AL-AMEEN COLLEGE OF LAW

MODEL ANSWER PAPER: Economics-3

IIIsem 5 yrs B.A.LL.B

ECONOMIC THEORY AND PUBLIC FINANCE

Q. No.1. Define National Income. Explain different methods of estimation of

National Income.

The total income of the nation is called national income. The aggregate
economic performance of the whole economy is measured by the national
income date in fact, national income data provide a summary statement of

In real terms, national income is the flow of goods and services produced
in an economy in a year or a particular period of time.

Modern economy is a money economy. Thus national income of the country

is expressed in money terms. A national sample survey has therefore,

commodities and services accruing to the inhabitants of a Community

heterogeneous whole. It is the expression, in monetary terms, of the variety

of goods and services produced by a nation during a year.

The methods of estimating National Income are: (1) Income method.

1) In this method, the total of all money incomes such as wages, salaries, rent,
profit received by persons and enterprises in the country during the year are
totaled up. The following classification of incomes is considered as
comprehensive a) Wages and salaries, b) Supplemental labour income, c)
Earnings of self employed or professional incomes, d) Dividends, e)
Undistributed Profits, f) Interest, g) Rent and h) profit of state enterprises.
However, transfer payments like gifts, subsidies etc. are to be deducted from
 the total of factor income. Thus National Income is equal to the factor
incomes business transfer payments.

2) The expenditure or outlay method National income on the expenditure side is

equal to the value of consumption Plus Investment. In this method we have to
(i) estimate private and public expenditure on consumer goods and services,
(ii) add the value of investment in fixed capital and stocks, with due
consideration for net positive or negative inventories, and (iii) add the value of
imparts. To express it is symbolic terms.

Y= (C + I + G) + (X M) + (R P)
Where
C = Consumption expenditure
I Investment expenditure and
G = Govt. Purchases.

3) The Value added Method:- In the value added method a summation of the
increase in value at each separate production stage, leading to output in final
form, given the value of GNP. To avoid double counting of intermediate goods,
one must carefully estimate the value added at each stage of the production
process. From the total value created at a given stage, we should thus substract
all the cost materials and intermediate goods not produced in that stage or the
value of inputs at a given stage, should be deducted from the value of output.
Even the value of inputs purchased from other firm or sectors should be
substracted.
Q. No. 2 Explain briefly Keynesian Theory of Employment, with effective demand.

The Classical economists assumed full employment on the basis of says market
which states that supply creates its own demand. According to Keynes under
employment equilibrium is normal feature. He explained his theory of

the short run it is assumed that capital equipment population or man power,
technical knowledge labour efficiency remain constant. Keynes theory says that
the value of employment depends on the level of the national income and
output. If these factors are fixed, the N. I. can be increased only by employing
more labour. According to Keynes the increase in National Income would mean
increase in employment. The larger the value of employment, the larger the
national income. This theory of employment is based on the principle of
effective demand.

Principle of effective demand Effective demand is that aggregate supply. In

other words effective demand is the point. Where aggregate demand curve and
aggregate supply curve intersect. AD is the total of consumption expenditure
and investment expenditure. As output income and employment increase
aggregate demand also increases. For each level of output employment and
income there will be a corresponding level of aggregate demand. But all the
aggregate demand not effective demand. AD which is equal to aggregate supply
is effective demand. Effective demand bring equal to total output as well as total
expenditure is also equal to national income. He explains his principle of
effective demand using aggregate demand function or price effective demand
is that aggregate demand price which becomes effective, because it is equal to
aggregate supply price and thus represent a position of short run equilibrium.

Aggregate Demand Function or Price: The ADF or price for the output of any
given amount of employment is the total sum of money or proceed which is
expected from the sale of output produced when that quantity of labour is
employed. The aggregate demand Price represents the expected receipts when
a given volume of employment is offered to workers.

Aggregate: Supply function orprice: - The aggregate supply price when any
given number of workers is employed is the total cost of production of the
output at a certain level of employment. It is the sum total of all payments made
by entrepreneurs to all the factors of production producing that output. We can
prepare an aggregate supply price schedule according to the total number of
workers employed in the economy and we can have a corresponding aggregate
supply price curve or aggregate function. The greater the amount of
employment offered by the employees taken together to the workers in the
economy.

Keynes General theory of employment is based on the following

assumptions.

1) Perfect Competition: There is fairly high degree of competition in the

markets.

2) Short Period: The time that is considered is the short period.

3) Operation of diminishing returns:- There is the operation of diminishing

returns to productive resources or increasing costs.

4) Absence of govt. part in economic activity:- the Govt. plays no significant

part either as a taxer or as a spender.

5) A closed economy:- There is absence of the influence of experts and

imparts.

6) Static conditions:- The general theory does not trace out the effect of the
future on the present economic events clearly.

7) Heroic aggregate:- The relation in aggregate like the national incomes

saving and investment are better tools. In this diagram the curve AD
represents ADF and the curve AS represents ASF. The two curves intersect
each other at E. this is the point of effective demand. At this point
 ADF and ASF are exactly balanced. ON is the employment available OM
is the receipts / costs.

Q. No. 3 what do you mean by vicious circle of poverty? Explain its

determinants.

Vicious circle of poverty is the great challenge for all the developing
economies. Many development barriers are both a cause and consequence of
poverty. Such circular relationships per perpetuate the low level of development
including capital deficiency and market imperfections as characteristics of poor
countries. The basic vicious circle is marked imperfections, capital deficiency,
low productivity low investment, low real income, low savings. This circle
emphasizes that total output is low, and that little remain as a surplus of the low
level of real income the flow of saving is small. The low level of real income is
due to lack of capital stock, is inturn the result of low level of real income. Thus
capital deficiency and low productivity have contributed to the saying that a
poor country is poor because it is poor.

In a poor country, the level of productivity and so of incomes, is very low which
means a low purchasing power. Since the purchasing power of the people is
low, the scope for business and industry is correspondingly limited. The
inducement to invest is practically absent. The rate of investment being low,
production is low and the incomes are small completing the vicious circle.

The underdeveloped countries face the vicious circle of poverty on the demand
side of capital formation because the size of market is too small. The result is
there is not much inducement for the businessmen and industrialist to make
investment. The vicious circle of poverty also operates on the supply side.
Determinants of Vicious circle of Poverty:

1) Underdevelopment:- It is because of under development of the Indian

Economy that the level of her national and per capita incomes are low.
Under development is due to lack of industrialization as there are no
investments as there are no savings due to low income of the people.

