Anurag Sharma -1-

Centre Director

Chapter – 1 Indian Economy on the Eve of Independence

Origin of British Rule

The British rule over India changed the course of history in India. The foundation of British Empire
in India was laid by Battle of Plassey, fought in 1757.

Basic Purpose of British Rule

The main purpose of the British rule in India was to use Indian economy as feeder economy for the
development of British economy. British colonial rule tempered the Indian economy very badly. They
exploited India’s natural as well as human resources for the glory of their own country. Finally, after 200
years of British rule, India gained independence from them on the 15 th August, 1947.

Before the advent of British rule, Indian economy was characterised with the following features:
 Prosperous Economy : India was an independent, self-reliant and prosperous economy.
 Agrarian Economy : Agriculture was the main source of livelihood for most people and it engaged
about two-third of the total population.
 Well Known Handicraft Industries : India was also known for its handicraft industries in the fields
of cotton and silk textiles, metal and precious stone works, etc. Handicraft products enjoyed a
worldwide market due to its reputation of fine quality of material used and the high standards of
craftsmanship.

Meaning of Colonialism
Colonialism refers to a system of political and social relations between two countries, of which one
is the ruler and the other is its colony. The ruling country not only has political control over the colony, but
it also determines the economic policies of the dominated country.

Low Level of National Income and Per Capita Income

The economic condition of a nation can be judged with the data of national income and per capita income.
 However, no sincere attempt was made by the British Government to estimate India’s national and
per capita income.
 Some individual attempts were made by experts like Dadabhai Naoraji, William Digby, Findlay
Shirras, V.K.R.V. Rao and R.C. Desai. But, all these estimates produced conflicting and inconsistent
results.
 However, estimates of Dr. Rao on national and per capita incomes were considered very significant.
 Most of the studies revealed that country’s growth of aggregate real output during the first half of the
twentieth century was less than 2% and only 0.5% growth in per capita output per year.

Agricultural Sector
During the pre-British period, the condition of Indian agriculture was not at all satisfactory.
 India’s economy under the British colonial rule was overwhelmingly rural and agricultural in
character.
 Nearly 85% of the country’s population lived mostly in villages and derived livelihood, directly or
indirectly from agriculture.
 Even with this large proportion of population engaged in agriculture, the country was not self-
sufficient in food and raw materials for industry.

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Main Reasons for Stagnation in Agriculture Sector

The stagnation in the agricultural sector was caused due to the following reasons:
1. Land Settlement System : The most important reason for stagnation in agricultural sector was the
introduction of ‘Zamindari System’ by the colonial government.
 Under this system, profits accruing out of agriculture sector went to the zamindars in the form
of ‘lagaan’.
 The main interest of the zamindars was only to collect lagan regardless of the economic
condition of the cultivator.
 The dates for depositing specified sums of lagan to British Government were also fixed,
failing which the zamindars were to lose their rights.
 The zamindars and the colonial government did nothing to improve the condition of
agriculture.

2. Commercialization of Agriculture : Commercialization of agriculture means production of crops

for sale in the market rather than for self consumption.
 During the British rule, farmers were even higher price for producing cash crops (like cotton or jute),
so that such crops could be used as raw material for British Industries.
 Thus, British rule promoted shifting of crops from food crops to cash crops.

Commercialization of Agriculture resulted in Famines

 During the British rule, agriculture was commercialized to cater to the needs of the British industries
for necessary raw material.
 The British industrialists were always in need of raw materials like cotton, jute, groundnut,
sugarcane, etc. to keep their factories running.
 By offering high prices, the Indian peasants were attracted to production of commercial crops instead
of food crops.
 The extent of commercial agriculture went so far as to make may peasants purchase their food
requirements from shops in towns.
 This fall in production of food crops was responsible for frequent famines in India during the British
days.

3. Low level of Productivity : Low levels of technology, lack of irrigation facilities and negligible use
of fertilizers resulted in low level of productivity.
 The cultivator had neither the means nor any incentive to invest in agriculture.
 The zamindar had no roots in the villages, while the British rule spent little on agriculture,
technical or mass education.
 All this made it difficult to introduce modern technology, which caused a perpetually low
level of productivity.

4. Adverse Effect of Partition : India’s agriculture production received a further set back due to the
country’s partition at the time of independence.
 A sizeable portion of the undivided country’s highly irrigated and fertile set back to Pakistan.
 Almost, the whole of jute producing area became part of East Pakistan (now Bangladesh).
India’s jute goods industry, which had enjoyed a world monopoly so far, suffered heavily for
lack of raw material.

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Industrial Sector
Like agriculture, India could not develop a sound industrial base under the British rule. The poor
state of Industrial sector during the British rule is illustrated in the following points:
1. De-industrialization – Decline of Handicraft Industry : British Government systematically
destroyed Indian handicraft industries and no modern industrial base was allowed to come up. The
primary motive of British rule behind the de-industrialization was two-fold:
(i). To get raw materials from India at cheap rates to be used by upcoming modern industries in
Britain;
(ii). To sell finished products of British industries in Indian market at higher prices.
The two-fold policy of British rule was enforced to ensure the maximum advantage of their home
country.

2. Adverse effects of decline of Handicraft Industry : Decline of handicraft industries adversely

affected the Indian economy in the following ways:
(i). High Level of Unemployment : The decline of Indian handicraft resulted in unemployment
of a mass scale. The displaced artisans were forced to take up agriculture for their livelihood.
This increased the burden of population on villages and over-crowding in agriculture.

(ii). Import of Finished Goods : The Indian made goods could not withstand the foreign
competition of machine made cheap goods. It encouraged the import of manufactured goods
from Britain.

3. Lack of Capital Goods Industries : Capital goods industry refer to those industries which can
produce machine tools, which are, in turn, used for producing articles for current consumptions.
 During the British rule, there was hardly any capital goods industry to promote further
industrialization in India.
 British rulers did not pay any attention for their promotion as they always wanted Indians to
be dependent on Britain, for the supply of capital goods and heavy equipments

4. Low contribution to Gross Domestic Product (GDP) : The growth rate of the new industrial sector
and its contribution to the GDP remained very small.

5. Limited role of Public Sector : The limited area of operation of the public sector was also a
significant reason for drawback of the industrial sector. The Public sector remained confined only to
the railways, power generation, communications, ports and some other departmental undertakings.
Finally, it can be concluded that India remained backward in the industrial sector during the British
rule.

Modern Industries operating during Independence

Due to initiative of the private sector, modern industries started to come up during the second half of
the 19th century.
 The industries established in this period were mainly confined to cotton textile and jute mills and
their progress remained very slow.
 The cotton textile mills were mainly dominated by Indians and were located in the western parts of
the country, namely Maharashtra and Gujarat.
 The jute mills dominated by the foreigners were mainly concentrated in Bengal.

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 The major breakthrough was setting up of Tata Iron and Steel Company (TISCO) in the year 1907
in Jamshedpur (Bihar).
 A few other industries in the fields of sugar, cement, paper etc. also come up after the Second
World War.

Foreign Trade
State of India’s Foreign Trade during British Rule
1. Exporter of Primary Products and Importer of Finished Goods : India became an exporter of
primary products such as raw silk, cotton, wool, sugar, indigo, jute, etc. and an importer of finished
consumer goods like cotton, silk and woolen clothes and capital goods like light machinery,
produced in the British Industries.

2. Monopoly Control of British Rule : British Govt. maintained a monopoly control over India’s
exports and imports.
 More than ½ of India’s foreign trade was restricted to Britain while the rest was allowed
with few other countries like China, Ceylon (Sri Lanka) and Persia (Iran).
 The opening of the Suez Canal in 1869 served as a direct route for the ships operating
between India and Britain.

3. Drain of Indian wealth during British rule : Under the British rule, India became an exporter of
primary products (raw material) and an importer of finished goods. There was huge export surplus
due to excess exports. However, export surplus was used:
(i). To make payments for expenses incurred by an office set up by the colonial government in
Britain.
(ii). To meet expenses on war fought by the British government.
(iii). To import invisible items.

Demographic Condition
 1st Official Census : The first official census was conducted in the year 1881. Though
suffering from certain limitations, the census revealed unevenness in India’s population
growth. From 1881 onwards, census operations were carried out after every ten years.
 1921 : Year of the Great Divide: Before 1921, India was in the first stage of demographic
transition. The second stage of transition began after 1921. So, the year 1921 is described as
the ‘Year of the Great Divide’.

The Demographic condition during the Colonial rule is described in the following points:

1. High Birth Rate and Death Rate : Birth Rate refers to number of children born per thousand in a
year. Death rate refers to number of people rate were very high at nearly 48 and 40 per thousand
respectively.

2. Extremely Low Literacy Rate : The overall literacy level was less than 16 per cent. Out of this, the
female literacy level was at a negligible low of about 7 per cent.

3. Poor Health facilities : Public health facilities were either unavailable to large mass of population
or, when available, were highly inadequate. As a result, water and air-borne diseases were
widespread and took a huge toll on life.
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4. High Infant Mortality Rate : Infant mortality rate refers to number of infants dying before reaching
one year of age per 1,000 live births in a year. The infant mortality rate was quite alarming- about
218 per thousand, in contrast to the infant mortality rate of 44 per thousand in 2011.
5. Low Life Expectancy : Life Expectancy refers to the average number of years for which people are
expected to like. Life expectancy was also very low – 32 years, in contrast to 65.5 years in 2011.
6. Widespread Poverty : There was no reliable data about the extent of poverty. But, there is no doubt
that extensive poverty prevailed in India during the colonial period. The overall standard of living of
common people in India was very low and there was widespread poverty in the country.

Infrastructure

The infrastructure facilities during British rule were very poor. Some efforts were made to develop
basic infrastructure like roads, railways, ports, water transport, posts and telegraphs. But, the main aim
motive behind such infrastructural development was to serve various colonial interests. The state of
infrastructure as inherited from the British rule, is discussed below:

1. Roads : The colonial administration could not accomplish much on construction of roads due to
scarcity of funds.
 The roads that were built, primarily served the interests of mobilizing the army and shifting
raw materials.
 There always remained an acute shortage of all weather roads to reach out to rural areas
during the rainy season. As a result, people living in these areas suffered badly during natural
calamities and famines.

2. Railways : The most important contribution of the British rule was to introduce railways in India in
1850. The railways affected the structure of the Indian economy in two important ways:
 Railways enabled people to undertake long distance travel. It broke geographical and
cultural barriers and promoted national integration.
 It enhanced commercialization of Indian agriculture, which adversely affected the
comparative self-sufficiency of the village economies in India.

3. Air and Water Transport : The colonial dispensation took measure for the development of water
transport. The inland Waterways, at times, also proved uneconomical as in the case of the coast canal
on the Orissa coast. The main purpose behind their development was to serve Britain’s colonial
interest. The colonial government also showed way to the air transport in 1932 by establishing Tata
Airlines. This way it inaugurated the aviation sector in India.

4. Communication : Modern postal system started in India in 1837. The first telegraphy line was
opened in 1857. The introduction of the expensive system of electric telegraph in India served the
purpose of Maintaining law and order.

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Reason for Infrastructural Development

The basic objective of British Govt. to develop infrastructure was not to provide basic amenities to the
people, but to serve their own colonial interest.

1. The Roads were built for mobilizing the army within India and for drawing out raw materials from
the countryside to the nearest railway station or port and to send these to England or other lucrative
foreign destinations.

2. Railways were developed by the Britishers mainly for three reasons:

 To have effective control and administration over the vast India territory;
 To earn profits through foreign trade by linking railways with major ports;
 To make profitable investment to British funds in India.

3. The system of Electric Telegraph was introduced at a high cost to serve the purpose of maintaining
law and order.

Positive Contributions of British Rule

British Rule also had some positive effects on the Indian economy. They are discussed as under :

1. Self-sufficiency in food grain production : Commercialization of agriculture initiated by British

Govt. resulted in self-sufficiency in food grain production.

2. Better means of transportation : Development of roads and railways provided cheap and rapid
transport system and opened up new opportunities of economic and social growth.

3. Check on Famines : Roads and railways worked as a great check on the occurrence and impact of
famines as food supplies could be transported to the affected areas in case of droughts.

4. Shift to Monetary Economy : British rule helped Indian economy to shift from better system of
exchange (exchange of goods for goods) to monetary system of exchange.

5. Effective administrative setup : The British Govt. had an efficient administration system, which
served as a ready reckoner for Indian politicians.

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 Anurag Sharma -7-
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Chapter – 2 Indian Economy (1950 – 1990)

Central Problems of an Economy

The three major central problems of an economy are:
1. What to Produce : It involves deciding the final combination of goods and services to be produced,
i.e., it involves selection of goods and services and the quantity of each, that the economy should
produce.
2. How to Produce : It involves deciding the technique of production, i.e. whether selected goods be
produced with more labour and less capital (known as Labour Intensive Technique) or with more
capital and less labour (know as Capital Intensive Technique).
3. For whom to Produce : It involves deciding the distribution of output among people, i.e. it involves
selection of the category of people who will ultimately consume the goods.

Types of Economy

1. Centrally Planned Economy (Socialist Economy):- Centrally planned economy is an economy

system in which all the decision regarding economic problem are taken by central authority or
government for maximization of social welfare. Example China , Russia , North Korea, Cuba.
Features
 All the means of production are owned by the government.
 Governments takes all the decision regarding consumption, production and investment.
 There does not exists any element of competition under centrally planned economy.
 All decision aim to maximize social welfare.
 All the decisions are taken and coordinated by the central planning authority. The central planning
authority decides what, how and for whom to produce. There is no role for market or price
mechanism.
2. Market Economy (Capitalist Economy):- Market economy is an economic system in which
decision regarding central economics problems is taken by market forces for maximization of profit.
Example USA , UK.
Features
 All the means of production (i.e. land, labour, capital and enterprise) are owned and managed by
private sector.
 Private sector is free to take all decisions regarding production, consumption and investment
independently.
 There exists stiff competition among different private firms.
 All the decisions are generally guided by the profit motive.
 The government does not interfere in any economic activity.(Leisure Fare Policy)
 A market economy works through price mechanism. It is a process where price is determined by
market forces of demand and supply.

3. Mixed Economy:- Mixed economy is that economic system in which both public and private sector
work together for full filling their motive by using resources own by them. Example India .
Features
 It combines the features of both centrally planned and market economy.

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 In this economy, private sector is given the freedom to choose its lines of production and fix prices
on the basis of price mechanism. At the same time, the government keeps a close watch on its
activities.
 In the present modern world, no economy is 100% centrally planned or market oriented as both the
sectors play more or less equal roles in the functioning of the economy. So, modern economies are
virtually mixed economies in which central problems are solved partly through central
planning and partly by price mechanism.

India adopted the Mixed Economy

After the freedom, leaders of independent India (like Jawaharlal Nehru) were confused with regard to
economic system, to be followed in India.
 Some leaders were in favour of Socialist Economy. However, in a democratic country like India,
complete dilution of private ownership was not possible.
 Capitalist Economy System did not appeal to Jawaharlal Nehru, our first prime minister, as under
this system, there would be less chances for improvement in quality of life of majority of people.
 As a result, Mixed Economy (with best features of both Socialist and Capitalist Economy) was
adopted by the Indian Economy. In this view, India would be a socialist society, with strong public
sector, but also with private property and democracy.

What is Economic Planning?

Economic planning means utilization of country’s resources in different development
activities in accordance with national priorities.

Economic Planning
 Economic planning can be defined as making major economic decisions (what, how and for whom to
produce) by the conscious decision of a determinate authority, on the basis of a comprehensive
survey of the economy as a whole.
 The purpose of the commission was to carefully assess the human and physical resources of the
country and to prepare the Plans for the effective use of resources.

Goals of Five Year Plans

 Each five year plan listed the basic Goals of India’s development, which served as the guiding
principles of Indian planning.
 These basic Goals are:
(i). Growth
(ii). Modernisation
(iii). Self-reliance
(iv). Equity

Growth
 Growth refers to increase in the country’s capacity to produce the output of goods and services
within the country.
 A good indicator of economic growth, in the language of economics, is steady increase in the Gross
Domestic Product (GDP).

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 GDP refers to market value of all the final goods and services produced in the country during a
period of one year. Increase in GDP or availability of goods and services enables people to enjoy a
more rich and varied life.
 The GDP of a country is derived from the different sectors (Agriculture sector, Industrial sector and
Service sector) of the economy.
 In some countries, growth in agriculture contributes more to the GDP growth, while in some
countries; growth in service sector contributes more to GDP growth.
 The contribution of each sector makes up the structural composition of the economy.

Modernisation
 Adoption of New Technology : Modernisation aims to increase the production of goods and
services through use of new technology. For example, a farmer can increase the output on the farm
by using new seed varieties instead of using the old ones. Similarly, a factory can increase output by
using a new type of machine.
 Change in social outlook : Modernisation also requires change in social outlook, such as gender
empowerment or providing equal rights to women. A society will be more civilized and prosperous if
it makes use of the talents of women in the work place.

Self-reliance
 Self-reliance under Indian condition means overcoming the need of external assistance. In other
words, it means to have development through domestic resources.
 To promote economic growth and modernisation, the five year plans stressed on the use of own
resources, in order to reduce our dependence on foreign countries.
 The policy of self-reliance was considered a necessity because of two reasons:
 To reduce foreign dependence: As India was recently freed from foreign control, it is
necessary to reduce our dependence on foreign countries, especially for food. So, stress
should be give to attain self-reliance.
 To avoid Foreign Interference: It was feared that dependence on imported food supplies,
foreign technology and foreign capital may increase foreign interference in the policies of out
country.

