur in the following forms:
 Implementation of extra-constitutional authority: The most significant
spheres for political corruption are legislature, election and bureaucracy.
The materialization of extra-constitutional centres of power exercise vast
influence and power on behalf of the legally constituted institutions and
authorities.
 Raising of political funds by professional politicians: In India, politics
has come to obtain the character of a big industry in which the fund-raising
qualities of a politician draw the largest premium. As elections have become
an exclusive proposition, each party has shifted its focus from honesty to a
capacity to raise funds regardless of the means used.
 Kickbacks: The most famous case of political corruption, which has
presumed global impact, has been the supposed kickbacks in the purchase
of Bofors 155m FH-778 guns. In 1987, the Swedish Radio claimed that an
Indian firm was given a commission of 33 million Swedish Kroners (about
‘65 millions) regarding a deal worth billions of rupees for the delivery of the
Bofors guns. It was said that the commission was remunerated in foreign
exchange to the persons and friends who were close to the then Prime
Minister Rajiv Gandhi. The Joint Parliamentary Committee that held an
enquiry into this deal, did not find anything wrong, and pardoned Rajiv
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176 Material
 the government for improprieties in the whole negotiations and the deal. It Planning in India

resulted in such a public protest that it became the most important issue in
the 1989 general elections and resulted in the defeat of Rajiv Gandhi’s
government. The Central Bureau of Investigation is still working on this
case to resolve the ambiguity of political kickbacks alleged to have been NOTES
rewarded in the deal.
 Bribing MPs to save government from accusation against the prime
minister and a few cabinet members: The Bank Securities Scam of 1992
was a major political fallout. In 1993, the main accused in the scam Harshad
Mehta had alleged in a packed press conference hall that he had himself given
a suitcase containing 6.7 million to the then Prime Minister Narasimha Rao
at the latter’s official house at New Delhi’s Race Course Road. Later, the
remaining 3.3 million were given to the prime minister’s men. Although many
people did not believe Rao’s involvement in the scandal, the opposition made
it an issue. It called for a no-confidence motion against the Rao government.
The speedy no-confidence motion brought out by the Bharatiya Janata Party
(BJP) and the Communist Party (Marxist) (CPM), which were the opposition
parties at that time in the Parliament was ignominiously defeated. It was alleged
that the managers of the Congress Party had bought out enough votes (a
dozen in numbers) to defeat the no-confidence motion. The defeat of the no-
confidence motion and survival of the Rao government were the two aims
accomplished by the commercial transaction. The Congress Party declared
that as the motion was defeated, it proved that the people were not keen to
believe that the government was fraudulent.
 Selling Public offices: Another way of bribing the MPs and members of
legislative assemblies (MLA) is by the incentive to give the legislators berths
in the Council of Ministers or grant them bait of public offices to allow a
party in minority or a particular political leader to remain in power. This
leads to the establishment of jumbo-sized governments. It has become a
common practice of specifically all governments that have coalition
governments, both at the centre and states level.
 Money laundering: In February 1996, there occurred the $18 million
Jain Hawala Case (money laundering scandal). The former Prime Minister
Rao, some cabinet ministers and almost sixty politicians of different
political parties and bureaucrats were involved in this scandal. These
people were guilty of the violation of the Foreign Exchange Regulation
Act (FERA), and were receiving money in foreign countries by means
of Hawala transactions through some businessmen like N.K. Jain and
his brothers.
The process of politicization and criminalization of politics adds to the political
corruption in the country. Democracy is threatened due to the politicization of the
police. Politicians use most pernicious methods such as the use of the services of
the anti-social elements during elections. There is a close nexus between criminal
elements and mafia leaders and the politicians. Practices such as booth-capturing, Self - Learning
Material 177
Planning in India violence, threats and victimization of voters in the electoral process are quite
prevalent. These practices ruin the weaker sections of our electorate. Today, it is
extremely hard to affect the conviction of culprits, who are guilty of crimes such as
murder, grievous hurt, intimidation and rape.
NOTES
Bureaucratic Corruption
The following are the examples of activities, which are generally considered corrupt
practices and unethical behaviour in the part of bureaucracy:
 Bribery, graft, patronage, nepotism and influence peddling
 Conflict of interest (including such activities as financial transactions to gain
personal advantage, accepting outside employment during the tenure in
government)
 Misuse of inside knowledge—for example, through the acceptance of
business employment after retirement or resignation, favouring relatives and
friends in awarding contracts or arranging loans and subsidies and accepting
improper gifts and entertainment
 Protecting incompetent people
 Regulating trade practices or lowering standards in such a manner so as to
give advantage to oneself or to the family members
 Use and abuse of official and confidential information for private purposes
Such activities may produce many such costs for a society as inefficiency,
mistrust of government and its employee’s distortion of programme achievements,
waste of public resources, encouragement of black market operations and eventual
national instability. A situation is created, which tolerates white-collar crimes against
the nation by those who are its employees. Such costs may or may not be acceptable
by a state, but at least a society should be aware that it is incurring them, and
public officials should be sensitized towards their existence.
The following factors result in corruption and unethical conduct among public
servants:
 Job scarcity
 Insufficient salary
 The ever-increasing powers that they enjoy to regulate the states’ economy
and social affairs
Various opportunities for making money are offered by this increased
regulatory authority; for instance, in the cases of the development planning,
granting permits, import-export licenses, contracts for construction; collecting
customs and other duties and accounting for foreign exchange. Due to a valueless
polity that governs the country, the integrity of civil services has eroded. Political
executives achieve their short-term objectives by deploying pliant functionaries,
handpicked on lines of their caste, community or political associations to handle
key assignments. Due to this, the cadres of several civil services, which include
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the police and judicial services, are demoralized and their functioning is badly Planning in India