Hence many people are depend on agriculture, where they get meager
earnings.

2) Rapid growth of population:- Over population is another important cause of

he prevailing poverty in the Country when the national income is divided
among too many people the per capita income is bound to be low.

3) Low Agricultural Productivity:- Carrying on cultivation by primitive

techniques small size of holdings, insufficient irrigation, failure of the use
of the modern agricultural inputs keep agricultural productivity in India at
a very low level.

4) Unemployment and underemployment:- The existence of huge

unemployment and underemployment leads for dependency. The income

earner of the family has to share his income to the unemployed for their
survival. This cause is import to rampant poverty in the country.

5) Inequality:- It is also another determinants. Inequality in the distribution of

national income has also been a major cause of mass poverty in India. When
a large chunk of national income is packeted by 5 to 10% of the population,
the majority of population.
 Q. No. 4 What is Public revenue? Mention the different sources of public
revenue.

Public revenue refers to the income of the national through different sources.
The union Govt. of India has the powers to take major decisions concerning
financial matter.

Sources of Public Revenue:-

A present the central Govt. gets its revenue from three main sources. They are:
1) Tax revenues 2) Non tax revenues and 3) Capital receipts.

I Tax Revenues:- Tax is a compulsory Payment made by the people to the Govt.
without expecting any quid-pro-quo relations. The Central Govt. mobilizes its
tax revenues from two main sources. They are: 1) Direct Taxes and (b) Indirect
Taxes.

1) Direct taxes:- Taxes levied on the Income and Wealth of the people are called
direct taxes. They include personal income tax, corporation tax, wealth tax, gift
tax, estate duty, interest tax, expenditure tax etc. Direct taxes bring about 48.8%
of the tax revenue to the Central Govt. Direct taxes sub divides into:-

a) Income Tax:- Income Tax is a tax levied by the Central Govt on the incomes
of individuals, Hindu undivided families and unregistered firms and
association.

b) Corporation Tax: This tax is levied on the incomes of registered

companies and corporation.

c) Wealth tax:- Wealth tax is levied on the excess of the net wealth over
exemption of individuals, Hindu undivided families and companies. It was
first introduced in 1957 on the recommendations of Prof. Kaldor.

d) Gift tax: This tax is levied on all donations and gifts except the ones given
by the charitable institutions, Govt. companies and Private Companies.

e) Interest Tax: It is the tax levied on the gross interest earned by

Commercial Banks and Individuals.
 f) Expenditure Tax:- This is another types of tax levies on expenditure.

The other taxes are Banking cash transaction tax, Securities transaction tax
etc.

2) Indirect Taxes:- The taxes levied on the goods and services are called indirect
taxes. The sources of indirect taxes are:-

a) Central Excise Duties:- These are the taxes levied on commodities which
are produced within the country etc. Sugar, Cotton, Match box, Kerosene,
paper, petrol, tea, coffee, etc.

b) Customs duties:- They are the taxes levied on Commodities imported into
India or those exported from India.

c) Service Tax:- Various services are brought under the tax net by the Central
Govt. and it was introduced in 1994-95.

d) Taxes on Union Territories:- The taxes levied and collected from Union
Territories is another source of revenue to the Govt.

II Non-Tax Revenues:- Revenues mobilized from sources other than taxes are
called non-tax revenue.

1) Public Enterprises:- The Central Govt. Owns a large number of Commercial

and industrial establishments. When they earn profits, it will become the
revenue of the central govt.

2) Administrative Revenue:- The Central Govt. from day-to-day administration

gets sizable revenue by way of fees, licence fees, fines and penalties special
assessments etc.

3) Railways, post and telegraphs:- They are owned by the Central Govt. the Profit
earned by these undertakings constitute the sources of revenue to the Govt.

4) Income from currency and mint:- The Union Govt of India earns revenue from
currency and mint.
III Capital Receipts:- When revenue mobilized through tax and non tax sources is
insufficient to meet its expenditure, the central govt. will try to mobilized
income from capital receipts eg. 1) Internal and External borrowings, (2) Small
savings, (3) Provident fund, (4) Loan recovery, (5) Public deposits etc.

Q. No. 5 Define deficit financing. Explain the different types of deficit.

According to the planning commission, the term deficit financing is used to

denote the direct addition to gross national expenditure through budget deficits.

Deficit financing has been used by the Govt of India for mobilizing funds to
finance economic development. When the govt. cannot raise enough financial
resources through taxation it finances. Its expenditure through: 1) Borrowing
from the market, (2) by running down its cash balances with the RBI and (3) by
borrowing from RBI.

The concepts of deficit financing are:-

1) Revenue Deposit:- The concepts of revenue deficit is a simple and straight

forward one Revenue deficit equals the difference between the revenue
receipts and the revenue expenditure. Current revenue expenditure of the
Central Govt is composed of plan and non plan expenditure of the Govt.
and is met out of current revenue receipts. Thus:

Revenue Deficit = Revenue expenditure - Revenue receipts.

2) Budget deficit:- Budget deficit occurs when total expenditure exceeds total
receipts. Here total expenditure includes aggregate of both revenue
expenditure and capital expenditure likewise, total receipts includes both
revenue receipts and capital receipts Thus:

Budget Deficit = Total expenditure - Total Receipts.

The concept of budget deficit was given up by the govt of India since
1997-98.
3) Fiscal deficit:- The term fiscal deficit may be defined as budgetary deficit
Plus market borrowings and other liabilities of the govt. of India. In other
words fiscal deficit equals revenue receipts plus non-debt capital receipts
minus total expenditure. Thus:

Fiscal Deficit Revenue Receipts + Non Debt capital receipts Total

expenditure.

In the above equation non-debt capital receipts refers only to recoveries of

loans and other receipts Eg. The total expenditure plan and non plan of the
Union Govt. of India.

Fiscal Deposit indicates the total borrowing requirements of the Govt. from
all sources. It reflects the time extent of borrowing by the Govt. in a fiscal
year.

4) Primary deposit:- In recent years, the Finance Minister has introduced one
more concent of deficit known as Primary deficit. Primary deficit is

expenditure after excluding interest earnings as well as interest payments.