Equity
 It is important to ensure that benefits of economic prosperity are availed by all sections (rich as well
as poor) of the economy.
 According to Equity, every Indian should be able to meet his or her basic needs (food, house,
education and health care) and inequality in the distribution of wealth should be reduced.
 In short, Equity aims to raise the standard of living of all people and promote social justice.

Agriculture Development

Land Reforms
 Land reforms primarily refers to change in the ownership of landholdings. Land reform measures
have been introduced by various underdeveloped and developing countries, for attaining a rational
land distribution pattern and viable farming structure.

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Abolition of Intermediaries
 However, the goal of equity was nor fully served by abolition of intermediaries because of following
reasons:
(i). In some areas, the former zamindars continued to own large areas of land by making use of
some loopholes in the legislation:
(ii). In some cases, tenants were evicted and zamindars claimed to be self-cultivations;
(iii). Even after getting the ownership of land, the poorest of the agricultural labourers did not
benefit from land reforms.

Land Ceiling
Land Ceiling refers to fixing the specified limit of land, which could be owned by an individual.
 Beyond the specified limit, all lands belonging to a particular person would be taken over by the
Govt. and will be allotted to the landless cultivators and small farmers.
 The purpose of land ceiling was to reduce the concentration of land ownership in few hands.
 Land ceiling helped to promote equity in the agriculture sector.
 However, the land ceiling legislation was challenged by the big landlords. They delayed its
implementation. This delay time was used by them to get the land registered in the name of close
relatives, thereby escaping from the legislation.

Conclusion
 Land reforms were successful in Kerala and West Bengal because of governments of these states
were committed to the policy of land reforms.

Green Revolution
At the time of independence, about 75% of the country’s population was dependent on agriculture.
 India’s agriculture vitally depends on the monsoon and in case of shortage of monsoon, the farmers
had to face lot of troubles.
 Moreover, the productivity in the agriculture sector was very low due to use of outdated technology
and absence of required infrastructure.
 As a result of intensive and continued efforts of many agriculture scientists, this stagnation in
agriculture was permanently broken by the ‘Green Revolution’.
 Green Revolution refers to the large increase in production of food grains due to use of high
yielding variety (HYV) seeds.

HYV Seeds: Main Reason for Agriculture Revolution

 Agriculture revolution occurred primarily due to the miracle of new wonder seeds {high yielding
varieties (HYV) of seeds}, which raised agriculture yield per acre to incredible heights.
 These seeds can be used in those places where these are adequate facilities for drainage and water
supply.
 As compared to other ordinary seeds, these seeds need heavy doses of chemical fertilizers (4 to 10
times more fertilizers) to get the largest possible production.
 So, to derive benefit from HYV seeds, Indian farmers need to have:
 Reliable irrigation facilities; and
 Financial resources (to purchase fertilizers and pesticides).

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Indian Economy experienced the success of Green Revolution in 2 phases:

1. In the first phase (Mid 60s to Mid 70s), the use of HYV seeds was restricted to more affluent states
(like Punjab, Andhra Pradesh, Tamil Nadu, etc.). further, the use of HYV seeds primarily benefited
the wheat growing regions only.
2. In the second phase (Mid 70s to Mid 80s), the HYV technology spread to a larger number of states
and benefited more variety of crops.

Important Effects of Green Revolution

1. Attaining Marketable Surplus : Green Revolution resulted in ‘Marketable Surplus’. Marketable
surplus refers to that part of agricultural produce which is sold in the market by the farmers after
meeting their own consumption requirement.
 Growth in agriculture output makes a difference to the economy only when large proportion
of this increase is sold in the market.
 Fortunately, a good proportion of rice and wheat produced during the revolution period was
sold by the farmers in the market.
2. Buffer Stock of Food Grains : The green revolution enabled the government to procure sufficient
amount of food grains to build a stock which could be used in times of food shortage.
3. Benefit to Low-Income groups : As large proportion of food grains was sold by the farmers in the
market, their prices declined relative to other items of consumption. The low-income groups, who
spend a large percentage of their income of food, benefited from this decline in relative prices.

Risks involved Under Green Revolution

(i). Risk of Pest Attack : The HYV crops were more prone to attack by pests. So, there was a risk that
small farmers who adopted this technology could lose everything in a pest attack. However, this risk
was considerably reduced by the services rendered by research institutes established by the
government.
(ii). Risk of Increase in Income Inequalities : There was a risk that costly inputs (HYV seeds,
fertilizers, etc.) required under green revolution will increase between small and big farmers since
only the big farmers could afford the required inputs.
However, due to favourable stapes taken by the government, these fears did not come true. The
government provided loans at a low interest rate to small farmers so that they could also have access
to the needed inputs.

Debate Over Subsidies to Agriculture

Subsidy, in context of agriculture, means that the farmers get inputs at prices lower than the market
prices.
 During the initial phases of Green Revolution, new technology was looked upon as being risky by
the farmers.
 So, it was necessary for the Govt. to grant subsidies to provide an incentive for adoption of the new
HYV technology.

Economists in Favour of Subsidies

1. The government should continue with agriculture subsidies as farming in India continues to be a
risky business.

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2. Majority of the farmers are very poor and they will not be able to afford the required inputs without
the subsidies.
3. Eliminating subsidies will increase the income inequality between rich and poor farmers and will
violate the ultimate goal of equity.

Economists Against the Subsidies

1. According to some economists, subsidies were granted by the Government to provide an incentive
for adoption of the new HYV technology. So, after the wide acceptance of technology, subsidies
should be phased out as their purpose has been served.
2. Subsidies do not benefit the poor and small farmers (target group) as benefits of substantial amount
of subsidy go to fertiliser industry and prosperous farmers.

Critical Appraisal of Agriculture Development (1950 – 1990)

 Between 1950 and 1990, there had been substantial increase in the agriculture productivity. As a
result of Green revolution, India became self-sufficient in food production. Land reforms resulted in
abolition of zamindari system.
 The Proportion of GDP between 1950 and 1990 contributed by agriculture declined significantly, but
not the population depending on it.
 Around 65% of the country’s population continued to be employed in agriculture, even till 1990.
Agriculture output could have been grown with much less people working in the sector, but
industrial and service sectors were unable to absorb the extra people involved in agriculture.
 The involvement of such a large proportion of the population in agriculture was regarded as the
important failure of policies followed during 1950-1990.

Industrial Development
 The developing countries (like India) can progress only if they have a good industrial sector. Industry
provides employment, which is more stable than the employment in agriculture. Industrialisation
promotes modernisation and overall prosperity. Due to this reason, Five Year Plans stressed a lot on
the industrial development.

Role of Public Sector in Industrial Development

1. Shortage of Capital with Private Sector : Private entrepreneurs did not have the capital to
undertake investment in industrial ventures, required for the development of Indian economy. At the
time of independence, Tatas and Birlas were the only well known Private entrepreneurs. As a result,
Government had to make industrial investment through Public Sector Undertakings (PSU’s).
2. Lack of Incentive for Private Sector : The Indian market was not big enough to encourage private
industrialists to undertake major projects, even if they had capital to do so. Due to limited size of
market, there was low level of demand for the industrial goods.
3. Objective of Social Welfare : The objective of equity and social welfare of the Government could
be achieved only through direct participation of the state in the process of industrialisation.
As a result, state had complete control over those industries, that were vital for the economy.

Industrial Policy Resolution 1956

Industrial Policy is a comprehensive package of policy measures which covers issues connected with
different industrial enterprises of the country.

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 After the Industrial Policy, 1948, Indian economy had to face a series of economic and political
changes, which necessitated the need for a fresh industrial policy for the country. So, on 30 th April,
1956, a second Industrial Policy Resolution was adopted in India.

Classification of Industries
According to Industrial Policy Resolution 1956, the industries were reclassified into three categories,
viz., Schedule A, Schedule B and Schedule C.
1. Schedule A : This first category comprised industries which would be exclusively owned by the
state. In this schedule, 17 industries were included, like arms and ammunitions; atomic energy;
heavy and core industries; aircraft; oil; railways; shipping; etc.
2. Schedule B : In this schedule, 12 industries were placed, which would be progressively state-owned.
The state would take the initiative of setting up industries and private sector will supplement
efforts of the state. This schedule includes industries like aluminium, other mining industries,
machine tools, fertilizers, etc.
3. Schedule C : This schedule consisted of the remaining industries which were to be in the private
sector. The state would facilitate and encourage the development of all these industries. These
industries were controlled by the state through a system of licenses, enforced under industries
(Development and Regulation) Act, 1951.

Industrial Licensing
An industrial license is a written permission from the government, to an industrial unit to manufacture
goods. The Industries (Development and Regulation) Act, 1951, empowered the government, to issue
license for:
 Setting up of new industries;
 Expansion of existing ones; and
 Diversification of products.

Small – Scale Industry (SSI) / Karve Committee

A small-scale industry’ is defined with reference to the maximum investment allowed on the assets
of a unit. This limit has changed from rupees five lakh in 1950 to present limit of rupees one crore.

Important Points about Small – Scale Industries

1. Employment Generation : Small – scale industries are more labour intensive, i.e., they use more
labour than the large-scale industries and, therefore, they generate more employment. After
agriculture, small-scale industries provide employment to the largest number of people in India.
2. Need for Protection from Big Firms : Small-scale industries cannot compete with the big industrial
firms. They can flourish only when they are protected from the large firms.
So, various steps were taken by the government for their growth.
 Reservation of Products : Government reserved production of a number of products for the
small-scale industry.
 Various Concessions : Small-scale industries were also given concessions, such a lower
excise duty and bank loans at lower interest rates.

Trade Policy : Import Substitution

In order to be self-reliant in vital sectors, India has followed the strategy of replacing many imports
by domestic production.
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 In the first seven plans, trade was characterised by an inward looking Trade Strategy. Technically,
this strategy is called ‘Import Substitutions’.
 Import Substitution refers to a policy of replacement or substitution of imports by domestic
production.
 For example, instead of importing vehicles made in a foreign country, domestic industries would be
encouraged to produce them in India itself.
 The basic aim of the policy was to protect domestic industries from foreign competition.
 The policy of import substitution can serve 2 definite objectives:
 Savings of precious foreign exchange; and
 Achieving self-reliance.

Protection from Imports through ‘Tariffs’ and ‘Quotas’

Government made use of two ways to protect goods produced in India from imports:
1. Tariffs : Tariffs refer to taxes levied on imported goods. The basic aim for imposing heavy duty on
imported goods was to make them more expensive and discourage their use.
2. Quotas : Quotas refer to fixing the maximum limit of the imports of a commodity by a domestic
producer.
The tariffs on imported goods and fixation of quotas helped in restricting the level of imports. As a
result, the domestic firms could expand without fear of competition from the foreign market.

Critical Appraisal of Industrial Development (1950 - 1990)

1. The proportion of GDP contributed by the industrial sector increased in the period from 11.8% in
1950-51 to 24.6% in 1990-91. This rise in the industry’s share of GDP is an important indicator of
development. The 6% annual growth rate of the industrial sector during the period is also admirable.
2. Indian industry was no longer restricted to cotton textiles and jute. Is also included engineering
goods and a wide range of consumer goods.
3. The promotion of small-scale industries gave opportunities to people with small capital to get into
business. New investment opportunities helped in generating more employment. It promoted growth
with equity.
4. Protection from foreign competition (through Import Substitution) enabled the development of
indigenous industries in the areas of electronics and automobiles sectors, which otherwise could not
have developed. However, this protection had two drawbacks:
(i). Inward Looking Trade Strategy : Our policies were ‘inward oriented’ and so we failed to
develop a strong export sector.
(ii). Lack of Competition : Due to restrictions on imports, some domestic producers made no
sincere efforts to improve the quality of their goods and it forced the Indian consumers to
purchase, whatever is produced by them. The domestic industry failed to achieve
international standards of product quality.
5. Licensing Policy helped the government to monitor and control the industrial production. However,
excessive regulation by the government created two difficulties:
(i). Misuse : It was misused by industrial houses. Some big industrialists would get a license, not
for starting a new firm, but to prevent competitors from starting new firms.
(ii). Time Consuming : The cumbersome and complex procedure for obtaining license was very
time consuming. A lot of time was spent by industrialists in trying to obtain a license.

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6. Public Sector made a remarkable contribution by creating a strong industrial base, developing
infrastructure and promoting development of backward areas.
 However, the public sector continued to monopolise (that too ineffectively) in certain non-
essential areas, which could be well handled by the private sector. For example, hotel
industry, production of goods (like Modern Bread).
 Many public sector firms also incurred huge losses but continued to function because of
difficulty in closing a government undertaking.
 The monopoly of public sector in such non-essential areas was criticized by many scholars.
According to them, the role of public sector should be limited to strategic areas (like national
defense) and private sector should be given the opportunity for other non-essential areas.
According to some economists, public sector is not meant for earning profits but to promote the
welfare of the nation. So, they should be evaluated on the basis of their contribution to welfare of
the people and not on the profits the earn.

Conclusion

In Agriculture Sector
 India became self-sufficient in food production due to the green revolution.
 Land reforms resulted in abolition of zamindari system.

In Industrial Sector
 The industries became far more diversified compared to the situation at independence. However,
excessive government regulation prevented their growth.
 Many economists were dissatisfied with the performance of public sector enterprises.

In Trade Sector
 Our policies were ‘inward oriented’ and so we failed to develop a strong export sector.
 The domestic producers were protected against foreign competition in order to gain self-reliance.
However, this did not give them the incentive to improve the quality of goods that they produced.

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Anurag Sharma
Centre Director

Chapter 3 - Liberalisation, Privatisation and Globalisation (LPG)

Reasons for Economic Reforms

The economic condition of India in the year 1991 was very miserable. It was due to the cumulative
effect of number of reasons. Let us discuss the various reasons, which aroused the need for making major
economic reforms in the country:

1. Poor Performance of Public Sector: In the 40 years period (1951-90), public sector was
assigned an important role to work for the economic development of India. The number of public
enterprises increased from 5 in 1951 to 232 in 1991. Except few public enterprises, the overall
performance was very disappointing. Considering the huge amount of losses incurred by a good
number of public sector enterprises, the Government recognized the need making necessary reforms.

2. Deficit in Balance of Payments (BOP): Deficit in balance of payments arises when foreign
payments for imports are in excess of foreign receipts from export. Even after imposing heavy tariffs
and fixing quotas, there was a sharp rise in imports. On the other hand, there was slow growth of
exports due to low quality and high prices of Indian goods in the international market.

3. Inflationary Pressures: There was a consistent rise in the general price level in the economy. The
rise in prices was mainly due to increase in money supply in the economy and shortage of essential
goods. The increase in the supply of money occurred due to ‘Deficit Financing’ The rate of inflation
rose from 6.7% to 16.7%. Such a high level of inflation adversely affected the demand for Indian
products in the domestic as well as foreign market.
4. Fall in Foreign Exchange Reserves: In 1991, foreign exchange reserves fell to the lowest level
and it led to the foreign exchange crisis in the country. Foreign exchange reserves, needed to import
petrol and other important items, dropped to levels that were not sufficient for even a fortnight.
5. Huge Burden of Debts: The expenditure of the government was much higher than revenue. As a
result, government had to borrow from banks, people within the country and from international
financial institutions.

Crises of 1991 Forced India for Financial help from IMF and World Bank
To manage the economic crisis of 1991, Indian Government approached the International Bank for
Reconstruction and Development (IBRD), popularly known as World Bank and the International Monetary
Fund (IMF) and received $ 7 billion as loan.
For availing the loan, these international agencies expected India to liberalise and open up the economy
by
 Removing restrictions on the private sector;
 Reducing the role of the government in many areas; and
 Removing trade restrictions.
India agreed to the conditions of World Bank and IMF and announced the New Economic Policy.

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Centre Director

The New Economic Policy (N.E.P.)

The New Economics Policy (NEP) consisted of wide range of economic reforms. The main aim of the
policy was to create a more competitive environment in the economy and remove the barriers to entry
and growth of firms. The New Economics Policy can be broadly classified into two kinds of measures:

Note: The NEP is called ‘new’ because it had more or less completely reversed the policy being
followed prior to 1991. The measures taken under the NEP are popularly called ‘economic reforms’.
These reforms laid stress on replacing the License, Quota and Permit (LQP) by Liberalisation,
Privatisation and Globalisation (LPG) regime.

1. Stabilisation Measure: They refer to short-term measures which aim at:

(i) Correcting Weaknesses of the BOP by maintaining sufficient foreign exchange reserves; and
(ii) Controlling inflation by keeping the rising prices under control.

2. Structural Reform Measures: They refer to long-term measures which aim at:
(i) Improving the efficiency of the economy; and
(ii) Increasing international competitiveness by removing the rigidities in various segments of the
Indian economy.

Main Features of The New Economic Policy

The three main features of new economic policy are:
1. Liberalisation 2. Privatisation 3. Globalisation

 Out of liberalization, privatization and globalization, the first two are policy strategies and the
third one is the outcome of these strategies.
 Liberalisation, Privatisation and Globalisation or ‘LPG’ have become a much talked of subjects
among politicians, economists and business in modern days.
 These three expressions are the supporting pillars, on which the structure of new economic policy
of our Government has been erected and implemented since 1991.