affected.
Causes of Corruption
The following are some of the chief causes of corruption in India: NOTES
(i) Scarcity of resources: The scarcity of resources–educational, natural and
monetary–leads to job scarcities, insufficient salaries, etc. This means more
people need these resources. There is an increase in competition for these
resources and people resort to paying bribes and other evil practices in
order to avail them.
(ii) Conflict of values in our expanding economy: In the emerging society,
with its emphasis on purposively initiated processes of urbanization and
industrialization, there has come about a steady weakening of the old system
of values without it being replaced by an effective system of new values.
Corruption thrives in such a conflict of values simply because there is no
agreement on the definition of corruption.
(iii) Acute poverty: The co-existence of acute poverty and confounding
prosperity has also eroded the integrity of the people. The Railway
Corruption Enquiry Committee (1953–1955), which was presided over by
Acharya J.B. Kripalani, observed:
We believe that, so far as the disparity in emoluments of the lowest and the
highest paid government employees is conceded, it should be narrowed down.
It is argued that as long as the disparity between the lowest and highest paid
employees in trade and industry remains high, the Government, if it tried to
reduce high emoluments of its executive, will not get the requisite talent for
public service…We believe that if the Government takes the initiative in reducing
disparity of emoluments of its high paid and low paid employees, it will
progressively reduce corruption as we march towards socialism, which has
been declared to be the goal of government policy.