Thus:

Primary deficit = Fiscal deficit Interest Payments.

Primary Deposit can be classified into revenue and capital deficit. Primary
deficit on revenue account would equal revenue deficit less net interest
payments and on capital account would equal capital expenditure less loan
repayment.
Q. No. 6 Distinguish between economic growth and economic development.

In general parlance, the terms economic development and economic growth

are synonyms and connote the same meaning. For a long time, the terms
economic development Economic growth, Economic progress, Economic
welfare, Secular change etc. were used as synonyms and were interchanged
with one another. A layman may not find any difference in these terms. For
him all of them would mean increase in national income, improvement in
living standards, equitable distribution of income and wealth etc. But some
leading economists like Mrs. Ursula Hicks, Prof. A Maddison, C. P.
Kindleberger, Prof. J. A. Schumpeter and other have drawn a line of
demarcation between economic development and economic growth.

According
called economic growth in rich countries and in the poor ones, it is called

growth means more output and economic development implied both more
output and changes in the technical and institutional arrangements, by
which it is produced based on the above discussion, a distinction between
economic development and economic growth may further be explained by
means of the table as follows:-

Sl.
Economic Growth Economic Development
No.

1 Narrow concept Wider concept

2 A quantitative A qualitative phenomenon

3 Measures in terms of real per capita Measures in terms of real national

Income income

4 Macro economic study Micro economic study

5 Is an effect of development A cause of economic growth

6 Relates to developed countries Relates to under developed countries
7 Long period economic phenomenon Short period economic process

8 Possible without development Not possible without growth

9 Spontaneous Regulated and controlled

10 Minimum Govt. interference More Govt. interference

11 Automatic process Induced process

12 Expansion without a change in Innovative process with structural

Structure transformation

13 Single dimension phenomenon Multi dimension phenomena

14 Quantitative significance Qualitative significance

Q. No. 7 Define public expenditure. Explain its items.

The expenditure made by Central Govt. on country is called as Public

expenditure. The expenditure made by the Central Govt. can be broadly
classified into two categories that is Plan expenditure and Non Plan
expenditure.

2) Revenue expenditure and Capital Expenditure. Heads of expenditure of

Central Govt.

1) Plan expenditure:- The expenditure made on various economic and socialservices,

nation building activities and such other developmental activities is called plan
expenditure. The plan outlay consists of agriculture and allied activities, rural
development, irrigation and flood control energy, industry and numerals, transport
etc.

a) Central Plan Schemes:- In the Central Plan schemes there

areeconomic, social and general services.
i) Economic Services:- Expenditure on economic services include
such projects as agriculture and allied activities, rural
 development, industry and minerals, energy transport, science,
technology, environment etc.

ii) Social Services: Expenditure on social services include such

activities as education, art, and culture, health and family
welfare, social welfare, nutrition, sanitation etc.

iii) General Services:- The expenditure on general services include

maintenance of law and order, internal and external securities
etc.

b) Central Assistance to state Plans:- India has quasi-federal form of

constitution in which there is a strong central Govt. and several state
Govts. The Central giving plan assistance to these state Govts. And this
assistance is included in the Central Plan expenditure.

c) Central assistance for Union territory Plans:- Some territories in the

country are under the direct control of the Central Govt. it gives plan
assistance to these territories which are also included in the Central Plan
expenditure.

2) Non Plan Expenditure:- Non Plan Expenditure is a term used to cover

allexpenditure of the govt. not included in the plan. It includes both developmental
and non-developmental expenditures. The important terms of non-plan
expenditures are defence and internal security, interest payments, grants-in-aid
subsidies, pensions etc.

i) Civil expenditure:- Civil expenditure refers to the expenditure of the Govt.

It includes maintenance of Law and Order, Civil administration, Tax
collection, Public and Internal security, Judiciary Pension etc.

ii) Defence expenditure:-Defence expenditure is the most important item of

expenditure of Central Govt. production of arms and ammunitions,
purchase of costly defence equipment, salary, pension and training to
defence personnel etc.
 iii) Interest payments:- The biggest item in the Central Govt expenditure is the
interest payments made on the internal and external borrowings.

iv) Subsidies:- Another important item of the Central Govt. non-plan

expenditure is subsidies for food, fertilizers and export promotion.

v) Grand-in-aid:- The Central Govt. gives grant-in-aid to the state Govts.

And union territories.

vi) Loans and advances:- The Central Govt. also gives loans and advances to
state and Union territories.

vii) Miscellaneous expenditure:- Reliefs given at the time of floods, droughts,

earth quakes and such other natural calamities, rehabilitation expenditure,
aid to backward regions etc. are other items of non-plan expenditure.

Write Short Notes on:-

a) Big push theory of Growth.

The theory of Big Push is associated with the name of Professor Paul N
Rosenstein Rodan. The big push or a large comprehensive programme
highlights the need for tremendous efforts which are required o take the
underdeveloped economies out of stagnation and vicious circle of poverty. The
development process is a series of discontinuities jumps and growth activities
are full of lumps and discontinuities. To overcome the discontinuities of
development process and making the developing economies more on higher
production a big Push is needed Rodan suggest three kinds of indivisibilities
and external economies. They are:

(i) Indivisibility in the Production function,

(ii) Indivisibility of demand and

(iii) Indivisibility in the supply of

savings.

(i) According to Rosenstein Rodan, indivisibilities in production function refer to the

indivisibilities of inputs, outputs and processes, that lead to increasing returns
by raising output, income and employment and lowering he capital
output
 ratios. He regards social overhead capital that is power, transport,
communication housing etc. as the most important instance of indivisibility and
hence of external economies on the supply side.

(ii) Indivisibility of Demand:- According to Rosenstein Rodan the importance of

indivisibility of demand lies in the expansion of market size. The small
markets in underdeveloped countries carpeted by the low per capita income
and purchasing power of the general wall of people. he agrees that a single
factor even if it uses modern methods of production is likely to jail if set up on
its own because of the smallness of the market output for its output. So, the
indivisibility of demand requires simultaneous setting up of a large number of
industries.

(iii)Indivisibility in the supply of savings:- Substantial investment requires for starting

of industries at one hand and at the same time requires high volume of savings.
This is too difficult to achieve in underdeveloped countries because of low level
of income. To raise the level of savings, it is imperative that a gap between
income and expenditure should be created and savings should be steeped up.

b) Budget

Budget is an important document of present Socio-economic system. It

reflects economic and social policies of the Govt. it is a master plan and policy
instrument of the Govt.