Liberalization means removal of entry and growth restrictions on the private sector.
 Liberalization involves deregulation and reduction of government controls and greater autonomy
(freedom) of private investment, to make economy more competitive.
 Under this process, business is given free hand and is allowed to run on commercial lines.
 The purpose of liberalization was:
o To unlock the economic potential of the country by encouraging private sector and
multinational corporations to invest and expand; and
o To introduce much more competition into the economy and creating incentives for increasing
efficiency of operations.
 The economic reforms taken by the Government under liberalization include the following:
(i) Industrial Sector Reforms
(ii) Financial Sector Reforms
(iii) Tax Reforms
(iv) Foreign Exchange Reforms
(v) Trade and Investment Policy Reforms
The economic Reforms taken by the Government under liberalization include the following:
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(A). Industrial Sector Reforms

The Government introduced its new industrial policy on July 24, 1991. The various measures under
industrial policy reforms include:

1. Reduction in Industrial Licensing: The new policy had abolished industrial licensing for all
projects, except for a short list of industries (like liquor, defence equipments, industrial explosives,
etc.). No licences were needed to set up units, expand or diversify the existing line of manufacture,
except in certain industries, related to security and strategic considerations.

2. Decrease in role of Public Sector: The number of industries, exclusively reserved for the public
sector, reduced from 17 to 3. The only industries, which are now reserved for the public sector are:
(i) Defence equipments; (ii) Atomic energy generation; and (iii) Railway Transport.

3. De-reservation under small-scale industries: Many goods produced by small scale industries
have now been dereserved. This investment ceiling on plant and machinery for small undertakings
has been enhanced to rupees one crore. It many industries, the market has been allowed to determine
the prices through forces of the market (and not by directive policy of the government).

4. Monopolies and Restrictive Trade Practices (MRTP) Act : With the introduction of liberalization
and expansion schemes, the requirements for large companies, to seek prior approval for expansion,
establishment of new undertakings, merger, amalagamation, etc. were eliminated.

(B). Financial Sector Reforms

1. Change in Role of RBI : The role of RBI was reduced from regulator to facilitator of financial
sector. As a result, financial sector was allowed to take decision on many matters, without consulting
the RBI.

2. Origin of private Banks :The reform policies led to the establishment of private sector banks in
India like ICICI Bank or ABN Amro Bank. This increased the competition and benefitted the
consumers through lower interest rates and better services.

3. Increase in limit of Foreign investment : Foreign investment limit in banks was raised to around 51
per cent. Foreign Institutional Investors (FII) such as merchant bankers, mutual funds and pension
funds were now allowed to invest in Indian financial markets.

4. Ease in Expansion Process : Banks were given freedom to set up new branches (after fulfillment of
certain conditions) without the approval of the RBI.

(C). Tax Reforms (Fiscal Reforms )

Tax reforms refer to reforms in government’s taxation and public expenditure policies, which are
collectively known as its ‘Fiscal Policy’. Taxes are of two types:
 Direct Taxes consist of taxes on incomes of individuals as well as profits of business enterprises.
For example, Income Tax (taxes on individuals incomes) and Corporate tax (taxes on profits on
companies).
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 Indirect Taxes refer to those taxes which affect the income and property of persons through their
consumption expenditure. Indirect taxes are generally imposed on goods and services. For example,
sales tax, VAT, Custom duty, etc.

The major Tax Reforms made are:

1. Reduction in Taxes
High rates of tax on individual income (Income Tax) and profits of companies (Corporate
Tax) were responsible for tax evasion by people. Since 1991, there has been a continuous reduction
in the Income Tax and Corporate Tax. It is now widely accepted that moderate rates of income tax
encourage savings.
2. Reforms in Indirect Taxes
Considerable efforts have also been made to reform the indirect taxes, to facilitate
establishment of common national market for goods and commodities. For example, Central Value
Added Tax (CENVAT) has replaced Central Excise Duties, to avoid cascading effect of the duties.
3. Simplification of Process
In order to encourage better compliance on the part of taxpayers, amny procedures have been
simplified.

(D). Foreign Exchange Reforms

The important reforms made in the foreign exchange market are –

(a) Devaluation of Rupee
Devaluation refers to reduction in the value of domestic currency by the government. To
overcome balance of Payments crisis, the rupee was devalued against foreign currencies. This led to
an increase in the inflow of foreign exchange.

(b) Market Determination of Exchange Rate

The government allowed rupee value to be free from its control. As a result, market forces of
demand and supply determine the exchange value of the Indian rupee in terms of foreign currency.

(E). Trade and Investment Policy Reforms

 Before 1991, to product the domestic industries, a lot of restriction were imposed on imports, in the
form of high tariffs and quotas.
 However, this protection reduced the efficiency and competitiveness of the domestic industries. It led
to slow growth of the manufacturing sector.
 So, liberalization of trade and investment regime was initiated to increase international
competitiveness of industrial production and to promote foreign investment and technology into the
economy.
 The aim was to promote the efficiency of the local industries and the adoption of modern
technologies.
The reforms aimed at following measures –

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(a) Removal of Quantitative Restriction on Imports and Exports

Under the new economic policy, quantitative restrictions on imports and exports were greatly
reduced. For example, quantitative restriction on imports of manufactured consumer goods and
agricultural products were fully removed from April 2001.
(b) Removal of Export Duties
Export duties were removed to increase the competitive position of Indian goods in the
international market.
(c) Reduction in Import Duties
Import duties were reduced to improve the position of domestic goods in the foreign market.
(d) Relaxation in Import Licensing System
The import licensing was abolished, except in case of hazardous and environmentally
sensitive industries. This encouraged domestic industries to import raw materials at better prices,
which raised their efficiency and made them more competitive.

Privatisation

Privatization means transfer of ownership, management and control of public sector

enterprises to the entrepreneur in the private sector.
It implies greater role of the private sector in the economic activities of the country.
Over the years, Indian Government has diluted its stake in several public enterprises, including
IPCL, IBP, Maruti Udyog etc.

Privatization can be done in two ways –

1. Transfer of ownership and management of public sector companies from the government to the
Private Sector.
2. Privatization of the public sector undertakings (PSU) by selling off part of the equity of PSUs to
the public. This process is known as disinvestment.

Navratnas and Mini Ratnas

In order to improve efficiency, infuse professionalism and enable PSUs to compete more effectively
in the liberalized global environment, the government chose nine PSUs (BHEL, BPCL, SAIL,
etc)and declared them ‘NAVRATNAS’ in the year 1996. They were given greater managerial and
operational autonomy in taking various decisions, to run the company efficiently and to increase
their profits.
Apart from this, 97 other profit-making enterprises were granted operational, financial and
managerial autonomy and they were referred as ‘MINIRATNAS’.

A few examples of public enterprises with their status are as follows –

(1) Maharatnas
(a) Indian Oil Corporation Limited (IOCL)
(b) Steel Authority of India Limited (SAIL)
(2) Navratnas
(a) Bharat Heavy Electricals Limited (BHEL)
(b) Mahanagar Telephone Nigam Limited (MTNL)

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Anurag Sharma
Centre Director

(3) Miniratnas
(a) Bharat Sanchar Nigam limited (BSNL)
(b) Airport Authority of India (AAI)
Objective of Privatisation
The most common and important objectives of privatisatoin are –
(a) Improving the financial condition of the government.
(b) Raising funds through disinvestment.
(c) Reducing the workload of public sector.
(d) Increasing the efficiency of the government undertakings.
(e) Providing better goods and services to consumers.
(f) Bringing healthy competition within an economy.

Arguments in Favour of Privatisation

1. Reduction in Budgetary Deficit
Public sector enterprises were putting large burden on public exchequer due to huge losses
and growing subsidy payments. Privatization reduces the financial burden of the government.
2. Competitive Environment
Privatization abolishes the monopoly position of the public sector enterprises and helps in
improving the competitive strength and efficiency these enterprises.
3. Better Managerial Efficiency
Privatization is supported as a means of improving managerial efficiency as the management
is not subject to unwanted political pressure and interference.
4. Profit Oriented Decision
Private sector works with the ‘profit-oriented’ approach. It infuses the commercial spirit in
the functioning of the enterprises and leads to an improvement in efficiency and performance of the
enterprises.
5. Increase in Investment and Employment Opportunities
Privatization open up the areas, which were earlier reserved for the public sector, like in case
of insurance sector. It increases the investment by the private sector, which leads to creation of
greater employment and income earning opportunities in the economy.

Arguments Against Privatisation

1. Social Welfare Neglected
Te foremost argument against privatization policy is that private sector enterprises operate
mainly with the objective of profit maximization. Thus, this system does not guarantee social welfare
of the poor people.
2. Lop-Sided Economic Development
Private sector does not take interest in projects which are risky and have long gestation period
with lower profitability. It may adversely affect the growth of basic and heavy industries and
infrastructure in the country.
3. Concentration of Economic Power
Privatisation can also result in the substitution of a public monopoly to a private monopoly,
which may lead to monopolistic exploitation by efficient private owners.
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4. Rise in Level of Unemployment

Under privatization, there is always fear to retrenchment and consequent unemployment.
Privatization is many public sector enterprises has led to voluntary retirement of many workers.

Globalisation
 Globalization is the outcome of the policies of liberalization and privatization.
 It mean opening up of the economy for world market by attaching international competitiveness.
 Globalization means integrating the national economy with the world economy through removal of
barriers on international trade.
 Globalization offers opportunity for an organization to expand globally, i.e., in worldwide market.
 Improving technologies, better transportation an communication have enabled companies to expand
into global or worldwide markets.

Change Made by the Globalisation of the Indian Economy

1. The new economic policy prepared a specified list of high technology and high investment priority
industries, in which automatic permission will be available for foreign direct investment up to 51 per
cent of foreign equity.
2. In respect of foreign technology agreements, automatic permission is provided in high priority
industry up to a sum of Rs. 1 crore. No permission is now required for hiring foreign technicians or
for testing indigenously developed technology abroad.
3. In order to make international adjustment of Indian currency, rupee was devalued in July 991 by
nearly 20 per cent. It stimulated exports, discouraged imports.
4. In order to bring the Indian economy within the ambit of global competition, the government has
modified the customs duty to a considerable extent. Accordingly, the peak rate of customs duty has
been reduced from 250 per cent to 10 per cent in 2007-2008 budget.

Positive and Negative Traits of Globalization

In Favour of Globalisation
Globalisation resulted in greater access to
 Global markets,
 Advanced technology and
 Increased the possibility for large industries of developing countries to become important
players in the international arena.

Against Globalisation
 Benefits of globalisation accrue more to developed countries as they are able to expand
their markets in other countries.
 Globalsiation compromises the welfare and identity of people belonging to poor countries.
 Market-driven globalization increases the economic disparities among nations and people.

Outsourcing
Outsourcing refers to contracting out some of its activities to a third party which were earlier performed
by the organisation. For example, many companies have started outsourcing security service to outside
agencies on a contractual basis.
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 Is has intensified in recent times because of the growth of fast modes of communication, particularly
the growth of Information Technology (IT).
 With the help of modern telecommunication links, the text, voice and visual data in respect of these
services is digitized and transmitted in real time over continents and national boundries.
 India has become a favourable destination of outsourcing for most of the MNC’s because of low
wage rates and availability of skilled manpower. For example, Indian Business Process
Outsourcing (BPO) companies are already gaining prominence and earning precious foreign
exchange.
 Some of the services outsourced to India include:
(i) Voice-based business processes (known as BPO or Call Centers);
(ii) Record keeping;
(iii) Accountancy;
(iv) Banking services;
(v) Music recording;
(vi) Film editing;
(vii) Book transcription;
(viii) Clinical advice, etc.

World Trade Organisation (WTO)

WTO was founded in 1995 as the successor organisation to the GATT.
 The WTO agreements cover trade in goods as well as services, to facilitate international trade.
 At present, there are 164 member countries of WTO and all the members are required to abide by
laws and policies framed under WTO rules.
 As an important member of WTO, India has been in the forefront of framing fair global rules,
regulations and advocating the interests of the developing world.
 India has kept its commitments made of the WTO. India has taken reasonable steps to liberalise trade
by removing quantitative on imports and reducing tariff rates.
(i) To enlarge production and trade of services;
(ii) To ensure optimum utilisation of world resources; and
(iii) To protect the environment.

Some Major Functions of WTO

1. To facilities international trade (both bilateral and multi-lateral) through removal of tariff as well as
non-tariff barriers;
2. To establish a rule-based trading regime, in which nations cannot place arbitrary restrictions on
trade;

Role of World Trade Organisation

1. WTO oversees the implementation of the significant tariff cuts and reduction of non-tariff
measures agreed in the trade negotiations.
2. It acts as a watchdog of international trade and regularly examines the trade regimes of individual
members.
3. Trade disputes that cannot be solved through bilateral talks are adjudicated under the WTO
Dispute Settlement Court.
4. WTO is a management consultant for world trade. Its economists keep a close watch on the
global economy and provide studies on the main trade issues of the day.
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Anurag Sharma
Centre Director

An Appraisal of LPG Policies (Economic Reforms)

Economic reforms or regime of Liberalisation, Privatisation and Globalisation (LPG) introduced in India
in 1991, created mixed reactions at different levels. Let us discuss some of the positive and negative
aspects of economic reforms.

Arguments in Favour of Economic Reforms

1. Increase in rate of Economic Growth : The growth of GDP increased from 5.6% during 1980-91
to 7.6% during 2015-2016. This shows that there has been an increase in the overall GDP growth in
the reform period.
 During the reform period, the growth of agriculture and industrial sectors has declined,
whereas the growth of service sector has gone up. This indicates that the growth is mainly
driven by the growth in the service sector.
 Currently, the growth rate of GDP is estimated to be more than 8%.

2. Inflow of Foreign Investment : The opening up the economy has led to the rapid increase in
foreign direct investment (FDI). The foreign investment (FDI and foreign institutional investment)
increased from about US $ 100 million in 1990-91 to US $ 3,962 billion in 2015-16. With launch to
Make in India initiative in September 2014, Foreign Direct Investment (FDI) Policy was further
liberalised. Due to this reason, FDI inflow in India increased by 48%.

3. Rise in Foreign Exchange Reserves : Foreign exchange reserves reached the level of $ 25,186
million at the end of March, 1995 as compared to only $ 3,962 million on 1989-90. At present India
is the 6th largest foreign exchange reserve holder in the world, with US $ 368.231 billion at the end
of November, 2016

4. Rise in Exports : During the reform period, India experienced considerable increase in exports of
auto parts, engineering goods, IT software and textiles.

5. Control of Inflation : Increase in production, tax reforms and other reforms helped in controlling
the inflation. The annual rate of inflation reduced from the peak level of 17% in 1991 to around
5.48% in 2015-16.

6. Increase in role of Private sector : Abolition of licensing system and removal of restrictions on
entry of the private sector, in areas earlier reserved for the public sector, have enlarged the area of
operation of the private sector.
Criticism of Economic Reforms

1. Neglect of Agriculture

(i) Reduction of public investment : Public investment in agriculture sector, especially in

infrastructure, which includes irrigation, power, roads, market linkages and research and
extension (which played a crucial role in the Green Revolution), has been reduced in the reform
period.
(ii) Removal of subsidy : Removal of fertiliser subsidy increased the cost of production, which
adversely affected the small and marginal farmers.

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Centre Director

(iii) Liberalization and reduction in import duties : After the commencement of WTO, a number
of policy changes were made: (a) Reduction in import duties on agricultural products; (b)
Removal of minimum support price and (c) Lifting of quantitative restrictions on agricultural
products.
(iv) Shift towards cash crops : Due to Export-oriented policy strategies in agriculture, the
production shifted from food grains to cash crops for the export market. It led to rise in the prices
of food grains.

2. Growing Unemployment
In the public sector, on the plea of overstaffing and redundancy, and in the private sector, on the plea
of modernization and technological up gradation, workers are gradually being retrenched or forced to
accept voluntary retirement scheme.

3. Low level of Industrial Growth

(a) Cheaper Imported Good

Cheaper imports replaced the demand for domestic goods and domestic manufacturers started
facing competition from imports. For example, cheaper Chinese goods poses a big threat to Indian
Manufacturers.

(b) Lack of Infrastructure facilities

The infrastructure facilities, including power supply, have remained inadequate due to lack of
investment.

(c) Non-tariff barriers by developed countries

All quota restriction on exports of textiles and clothing have been removed from India. But
some developed countries, like USA have not removed their quota restriction on import of textiles
from India.

4. Ineffective Disinvestment Policy

Under this policy, there has been a substantial loss to the government as assets of the public sector
undertakings have been under-valued and sold to the private sector. Moreover, the proceeds from
disinvestment were used to compensate the shortage of government revenues rather than using it for
the development of PSUs.

5. Ineffective Tax Policy

The tax reduction in the reform period was done to generate larger revenue and to curb tax
evasion. But, it did not result in increase in tax revenue for the government.

6. Spread of Consumerism
The new policy has been encouraging a dangerous trend of consumerism by encouraging the
production of luxuries and items of superior consumption.

7. Unbalanced Growth
Growth has been concentrated only in come select areas in the services sector, such as
telecommunication, information technology, finance, entertainment, travel and hospitality services,

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real estate and trade, rather than vital sectors, such as agriculture and industry, which provide
livelihood to millions of people in the country.

What is Deficit Financing?

Deficit financing refers to borrowing from Reserve Bank of India (RBI) by the government to meet its
deficit. RBI issues new currency for this purpose, which increases the money supply in the economy.

Bilateral Trade: Trade between two countries is known as Bilateral Trade.

Multi-lateral Trade: Trade between more than two countries is known as Multi-lateral Trade.