(iv) Lack of strong public opinion against the evil of corruption: Corruption
is a consequence of the way of life of our acquisitive society, where people
are judged by what they have rather than by what they are. The possession
of material goods seems to have become the sine qua non of life. Thus,
materialism, importance of status resulting from the possession of money
and economic power, group loyalties and parochial affinities, etc. seem to
be on the increase. This is because of the general apathy or inability of all
sections of the society to appreciate in full, the need of strict observance of
a high standard of behaviour. This has resulted in the emergence and growth
of white-collared and economic crimes.
(v) Economic necessity: Inadequate remuneration or salary scales and the
rising cost of living is probably one of the most important causes of corruption.
In recent years, the ever-rising cost of living has brought down the real
income of various sections of the community, particularly that of the salaried
classes. It is, therefore, inevitable that government servants are the worst hit
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Planning in India and have had to face an appreciable fall in the standard of living. The
economic necessity has encouraged those who had the opportunities to
succumb to temptations.
NOTES (vi) The structure or system of government induces corruption to
influence peddlers: Peddlers are ostensibly designated as liaison officers,
public relations officers, officers on special duty, etc., or alternatively work
independently as ‘contact men’, on commission basis. They are generally
influential people who are either related, or otherwise closely connected
with ministers and senior bureaucrats, or retired high government officers
who are in a position to influence or bring pressure upon the concerned
officers. These concerned officers are likely to be their erstwhile colleagues
or subordinates.
(vii) Complicated and cumbersome working of government offices: It is
alleged that the working of certain government departments is complicated,
cumbersome and dilatory. This has encouraged the growth of dishonest
practices like the system of ‘speed money’. In these cases, the bribe giver
generally does not wish to get anything done unlawfully, but only wants to
expedite the process of movement of files and communications, relating to
decisions.
(viii) Collusion of commercial and industrial magnates, etc. to serve their
individual interests: It is not always a government servant who takes the
initiative in the matter of corruption. Corruption can exist only if there is
someone willing to corrupt and is capable of corrupting. Both willingness
and capacity to corrupt are found in ample measure in the industrial and
commercial classes.
(ix) Non-cooperation of trade associations and Chamber of Commerce:
Unscrupulous and dishonest members of industrial and commercial classes
are major impediments in the purification of public life. It is quite important
to fight these unscrupulous agents of corruption so as to eliminate corruption
in public services. In fact, they go together. The Trade Association, the
State Chambers of Commerce and the Federation of Indian Chambers of
Commerce could lend powerful support to the fight against corruption.
However, it is not easy to achieve their cooperation.
(x) Protection given to the public services in India: There is too much security
of tenure accorded to the bureaucracy by requiring that no public servant
shall be dismissed or removed by an authority, subordinate to that by which
he was appointed. And further, no such person shall be dismissed, or removed,
or reduced in rank until he has been given a reasonable opportunity of showing
cause against the action proposed to be taken in regard to him.
(xi) Lack of severe punishment for the offenders: Anti-corruption laws in
India are weak and do not empower the people since there is an absolute
lack of penalties for corrupt bureaucrats.

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 (xii) Get-rich-quick attitude of the masses: The attitude of get-rich-quick Planning in India

has crept into the Indian society. This has resulted in several frauds, crimes
and corrupt practices, especially among the youth.
(xiii) Cut-throat competition: Banks, political parties, companies, educational NOTES
institutes–all social organizations in India are competing to become the
pioneers in their respective fields. Corruption is one of the ways in which
such competition is tackled.
(xiv) Presence of black money: Black money refers to the amount held
illegitimately by an individual, organization or party. Illegal practices such as
black marketeering, smuggling of drugs and illegal objects, bribery and
terrorism can lead to the accumulation of black money. The practice of not
revealing the actual income for tax evasion also amounts to its amassment.
Black money is often deposited in tax havens.
(xv) System of democracy: The system of democracy allows for public funds
to be used by bureaucrats and public servants for public welfare schemes.
The consortiums involved in various schemes interfere with the allocation of
these funds.
(xvi) High cost of elections: All political parties strive hard to win voters and
embark on election campaigning on a massive scale. There have been reports
of the voters being bribed with liquor and money.
(xvii) Meager salary being paid to government servants: The public servants
are paid very low salaries, and it is not easy to shun the temptation of more
funds to increase one’s standard of living. This is one of the reasons that
corruption is seen as indispensable by government employees.
5.3.5 Other Issues
The relationship between employer and employee or trade unions is called industrial
relation. Harmonious relationship is necessary for both employers and employees
to safeguard the interests of the both the parties of the production. In order to
maintain good relationship with the employees, the main functions of every
organization should be to avoid any dispute with them or settle it as early as possible
so as to ensure industrial peace and higher productivity. Personnel management is
mainly concerned with the human relation in industry because the main theme of
personnel management is to get the work done by the human power and it fails in
its objectives if good industrial relation is maintained. In other words, good industrial
relation means industrial peace which is necessary for better and higher productions.
Definition
(i) Industrial relation is that part of management which is concerned with the
manpower of the enterprise – whether machine operator, skilled worker or
manager.