Meaning of Budget:- An estimate of all anticipated revenue and expenditure of

the Govt. for the ensuing financial year is called as budget. This is known as
the annual financial statement.

Types of Budget:- There are thrice types of budgets they are:

1) Balanced Budget:- A budget is said to be balanced when its tax revenue and
expenditure are equal.
 2) Surplus budget:- When the anticipated revenue exceeds expenditure an
imbalance is created in the budget. This kind of a budget is called surplus
budget.

3) Deficit budget:- Deficit budget is one which the anticipated expenditure is more
than the anticipated revenue. At present, most of the Govts. In the world present
deficit budget.

The budget of the Indian Govt. gives a complete picture of the estimated
receipts and expenditures of the govt. it gives three sets of figures, that is (i)
Actual figures for the proceeding, (ii) Revised estimates for the current year and
(iii) Budget estimates for the following year.

The union budget of the govt. of India is prepared for the financial year,
commencing on 1st April and ending on 31st March.
Parts of Union Budget:-

a) Revenue account b) Capital account

Revenue Revenue Capital Capital

Receipts Expenditure receipts Expenditure

Tax Non Tax Plan Non Plan Plan Non Plan

Rev. Rev. Expend. Expend. Expend. Expend.

Market Internal Other

Debt External debt Liabilities

c) Trade Cycle

Business or Trade cycles are a prominent features of the capitalist

economies. They refer to the regular fluctuations in aggregate economic
activity. They appear in regular
phenomenon.
 In Keynes words:- A business cycle is composed of periods of good trade
characterized by rising Prices and low employment percentage attempting
with periods of bad trade characterized by falling prices and high
unemployment percentage.

Characteristics of Trade Cycle:-

1. A business cycle shows a ware like variation in economic activity.

2. A business cycle is an economy wide phenomenon when it sets in the

industrial sector, soon its spread and other sectors.

3. Business fluctuations trend to occur. They appear again and again after the
lapse of sometime.

4. Trade cycles are self-reinforcing cumulative on the cyclical movement starts

in one direction its tends to feed on itself and passes through its stages.

Stages of business cycle

1. Depression or stump:- It has described as a state of affairs in which real income

consumed or volume production per head and the rate of employment are falling
and are sub-normal in the sense that these are idle resources and unused capacity
especially unused labour. This characterized with mass unemployment, falling
prices, falling profit low wages etc.

2. Recovery (Revival) Recovery shows the upturn of the output and employment
of the economy from the state of depression. During this phase there is slight
improvement in economic activity, improvement in business activity. Industrial
production picks up slowly and gradually, volume of employment increases
prices slow rises etc.

3. Boom or prosperity:- According to Haborler Prosperity is a state of affairs in

which the real income consumed, real income produced and the level of
employment are high or rising and there are no idle resources or unemployment,
income rises faster than before demand increases etc.
4. Recession:- With great demand for factors of production during boom their
prices increases, but the quality available is inferior has efficient workers have
to be taken on higher wages. As a consequence costs take an upward swing than
starts the downward. This leads to crisis and finally assumes the shape of
depression.

8. Explain the Characteristics of a good tax system

1) Maximum Social Benefit:- According to Dr. Dalton that system of taxation

is the best which is based on the principle of maximum social advantage.

2) Equality in the distribution of tax burden:- There is those who are better
off should pay more taxes and they should bear a great burden of taxation.

3) Multi Taxation System:- The tax system in which taxes are levied on
should be divers, tied instead of being concentrated in one or two taxes.

4) Productivity of the tax system:- The tax system should give the maximum
possible encouragement to the productive capacity of the country.

5) Rights of tax payers: - A sound tax system will have to safeguard the interest
of the tax payers. In a democratic set up, the rights of tax payers have to be
continuously kept in mind.

6) Universal application of Taxes:- Each individual should pay according to

his ability to pay, and the individuals possessing the same ability to pay
should contribute the same amount by way of taxes without any
discrimination.

7) Elasticity:- The taxation system should provide to the govt. increased

income with the increase in the national income of the country. The taxation
system should also yield more income when the govt. expenditure goes up.
8) Convenience:- The govt. should keep in view the convenience of the tax
payer while devising the taxation system of the country. Since the tax payers
make sacrifices when they pay the taxes, it is essential for the govt. to see
that they are not put any avoidable inconvenience.

a) Absence of the tax evasion:- The tax system of the country should
be so devised as to leave no scope for tax evasion on the part of the
tax payers. To achieve this objective there should be proper blending
of all sorts of commodity and personal taxes. This will reduce the
scope for tax evasion to the minimum.

9.Explain Critical minimum Effort thesis

The theory is associated with the name of Harvey Leibenstein. The

theory is based on the relationship between three factors viz. Per
capita income population growth and investment. Leibenstein
identifies population as an income depressing factor, whereas
investment is an income generating factor. Growth in an economy
is possible only when the income generating factors turn out to be
more powerful than the income depressing factor. A critical

following factors.

Firstly, some of the factors of production are indivisible so that unless they
are used in full or in minimum amount, they will lead to internal
diseconomies. To overcome these diseconomies, some minimum critical
investment may be necessary.

Secondly, there is a sort of mutually and inter dependence between a

number of firms and industries. As these develop, there emerge external
economies. Apparently, these economies can be reaped only when there are
at least that minimum number of industries operating, which make these
economies possible. In their absence these economies may not arise at all.
 Thirdly, at any time the economy may be subjected to autonomously
generated income depressing factors and at the same time be subject to
depressants induced by some aspects of the process of growth. A certain
minimum investment is necessary to overcome them and to initiate
sustained growth.

Finally, there are some attitudes which are to be developed for growth.
They are:

a) Western market incentives,

b) A willingness to accept entrepreneurial risks,

c) An eagerness to be trained for industry,

d) An eagerness to promote scientific and technical process.

10. Critically explain Says of Law of market

Says law of markets was rooted in the mainstream of supply oriented

classical economics. J. B. Say, a French economist of the 19 th Century,
asserted that, supply creates its own demand. This appears to be a simple
proposition, but has had many different meanings. Basically, says law
contends that the product of output in itself generates purchasing power,
equal to the value of that output. Supply creates its own demand. It is argued
that, production increases not only the supply of goods but, by virtue of the
requisite cost payments to the factors of production, also creates the demand
to purchase these goods.