Tariff Barriers: The barriers which are imposed on imports, to make them relatively costly, to protect
the domestic production, are known as Tariff Barriers. (Ex. Custom Duty)

Non-Tariff Barriers: The barriers which are imposed on the amount of imports and exports are
known as Non-tariff Barriers.

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Chapter – 4 Poverty

Meaning of Poverty
Poverty refers to a state in which an individual is unable to fulfill even the basic necessities of life. The
minimum requirements include food, clothing, housing, education and health facilities. In a country, where a
big mass of the population is deprived of even minimum amenities of life for a very long period, then such a
country suffers from a vicious circle of poverty.

Who are Poor?

Poverty in India has been studied from two points : urban and rural.

Poor in Urban and Rural Areas

 In Urban Areas, poor people include push cart vendors, street cobblers, rag pickers, beggars, etc.
 They possess few assets.
 They reside in Kutcha hutments with walls made of baked mud and roofs mad of grass, thatch,
bamboo and wood.
 In Rural Areas, poor people include landless agricultural labourers, cultivators with very small
landholdings, landless labourers engaged in a variety of non- agricultural jobs or tenant cultivators
with small land holdings.
 Many of the rural people are landless. Even if some of them possess land, it is only dry or waste
land.

Characteristics of Poor People

1. Hunger, starvation and malnutrition:- Starvation and hunger are the basic problems of the poorest
households. Malnutrition is alarmingly high among the poor.
2. Poor Health:- They are generally physically weak due to ill health, disability or serious illness. Their
children are less likely to survive or be born healthy.
3. Limited Economic Opportunities:- They have very limited economic opportunities due to lack of
literacy and skills. So, they face unstable employment. They are notable to negotiate their legal
wages from employers and are exploited.
4. Debt Trap:- They borrow from money lenders, who charge high rates of interest, that push them into
chronic indebtedness.
5. Lack of facilities of electricity and water:- Most poor households do not have access to electricity.
Their primary cooking fuel is firewood and cow dung cake. A large section of poor people do not
even have access to safe drinking water.
6. Gender Inequality:- Gender inequality prevails within the family in regard to participation of gainful
employment, education and in decision-making.
7. Bigger Families:- The poor families are bigger in size, which make their economics condition
worse.

Measures of Poverty: Relative and Absolute

There are two measures to determine the extent of poverty:
(i). Relative Poverty
(ii). Absolute Poverty

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Relative Poverty
Meaning Relative poverty refers to poverty of people, in comparison to other people, regions or nations.
Example If Ram has lower income in comparison to Shyam, then we can say that Ram is relatively poor.
Importance It helps in understanding the relative position of different segments of the population.
It only reflects the relative position of different segments of the population in the income
Limitation hierarchy. It does not consider, how poor the poor person is or whether he is deprived of the
basic minimum requirements of life or not.

Absolute Poverty
Meaning Absolute poverty refers to the total number of people living below poverty line.
Example According to absolute measure, around 23.6% of India’s population is below poverty line.
The concept of absolute poverty is relevant for the less developed countries like India, where
Importance
there is abundance of poverty. It helps to measure the number of poor people.
The method of “Poverty Line” used to measure absolute poverty does not differentiate between
the very poor and the other poor. Moreover, it does not consider social factors that generate and
Limitation
are responsible for poverty, like illiteracy, ill health, lack of access to resources, discrimination
or lack of civil and political freedoms.

How to Measure Absolute Poverty?

In India, ‘Poverty Line’ is used as a standard to measure the number of poor people.
 In poverty line, a standard is fixed in terms of minimum level of consumption.
 Absolute poverty refers to a situation when a person fails to reach this minimum consumption level.
So, in context of India, proportion of people living below ‘Poverty Line’ gives the absolute measure of
poverty. In this chapter, we will take poverty in the sense of absolute poverty.

Measurement of Poverty: Pre and Post Independent India

In the Pre-independent India, Dadabhai Naoroji was the first person to discuss the concept of Poverty Line.
He used the ‘Jail Cost of Living’ to calculate the poverty line. He used the menu for a prisoner and used
appropriate prevailing prices, to arrive at the cost of consumption of an adult prisoner.

Concept of Poverty Line

Poverty Line is a cut-off point on the line of distribution, which usually divides the population of the
country as poor and non-poor.
 The concept of poverty line is used to measure the extent of poverty in a country.
People having income below the poverty line are called “Poor”, and
People with income above poverty line are called “Non-Poor”.
 Poverty line tries to capture the socially acceptable minimum living standards, which the society tries
to fulfill.

Determination of Poverty Line

In India, “Monthly Per Capita Expenditure or MPCE” method s used to determine the poverty line.
According to this method, monetary value (per capita expenditure) of the minimum calorie intake is
calculated.

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 Minimum Calorie Intake : The Planning Commission has defined poverty line on the basis of
recommended nutritional requirements of 24 calories per person per day for rural areas and 2100
calories per person per day in urban areas.
 Higher calorie intake has been fixed for rural areas because the rural worker has to do greater
physical work as compared to the urban worker.
 Monetary value of minimum calorie intake : The minimum Monthly Per Capita Consumption
Expenditure (MPCE) in 2011-12 is worked out to be Rs. 816 per person in rural areas and Rs. 1,000
in urban areas.

Categorising Poverty
There are many ways to categorise poverty:
1. Chronic Poor : In includes people who are always poor and those who usually poor.
2. Transient Poor : Transient poor may be classified as churning poor (who regularly move in and out
of poverty, like small farmers) and occasionally poor (who are rich most of the time and poor
sometimes).
3. Non-Poor : They are never poor.

Criticism of Poverty Line

(i). The method groups all the poor together and does not differentiate between the very poor and the
other poor.
(ii). This mechanism is helpful in identifying the poor as a group to be taken care of by the government.
However, it is very difficult to identify the poor, who need help the most.
(iii). There are many factors, other than income and assets, which are associated with poverty, like
accessibility to basic education, health care, drinking water, etc. which have been ignored.

The Number of Poor in India

When the number of poor is estimated as the proportion of people the poverty line, it is known as ‘Head
Count Ratio’. In other words, Head count ratio is calculated by dividing the number of people below the
poverty line by the total population.

Causes of Poverty
1. Population Explosion : Rapid growth of population, particularly among the poor, is responsible for
the problem of poverty. It is obvious that when total notional income is thinly spread over a large
number of people, the per capita income is bound to be low.
2. Poor state of Agriculture : Agriculture in India was has continued to be backward due to us of
primitive method of production and fragmented small land holdings. As a result, labour and land
productivity continue to be low in India. Consequently, most of the farmers live in a state of poverty.
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3. High Illiteracy Rate : The weaker sections of society have to take up low paid jobs due to lack of
knowledge.. the scheduled castes and tribes are not able to participate in the emerging employment
opportunities in different sectors of the urban and rural economy as they do not have the necessary
knowledge and skills to do so.
4. High level of Unemployment : The urban poor in India are largely the overflow of the rural poor
who migrate to urban areas in search of employment and a livelihood.
5. High level of Indebtedness : Unemployment or under employment and the casual nature of work
compels people to borrow money, that too at higher interest rates. Such indebtedness is one of the
significant factors of poverty.
6. Inflation : The step and continuous rise in prices, particularly of essential commodities like food
grains, has added to the miseries of the poor. Sharp rise in prices and negligible change in monetary
income has decreased the purchasing power of low-income earners and resulted in lower standard of
living.
Government Approach to Remove Poverty
1. Growth-oriented approach : This approach was initiated from the First Five Year Plan. This
approach is based on an expectation that effects of economic growth (rapid increase in GDP and per
capita income) would spread to all sections of the society and will trickle down to the poor section
also.
However, Growth-oriented approach proved to e ineffective because:
(i). Population growth resulted in a very low growth in per capita incomes.
(ii). Green Revaluation intensified the disparities regionally and between large and small farmers.
(iii). There was unwillingness and inability to redistribute land.

2. Poverty Alleviation Programmes : This second approach has been initiated from the Third Five
Year Plan and progressively enlarged since then. The government has introduced a variety of
programmes for reduction of poverty

3. Minimum Needs Programme : This approach has been initiated from the Fifth Five Year Plan. It
aims to provide minimum basic amenities to the people.
 India was among the pioneers in the world to visualize that people’s living standard could be
improved through public expenditure on social consumption needs (food grains at subsidised
rates, education, health, water supply and sanitation).
 Programmes under this approach are expected to supplement the consumption of the poor,
create employment opportunities and bring improvements in health and education.
 Three major programmes that aim at improving the food and nutritional status of the poor
are:
(i). Public Distribution System;
(ii). Midday Meal Scheme.

Poverty Alleviation Programmes in India :- The government has specifically designed anti-poverty
programmes for generation of both self-employment and wage employment.

Self –Employment Programmes

1. Rural Employment Generation Programme (REGP) : This programme was started by the
government to create self-employment opportunities in the rural areas and small towns.
 It was implemented by Khadi and Village industries Commission

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 Under this programme, one could get financial assistance in the form of bank loans to set up
small industries.

2. Prime Minister’s Rozgar Yojana (PMRY) : Under this programme, the educated unemployed
from low income families in rural and urban areas were given financial held to set up any kind of
enterprise that generates employment.

3. Swarna Jayanti Shahri Rozgar Yojana (SJSRY) : SJSRY mainly aims at creating employment
opportunities for both self-employment and wage employment in urban areas.
 This programme seeks to provide gainful employment through encouraging the setting up of
self-employment ventures or provision of wage employment.

4. Swarnjayanti Gram Swarozgar Yojana (SGSY) : SGSY aims at promoting micro enterprises and
to bring the assisted poor families (Swarozgaries) above the poverty line, by organizing them into
Self-Help Groups (SHGs).
 People who wish to benefit from this scheme, are encouraged to form self-help groups
(SHG).
 Initially they are encouraged to save some money and lend among themselves as small loans.
 Later, through banks, the government provides partial financial assistance to SHG’s, which
then decide, whom the loan is to be given, for self-employment ctivities.

Wage Employment Programmes : The government has launched various programmes to generate wage
employment for the poor unskilled people living in rural areas. Some of them are:
1. Sampoorna Gremeen Rozgar Yojana (SGRY) : The scheme aims to provide additional and
supplementary wage employment by undertaking labour intensive work, thereby providing food
security and increasing nutritional levels.
 Wages were paid as a combination of food grains and cash.

2. National Food for Work Programme (NFFWP) : This programme was launched in 2004 with the
objective of intensifying the generation of supplementary wage employment.
 The programme was implemented as a 100% Centrally Sponsored Scheme.
 This Programme was incorporated in Mahatma Gandhi national Rural Employment
Guarantee Act (MGNREGA) in 2005.

Critical Evaluation of Poverty Alleviation Programmes

1. Lack of Resources : As compared to the magnitude of poverty, the amount of resources allo0cated
for these programmes is not sufficient.

2. Unequal Distribution of assets : Due to unequal distribution of land and other assets, the benefits
from poverty alleviation programmes have been appropriated by the non-poor.

3. Improper Implementation : These programmes depend mainly on government and bank officials
for their implementation. However, corruption, lack of training, pressure from local leaders and non-
participation of local level institutions, resulted in improper implementation of the programme.

4. Lack of Infrastructure : There was lack of infrastructural facilities, such as schools, roads, power,
telecom, IT services, training institutions, etc. in the poverty stricken areas.

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5. Lack of Active Participation of poor people : High growth rate alone is insufficient to reduce
poverty. In fact, there is a need for active participation of the poor for effective implementation of
poverty alleviation programmes.

Measures to Remove Poverty

1. Acceleration of Economics Growth
 Fast economic growth would automatically improve the economic condition of the people
and reduce the incidence of poverty.
 A fast growing economy produces increasingly larger amount of goods and services,
provides greater employment opportunities and generates higher incomes.

2. Reducing Inequalities of Income

 If the high growth rate is accompanied with increased inequalities of income, then fruits of
economic development will accrue only to the rich section, whereas the poor will grow in
numbers.
 Thus, inequalities must be reduced, if development is to benefit the poor.

3. Population Control
 In order to remove poverty, it is very essential that population growth rate be checked.
 Poverty can be removed to a greater extent, if we intensify family planning campaign.

4. Agricultural Development
 Eradication of mass poverty in rural areas is possible only when due emphasis is given for
agricultural development as India‘s large proportion of population depends on the agricultural
sector.
 So, there is a serious need to enhance the agricultural production and productivity.
 Government should take steps to make provisions for financial assistance to small and
marginal farmers, high yielding varieties of seeds, irrigation facilities, fertilizers, etc.

5. More Employment Opportunities

 For this purpose, labour intensive techniques should be promoted.
 Small-scale industries and construction activities should be encouraged in rural areas for
generation of employment.
 Educational facilities should be more diversified and a sustained programme of training is
necessary, to develop skills among the educated unemployed, through special training or
apprenticeship courses.

6. Land Reforms
 By the imposition of ceilings on landholdings and their effective implementation, a good
amount of land can be acquired, to be distributed among the landless labourers.
 On obtaining land, the landless labour will be able to employ themselves and will produce
subsistence for themselves.

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Chapter – 5 Human Capital Formation

Introduction
All the planners believe that the building of a strong nation depends upon development of people and the
organisation of human activity. The development of human resources means increase in the quality of
human beings, which helps in the process of growth and development of the economy.
In the words of Prof. Whipple, “A nation’s true wealth is neither in its land and water, nor in forests and
mines, nor in its flock and herds, nor in dollars but in its wealthy and happy men, women and children.”

Physical Capital and Human Capital

1. Physical Capital : It includes all those which are required for further production, like plant and
machinery, factory, buildings, raw materials, etc.
 The physical capital is needed to make use of physical resources.
 Its accumulation is quite important for economic growth of a country.
 The physical capital formation is mainly an economic and technical process.

2. Human Capital : It refers to the stock of skill, ability, expertise, education and knowledge
embodied in the people.
 Human capital is needed to make effective use of physical capital.
 There is a need for investment in human capital to produce more human capital out of human
resources.
 Societies need sufficient human capital in the form of competent people who have themselves
been educated and trained as professors and other professionals.

A country can turn physical resources like land into physical capital like factories. Similarly, it can lo
turn human resources like students into human capital like engineers and doctors. Both the forms of
capital formation are outcomes of conscious investment decisions.

Human Capital creates both Private and Social Benefits

 Human Capital benefits not only the owner but also the society in general. For example, an education
person can effectively take part in a democratic process and contribute to the socio-economic
progress of nation.
 On the other hand, Physical Capital creates only private benefit. It happens because , benefits from a
capital good flow to those who pay the price for the product and services produced by it.

Comparison Between Physical Capital and Human Capital

S.No. Physical Capital Human Capital
1. Physical capital is tangible and can be Human capital is intangible and cannot be
easily sold in the market. sold in the market.
2. It depreciates with the passage of time. Depreciation in human capital can be
reduced by making continuous investment
in education and health.
3. It is more mobile between counties. Human capital is less mobile between
countries as compared to physical capital.
4. It can be built through imports. Human capital formation is to be done
through conscious policy formulations.

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Meaning of Human Capital Formation (HCF)

Human Capital Formation refers to development of abilities and skills among the population of the
country.
 It is the process of acquiring and increasing the number of persons, who have the skills, education
and experience.
 Human capital formation is associated with investment in man and his development as creative and
productive resources.

Sources of Human Capital Formation

There are a number of ways by which human capital can be increased. The different sources of human
capital formation are:

1. Expenditure on Education: Proper utility of manpower depends on the system of education and
training of peoples.
 Labour skill of an educated person is more than that of an uneducated person, which enables
him to generate more income than the uneducated person.
 Spending on education by individuals is similar to spending on capital goods by companies.
Individuals invest in education to increase their future income and raise the living standard.
 Education contributes to economic growth because:
 Education confers higher earning capacity on people;
 It gives better social standing and pride;
 It provides knowledge to understand the changes taking place in society;
 It facilities adaptation of new technologies.

2. Expenditure on Health: Health expenditure is a source of human capital formation as it directly

increases the supply of healthy labour force.
 Poor health and undernourishment adversely affect the quality of manpower.
 Therefore, expenditure on health is important to build and maintain productive labour force
and to improve quality of life of people in the society.
 Adequate food and proper nourishment to people, along with adequate health and sanitation
facilities leads to qualitative improvement in human capital.
 The various forms of health expenditures include:
 Preventive Medicine known as vaccination;
 Curative medicine, i.e. medical intervention during illness;
 Social Medicine, i.e. spread of health literacy;
 Provision of clean drinking water;
 Good sanitation facilities.

3. On- the-job-Training: Many firms provide on-the-job training to their workers.

 Such training has the advantage that it can be provided fast and without much cost.
 It increases the skill and efficiency of the workers and leads to an increase in production and
productivity.
 On-the-job training may take difference forms:
 Workers may be trained in the firm itself under the supervision of a skilled worker;
 Workers may be sent for off-campus training.

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4. Expenditure on Migration: People migrate from one place to another in search of jobs that fetch
them higher salaries.
 Unemployed people from rural areas migrate to urban areas in search of jobs.
 Technically qualified persons (like engineers, doctors, etc.) migrate to other countries
because of higher salaries that they may get in such countries.
 Migration in both these cases involves two kinds of cost:
 Cost of transportation from one place to another; and
 Higher cost of living in the migrated places.

5. Expenditure on Information: Expenditure is incurred to acquire information relating to labour

market and other markets.
 It involves amount spent on seeking information about educational institutions, their
educational standards and cost of education.
 For example, people want to know the level of salaries associated with various types of jobs,
whether the educational institutions provide the right type of employable skills and at what
cost.