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Planning in India (ii) Industrial relation is a relation between employer and employees, employees
and employees and employees and trade unions. - Industrial dispute Act
1947.
NOTES (iii) While moving from jungle of the definitions here, industrial relation is viewed
as the ‘process by which people and their organizations interact at the place
of work to establish the terms and conditions of employment.’
The industrial relation relations also called as labour-management, employee-
employers relations.
A few notable features pertaining to industrial relations are as under:
1. Industrial relation do not emerge in vacuum, they are born of employment
relationship in an industrial setting. Without the existence of the two parties,
i.e., labour and management, this relationship cannot exist. It is the industry,
which provides the environment for industrial relations.
2. Industrial relations are characterized by both conflict and co-operations.
This is the basis of adverse relationship. So the focus of industrial relations
in on the study of the attitudes, relationships, practices and procedure
developed by the contending parties to resolve or at least minimize
conflicts.
3. As the labour and management do not operate in isolations but are parts of
large system, so the study of industrial relation also includes vital environment
issues like technology of the workplace, country’s socio-economic and
political environment nation’s labour policy, attitude of trade unions workers
and employers.
4. Industrial relation also involve the study of conditions conductive to the
labour, managements co-operations as well as the practices and procedures
required to elicit the desired co-operation from both the parties.
5. Industrial relations also study the laws, rules regulations agreements, awards
of courts, customs and traditions, as well as policy framework laid down
by the governments for eliciting co-operations between labour and
management. Besides this, it makes an in-depth analysis of the interference
patterns of the executive and judiciary in the regulations of labour–
managements relations.
In fact, the concepts of industrial relations are very broad-based, drawing
heavily from a variety of discipline like social sciences, humanities, behavioural
sciences, laws, etc.
In fact, industrial relation encompasses all such factors that influence behaviour of
people at work. A few such important factors are details below:
1. Institution: It includes government, employers, trade unions, unions
federations or associations, government bodies, labour courts, tribunals and
other organizations which have direct or indirect impact on the industrial
relations systems.
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 2. Characters: It aims to study the role of workers unions and employers’ Planning in India

federations officials, shop stewards, industrial relations officers/manager,

mediator/ conciliators/arbitrator, judges of labour court, tribunal, etc.
3. Methods: Focus on collective bargaining, workers’ participation in the NOTES
industrial relation schemes, discipline procedure, grievance re-dressal
machinery, dispute settlements machinery working of closed shops, union
reorganization, organizations of protests through methods like revisions of
existing rules, regulations, policies, procedures, hearing of labor courts,
tribunals, etc.
4. Contents: Includes matter pertaining to employment conditions like pay, hours
of works, leave with wages, health, and safety disciplinary actions, lay-off,
dismissals retirements, etc., laws relating to such activities, regulations governing
labour welfare, social security, industrial relations, issues concerning with
workers’ participation in management, collective bargaining, etc.
Objectives of Industrial Relations
(a) To safeguard the interest of labour and management by securing the highest
level of mutual understanding and good-will among all those sections in the
industry which participate in the process of production.
(b) To avoid industrial conflict or strife and develop harmonious relations, which
are an essential factor in the productivity of workers and the industrial progress
of a country.
(c) To raise productivity to a higher level in an era of full employment by lessening
the tendency to high turnover and frequency absenteeism.
(d) To establish and nurse the growth of an industrial democracy based on
labour partnership in the sharing of profits and of managerial decisions, so
that ban individuals personality may grow its full stature for the benefit of the
industry and of the country as well.
(e) To eliminate, as far as is possible and practicable, strikes, lockouts and
gheraos by providing reasonable wages, improved living and working
conditions, said fringe benefits.
(f) To establish government control of such plants and units as are running at a
loss or in which productions has to be regulated in the public interest.
(g) Improvements in the economic conditions of workers in the existing state of
industrial managements and political government.
(h) Control exercised by the state over industrial undertaking with a view to
regulating production and promoting harmonious industrial relations.
(i) Socializations or rationalization of industries by making he state itself a major
employer
(j) Vesting of a proprietary interest of the workers in the industries in which
they are employed