1. Optimum Allocation of Resources:- There is optimum allocation of

resources as they are allocated to different channels of production in
terms of proportionately and equality of marginal products.

2. Perfect equilibrium:- Commodity prices and factor prices are

determined in perfect equilibrium of their demand and supply.
3. Perfect competition:- There is perfect competition prevailing in the
commodity market as well as factor market. Thus commodity prices are
equal to average costs and factor prices are equal to marginal
productivities.

4. Market Economy:- There is free enterprise economy.

5. Elastic Market:- The size of the market has no limits. Thus there is
automatic expansion of the market with an increase in output offered for
sale.

1. Automatic attainment of full employment:- In the long run, free

economy automatically attains equilibrium at full employment level.

is no obstacle to full employment.

2. There can be no deficiency of Aggregate demand:- Since supply,

automatically creates its own demand, there is no deficiency of
Aggregate demand:- Since supply, automatically creates its own
demand there is no possibility of any general over production. Thus

demand.

3. No problem of general unemployment:- When there is no general

over production, than there can be problem of general
unemployment in the long run and the economy tends to remain at
full employment equilibrium level.

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 AL-AMEEN COLLEGE OF LAW
PREPARATORY EXAMINATION, Dec -2018

III sem 5 yrs B.A.LL.B

Model Answer

ECONOMICS 4

ECONOMIC DEVELOPMENT OF INDIA

Q. No.1. Define Planning? Explain the achievements and failures of Indian
Planning System?

Planning may be defined as the conscious and deliberate choice of

economic priority by some public authorities.

Achievements of the planning:

a) Growth in national income and per capita income An important

objective of planning is to increase output of all goods and services i.e.
to increase national income. As a direct
National Incomer and Per Capital Income went up.

b) Progress in Agriculture:- As a result of this plan expenditure of 22% on

agriculture and irrigation agricultural production increased
considerably. The area and product of all the crops had more than
doubled or even trebled since 1966 the main emphasis has been on the
introduction of new technology for raising the agricultural productivity.
This work was first undertaken under the intensive.
Agricultural Area Programme: This was followed by the
Hyvprogramme.

c) Progress in industry:- More impressive the growth of agriculture has

been the increase in the field of industry. The growth of steel,
aluminium, engineering goods, chemicals, fertilizers and petroleum
products is specially important with the growth these industries many
other industries started.

d) Growth of Public Sector:- The Public Sector in this country with all its
limitations has reached the commanding weights and thus contributes
 a lot to economic growth. At the time of independence its size was quite
small. During the planning period approximately 45% of the total
investments have been made in the public sector.

Failures of Planning in India:-

a) Failure to Abolish Poverty:- The growth of per Capital Income is very

low. The impact of the plan on reduction of poverty was only marginal.
Though the percentage of people living below poverty line had come
down, there is still more than 26% under poverty line.

b) Failures in providing employment:- Unemployment is on the increase

despite planning programmes. The number of unemployed persons was
over 5 million at the end of the First Plan and now it is 10.6 millions in
the Ninth Plan.

c) Failure in the reduction of inequalities of Income and Wealth:- During

the last five decades of planned economic development, inequalities of
income have increased, redistribution of income in favour of the less
privileged classes has not taken place. The rich are clearly becoming
richer, there is growing of income and wealth in hands of the propertied
classes.

d) Failure of Land Reforms:- The decision to fix ceiling of land holdings

and transfer surplus land to small peasantry has not been properly
implemented. The rich and unsaddle formers have become very
powerful by using all the benefit that govt. has provided them. Under
the plans as for Eg. The irrigation facilities, the improved seeds, the
subsidized fertilizers etc.

Q. No. 2 What is Agricultural Productivity? Explain its causes and measures of

the low productivity in India?

Agricultural Productivity relates to land productivity, i.e. yield per hectare.

It is expressed in physical production rather than on value concept. We take
into account the quality of the produce and not its value causes:-
a) Overcrowding in agriculture:- Indian agriculture is overcrowded by the
people. This had led to decline in the per capita land area. Subdivision
and fragmentation of land holdings distinguished unemployment and
negative marginal productivity.

b) Lack of finance, storage and marketing facilities:- Agricultural

Productivity in India has suffered in the initial stages due to the non-
availability of finance, storage and marketing facilities. The provisional
made under planning are inadequate.

c) Lack of improved seeds, manure and plant protection:- The Indian

farmers selects his seeds indiscriminately and often hastens to buy them

Crops. Failure of applying the chemical fertilizers and applying the

pesticides at proper time in the cause for the low productivity.

d) Weaknesses in policy perceptions:- Recent research studies have drawn

attention to this factor. Owing to a number of economic and political
compulsions, the Indian strategy for agricultural growth remained
preoccupied.

e) Uneconomical size of holdings:- India is a poor country consisting of

small farmers. Every farmer, owns a bund. More than 70% of the total
land holdings are small in size. Not only the land holding are small, but
they are scattered. The application of modern science and technology to
agriculture has becomes a difficult task. The small size of holdings has
contributed to the low productivity of agriculture.

f) Poor technique of production:- Primitive and poor techniques of

production, inadequate and obsolete nature of implements and failure to
apply modern science and technology to our agriculture have been the
contributory factors for the low productivity of agriculture in India. Our
farmers having been entangled by the victions circle of poverty have
continued agricultural operations with old methods.
 g) Lack of Research:- Low level of research is also one of the factors
responsible for the low productivity of agriculture in India.

Remedial Measures:

a) Programme for the balanced regional development.

b) Vitalize and modernize the motives of rural people.

c) Improving the agricultural practices.

d) Effective and proper implementation of land reforms policy.

e) Encouragement for adult literacy programme.

f) Foster collective bargaining among farmers.

g) Supply of Hyv seeds, chemical fertilizers etc.

Q. No. 3 Define industrialization? Explain the industrial policy 1991?

Industrialization means development of industries, mining, power, plants

transport etc. it is a continuous process of creation and growth of factories,
mills, mines, power plants etc.

The new industrial policy was announced on July 24, 1991. It has
been designed to achieve the following objectives.

a) To correct distortions in the pattern of industrial growth.

b) To maintain a sustained growth in productivity and employment.

c) To attain technological dynamism and international competitiveness.