Importance or Role of Human Capital Formation

1. Effective use of Physical Capital:
 The physical capital can be created only by means of hard and intelligent work of human
beings in the economy.
 Hence, human skill and their efforts help in effective, utilisation of physical capital.

2. Higher productivity and production:

 Increase in productivity and quality production depends on technical skill of the people,
which can be acquired only by means of education, training and maintaining the health of the
people.
 Investment human capital helps in acquiring new skills and also Knowledge relating to
management of resources, technology and production.

3. Inventions, innovations and technological improvement: The human capital formation stimulates
innovations and creates ability to absorb new technologies.
 Education provides knowledge to understand changes in society and scientific advancements,
which facilities inventions and innovations.
 Similarly, the availability of educated labour force facilities adaptation to new technologies.

4. Modernization of attitudes:
 Economic development of a country depends on the minds of the people and their changing
attitudes towards creating a ‘will’ for development.
 Investment in human capital helps in changing mental outlook and promotes development of
the economy.

5. Increases life expectancy: Formation of human capital raises life expectancy of the people. Health
facilities and availability of nutritive food enable people to live a healthy
and long life. This in turn, adds to the quality of life.

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6. Improves Quality of Life:

 Human capital formation not only makes people productive and creative, but also transforms
the lives of the people.
 People start living and enjoying higher incomes and more satisfying life.

7. Control of population growth: It has been observed that educated persons have smaller families as
compared to illiterate families. So, spread of education is necessary to control the population growth
rate.

Problems of Human Capital Formation

1. Insufficient resources: The resources allocated to the formation of human capital have been
much less than the resources required. Due to this reason, the facilities for the formation of human
capital have remained grossly inadequate.

2. Brain Drain: People migrate from one place to another in search of better job opportunities and
handsome salaries. It leads to the loss of quality people like doctors, engineers, etc. who have high
caliber and are rare in a developing country. The cost of such loss of quality human capital is very
high.

3. High growth of Population: The continuous rise in population has adversely affected the quality
of human capital. It reduces per head availability of the facilities.

4. Lack of Proper manpower planning: There is an imbalance between the demand and supply of
human resources of various categories, especially in case of highly skilled personnel. The absence
of such balancing has resulted in the wastage of resources.

5. Weak science and technology: In respect of education, the performance is particularly

unsatisfactory in the fields of science and development of modern technology. + Pg 34 old notes

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Chapter – 6 Rural Development

Meaning of Rural Development

Rural Development refers to continuous and comprehensive socio-economic process, attempting to
improve all aspects of rural life.
 The term rural development includes not only agriculture development, but it involves all those
aspects, which improves quality of life of people. It aims at improving the economic and social
conditions of people living in villages.
 In this chapter, we will discuss:
 Credit and Marketing facilities for rural people;
 Diversification of Agriculture Activities; and
 Organic Farming and its significance in sustainable development.

Process of Rural Development

1. Development of Human Resources
 Proper attention to literacy (specifically on female literacy), education and skill development;
and
 Better Health facilities for the physical growth.
2. Development of Infrastructure : It involves
 Improvement in electricity, irriganation, credit, marketing and transport facilities (including
construction of village roads and feeder roads to nearby highways);
 Better facilities for agriculture research and extension and information disseminate.
3. Land Reforms
 Elimination of exploitation in land relations;
 Actualisation of the goal of ‘land to the tiller’;
 Improvement of socio-economic conditions of rural poor by widening their land base.
 Increasing agriculture productivity and production.
4. Alleviation of Poverty
 As stated earlier, around 30% of total population in still below the poverty line. So, there is a
serious need for taking serious steps for alleviation of poverty and bringing significant
improvement in living conditions of weaker sections.
5. Development of the productivity resources
 Development of the productivity resources of each locality to enhance opportunities of
employment (particularly other than farming).

Rural Growth
 Growth of rural economy depends on timely infusion of capital, to realize higher productivity in
agriculture and non-agriculture sectors. In agriculture, farmers are in strong need for credit due to
long time gap between crop sowing and realization of income.
 Framers borrow from various sources to meet initial investment of seeds, fertilizers, implements and
other family expenses of marriage, death, religious ceremonies, etc.
 So, credit is one the important factors, which contribute to agriculture production.
 Credit needs of farmers can be examined on the basis of ‘Time’ and ‘Purpose’.

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Sources of Rural Credit

There are two sources, from which the farmers can raise loans:
(i) Non-Institutional Sources (ii) Institutional Sources

Non-Institutional Sources
The major non-institutional sources are:
1. Moneylenders : From the very beginning, moneylenders have been advancing a major share of farm
credit. The peasants are exploited through exorbitant (very high) rates of interest. Quite frequently,
their accounts are manipulated without their knowledge.
2. Relative : Cultivators borrow funds from their own relatives in times of crisis. These loans are a kind
of informal loans and carry no interest and are normally returned after harvest.
3. Traders and commission agents : They provide credit to the peasants on the mortgage of crops at
high rates of interest, on a condition, that the crops will be sold to them at low prices.
4. Rich Landlords : Small as well as marginal farmers and tenants, take loans from landlords, for
meeting their financial requirements. Landlords also charge high rates of interest on such loans and
exploit the peasants, particularly small farmers and tenants.

Institutional Sources
Government established the institutional sources with the following objectives:
 To provide adequate credit to farmers at a cheaper interest rate.
 To assist small and marginal farmers in raising their agriculture productivity and maximising their
income.

Some of the important institutional sources of agriculture credit are:

1. Co-operative Credit : The primary objective of the co-operative is to liberate the Indian peasantry
from the clutches of moneylenders and to provide them credit at low rates of interest.
2. Land Development Bank : They provide credit to the farmers against the mortgage of their lands.
Loans are provided for permanent improvement of land, purchasing agriculture implements and for
repaying old debts.
3. Commercial Bank Credit : Initially, commercial banks played a marginal role in advancing rural
credit. However, after nationalization in 1969, they expanded their branches in rural areas and
started directly financing the farmers.
4. Regional Rural Banks : They are opened up in those areas where there are no banking facilities.
Their main objective is to provide credit and other facilities, especially to small and marginal
farmers, agricultural labourers, artisans and small entrepreneurs in rural areas.
5. The Government : The loans provided by the government are known as taccavi loans and are lent
during emergency or distress, like famines, floods, etc. The rate of interest charged against such loan
is as low as 6%.
6. National Bank for Agriculture and Rural Development (NABARD) : It is the Apex Bank which
coordinates the functioning of different financial institutions, working for expansion of rural credit.
 Its objective is to promote health and strength of credit institutions (namely, cooperatives,
commercial banks and regional rural banks).
 Besides providing finance to credit institutions, NABARD also provides financial assistance
to the non-farm sector, to promote integrated rural development and prosperity of backward
rural areas.
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7. Self-Help Group (SHG) Bank Linkages Programme for Micro Finance :

Their focus is largely on those rural poor, who have no sustainable access to the formal
banking system.
So, their target groups comprise of small and marginal farmers, agriculture and non-
agricultural labourers, artisans, etc.
SHGs promote thrift in small proportions by a minimum contribution from each member.
From the pooled money, credit is given to the needy members at reasonable interest rates,
which is to be repaid in small installments.
SHGs have also helped in the empowerment of women. However, the borrowings are mainly
confined to consumption purpose and negligible proportion is borrowed for agriculture
purpose.

Critical Appraisal of Rural Banking

Some of the problems faced in rural banking are:
1. Insufficiency : The volume of rural credit in the country is still insufficient in comparison to its
demand.
2. Inadequate Coverage of institutional sources : The institutional credit arrangement continues to be
inadequate as they have failed to cover the entire rural farmers of the country.
3. Inadequate Amount of Sanction : The amount of loan sanctioned to the farmers is also inadequate.
As a result, farmers often divert such loans for unproductive purposes, which dilute the very purpose
of such loan.
4. Less attention to poor or marginal farmers : Lesser attention has been given n the credit
requirements of needy (small and marginal) farmers. On the other hand, well-to-do an areas of
concern.
(i). Banks need to change their approach from just being lenders to building up relationship
banking with the borrowers; and
(ii). Farmers should also be encouraged to inculcate the habit of thrift (saving) and efficient
utilisation of financial resources.

Agricultural Market System

 Agricultural marketing is a process that involves assembling storage, processing, transportation,
packaging, grading and distribution of different agricultural commodities across the country.
 Agriculture marketing system is an efficient way be which the farmers can dispose their surplus
produce at a fair and reasonable price. It involves different activities for movement of farm produce
from the producer to the ultimate consumer.

Problems Faced by Farmers

 Manipulations by Big Traders : Prior to independence, farmers suffered from faulty weighing and
manipulation of accounts while selling their produce to traders.
 Lack of Market Information : Farmers were often forced to sell at low price due to lack of required
information on prices prevailing in markets.
 Lack of Storage Facilities : They also did not have proper storage facilities to keep back their
produce for selling later at a better price. even today, more than 10% of goods produced in farms are
wasted due to lack of storage.

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Measures to Improve Agriculture Marketing

1. Regulated Markets
 The first measure was regulation of markets, to create orderly and transparent marketing
conditions.
 Regulated markets have been organised with a view to protect the farmers from the
malpractices of sellers and brokers. This policy benefited harmers as well as consumers.

2. Infrastructure Facilities
 The government aims to provide physical infrastructure facilities like roads, railways,
warehouses, godowns, cold storages and processing units.
 The current infrastructure facilities are quite inadequate to meet the growing demand and
need to be improved.
3. Cooperative Marketing
 The aim of cooperative marketing is to realize fair price for farmers products.
 Under this, marketing societies are formed by farmers to sell the output collectively and to
take advantage of collective bargaining, in order to obtain better price.
 Milk cooperatives in Gujarat have been very successful in transforming the social and
economic condition of Gujarat and some other parts of the country.
However, cooperatives have received a setback during the recent past because of :
 Inadequate coverage of farmer member;
 Lack of appropriate link between marketing and processing cooperatives;
 Inefficient financial management.

4. Different Policy Instruments

In order to protect the farmers, the government has initiated the following policies:
 Minimum Support Prices (MSP) : To safeguard the interest of farmers, government fixes
the minimum support prices of 24 agricultural products, like wheat, rice, maize, cotton,
sugarcane, pulses, etc.
 Such a price may be regarded as an offer price, at which the Government is willing to buy
any amount of grains from the farmers.
 Maintenance of Buffer Stocks : The Food Corporation of India (FCI) purchases wheat and
rice at the procurement prices, to maintain buffer stock. Buffer stock is created in the years of
surplus production and is used during shortages.
 It helps to ensure regularity in supply and stability of prices.
 Public Distribution System (PDS).
 The public distribution system is out country operates through a network of ration shops and
fair prices shops.
 Fair prices shops offer essential commodities like wheat, rice, kerosene, etc. at a price below
the market price, to the weaker sections of the society.

Emerging Alternate Marketing Channels

1. Origin of Farmers Market
 Farmers can increase their share in the price paid by the consumers, if they directly sell their
produce to consumers.
 As a result, the concept of “Farmers Market” was started, to give boost to the small farmers
by providing them provide direct access to the consumers and eliminating the middlemen.

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 Some examples of these channels are:

Apni Mandi in Punjab, Haryana and Rajasthan;
Hadaspar Mandi in Pune;
Rythu Bazars in Andhra Pradesh; and
Uzhavar Sandies (farmers market in Tamil Nadu).

2. Alliance with National and Multinational Companies : Several national and multinational fast
food chains are increasingly entering into contracts/ alliances with farmers.
 They encourage the farmers to cultivate farm products (vegetables, fruits, etc.) of the desired
quality.
 They provide them with not only seeds and other inputs, but also assure procurement of the
produce at pre-decided prices.
 Such arrangements help in reducing the price risk of farmers and expand the market for farm
products.

Diversification of Agriculture Activities

Reason of Diversification
Agriculture plays a very important role in the economic development. However, the vast majority of rural
people work on land and there is greater risk in depending only on agriculture. The need for diversification
arises because:
(i). There is greater risk in depending exclusively on farming for livelihood; and
(ii). To provide productive sustainable livelihood options to rural people.

Benefits of Diversification
It becomes difficult to find gainful employment in the areas where there are inadequate irrigation facilities.
So, diversification into other sectors is essential:
 To provide supplementary gainful employment;
 To enable them to earn higher levels of income; and
 To enable rural people of overcome poverty and other troubles.

Types of Diversification
Diversification includes two aspects:
(i). Diversification of Crop Production;
(ii). Diversification of Productive Activities (shift of workforce from agriculture to other allied activities
and non-agriculture sector).

Diversification of Crop Production

It involves a shift from single-cropping system to multi-cropping system.
 Diversification involves a shift in cropping pattern from food grains to cash crops. Basically, the
main aim is to promote shift from subsistence farming to commercial farming.
 Multi-cropping system reduces the dependence of farmers on one or two crops as they are engaged in
growing a wide variety of crops.
 There is a need to encourage farmers to take up cultivation of a wide variety of crops. It will also
raise their income.

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Diversification of Productive Activities

As agriculture is already overcrowded, a major proportion of the increasing labour force needs to find
alternate employment opportunities in other non-farm sectors.
 Non-farm Activities has several segments. Some segments of non-farm activities possess dynamic
linkages that permit healthy growth, while others are in subsistence, low productivity propositions.
 The dynamic sub-sectors include agro-processing industries, food processing industries, leather
industry, tourism, etc.
 Those sectors which have the potential but seriously lack infrastructure and other support, include
traditional household-based industries, like pottery, crafts, handlooms, etc.

Animals Husbandry
Animal Husbandry (or Livestock farming) is that branch of agriculture, which is concerned with the
breeding, rearing and caring for farm animals.
 Under livestock farming, cattles, goats and fowls (duck, goose, etc.) are the widely held species.
 India owns one of the largest livestock populations in the world.
 Livestock production provides increased stability in income, food security, transport, fuel and
nutrition for the family, without disrupting other food producing activities.

Dairying
Dairying is that branch of agriculture which involves breeding, raising and utilization of dairy animals
for the production of milk and the various dairy products from it.
 Dairying is the business of producing, storing and distributing milk and its products.
 Due to the successful implementation of ‘Operation Flood’, India ranks first in the world in milk
production.
 Operation Flood (or White Revolution) was started by National Dairy Development Board (NDDB)
in 1970 under the expert guidance of then chairmen, Dr. Verghese Kurien. The objective of this
programme was to create a nationwide milk grid.
 Under the Operation Flood system, all the farmers pool their milk produce according to
different grades and same is processed and marketed to urban centres through cooperatives.
The farmers are assured of a fair price and income.
 Gujarat state is held as a success story in the efficient implementation of milk cooperative,
which has been followed by many states.
 Mean, eggs, wool and other byproducts are also emerging as important productive sectors for
diversification.

Fisheries
Fisheries refer to the occupation devoted to the catching, processing or selling of fish and other aquatic
animals.

Important Points about Fishing

1. Fishing Community regards water body as ‘mother’ : The water bodies (sea, oceans, rivers, lakes,
natural aquatic ponds, streams) are considered as ‘mother’ or ‘provider’ as they provide life-giving
source to the fishing community.
2. Volume of Fish Production : Presently, fish production from inland sources contributes about 49%
to the total fish production and the balance 51% comes from the marine sector (sea or oceans).

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3. Share of Fishing in GDP : To total fish production accounts for 1.4% of the total GDP. Among
states, Kerala, Gujarat, Maharashtra and Tamil Nadu are the major producers of marine products.
4. Women Participation in Fishing : Even though women are not involved in active fishing, still, 60%
of the workforce in export marketing and 40% in internal marketing are women.
5. Problems faced in Fishing :
(i). Widespread Underemployment
(ii). Low per capita earnings
(iii). Absence of mobility of labour to other sectors;
(iv). High illiteracy rate and indebtedness.

Horticulture
Horticulture refers t the science or art of cultivating fruits, vegetables, tuber crops, flowers, medicinal and
aromatic plants, spices and plantation crops.
 India has adopted horticulture as it is blessed with a varying climate and soil conditions.
 It has been estimated that this sector provides employment to around 19% of total labour force.

Important Points About Horticulture

1. Golden Revolution Period : The period of 1991-2003 is known as ‘Golden Revolution’ because
during this period, the planned investment in horticulture became highly productive and the sector
emerged as a sustainable livelihood option.
2. Share in World’s Production : India has emerged as a world leader in producing a variety of fruits,
like mangoes, bananas, coconuts, cashew nuts and a number of spices
3. Great Scope for Women Employment : Flower harvesting, nursery maintenance, hybrid seed
production and tissue culture, propagation of fruits and flowers and food processing are highly
remunerative employment options for women in rural areas.

Information Technology
Information Technology (IT) refers to that branch of engineering that deals with the use of computers
and telecommunications to retrieve and store and transmit information.

Important points about Information Technology

 It also has a positive impact on the agriculture sector as it circulates information regarding emerging
technologies and its applications, prices, weather and soil conditions for growing different crops, etc.
 It acts as a tool for releasing the creative potential and knowledge embedded in our people. It also
has potential of employment generation in rural areas.

Sustainable Development and Organic Farming

Meaning of Organic Farming
Organic farming is the form of agriculture that relies on techniques such as crop rotation, green manure,
compost and biological pest control. This method avoids the use of synthetic chemical fertilizers and
genetically modified organisms.
 Organic farming is the process of producing sage and healthy food, without leaving any adverse
impact on the environment.
 Organic agriculture is a whole system of farming that restores, maintains and enhances the ecological
balance.
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 There is an increasing demand for organically grown food, to enhance food safety throughout the
world.