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Planning in India Main aspects of industrial relations are as follows:
(i) Labour relations, i.e., relations between union and management.
(ii) Employer-employees relations, i.e., relations between management and
NOTES employees.
(iii) Group relations, i.e., relations between various groups of workmen.
(iv) Community or public relations, i.e., relations between industry and society.
(v) Promotions and development of healthy labour-management relations.
(vi) Maintenance of industrial peace and avoidance of industrial strife
(vii) Development of true industrial democracy.
Effects of Poor Industrial Relations
Poor industrial relation produces highly disquieting effects on the economic life
of the country. We may enumerate the ill-effects of poor industrial relations as
under:
1. Multiplier effects: Modern industry and for that matter modern economy
are interdependent. Hence although the direct loss caused due to industrial
conflict in any one plant may not be very great, the total loss caused due to
its multipliers effect on the total economy is always very great.
2. Fall in normal tempo: Poor industrial relations adversely effect the normal
tempo of work so that work far below the optimum level. Costs build up.
Absenteeism and labour turnover increase. Plants discipline breaks down
and both the quality and quality of production suffer.
3. Resistance of change: Dynamic industrial situation calls for change more
or less continuously. Methods have to be improved. Economics have to be
introduced. New products have to be designed, produced and put in the
market. Each of these tasks involves a whole chain of changes and this is
resisted bitterly if these are industrial conflict.
4. Frustration and social cost: Every man comes to the work place not just
to earn a living. He wants to satisfy his social and egoistic needs also. When
he finds difficulty in satisfying these needs, he feels frustrated. Poor industrial
relations take a heavy toll in terms of human frustration. They reduce cordiality
and aggravate social tension.
Suggestions to Improve Industrial Relations
(a) Both management and unions should develop constructive attitudes towards
each other.
(b) All basic policies and procedures relating to industrial relation should be
clear to everybody in the organization and to the union leader. The personnel
manager must make certain that line people will understand and agree with
these policies.

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 (c) The personnel manager should remove any distrust by convincing the union Planning in India

of the company’s integrity and his own sincerity and honesty. Suspicious,
rumours and doubts should all be put to rest.
(d) The personnel manager should not vie with the union to gain workers, loyalty NOTES
for the organization. Several research studies also confirm the idea of dual
allegiance. There is strong evidence to discard the belief that one can owe
allegiance to one group only.
(e) Management should encourage right kind of union leadership. While it is
not for the management to interfere with union activities, or choose the
union leadership; its action and attitude will go a long way towards developing
the right kind of union leadership.
Importance of Industrial Relations
The healthy industrial relations are key to the progress. Their significance may be
discussed as follows:
1. Uninterrupted production – The most important benefit of industrial
relations is that this ensures continuity of production. This means, continuous
employment for all from manager to workers. The resources are fully utilized,
resulting in the maximum possible production. There is uninterrupted flow
of income for all. Smooth running of an industry is of vital importance for
several other industries; to other industries if the products are intermediaries
or inputs; to exporters if these are export goods; to consumers and workers,
if these are goods of mass consumption.
2. Reduction in industrial disputes – Good industrial relation reduce the
industrial disputes. Disputes are reflections of the failure of basic human
urges or motivations to secure adequate satisfaction or expression which
are fully cured by good industrial relations. Strikes, lockouts, go-slow tactics,
gherao and grievances are some of the reflections of industrial unrest which
do not spring up in an atmosphere of industrial peace. It helps promoting
co-operation and increasing production.
3. High morale – Good industrial relations improve the morale of the
employees. Employees work with great zeal with the feeling in mind that the
interest of employer and employees is one and the same, i.e., to increase
production. Every worker feels that he is a co-owner of the gains of industry.
The employer in his turn must realize that the gains of industry are not for
him alone but they should be shared equally and generously with his workers.
In other words, complete unity of thought and action is the main achievement
of industrial peace. It increases the place of workers in the society and their
ego is satisfied. It naturally affects production because mighty co-operative
efforts alone can produce great results.
4. Mental revolution – The main object of industrial relation is a complete
mental revolution of workers and employees. The industrial peace lies
ultimately in a transformed outlook on the part of both. It is the business of
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Planning in India leadership in the ranks of workers, employees and government to work out
a new relationship in consonance with a spirit of true democracy. Both
should think themselves as partners of the industry and the role of workers
in such a partnership should be recognized. On the other hand, workers
NOTES must recognize employer’s authority. It will naturally have impact on
production because they recognize the interest of each other.
5. New programmes – New programmes for workers development are
introduced in an atmosphere of peace such as training facilities, labour welfare
facilities, etc. It increases the efficiency of workers resulting in higher and
better production at lower costs.
6. Reduced wastage – Good industrial relations are maintained on the basis
of cooperation and recognition of each other. It will help increase production.
Wastages of man, material and machines are reduced to the minimum and
thus national interest is protected.
Thus, from the above discussion, it is evident that good industrial relation
is the basis of higher production with minimum cost and higher profits. It also
results in increased efficiency of workers. New and new projects may be
introduced for the welfare of the workers and to promote the morale of the
people at work.
An economy organized for planned production and distribution, aiming at
the realization of social justice and welfare can function effectively only in an
atmosphere of industrial peace. If the twin objectives of rapid national development
and increased social justice are to be achieved, there must be harmonious relationship
between management and labour.
Human Development, Environmental Issues and Sustainable
Development
Human Development
The principal objective of development planning is human development and the
attainment of higher standard of living for the people. This requires a more
equitable distribution of development benefits and opportunities, better living
environment and empowerment of the poor and marginalized. There is special
need to empower women who can act as catalysts for change. In making the
development process inclusive, the challenge is to formulate policies and
programmes to bridge regional, social and economic disparities in as effective
and sustainable a manner as possible.
The Eleventh Five Year Plan sought to address this challenge by providing
a comprehensive strategy for inclusive development, building on the growing
economic strength of the economy in the past decades. This strategy is going to
continue and will be consolidated further in the Twelfth Five Year Plan. The
Approach Paper to the Twelfth Five Year Plan (2012-17) stresses the need for
more infrastructural investment with the aim of fostering a faster, sustainable and
more inclusive growth.
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Environmental Issues Planning in India