The salient features of the industrial policy 1991 are;

1) Abolition of Industrial Licensing:- The Industrial licensing will be

abolished for all projects except for those, which are important for
security, strategic, social and environmental reasons and items of
elite consumption, with this almost 85% of industry has been taken
out of the licensing compulsory. There are coal, alcohol, petroleum,
sugar, cigarettes hazardous chemicals, dungs and
 pharmaceuticals, asbestos, paper and newsprint, plywood and other
based products, entertainment electronics animals fats and oils
tanned or dressed fur skins, electronics etc.

2) Automatic Clearance of imparts of capital goods:- If the foreign

exchange availability is ensured through foreign equality or f CIF
value of imported capital goods is less than 25% of the total value
of plant and equipment up to a maximum value of 2 crores,, the
automatic clearance of import of capital goods will be given.

3) Abolition of registration schemes:- All existing registration schemes

such as relicensed registration, exempted industries registration will
be abolished.

4) Automatic approval for foreign investment:- Approval will be given

for direct foreign investment up to 51% foreign equity in 34 high
priority industries provided foreign equity covers the foreign
exchange requirements of capital goods.

5) Public Sector role deluted:- The number of industries reserved for

the public sector since 1956 was I7. This number has now been
reduced to 6 (1) arms and ammunitions, defence aircrafts and
worship (2) Atomic energy, (3) Coal and lignite, (4) mineral oils,
specified to the atomic energy, (5) minerals, (6) rail transport.

6) Industrial location policy liberalized:- In a departure from the

prevailing location policy for industries, the new industrial policy
provides that in locations other than 23 cities of more than 1 million
population. There will be no requirement of obtaining industrial
approvals from the centre, except for industries to compulsory
licensing.

7) MRTP limit goes:- Under the MRTP Act, all firms with assets above
a certain size were classified as MRTP firms. Such firms were
permitted to enter selected industries only.
Q. No. 4 What is Foreign Trade? Explain the composition and Direction of

The Trade which is carried on within a nation is called internal trade. But
foreign trade means the trade between different nations of the world. It is
the exchange of goods and services between different sovereign nations.

Composition of experts:-

a) Increased in manufactured items and broad based expansion:- The very

special feature of increase in our experts is that the exports of
unconventional goods, etc.

b) Primary commodities:- They consist of agricultural and allied products

and ores and minerals. They include coffee, tea, oil cake, tobacco,
cashew, kernels, species, sugar etc.

c) Manufactured goods:- the manufactured goods have become very

readymade garments, coir yarn, leather and leather goods, jute etc.

d) The other Principal experts are textile fabrics engineering goods.

Handicrafts, jute items, chemicals etc.

Before independence Britain had a major share. But now India is

exporting goods to developed nations such as America, Japan, Russia,
West and Eastern European countries and also various countries of Asia
and Africa. Major part of our experts go to a few countries. Nearly half
of our exports are made to Asia and other oceanic countries. The second
most important source of export is Western European region and third
important source is American Countries.

Composition of Imports:-

a) Industrial Imports:-
Developmental imports and 2) Maintenance Imports.
 b) Capital intensive goods:- After Independence India is importing several
goods such as non-electrical machinery. Equipments, electrical
machinery metal manufacturing goods etc.

c) Petroleum Products:- Petroleum Products are eating away major share

of our foreign exchange in the list of our imports. They are imported on
a large scale in order to meet internal demand.

d) Capital goods, pearls and precious metals fertilizers, edible oils etc. are
our other imports.

e) Other items:- The other important items are medicines, chemicals,

different metals, paper, crude oil, raw cotton bronze, newsprint, raw
rubber etc.

Direction of Imports:-

a) Large source of imports:- Since independence the number of countries

from which we are importing has been increasing significantly. In the
beginning our imports were only with few countries including Britain.
But after independence there is a drastic change. India is having the
trade relation with countries like America, Japan, West Germany and
Britain.

The first important source of our imports is the Asia and Oceanic region.
The second important source of our imports is the European region. The
next place in our imports goes to American nations.

Q. No. 5What is Public Debt? Explain the causes and measures of public debt?

Public debt refers to all types of borrowings by the govt. from among the
institutions organizations and the public.

Causes of Public Debt:

a) Development Plans:- After Independence India implemented economic

plans to accelerate the growth rate of economy. The govt. is required
 to invest huge amount of capital to implement development plans. But,
the financial resources mobilized through tax sources is insufficient.
Therefore, the govt. is forced to borrow heavily.

b) Removal of temporary deficit:- When the expenditure of the govt.

exceeds its revenue temporary deficit may arise. To remove this
temporary deficit the govt. is forced to borrow as a result, public debt
mounts up.

c) Limits of taxation:- Taxes are our important source of revenue to the

Govt. but taxes are to be levied in such a way as to avoid any burden on
the people. the taxable capacity of the people in India is very low.

d) Control of Inflation:- In India, public debt is used as tool to control

inflationary trends in the economy. Due to larger investment and money
supply the prices are increasing.

e) Low taxable capacity:- As stated above the taxable capacity of the

people in India is very low. The govt. cannot mobilize required funds
through taxation consequently, the govt. is forced to borrow from the
public.

f) Higher govt. interference:- In a socialistic pattern of society the govt. is

expected to promote social welfare an work for the well of the people.
Due to the increased govt. interference in economic matters. The
expenditure has increased.

g) Mounting defence expenditure:- The defence expenditure of the country

has increased over the years. The growing defence expenditure could
not be met out of normal revenues. The central Govt. as a result is forced
to resort to heavy public borrowing.

Measures or repayment of debt:-

a) Repudiation of debt:- It means simply that the govt. does not recognize
its obligations and refuses to pay the interest as well as the principle.
Normally a govt. does not repudiate its debt.
 b) Conversion of loans:- The govt. convert an old loan into a new loan.

c) Serial bond redemption:- The govt. may decide to pay every year a
Certain portion of the bonds issued previously. This system enables a
portion of the debt to be paid off every year.

d) Buying up loans:- The govt. may redeem its debts through buying up
loans from the market.

e) Sinking Fund:- The Govt. creates the sinking fund and contributes to
that fund every year to repay back the debts every year from that fund.

Q. No. 6 What is balance of payment? Explain the causes and measures of

disequilibrium in B.O.P?