Benefits of Organic Farming

1. Economical Farming : Organic Farming offers a means to substitute costlier agriculture inputs
(such as HYV seeds, chemical fertilizers, pesticides, etc.) with locally produced cheaper organic
inputs.
2. Generates income though exports : It generates income through international exports as demand
for organically grown crops is on a rise.
3. Provides Healthy Food : It provides healthy food as organically grown food has more nutritional
value than food grown through chemical farming.
4. Safety of environment : The produce of organic farming is pesticide-free and is produced in an
environmentally sustainable way.

Challenges before Organic Farming

1. Lack of infrastructure and marketing facilities : Organic farming faces problems of inadequate
infrastructure and marketing facilities.
2. Low Yield : Organic farming has a lesser yield in the initial years as compared to modern agriculture
farming. As a result, small and marginal farmers find difficult to adapt to large-scale production.
3. Shorter food life : Organic produce has a shorter shelf life as compared to sprayed produce.
4. Limited choice of crops : The choice in production of off-season crops is quite limited in organic
farming.

Need for Agriculture Finance (Rural Credit)

Credit needs of the farmers can be examined from two different angles:
(i) On the basis of Time; (ii) On the basis of Purpose.
On the basis of Time
1. Short-term Credit: It refers to credit taken for a period of less than 15 months, to meet short-term
needs.
 The loan is taken to purchase seeds, fertilizers, paying wages to hired workers etc.
 Such loans can be repaid out of current income of farmers.
2. Medium-term Credit: It refers to credit taken for medium period, ranging from 15 months to 5
years. Such loan is required for:
 Production activities, like purchasing cattle, agricultural implements, etc.
 Unproductive activities, like expenditure on marriage, social or religious functions.
3. Long-term Credit: It refers to credit taken to meet long-term needs, for a period of more than 5
years and may extend to a period of 15 to 20 years. Such loans are repaid over a long period of time.
Long-term loans are needed for:
 Making permanent improvements on land;
 Digging tube wells;
 Purchase of larger agricultural implements and machinery like tractors, harvesters;
 Repayment of old debts.
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On the basis of Purpose

Agricultural credit needs of the farmers on the basis of purpose can be classified into the following two
categories:

1. Productive Loans: Productive loans refer to the loans which help the farmers in raising agricultural
production and productivity. For example, loans taken to purchase seeds, fertilizers, farm
implements or for making permanent improvements on land.

2. Unproductive Loans: Unproductive loans refer to the loans which do not help to raise agricultural
production and productivity. For example, loans taken for religious ceremonies, marriage,
supporting family in times of crop failure, settling old debts, etc.

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Chapter-7 - Employment – Growth, Informalisation and Other Issue

Introduction
Work at Home includes not only traditional work like weaving, lace making or variety of
handicrafts, but also modern jobs like programming work in the IT industry.

Meaning of Worker
A worker is an individual, who is involved in some economic activity, to earn a living.
 A worker contributes to the process of Gross Domestic Product (GDP) by rendering his productive
activities.
 Examples of workers are – Farmers, Managers, Labourers, Doctors, Barbers, etc.

Who All are Included in ‘Workers’?

The term workers include all those people, who are engaged in work, whether for others (i.e. paid
workers) or for themselves (self-employed workers).

Labour Force
All persons, who are working (have a job) and though not working, are seeking and are available
for work, are deemed to be in the labour force.
Labour force = Person working + Person seeking and/ or available for work
Labour force is the total of employed and unemployed persons.

How to Calculate Labour Force?

To get the labour force, subtract the following from the total population –
(a) Unfit people like old or handicapped persons,
(b) People who are not willing to work
(c) People who are not available for work.
It must be noted that children below 15 years and old persons above 60 years of age are excluded
from labour force.

Labour Force Participation Rate

The ratio of labour force to total population is called labour force participation rate.

Work Force
The number of persons, who are actually employed at a particular time are known as work force.
It includes all those persons who are actually engaged in productive activities.

Calculation of Number of Unemployed People

Unemployed People = Labour Force – Work Force

Participation of People in Employment

 “Worker-Population ratio” is an indicator which is used to analyse the employment situation in
the country.

 Worker-population ratio is calculated by dividing the total number of workers in India by the
population in India and multiplying it by 100.

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 Population is defined as the total number of people who reside in a particular locality at a particular
point of time.

Important Points About Worker–Population Ratio

Worker–population ratio is very useful in determining the proportion of population that is actively
contributing to the production of goods and services of a country.
 Higher ratio indicates that high proportion of its population is involved in economic activities.
 Medium or lower ratio indicates that less people ae involved in economic activities.

Meaning of Employment
 Employment is an activity which enables to earn means of living.
 It refers to an arrangement, by which a person earns income or means of livelihood. Employment
may be either in the form of self-employment or wage employment.

Self–Employment
An arrangement in which a worker uses his own resources to make a living, is known as self–
employment. Workers who own and operate an enterprise to earn their livelihood are known as self–
employed.
 More than 50% of workforce in India belongs to this category.
 In case of self–employment, a person makes uses of his own land, labour, capital and
entrepreneurship, to make living.
 For example, Shopkeepers, Trades, Business etc.

Wage Employment
An arrangement in which a worker sells his labour and earns wages in returns, is known as wage
employment. Under wage employment, worker is known as employee (or hired worker) and buyer of
labour is termed as employer.
 Workers do not have any other resources (land, capital and entrepreneurship), except their own
labour.
 They offer their labour services to others and in return get wages.
 For example. A doctor running his own clinic is an example of self–employment. However, if the
doctor is employed by a hospital by a hospital, then it will be wage employment.
 Wage employment is of two types –
(a) Regular Worker
(b) Casual Workers

Regular Workers (Regular Salaried Employees)

When a worker is engaged by someone or by an enterprise and is paid wages in a regular basis, the
such worker is known as regular salaried worker.
 Workers are hired on a permanent basis and also get social security benefits (like pension, provident
fund etc.).
 Regular workers account for just 14.6% of India’s workforce.
 For example, Professors, Teachers, Civil engineers working in the construction company etc.

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Casual Workers
Workers who are casually engaged and in return, get remuneration for the work done, are termed
as casual worker.
 Casual workers are not hired on a permanent basis. It means, they do not have : (i) Regular Income,
(ii) Protection or regulation from the government, (iii) Job security and (iv) Social benefits.
 Casual worker account for 32.8% of India’s workforce.
Growth of Employment and Gross Domestic Product (GDP)

 The gap between the growth of GDP and employment was widening. This trend is termed as
‘Jobless Growth’.
 Jobless Growth refers to a situation when the economy is able to produce more goods and
services without a proportionate increase in employment opportunities.
 In other words, it is a situation when there is an overall acceleration in the growth rate of GDP in the
economy without corresponding expansion in employment opportunities.

Casualisation of Workforce
The process of moving from self-employment and regular salaried employment to casual wage
work is known as casualisation of workforce.

Reasons for Increasing Casualisation

The various reasons for increasing casualisation are:
1. Self-employed small and marginal farmers are becoming casual workers due to low scope of
earnings in agricultural activities.
2. Displacement of workers from large industries in urban areas has shifted the status of regular
workers to the casual workers.
3. Slow growth of employment in the organized sector is also a reason for workers taking up casual
jobs.
4. Increase in the demand for casual labour in expanding construction, trade, and service activities in
rural areas, also led to casualisation of workforce.

Informalisation of Indian Workforce

Informalisation of Workforce refers to a situation whereby the proportion of workforce in the
informal sector to total workforce increases.

Formal Sector (Organised Sector)

All the public enterprise and private establishments which employ 10 or more hired workers, are
called formal sector establishments.
 Workers who work in such establishments are known as formal sector workers.
 Formal workers enjoy social security benefits and earn more than those in the informal sector.
 The government protects them in various way through its labour laws and they can form ‘Trade
Unions’ to protect their interests.
 However, the organized sector provides work to just 7% of the total work force.

Reasons for Fall in Employment in Employment in Organised Sector

1. There is a drastic fall in employment in public sector due to privatization and disinvestment.
2. Existing industrial units are reducing excess labour, in order to remain competitive.

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3. Firms are adopting new technologies to ensure competitiveness, which are more automated and,
therefore, not job creating.
Due to combined effect of all these reasons, there is very slow expansion in employment opportunities in
the organized sector.

Informal Sector (Unorganised Sector )

Informal sector includes all those private enterprises which hire less than 10 workers.
 Workers who work in such enterprises are known as informal sector workers. for example,
farmers, agricultural labourers, owners of small enterprise, etc.
 In India, over 90% employment is found in the unorganized sector, viz., small farms,
household industries, shops and other self-employment units.
 Workers and enterprises in the informal sector do not get regular income. They do not have
any protection or regulation from the government. Such workers have the risk of being
dismissed without any compensation.
 Informal sector uses the outdated technology and do not maintain any accounts.

Meaning of Unemployment
Unemployment refers to a situation in which people are willing and able to work at the existing
wage rate, but do not get work.
Unemployment is confined not only to unskilled workers, rather a sizable number of skilled workers fail
to get jobs for long periods.

Sources of Unemployment Data

There are three sources of data on unemployment

1. Reports of Census of India: Population census collects information on the economic activity of
people.
2. National Sample Survey Organisation (NSSO):- The NSSO collects data through sample surveys
and gives annual estimate of employment and unemployment.
3. Directorate General of Employment and Training (DGET): DGET has been implementing the
Employment Market Information (EMI) scheme over the last 30 years. EMI provides information
about the structure of employment, occupational compositions and educational profile of employees.

Types of Unemployment in India

Disguised Unemployment (Hidden Unemployment)

Disguised Unemployment refers to a state in which more people are engaged in work than are
really needed.
 For example, if two workers are needed on a piece of land and five workers are engaged on the
same job, then three workers are disguised unemployed.
 It is the most predominant from of unemployment in the agricultural sector of developing
countries like India.
 In the late 1950s, about one-third of agriculture workers in India were disguisedly
unemployed.
 The main problem of disguised unemployment is that apparently all seem to be employed, but
marginal productivity of the surplus labour is zero, i.e. contribution of extra workforce is zero.
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Seasonal Unemployment (winter/summer)

Unemployment that occurs at certain seasons of the year is known as seasonal unemployment.
 In India, seasonal unemployment is predominantly associated with agriculture.
 In agriculture, work is seasonal and there are no employment opportunities in the village for all
months in the year. So, when there is no work to do on farms, men go to urban areas and look
for jobs.
 The period of seasonal unemployment varies from state to state, depending upon the methods of
farming, the condition of soil, the type and number of crops grown, etc.

Open Unemployment
 Open Unemployment refers to that economic phenomenon in which persons are able and
willing to work at the prevailing wage rate, but fail to get work.
 Open Unemployment is different from Disguised Unemployment. In case of open unemployment,
workers are totally idle. However, in case of disguised unemployment, workers appear to be working
and do not seem to be idling away their time.

1. Frictional Unemployment: Frictional unemployment refers to temporary unemployment, which

exists during the period, wherein workers leave one job and join some other.
 It arises due to labour market imperfections, such as lack of market information about
availability of jobs or lack of perfect mobility on the part of workers.
 Introduction of new machines, nationalization in production process or break down of
plant may also lead to frictional unemployment.

2. Structural Unemployment: Structural unemployment refers to the unemployment, in which

people remain unemployed due to mismatch between unemployed persons and the demand for
specific type of workers.
 It is associated with the structural changes in the economy. The unemployment workers lack
skill and training, required by the developing industries.
 Example: Due to computerization, workers who do not possess enough knowledge of
computers, will be unemployed until they do some computer course or training.

3. Cyclical Unemployment: It is associated with the down-swing and depression phases of business
cycle.
 It is the most common type of unemployment in the developed capitalist economics.
 A business cycle consists of alternating periods of prosperity and depression.
 During the phase of prosperity, the level of economic activity, income, output and
employment rise.
 However, during period of depression, income and output fall and it gives rise to widespread
unemployment.

Causes of Unemployment

1. Slow Rate of Economic Growth: The actual growth rate always lies far below the rate targeted in
the five decades of planning. Employment opportunities created under the plans could not keep pace
with the additions to the labour force.
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Anurag Sharma
Centre Director

2. Population Explosion: The repaid rate of population growth has been another cause of increasing
unemployment in the country. It has not been possible to generate so many employment
opportunities to absorb the large growing labour force.

3. Underdeveloped Agriculture: Heavy pressure of population on land and the primitive methods
of agricultural operations are responsible for massive rural unemployment and underemployment in
the country.

4. Defective Educational System: The prevailing education system in India is full of defects as it
fails to make any provision for imparting technical and vocational education. As a result, educated
people are unable to meet the requirements of the firm.
5. Slow Growth of Industry: Due to shortage of capital and lack of modern and advanced
technology, industrial sector could not gain its momentum and could not generate sufficient
employment opportunities in the country.
6. Faulty Planning: The plans could not stop the migration of the rural population into urban areas.
The plans were unable to encourage use of labour - intensive techniques of agricultural and industrial
production. The plans have failed to put due emphasis on employment generating programmes like
development of dairies, fisheries and poultry farming. Insufficient infrastructure facilities (power,
transportation, communication, roads, etc.) have greatly hampered the expansion of work
opportunities.
7. Low Capital Formation: Low rate of capital formation has hampered the growth potential in the
agricultural and industrial sectors. Consequently, job-creation capabilities of both the sectors have
been affected adversely.

Remedial Measures for Unemployment

1. Accelerating Growth Rate of GDP: The aggregate employment problem can be solved through
the process of accelerated growth. Growth rates of GDP between 8% and 9% are needed over the
next ten years, to achieve a significant improvement in the employment situation.

2. Control of Population Growth: The rapid growth rate of population should be slowed down, so
that the additional jobs created do not fall short of new entrants to the labour market. Therefore, it is
necessary to adopt an effective and meaningful population control policy, like family planning
programmes.

3. Development of Agricultural Sector: Acceleration of agricultural growth is important to

increase labour productivity and quality of employment for large numbers of the existing labour
force. There is a need for agricultural revolution through improved techniques, extension of
irrigation facilities, reform of land laws, increase in public investment, etc.
4. Improvement in Infrastructure: The infrastructural facilities like health, education, irrigation,
electricity, roads, etc. are critical for overall development of the economy. Better infrastructural
facilities enable agriculture and industry sector. To produce to their full capacity.

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Anurag Sharma
Centre Director

5. Creation of Self- Employment Opportunities: Government should provide various facilities

like financial assistance, training of skills, supply of inputs, marketing of products, etc. to generate
more self-employment opportunities.

6. Reform of Educational System: The present system of educational system should be made more
vocational and work-oriented. Educational facilities should be more diversified and a sustained
programme of training is necessary, to develop skills among the educated unemployed through
special training or apprenticeship courses.

Industrial Unemployment: Industrial unemployment among the illiterates, who wish to work in
Industrial establishment.

 With the increase in size of urban population and the migration of population from rural to
urban industrial areas, the industrial unemployment is gradually becoming acute.

 The slow pace of industrialization is unable to generate sufficient employment opportunities. As

a result, there is huge industrial unemployment in the country.

Educated Unemployment: Educated unemployment refers to the unemployment among the

educated people.

 The rapid expansion of general education in the country has increased the educated people in the
country.

 However, due to slow growth of technical and vocational educational facilities, a huge
number of manpower is unnecessarily diverted towards general education.

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Anurag Sharma
Centre Director

Chapter 8 - Inflation
Meaning of Inflation
Inflation refers to a situation of persistent and appreciable rise in the general level of prices.

Important Points about Inflation

 Inflation Occurs Due to Rising Prices

Inflation is a process of rising prices and not a state of high prices. It shows a situation
when aggregate demand exceeds aggregate supply at the existing prices, which leads to rise in
general price level.

 There Should be Appreciable or Considerable Rise in Prices

It means, every small rise in price level is not inflationary in character. For example, a
modest and gradual rise in the price level (say 1% to 2% per annum) is not inflationary in
character as it is essential to achieve satisfactory rate of economic growth. The situation of
inflation arises only when rise in price level becomes excessive and unhealthy.

 During inflation all costs and prices do not rise together and in the same proportion. But, it is an
increase in the general level of prices, which is measured by the price index.
Types of Inflation
Inflation can be of different types, depending upon the rate of increase in price. On the basis of rate of
inflation, inflation can be following types –
1. Creeping or Mild Inflation
It occurs when the price level rises at a very slow rate (less than 3% per annum)
2. Walking or Trotting Inflation
It occurs when the price level rises at an intermediate range of 3% to 6 % per annum.
 The annual inflation rate is of a single digit.
 It is a warning signal for the government to control it before it turns into running inflation.
3. Running Inflation
It occurs when the sustained rise in prices is over 8% and is generally around 10% per annum.
 It normally shows two digit inflation.
 It affects the poor and middle classes adversely.
 Its control requires strong monetary and fiscal measures, otherwise it leads to galloping
inflation.
4. Galloping Inflation
It occurs when the price rises by double or triple digit inflation rates. It means, if price rise by
more than 10% but less than 1000% per annum, then galloping inflation occurs.
 It is also referred as jumping inflation.
 India has been witnessing galloping inflation since the second five year plan period.
5. Hyperinflation Inflation
It refers to a situation when the prices rise at an alarming high rate. The prices rise so fast that it
become very difficult to measure is magnitude.
 In quantitative terms, when prices rise above 1000% per annum, it is termed as Hyperinflation.

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Anurag Sharma
Centre Director

 Hyperinflation is an indication of the highest degree of abnormality in the monetary system of a

country.