Climate change is a global environmental problem which has been receiving intense
political attention both at domestic and international levels. The United Nations
Framework Convention on Climate Change (UNFCCC) defines ‘climate change’ NOTES
as a change of climate which is attributed directly or indirectly to human activity
that alters the composition of the global atmosphere and which is in addition to
natural climate variability observed over comparable time periods. The major
characteristics of climate change include rise in average global temperature, ice
cap melting, changes in precipitation, and increase in ocean temperature leading to
sea level rise. The efforts needed to address the climate change problem include
mitigation of GHG emissions on one hand, and building of adaptive capacities on
the other in developing countries to cope with the adverse impacts of climate
change on various sectors of the society and economy enabled and supported by
technology and finance.
Sustainable Development
India’s journey on the path of sustainable development has so far been marked
both by reasons for celebration and introspection. The right place to begin the
story would be the 1980s and early 1990s, which mark the beginning of economic
reforms, catalyst for India’s phenomenally faster growth rates since, and
coinciding with a time when countries around the world acknowledged and
started addressing the increasing environmental concerns, such as at the Earth
Summit in Rio in 1992. India’s faster gross domestic product (GDP) growth
over the last two decades has been unprecedented; but at the same time India’s
rankings in terms of the human development index (HDI) as well as indices
measuring environmental sustainability are yet to fully reflect this growth. However,
it would be a mistake to downplay the enormous progress made, as India has
followed a much more conscious path of sustainable development with impressive
results on the ground.

Check Your Progress

3. Which is the nodal agency for estimating the number of people living
below poverty line?
4. Define unemployment.

5.4 ANSWERS TO ‘CHECK YOUR PROGRESS’

1. A planned economy is an economic system in which the economy is directed
by the state.
2. Jawaharlal Nehru set up the Planning Commission with a Government of
India resolution in March 1950

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Planning in India 3. The Planning Commission is the nodal agency for estimating the number
and proportion of people living below the poverty line at national and regional
levels, separately for rural and urban areas.
NOTES 4. The state of joblessness for an able man who is willing to work is known as
unemployment.