Balance of payments is an important concept in international trade. It refers

to the difference between total value of visible and invisible exports and the
total value of visible and invisible imports in a given period of time.

Causes of adverse balance of payments:-

a) Despite an encouraging rate of growth of exports the pressure on the

balance of payments has increased since we started with a large volume
of imports, even a smaller percentage growth of imports was able to
asset a larger growth rate of exports and thus the deficit in balance of
trade n absolute terms because higher.

b) A major factor responsible for larger in flow of imports is due to the

policy of import liberalization introduced by the Govt. By Rajiv Gandhi.

c) There has been an increase in import intensity due to the pattern of

industrial development promoted during the seventh plan which catered
to the demands thrown up by the upper income groups of the population.
 d) The relative steep depreciation of the rupee, other currencies also led
to an increase in the value of imports.

e) Lastly, the Gulf war was responsible for the sharp declaration of

Methods of solve:-

a) Export promotion measures:- The govt. of India has tried to increase

set up institution to boost exports, such as export promotion councils for

different commodities, Trade Development Authority etc.

b) Restrictions of imports:- There are strict import controls in the country

to prevent and even ban the imports of no essential items or those goods
which are being produced within the country.

c) Foreign exchange Control:- The govt. has been enforcing strict

exchange controls even from the beginning of second world war. The
Govt. encourages the earnings of foreign exchange, it puts all types of
restrictions on Indian Nationals in spending foreign currencies.

d) Encouragement to inward remittances:- Known as inward remittances,

started picking up in a significant manner only from the middle of 1970s
when the govt. tightened its control on foreign exchange operators and
smugglers.

Q. No. 7 Define Poverty? Explain the poverty alleviation and employment

generation programs in India.

Poverty may be defined as the inability to secure the minimum consumption

requirements for life, health and efficiency. It is the hopelessness resulting

employment generation programmes are:

a) PradhanMantriGramodayaYojana PMGY was launched 2000-01 in all

states and union territories in order to achieve the objective of
sustainable human development at the village level. PMGY had five
 components that is primary health, primary education, rural shelter,
rural drinking water and nutrition.

b) SwarajayantiGramswarozgarYojana:- SGSY was launched n 1999 and

is the only self employment program currently being implemented. The
schemes are being implemented on a 75:25 cost sharing between center
and states.

c) SampoornaGrammenRozgarYojana:- The SGRY was launched in Sept.

2001. The objective of the programme is to provide additional wage
employment in the rural areas as also food security along with the
creation of durable community, social and economic infrastructure in
rural areas.

d) PradhanMantri Gram SadakYojana:- The PMGSY was launched in Dec.

2000 to provide road connectivity to 1.6 lakh unconnected habitations
with population of 500 persons or more in rural areas by the end of the
Tenth Plan Period. it is being executed in all the states and six union
territories.

e) Antyodaya Anna Yojana:- AAY was launched in Dec. 2000. Under the
scheme 1 crore of poorest among the BPL families covered under the
targeted public distribution system are identified. 25 kilograms of food
grains were made available to each eligible family at a highly subsidized
rate of Rs.2 per kg. wheat and 3 per kg for rice.

f) ValmikiAmbedkarAwasYojana:- VAMBAY was launched in Dec.

2001. The scheme has the primary objective of facilitating the
construction and upgradation of dwelling units, for slum dwellers and
providing healthy and enabling urban environment through community
toilets under Nirmal Bharat Abhiyan a component of the scheme.
Short Notes:-

a) EXIM Policy

The govt announced the Exim policy for the 5 year period on 2002-07
and 2004-

at the annual average growth rate of 26%. Key strategies to achieve the
object :

i) Unshackling of controls.

II) Creating an atmosphere of limit and transparency.

iii) Simplifying procedures and bringing down transactions costs.

iv) Adopting fundamental principle that duties and levies should not be
exported.

Special focus Initiatives:-

1) Handlooms and Handicrafts:- A new handicraft special economic

zone shall be established. Duty free imports of handlooms and
handicrafts sectors has been increased to 5%.

2) Gems and Jewellery:- Import of gold of 18 carrot and above shall

be allowed under the replenishment scheme.

3) Leather and Foot war:- Duty free import of specified items for
leather goods sector increased to 5%.

4) Export promotion scheme:- A new scheme to accelerate growth of

exports called Target plus has been introduced.

5) Service exports:- For service exports which ear foreign exchange of

Rs.10 lakh would be eligible for duty free credit entitlement of 10%
of total foreign exchange earned by them.
 6) Duty fee import under export promotion capital goods:- Capital
goods imported under EPCG for agriculture would be permitted to
be installed anywhere in agri export zone.

7) Export Oriented Untis:- They shall be exempted from service tax

in proportion to their exported goods in and services.

8) Bio technology Parks:- They would be granted all facilities of

100% EOUS.

9) Import of second hand capital goods:- Import of second hand

capital goods shall be permitted without any age restriction.

10) Free trade and ware housing zone:- A new scheme to establish free
trade and warehousing zone has been introduced to create trade
related infrastructure to facilitate the import and export of goods and
services with freedom to comp oil trade transaction in free currency.

b)Industrial Disputes

If there are conflicts or disputes between the employers and the workers
in industries, the conflicts are known as industrial disputes.

Causes of industrial disputes;-

1) Demand for higher wages and allowances:- This has been a major cause
of industrial disputes especially because of continuously rising prices,
the purchasing power of wages falls, lower the standard of living of
workers etc.

2) Demand for bonus:- This is another major cause of industrial disputes.

Labour naturally wants to have a share in the profits to which they feel
they have contributed.

3) Victimization:- The employers sometimes adopt a vindictive attitude

and punish demote or dismiss some leaders of workers. This is resented
and leads to a strike.
4) Long working day:- The workers demands for shortening working hours
and the same is resisted by the employers and thus arise a dispute.

5) Question of leave:- Question of leave and holiday sometimes creates

trouble and leads to strike.

6) Demand for better working conditions:- Facilities such as more safety

measures in the factory, canteen facilities, holidays and leave etc. is
another cause of industrial disputes.

7) Refusal to recognize a Union:- Some times, a strike may ensue because

the management refuses to give recognition or dilly dallies in giving
recognition to the trade union formed by workers.

8) Opposition to rationalization:- The workers resist rationalization of the

union being attended by the management.