Demand–Pull Inflation
It occurs when the aggregate demand of goods and services exceeds the aggregate supply of goods
and services at the existing prices, i.e., when there is excess demand for goods and services. Demand–pull
inflation is a phenomenon of ‘Too much money chasing too few goods’.
 It is also known as ‘Excess Demand Inflation’.
 Excess demand pulls up the price level and leads to emergence of inflation.
 Causes of Demand–Pull Inflation – This excess demand for goods and services occurs due to :
a) Exploring population
b) Rising money incomes
c) Expansion in money supply
d) Rising volume of black money
e) Increase in public expenditure
f) Increase in investment

Cost–Push Inflation
It occurs due to increase in cost of production without the corresponding increase in the productivity.
 This type of inflation occurs due to forces operating from the supply side or the cost side. So, it is
also known as supply or cost theory of inflation.
 Causes of cost–push inflation – it is caused due to :
a) Increase in the wages
b) Increase in profit
c) Higher taxes
d) Fall in the availability of basic inputs
e) Administered higher prices of inputs

Causes of Inflation

1. High Growth Rate of Population

In India, population is increasing at a very high ate and it is putting heavy pressure on the
aggregate demand and in the price level of the country.

2. Increase in Public Expenditure

Continuous increase in the Government expenditure puts large money incomes in the hands
of general public as expenditure of the Government becomes income for the people. It leads to
growing public demand for goods and services and consequent rise in price.
3. Increase in Money Supply
There has been persistent increase in the supply of money since the second five year plan,
without any equivalent increase in the GDP. It has increased the purchasing power of public, which
in turn, raises the demand for goods.
4. Deficit Financing
The rising expenditure of the government is responsible for adopting deficit financing as a
method of financing economic development. Printing of new currency increases the money supply,
which raises the aggregate demand for goods and services.

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Anurag Sharma
Centre Director

5. Growth of Black Money

Black money refers to that money which is acquired after evading taxes. Black money is
generally used for financing non–productive activities like investment in real estate, purchase of
gold, hoarding and black marketing of essential goods etc. All these give rise to inflation.

6. Increase Taxation
With every budget, the government increase the amount of Indirect taxes (taxes on goods and
services). It gives an opportunities to the trading classes to raise the prices (often more than the rate
of taxes). Such taxes are responsible for pushing up the price level in the country.
7. Easy Finance Facilities
Easy availability of credit for the purchase of consumer goods has significantly raised the
level of aggregate demand in India, which in turn, pushes up the price level in the country.
Problems Due to Inflation
1. Creates Business Uncertainty
Production is adversely affected on account of business uncertainty. Persistent rise in price
level discourages the entrepreneurs from taking risks involved in production.
2. Adverse Effect on Balance of Payment
Inflation often leads to increased import and/ or reduced report. This result in deficit in the
balance of payments, which in turn causes a drain in the foreign exchange reserve.
3. Rise in Inequalities in Income
During inflation, speculation and profiteers gain without any effort on their part. Thus,
inflation gives rise in disparities in the distribution of income and wealth.
4. Leads to Hoarding and Black Marketing
During inflation, the traders hoard essential goods with the aim of getting higher profits. The
buyers also hoard essential goods for the ear of paying higher prices in future. Thus, inflation leads
to growth of black marketing.
5. Adverse Effect on Weaker Section
The continuous rise in prices adversely affects the consumption of the weaker sections of the
population as they are not compensated for the rise in prices.
Policies to Control Inflation
The measures, which can be used to control inflation are broadly categorized as –
 Monetary Policy
 Fiscal Policy
 Other Measure
Monetary Policy
It is the policy of Central Bank to control money supply and credit creation in the economy. India’s
Central Bank is the Reserve Bank of India (RBI). Following two instruments of monetary policy are used
by RBI to control inflation.
Quantitative Instrument
1. Increase in Bank Rate
 The term ‘bank rate’ refers to the rate at which central bank lends money to
commercial banks as the lenders of last resort.
 During inflation, central bank increases the bank rate, which raises the cost of borrowings
from the central bank.
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Anurag Sharma
Centre Director

 It forces the commercial banks to increase their lending rates, which discourages borrowers
from taking loans.
 It reduces the availability of credit in the economy and helps to correct inflation.

2. Open Market Operations (Sale of Securities)

 It refers to sale and purchase of securities in the open market by the central bank.
 During inflation, central bank offers securities for sale.
 Sale of securities reduces the reserves of commercial banks.
 It adversely affects the bank’s ability to create credit and helps to control inflation.

3. Increase in Legal Reserve Requirements (LRR)

Commercial banks are obliged to maintain legal reserves. There are two components of legal
reserves –
a) Cash Reserve Ratio (CRR)
It is the minimum percentage of net demand and time liabilities, to be kept by
commercial banks with the central bank.

b) Statutory Liquidity Ratio (SLR)

It refers to minimum percentage of net demand and time liabilities, which
commercial banks are required to maintain with themselves.
 To correct inflation, the central bank increases CRR or/ and SLR.
 It reduces the amount of effective cash resources of commercial banks and limits their credit
creating power.
 It ultimately helps in controlling inflation in the economy.

Qualitative Instruments
These instruments aim to regulate the direction of credit. Major qualitative instruments or
measures are –
1. Increase in Margin Requirements
 Margin requirement refers to difference between the market value of security offered
and the value of amount lent.
 When the economy is suffering from inflation, central bank increase the margin, which
restricts the credit creating power of banks.
 Borrowers find it less attractive to borrow money and it helps to control inflation.
2. Moral Suasion (Advise to Discourage Lending)
 This is a combination of persuasion and pressure that Central Bank applies on other
banks in order to get them act, in a manner, in line with its policy.
 Moral suasion is exercised through discussion, letters, speeches and hints to banks.
 During inflation, the central bank advises, requests or persuades the commercial banks not
advance credit for speculative or non–essential activities. It helps to control inflation.
3. Selective Credit Controls (Introduce Credit Rationing)
 It refers to a method in which the central bank gives directions to other banks to give or
not to give credit for certain purposes to particular sectors.
 During inflation, the central bank introduces rationing of credit in order to prevent
excessive flow of credit, particularly for speculative activities.
 It helps to wipe off the excess demand and helps in controlling inflation in the economy.
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Anurag Sharma
Centre Director

Fiscal Policy

Fiscal policy refers to the policy of central government to control the situation of money supply in the
economy.
It is also known as ‘Revenue and Expenditure Policy’. Government can control inflation through its
fiscal policy. The main constituents or tools or instruments of Fiscal Policy are:

1. Expenditure Policy (Decrease in Government Spending)

 Government spends huge amount on infrastructural and administrative activities.
 To control the situation of inflation, Government should reduce its expenditure to the
maximum possible extent.
 Decrease in Government spending will reduce the level of aggregate demand in the
economy and helps to correct inflationary pressures in the economy.
2. Revenue Policy (Increase in Taxes)
 Revenue policy of the government is expressed in terms of taxes.
 Government imposes different kinds of direct and indirect taxes on the public.
 During inflation, government increases the rates of taxes and even imposes some new
taxes
 It leads to decrease in the level of aggregate expenditure in the economy and helps to
control inflation.

Other Measures
1. Income Policy: The primary objective of income policy is to ensure that wages, salaries and other
incomes should increase in tune with increase in productivity. However, it is difficult to implement
such a policy, especially in case of wage incomes due to pressure of trade unions.

2. Price Control of Essential Items: Under price control policy, the government fixes the
maximum price at which certain commodities could be sold. Prices of essential goods need to be
controlled in order to ensure their availability to all sections of the society.

3. Improvement In Public Distribution System: Price control policy needs to be accompanied by

rationing. Under rationing, specified quantity of goods is given to consumers at the controlled price
through Public Distribution System (PDS). Government should take reasonable steps to improve
PDS so that essential commodities can be made available to the weaker sections at the controlled
prices.

4. Increase In Availability of Goods: The Problem of inflation can be controlled to a great extent
by increasing the availability of goods in the economy. It need two measurements
(a) Increase in Domestic Production: The domestic production should be increased by allocating
more resources, providing subsidies and removing bottlenecks which obstruct the production of
these goods.
(b) Import Goods: If domestic production falls short of demand, then government should go for
import of essential items, so as to minimize inflationary pressures.

5. Population Control Measures: effective population control measures will help a lot in reducing
excess demand and controlling inflation.

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Anurag Sharma
Centre Director

Chapter 9 - Infrastructure
Meaning of Infrastructure
Infrastructure refers to all such activities, service and facilities, which are needed to provide different
kinds of services in an economy.
 Infrastructure provides supporting ‘Services’ in the main areas of industrial and agricultural
production, domestic and foreign trade and commerce.
 Infrastructural services include:
 Roads, railways, ports, airports, dams, power stations, oil and gas pipelines,
Tele-communication facilities, etc.
 Educational system including schools and colleges.
 Health system including hospitals.
 Sanitary system including clean drinking water facilities.
 Monetary system including banks, insurance and other financial institutions.

Economic and Social Infrastructure

1. Economic Infrastructure: It includes infrastructure associated with energy, transportation and

communication. Economic infrastructure is important to promote economic activities, i.e.,
production and trade of goods and services.
2. Social Infrastructure: It includes infrastructure associated with education, health and housing.
Social infrastructure consists of provision of all those services which improve the quality of
human resource.

Importance of Infrastructure
1. Facilitates functioning of the Economy: The functioning of an economy depends on
existence of infrastructural facilities. Agriculture, industry and service sectors depend heavily on
infrastructural facilities for their growth.
2. Agricultural Development: The development of modern agricultural depends on
infrastructural facilities (roadways, railways and shipping) for speedy and large-scale transport of
seeds, pesticides, fertilizers, etc. There is also a need for insurance and banking facilities, so that
agriculture can operate on a large-scale.
3. Economic Development: Development of infrastructure and economic development go hand in
hand.
 Agriculture depends on the adequate expansion and development or irrigation facilities.
 Industrial progress depends on the development, transport and communications.
Infrastructure contribution to economic development of a country both by increasing the
productivity of the factors of production and improving the quality of life of its people.
4. Better Quality of Life: Well- developed infrastructure leads to better quality of life.
 Improvements in water supply and sanitation have a large impact by reducing; morbidity’
(meaning proneness to fall ill) from major waterborne diseases and reducing the severity of
disease.
 The quality of transport and communication infrastructure can affect access to health care.
However, air pollution and safety hazards connected to transportation also affect morbidity,
particularly in densely populated areas.

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Centre Director

5. Provides Employment: Many people get employment in infrastructural projects like construction
and maintenance of roads, railways, electricity plants, etc.
6. Facilitates Outsourcing: A country with advanced infrastructure facilities, is able to reap benefits
from the outsourcing work. India is emerging as a global destination for BPO’s, KPO’s, call centres,
etc. due to IT support system and sound infrastructure.

Energy
Energy is an important input for most of the production processes and consumption activities. It plays a
crucial role in the development of an economy.
 There exist a positive correlation between economic growth and demand for energy. It happens
because growth is an index of increasing productive activity, which requires larger quantity of energy.
 In India, energy is used on a large-scale in agriculture and related areas, like production and
transportation of fertilizer, pesticides and farm equipment.
 Energy is required in house for cooking, household lighting and heating.

Sources of Energy: (i) Commercial Energy; and (ii) Non-Commercial Energy.

Commercial Energy
Commercial energy refer to those sources of energy which command a price and the users have to pay a
price for them.
 For example, coal, petroleum and electricity.
 Commercial sources of energy are generally exhaustible (except hydropower).
 Commercial sources account for over 50% of the total energy sources consumed in India.

Non-Commercial Energy
Non-commercial energy consists of those sources of energy which generally do not command a price.
 For example, firewood, agricultural waste and dried dung.
 Non-commercial sources are generally renewable.
 These are generally available free of cost as they are found in nature or forests.
 More than 60% of Indian households depend on traditional sources of energy for meeting
their regular cooking and heating needs.

S.No. Commercial Energy Non-commercial Energy

Commercial sources of energy are Non-commercial source are generally
1. Generally exhaustible (with the Renewable.
exception of hydropower)
Commercial sources of energy have Non-commercial sources are generally
a market, i.e. they command a price.
free. However, in the present period,
Even non-commercial sources like
2.
firewood and dried dung are charged a
price in the urban areas and to some
extent, in the rural areas as well.
Commercial sources are mostly Non-commercial sources are generally
3. Used for industrial and commercial used for domestic and consumption
purpose. purpose.

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Anurag Sharma
Centre Director

Energy can also be classified into 2 categories according to the sources from which it is derived:
(i) Conventional Sources of Energy; and
(ii) Non-Conventional Sources of Energy.

Conventional Sources of Energy

Conventional sources of energy refer to the sources of energy, which are in use since long and can
be stored. For example, coal and oil.
 Such sources are non-renewable resources of energy.
 Even today, most of the industries of the world make use of coal and oil in industries.
 Both commercial and non-commercial sources of energy are known as conventional
sources of energy.

Non-Conventional Sources of Energy

Non-conventional sources of energy refer to the sources of energy, which have come into use only
recently. For example, solar energy, wind energy, geo-thermal energy bio-gas and tidal power.
 Such sources are renewable resources of energy.
 Being a tropical country, India has almost unlimited potential for producing these types of energy,
if some appropriate cost effective technologies, that are already available, are used.
 Though, these types of energy resources are inexhaustible, a lot f problems are faced in harnessing
them and storing them, besides the problems of heavy cost and management. As a result, they are
not generally used in industries.

Conventional Vs Non-Conventional Sources of Energy

S.No. Commercial Energy Non-Commercial Energy

Conventional sources of energy are Non-conventional sources are abundant.
1.
Limited.
Conventional sources are non- Non-conventional sources of energy are
2.
Renewable. Renewable.
They pollute the atmosphere. They are pollution free, i.e. they are eco
3. Friendly.
Conventional sources are expensive Non-conventional source of energy are
4. means of energy. Cheaper. However, initial cost of non-
conventional sources is heavy.

Primary and Secondary Sources of Energy

Primary Sources: Primary or direct sources of energy are gifts of nature and they do not need any
transformation for using them. For example, Coal, petroleum or gas are primary sources as they can be
directly used for work by burning them.

Secondary Sources: Secondary or indirect sources of energy results from transformation of primary
sources. For example, Electricity is a secondary from of energy produced from primary energy resources
including coal, hydrocarbons, hydro energy, nuclear energy, etc.

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Anurag Sharma
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Power (Electricity)
 In order to attain economic development, power is required in every step.
 With the gradual development of various sectors of the economy, the demand for power is
increasing year after year.
 The growth rate of demand for power is generally higher than the GDP growth rate. In
order o have 8% GDP growth per annum, power supply needs to grow around 12% annually.
 In order to meet this increasing power requirement, a huge amount of investment is regularly
being made on the development of power projects.

Sources Of Power Generation

1. Thermal Power:
 When power is generated out of coal, oil ad natural gas, it is termed as thermal power.
 It is the major sources of electricity and account for 71.28% of total power generation.
2. Hydro-electric Power
 When power is generated from the waters of fast flowing rivers or high dams, it is
termed as hydro-electric power.
 It is the cheapest among all the three sources and it has no pollution agent. It is
renewable sources of energy.
3. Nuclear or Atomic Power:
 When power is generated from the radioactive elements like uranium, thorium and
plutonium, it is termed as nuclear or atomic power.
 It is the next most up-to-date source of power, whose generation has started mostly
from 1970-71. Atomic energy has environmental advantage and is also likely to be
economical in the long run.

Challenges in the Power Sector

1. Inadequate Electricity Generation

India’s installed capacity to generate electricity is not sufficient to feed an annual economic
growth of 7%. In order to meet the growing demand for electricity between 2000 and 2012, India
needs to add 1,00,000 MW of new capacity , whereas at present, India is able to add only 20,000
MW a year.

2. Underutilization of installed capacity

The installed capacity is underutilized as plants are not run properly. During excess demand, the
operational efficiency of power projects is reflected by ‘Plant Load Factor’ (PLF) In India, the PLF
is very poor and inadequate attention is paid to improve it.

3. Poor performance of State Electricity Boards (SEBs)

State Electricity Boards (SEBs), which distribute electricity, incur losses which exceed Rs. 500
billion. This is due to transmission and distribution losses, wrong pricing of electricity and other
operational inefficiencies. A large portion of these losses is due to theft of power and free supply of
power to agriculture.

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Centre Director

4. Shortage of Inputs
Thermal power plants, which are the foundation of India’s power sector, are facing shortage of
raw material and coal supplies.

5. Lack of Public Cooperation

There is general public unrest due to high power tariffs and prolonged power cuts in different
parts of the country.

Measures to meet Power Crisis

1. Improvement in Plant Load Factor(PLF): The Plant Load Factor is an important indicator of
operational efficiency of thermal power plants. Improvement in PLF will help better utilization of
capacity of the plant.
2. Control of Transmission and Distribution Losses: To solve the power crisis, transmission and
distribution losses should be effectively controlled as they adversely affect the financial health of
power utilities.
3. Increase in Productive Capacity: In India, there is underutilization of production capacity of
thermal power stations. Its productive capacity should be increased to control the power crisis.
4. Promote role of private Sector: Although the private sector has made some progress, it is necessary
to tap this sector to come forward and produce power on a large-scale. India is the world’s fifth
largest producer of wind power, with more than 95% investments coming from the private sector.

5. Development of Hydro Potential: India is quite rich in Hydro power potential with an estimated
hydro power potential of more than 1,50,000 MW. However, only 21.14% of the potential has been
developed till date. So, there is serious need to fully explore the potential of hydro power.