5.5 SUMMARY
 A planned economy is an economic system in which the economy is directed
by the state. It is an economic system in which the central government controls
industry by making major decisions regarding the production and distribution
of goods and services.
 The ‘Nehru-Mahalanobis’ model was formulated by Prof. P. C. Mahalanobis
under the guidance of Nehru.
 Rather than project a single average growth rate over the five-year
period, the Twelfth Five Year Plan (2012-17) envisaged three scenarios
termed as ‘strong inclusive growth’, ‘insufficient action’ and ‘policy
logjam’.
 The Government of India, in keeping with its reform agenda, constituted
the NITI Aayog to replace the Planning Commission instituted in 1950.
 The urban poor are majorly born out of the rural poor who had migrated to
urban areas in search of alternative employment and better livelihood,
labourers who do a variety of casual jobs and the self-employed who sell a
variety of things on roadsides and are engaged in various activities.
 Several factors, other than income and assets, are associated with poverty;
for instance, the accessibility to basic education, health care, drinking water
and sanitation.
 The Planning Commission, which is the nodal agency for estimating the
number and proportion of people living below the poverty line at national
and regional levels, separately for rural and urban areas; makes poverty
estimates every five years.
 The state of joblessness for an able man who is willing to work is known as
Unemployment.
 The problem of poverty—a multidimensional challenge for India—needs to
be addressed seriously.
 Wholesale price index (WPI) series with 2004-05 base was released on
14 September 2010.
 Economic survey 2011-12 showed increasing food prices on account of
unfavourable agricultural supply conditions coupled with the waning of base
effect, leading to sharp increase in inflation.
 The prevalence of corruption in civic life is a universal experience, but
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  Corruption in India has emerged as a social incident. It is extensive, and the Planning in India

cases of corruption are increasing at an unbelievable pace.

 The whole infrastructure in the contemporary Indian society is built on the
structure of corruption. NOTES
 The relationship between employer and employee or trade unions is called
industrial relation.

5.6 KEY TERMS

 Centralized planning: With centralized planning, the theory is that the
government will take ownership of the means of production and run the
economy in the interest of workers.
 Development: Development is a process that creates growth, progress,
positive change or the addition of physical, economic, environmental, social
and demographic components.
 Black money: In India, black money is funds earned on the black market,
on which income and other taxes have not been paid.

5.7 SELF-ASSESSMENT QUESTIONS AND

EXERCISES

Short-Answer Questions
1. Write a short note on NITI Aayog.
2. What are the major jobs undertaken by rural poor?
3. What are the measures adopted by the Government of India for the
eradication of poverty?
4. What are the various forms of political corruption?
Long-Answer Questions
1. Write a summary of various five-year plans in India.
2. Discuss the major reasons of poverty in India.
3. Explain the concept of inflation with reference to Indian economy.
4. What are the characteristics of corruption in India? Explain.
5. Describe the different types of corruption.

5.8 FURTHER READING

Mankar, V. G. 1995. Economic Policy and Planning. Delhi: New Age
International Publishers.
Patel, I.G. 2003. Glimpses of Indian Economic Policy. New Delhi: Oxford
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University Press. Material 189
Planning in India Soubbotina, Tatyana P. 2004. Beyond Economic Growth: An Introduction to
Sustainable Development. Washington: World Bank.
Van den berg, Hendrik. 2001. Economic Growth and Development. Ohio:
NOTES McGraw-Hill.
Banik, Nilanjan. 2015. The Indian Economy: A Macroeconomic Perspective.
New Delhi: Sage Publishing India.
Kapila Uma. 2009. Indian Economy Since Independence. New Delhi: Academic
Foundation
Rama P. Kanungo, Chris Rowley, Anurag N. Banerjee. 2014. Changing the
Indian Economy: Renewal, Reform and Revival. Netherlands: Elsevier.
Bimal Jalan. 2004. Indian Economy. United Kingdom: Penguin.
Nilanjan Banik. 2015. The Indian Economy: A Macroeconomic Perspective.
New Delhi: SAGE Publishing House.
K. R. Gupta, J. R. Gupta. 2008. The Indian Economy, Volume I. New Delhi:
Atlantic Publishers.

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