9) Political reasons:- Strikes of political nature are also not unknown.

c }Green Revolution

Green Revolution in India contributed for the commercialization of

agriculture. It contributed for the increase of the agricultural output, which
leads for marketable surplus.

Green revolution in India refers to the technological break through

in Indian agriculture by the development and use of high yielding varieties
of seeds, minor irrigation, use of fertilizers, regular plant protection and
mechanization of agriculture.

Green revolution is resulted from the application of modern

technology. The modern technology is based on a package of improved

composed of a package. Chiefly of four improvements, improved variety of

seeds, increased use of fertilizers, improved water supply and better cultural
practices.
 The main features are:-

1) The high yielding varieties:- The HYV programmes has accelerated the
green revolution improved strain of seeds are essential for increasing
agricultural production.

2) Multiple cropping:- The new multiple cropping plan was taken up in

1967-68. It aims at the development of short duration varieties of rice,
wheat, maize, jawar, bajra, barley, ragi oil seeds potato and vegetables
for new crop rotations.

3) Minor irrigation:- It also constitutes an important component of the new

strategy of agricultural development. It ensures better use of land and
ground water through multiple cropping pattern.

4) Use of fertilizers:- The increase in the consumption of fertilizers is more

significant. The use of chemical fertilizers is now widely accepted as
one of the key elements in the strategy for accelerating the growth of
agricultural output, especially in the short run.

5) Plant protection:- Another important aspect of green revolution is plant

protection by using pesticides and other such devices.

6) Other features of green revolution are modern equipment and machinery

support prices, processing, storage and marketing facilities, improved
credit policy.

8. Explain the Demographic features of Indian Economy.

The demographic features of Indian Economy are:

1) Density of population:- The density of population refers to the average

number of persons per square kilometer. The figure of the density is
arrived at by dividing the total population of a country by its area. It
refers to the land-man ratio. In the international sphere, India is a
country with the medium density of population. Density of
 population that can be supported in any country depends upon the
availability of natural resources and the extent of the use of technology
to exploit the resources.

2) Sex composition of Population;- The number of females per 1000 males

is called sex ratio. It is generally adverse to women in India. It has also
declined over the years except in 1981 there has been a fall by 7 points
and in 2001 there has been a rise by 6 points by raising to 933 from 927
in 1991. In India, the state of Kerala has a higher number of females
than males, 1058 females for thousand males. A sex ratio of 950 and
above can be considered favourable to females in India. Even though
biologically women are more showing to withstand diseases than men,
in India there is the predominance of the male population.

3) Age composition:- The age composition of the population helps us to

find out the dependency ratio in the population of a country. It is
expressed in terms of the percentage of the young population and the
old population to the active working population of the country. The
working population consists of the people in the age group of 15 to 60.
This is also called workforce of the country.

4) Rural Urban composition:-

population reflects on the pattern of living of the c
As a matte rof fact, the ratio of rural urban population of a county is an
index of the level industrialization of that country. As the industries get
momentum, ratio of urban population go on increasing. As India is
predominantly agricultural country, ratio of urban population is less as
compared to rural population.

9. What is agricultural Marketing? Explain the defects of

agricultural Marketing in India?

Marketing is a process of bringing together the producer and the buyer and
is essential to complete the process of production.
Defects:-

1) Lack of organization among Farmers:- The farmers do not have their

own collective organization or association to facilitate them to sell their
produce.

2) Forced sale:- The Indian farmers are forced to sell their produce at an
unfavourable time and place and get unfavourable price. They sell their
produce immediately after harvesting because of poverty and
indebtedness.

3) Poor shortage facilities in Villages:- The Indian farmer does not have
facilities to store his produce properly.

4) Poor Transport conditions:- The transport conditions in rural areas are

so bad that even rich farmers who have large amounts of surplus
produced may not always be interested in going to the mandies.

5) Existence of too many middlemen:- The number of intermediates and

middlemen between the farmers and the final consumer of Farm
produce are too many and the margin going to them is too large.

6) Lock of adequate information:- The farmers do not ordinary get

information about the ruling prices in the big markets. They have no
idea about marketing conditions and bout the possible prices in the
future.

7) Fraudulent Practices in the market:- In the irregulated markets, many

malpractices are common such as arbitrary deductions from sale
proceeds, discriminatory marketing charges etc.

8) Multiplicity of Weights and measures:- There was no common measure,

throughout the country. There is a great scope for creating the farmers.

9) Absence of grading and standardization of agricultural produce:- In a

country where there is excessive adulteration. On common simply think
of the system of grading and standardization.
 10) Lack of financial facilities:- For the finance required for agricultural
operation the farmer has to depend upon the village traders. Because of
the heavy indebtedness and high rate of interest, the farmers mortgages
his crop in advance of production to the village traders. Because of the
heavy indebtedness and high rate of interest, the farmers mortgages his
crop in advance of production to the village trader for lower price.

10. Define SSUS? Explain the importance of SSUS?

Small scale units here defined by the Govt. as those units which employed
less than 50 workers which using power or less than 100 workers without
using power.

Importance:-

a) Employment Generation:- A small scale industries are labour intensive

they reduce the incidence of unemployment and underemployment.
These industries provide the maximum employment per unit of capital
invested. It is estimated that there are about two crore persons engaged
in collage industries.

b) Capital Saving:- Small scale industries need smaller amount of capital,

as they require tools and small machinery. They make possible
economical in the use of capital.

c) Decentralization:- The small scale industries can be dispersed over all

the country very easily and will bring about dispersal or decentralization
of industries and will this promote the object of balanced regional
development.

d) Better distribution of income and wealth:- They enable people living in

different parts of the country to increase. Their income and standard of
living. They check the evils of Urbanization and localization. They
conform to ideal society, equal distribution of income among all people
and absence of exploitation of man by man.
e) Mobilization of entrepreneurial skill:- A number of entrepreneurs are
spread over small towns and villages of the country. Small scale
industry provides industrial experience and serves as a training ground
for a large number o small scale managers.

f) Harmonious social relations:- The relations between the employers and

employees in small scale unit seem to be harmonious. In the case of
small scale industries, the question of disputes does not arise at all since
the main form of labour in those industries is family labour.

g) Overcoming territorial immobility by carrying the job to the worker.

Small scale industries can overcome the difficulties of territorial
immobility.

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