Health
Health is a state of complete physical, mental and social well–being and not merely the absence of
disease or infirmity.
Important Points about Health and Health Infrastructure
 Health is not only absence or disease but also the ability to realize one’s potential. It is a yardstick of
one’s well being.
 Development of health infrastructure ensures a country of healthy manpower for production of goods
and services.
 Health infrastructure includes hospitals, doctors, nurses and other paramedical professionals, beds,
equipments required in hospitals and a well–developed pharmaceutical industry. Mere presence of
health infrastructure is not sufficient to have healthy people. It should be accessible to all the people.
Expansion of health infrastructure has resulted in the eradication of deadly disease like smallpox, guinea
worms and the near eradication of polio and leprosy.

Three–Tier System of Health Infrastructure

India’s health infrastructure and health care is made up of a three–tier system : Primary, Secondary and
Tertiary.

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Primary Health Care (PHC) Primary health includes –

 Education concerning prevailing health problems and methods of identifying, preventing and
controlling them.
 Promotion of food supply and proper nutrition and adequate supply of water and basic sanitation.
 Maternal and child health care.
 Immunization against major infectious diseases and injuries.
 Promotion of mental health and provision of essential drugs.

Secondary Health Care(SHC)

Hospitals which have better facilities for surgery, Electro Cardio Gram (ECG), are called
secondary health care institutions. They provide primary health care and also provide better health care
facilities. They are mostly located in district headquarters and in big towns.

Tertiary Health Care(THC)

Hospitals which have advanced level equipment and medicines and undertake all the complicated
health problems, which could not be managed by primary and secondary hospitals, come under ‘Tertiary
Health Care’.
The tertiary sector also includes many premier institutes which not only impart quality medical
education and conduct research, but also provide specialized health care. For example, AIIMS in Delhi.

Role of Private Sector

In recent times, the role of private sector, in providing health services, has considerably grown.
 More than 70% of the hospitals in India are run by the private sector.
 Private sector control nearly 40% of beds available in the hospitals.
 Nearly 60% of dispensaries are run by the private sector.
 Private sector provides healthcare to 80% of out–patients and 46% of in – patients.
 Private sector plays a dominant role in medical education and training, medical technology and
diagnostic, manufacture and sale of pharmaceuticals, hospital construction and the provision of
medical services. In 2001–02, there were more than 13 Lakh medical enterprise, employing 22 lakh
people.

Indian Systems of Medicine (ISM)

India has its own well developed alternate system of health care, namely: AYUSH, consisting of six systems
– Ayurveda, Yoga, Unani, Siddha, Naturopathy and Homeopathy.
 At present time are 3,004 ISM hospitals, 23,028 dispensaries and as many as 6,11,431 registered
practitioners in India.
 ISM has huge potential and can solve a large part of our health care problems because they are
effective, safe and inexpensive.
 However, little efforts have been to set up a framework to standardise education or to promote
research.

Medical Tourism in India

Health services in India combine latest medical technologies with qualified professionals.
Moreover, health services are cheaper in India as compared to costs of similar health care services in
other countries.

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As a result, foreigners come to India for surgeries, liver transplants, dental and even cosmetic
care. In 2004–05, 1,50,000 foreigners visited India for medical treatment and by 2012. India could earn
more than 100 billion rupees through such ‘medical Tourism’.

Rural – Urban Divide ( Poor – Rich Divide )

People living in rural areas do not have sufficient health infrastructure. This has led to differences
in the health status of people.
 70% of India’s population live in rural areas, but only 20% of total hospital s and 50% of total
dispensaries are located in rural areas. Out of about 7 lakh beds, only 11% beds are available in rural
areas.
 There are only 0.36 hospitals for every one lakh people in rural areas, while urban areas have 3.6
hospitals for the same number of people.
 Even though 165 recognised medical colleges produce 12,000 medical graduates every year, the
shortage of doctors in rural areas persists.
20% of these graduates leave the country for better monetary prospects and many opt for private
hospitals, located in the urban areas.
 The poorest 20% of Indians living in both urban and rural areas spend 12% of their income in
healthcare while the rich spend only 2%.

Women Health
Women constitute about half the total population in India.
 The child sex ratio declined from 945 in 1991 to 927 in 2001. It indicates growing incidence of
female foeticide in the country.
 More than 50% of married women between the age group of 15 and 49 have anaemia and nutritional
anaemia, caused by iron deficiency, which has contributed to 19 per cent of maternal death.

Health – A Basic Human Right

1) All citizens can get better health facilities if public health services are decentralized.
2) Success in the long–term battle against disease depends on education and efficient health
infrastructure. So, it is important to create awareness on health and hygiene and provide efficient
system.
3) Telecom and IT sectors can play an important role in improving the health process in the economy.
4) The effectiveness of healthcare programmes rests on primary healthcare. So, serious steps should be
taken to improve them.
5) Private–public Partnership (PPC) can effectively ensure reliability, quality and affordability of both
drugs and Medicare.

Critical Assessment of Health Infrastructure

1. Inequitable Distribution of Health Services

The existing health system suffers from inequitable distribution of institutions and manpower.
About 70% of India’s population live in rural areas, but only 20% of total hospitals are located in
rural areas.

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Centre Director

2. Communicable Disease
Increasing attention is urgently needed for prevention of Communicable disease like AIDS
(Acquired Immune Deficiency Syndrome), HIV (Human Immune Deficiency Virus) and SARS
(Severe Acute Respiratory Syndrome) through effective control measure.
3. Poor Sanitation Facilities
About 30% of the houses in urban areas do not have toilet facilities and the condition in rural
areas in even worse.
4. Lack of Manpower
Even though, India produces 12,000 medical graduates every year, still there is huge shortage of
manpower.
5. Malnutrition
Widespread malnutrition poses a major threat to the lives, especially in case of children.

6. Role of Private Sector

Public sector has not been so successful in providing adequate health structure. There is a need to
increase collaboration of public sector with private sector to meet health care needs of people.
Conventional Sources of Energy
1. Coal
Coal is the one of the most important primary source of energy –
 It accounts for about 67% of the country’s commercial needs.
 It has an important advantage over other fuels as it can be converted into other forms of energy,
such as electricity, gas and oil.
 India has coal reserves of about 2,87,000 million tons.
 However, coal is a non–renewable source and leaves a lot of smoke and residue.

2. Oil and Petroleum

 It is used in automobile industries, railways, factories and by household sector.
 The quantity of crude oil produced in India increased from 3 lakh tones in 1950–51 to 324 lakhs
tones in 2000-01.
 However, we still depend on imports of crude oil and major part of import bill goes on importing
these products.

3. Natural Gas
 It is produced in two way: (i) As associated gas produced along with the production of crude
petroleum; (ii) As free gas obtained from exclusive gas fields.
 Natural gas is also used as a raw material for fertiliser, petro-chemical plants and as cooking gas
(LPG) in households.

Non-Conventional Sources of Energy

1. Solar Energy: Solar energy is the energy received by the earth from the sun. This energy is in the
form of solar radiation, which makes the production of solar electricity possible.
 In a tropical country like India, solar energy should receive special attention as it is a renewable
source of energy.

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Centre Director

 It is now emerging as an important source of meeting the day-to-day heat energy requirements of
the domestic, institutional and industrial users.
 Due to less maintenance cost, solar energy is a more economical source of energy.

2. Biogas: Biogas refers to a gas made by fermentation of agricultural and animal waste.
 The technology for conversion of animal wastes into biogas is well developed and more
than 15 lakh biogas plants are already in operation.
 Biogas is a cheap and efficient fuel and its feedstock is renewable.

3. Wind Energy: Energy generated by controlling wind power is known as wind energy. India has a
very large wind power potential, which is being harnessed through the ‘Wind Energy Programme.
India is already the world’s fifth largest producer of wind power, with more than 955 investments
coming from the private sector.

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Anurag Sharma
Centre Director

Chapter 10 - Environment and Sustainable Development

Meaning of Environment

Environment is defined as the total planetary inheritance and the totality of all resources.
 Environment is the sum total of external forces which surround us.
 It includes all the biotic and abiotic factors that influence each other.

 Biotic Elements: Biotic elements include all living elements like birds, animals and
plants, forests, fisheries, etc.

 Abiotic Elements: Abiotic elements include non-living elements like air, water, land, etc.
For “Environment Protection Act, 1986”, refer Power Booster Section.

Functions of the Environment

1. Provides resources for Production: Environment supply renewable and non-renewable
resources.
 Renewable resources are those which can be used without the possibility of the resources
becoming depleted or exhausted, like trees, fishes, etc.
 Non-renewable resources are those which get exhausted with extraction and use, like
fossil fuel.
2. Environment assimilates waste: The process of production and consumption activities
generates a lot of wastage, which is absorbed by the environment.
3. Environment sustains life: Some basic necessities of life (sun, soil, water and air) are part
of environment. So, environment. So, environment sustains life by providing these essential
elements.
4. It provides aesthetic services: Environment includes land, forests, water bodies, rainfall, air,
atmosphere, etc. people enjoy the scenic beauty of these elements (like that of hill stations).
Such elements help in improving quality of life.

The environment is able to perform these functions without any interruption as long as demand on
these functions is within its ‘Carrying Capacity’.
‘Carrying Capacity’ Implies Two Things:
1. Resources extraction should remain below the rate of resource regeneration.
2. Generation of waste should remain within the absorption capacity of the environment.
If these two conditions are not fulfilled, then environment fails to perform its vital function of life
sustenance and it leads to the situation of ‘Environment Crisis’.
Reasons for Environment Crisis
The rising population of developing countries and affluent consumption and production standards
has put huge stress on the environment. Many resources have become extinct and the wastes
generated are beyond the ‘Absorptive Capacity’ of the environment.

Absorptive capacity means the ability of the environment to absorb degradation. The various reasons
for environment crisis are summarized as under:
1) The population explosion and advent of industrial revolution has increased the demand
for environmental resources, but their supply is limited due to overuse and misuse.
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Centre Director

2) The intensive and extensive extraction of both renewable and non-renewable resources
has exhausted some of the vital resources. Due to this, huge amount of money is spent on
technology and research to explore new resources.
3) Extinction of many resources and continuous rise in population has also resulted in
environmental crisis.
4) The development process has polluted the atmosphere and waters and there is decline in
air and water quality (70% of water in India is polluted). It has resulted in increased
incidence of respiratory and water-borne diseases.
5) The expenditure on health is also rising. Global environmental issues such as global
warming and ozone depletion also contribute to the increased financial commitments for the
government.

Opportunity costs of negative environmental impact are high

Increased financial commitments of the government due to global warming and ozone
depletion and rise in expenditure on health due to decline in air and water quality shows that
opportunity costs of negative environmental impacts are high.

Reversal of Supply-Demand relationship

Reason for Environment Degradation.

In the Past, Demand was less than Supply

In the early days of civilization, demand for environmental resources and services was much
less than their supply.
 Population was within the absorptive capacity of the environment; and
 Rate of resource extraction was less than the rate of regeneration of these resources.
As a result, environmental problems did not arise.

Presently, Demand is more than supply

In the present period, the demand for resources is in far excess of supply, i.e. demand is
beyond the rate of regeneration of the resources. With the population explosion and with the advent
of industrial revolution, the pressure on the absorptive capacity of the environment has increased
tremendously.
Thus, a reversal of supply-demand relationship is responsible for degradation of quality of
the environment.

Global Warming
Global warming is the observed and projected increase in the average temperature of earth’s
atmosphere and oceans. During the past century, the atmospheric temperature has risen by 1.1°F
(0.6°C) and sea level has risen several inches.

Cause of Global Warming

The global warming is due to increase in the greenhouse gas concentrations, like water vapour,
carbon dioxide, methane and ozone in the atmosphere.

Among Factors that may be Contributing to Global Warming are:

 Burning of coal and petroleum products (sources of carbon dioxide, methane, nitrous oxide,
ozone);

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Centre Director

 Deforestation, which increases the amount of carbon dioxide in the atmosphere

 Methane gas released in animal waste; and
 Increased cattle production, which contributes to deforestation, methane production and use
of fossil fuels.

Main Effects of Global Warming

 Ice is melting worldwide, especially at the earth’s poles. It has led a steep rise in sea level
and costal flooding.
 Hurricanes and other tropical storms are likely to become stronger.
 Increased incidence of tropical diseases, like malaria, cholera, dengue, chikungunya etc.
 There are thousands of species (like polar bears) in danger of becoming extinct forever.

Ozone Depletion
Ozone depletion refers to destruction of ozone in the ozone layer due to presence of chlorine from
manmade chlorofluorocarbons (CFCs) and other forces.

Cause of Ozone Depletion

The problem of ozone depletion is caused by high levels of chlorine and bromine compounds in the
stratosphere. The origin of these compounds is:
 CFC, which is used as cooling substances in AC and refrigerators; or
 Aerosol propellant and Bromofluorocarbons (halons), which is used in fire extinguishers.

Main Effects of Ozone Depletion

As a result of depletion of the ozone layer, more ultra violet (UV) radiation comes to earth and
causes damage to living organisms.
 UV radiation seems to be responsible for skin cancer in human beings.
 UV radiation lowers production of phytoplankton, which affects other aquatic organisms.
 UV radiation can also influence the growth of terrestrial plants.

Montreal Protocol
As ozone layer prevents most harmful wavelengths of ultraviolet light from passing through the
earth’s atmosphere, its depletion has general worldwide concern. It has led to adoption of the
“Montreal Protocal”.
 Montreal Protocol is a historical treaty designed by the members of United Nations to protect
the ozone layer by phasing out CFC, which is supposed to be main reason for ozone
depletion.
 Under the Montreal Protocol, all the signing members agreed to freeze the consumption and
production of CFC by the year 2013.
 India signed the Montreal Protocol along with its London Amendment on 17-9-1992.
 The Montreal Protocol has significantly reduced the burden of CFCs in the stratosphere and
helped in ozone recovery.

State of India’ Environment

 The black soil of the Deccan Plateau is particularly suitable for cultivation of cotton, leading
to concentration of textile industries in this region.
 The Indo-Gangetic plains spread from the Arabian Sea to the bay of Bengal are one of the
most fertile, intensively cultivated and densely populated regions in the world.

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 India’s forests, though unevenly distributed, provide green cover for a majority of its
population and natural cover for its wildlife.
 Large deposits of iron-ore, coal and natural gas are found in the country. India alone accounts
for nearly 20% of the world’s total iron-ore reserves.
 Bauxite, copper, chromate, diamonds, gold, lead, lignite, manganese, zinc, uranium, etc. are
also available in different parts of the country.
India’s environmental Problems pose a “Dichotomy” (contrast between two things that are
represented as being entirely different):
1. Poverty is causing environmental degradation through cutting down of trees (to use fuel
wood), overgrazing of animals, pollution of water resources, encroachment into forest land.

2. Affluence in living standards is causing environmental degradation because with affluence

(wealth), the demand for goods and services increases. Higher demand necessitates the need
for increase in production. For increasing the production, the demand for finite natural
resource increases. It raises the pollution resulting from more vehicles and industries.

Challenges to India’s Environment

Air pollution, water contamination, soil erosion, deforestation and wildlife extinction are some of the
most pressing environmental concerns of India. The priority issues identified are:

Land Degradation
Land degradation refers to a decline in the overall quality of soil, water or vegetation
condition, commonly caused by human activities.
 It occurs through natural and man-made processes of wind erosion, water erosion and water
logging.
 In India, land suffers from different types of degradation, mainly because of unstable use and
inappropriate management practices.
 Such kind of degradation leads to the loss of invaluable nutrients and lower food grain
production.
 Poor land use practices are responsible for the rapid land degradation in India.

Causes of Land Degradation

1. Overgrazing, i.e. grazing of natural pastures at stocking intensities above the live stock
carrying capacity.
2. Encroachment into forest lands.
3. Non-adoption of adequate soil conservation measures.
4. Unsustainable fuel wood and fodder extraction.
5. Improper crop rotation.
6. Extraction of ground water in excess of the recharge capacity.

Degradation of Forests or Deforestation

Deforestation involves the permanent destruction of indigenous forests and woodlands.
It refers to cutting, clearing and removal of rainforest, where land is thereafter converted to a
non-forest use.
 Deforestation is rising at such a rapid scale that is has totally disturbed the ecological balance
of the country.
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Centre Director

 The per capita forestland in the country is only 0.08 hectare against the requirement of 0.47
hectare to meet basic needs.
 There are very serious and dangerous consequences of forest depletion, like chances of more
floods, soil erosion, heavy siltation of dams and changes in climate.

Soil Erosion

Soil erosion takes place when the surface soil is washed away through excessive rains and
floods.
 Deforestation is one of the major reason for soil erosion.
 As per the estimates, soil is being eroded at a rate of 5.3 billion tones a year, which is in
excess of the recharge capacity. As a result, country loses 0.8 million tones of nitrogen, 1.8
million tones of phosphorus and 26.3 million tones of potassium every year.
 The quantity of nutrients lost due to erosion each year ranges from 5.8 to 8.4 million tones.

Biodiversity Loss
Biodiversity is defined as the variability among living organism from all sources, including
terrestrial, marine and other aquatic ecosystem and the ecological complexes of which they are a
part.
 Conversation and sustainable use of biodiversity is fundamental to ecologically sustainable
development.
 Biodiversity loss has serious economic and social costs for any country as many plant and
animal species are severely threatened by the destruction of their habitat and over–
exploitation of resources.

Air Pollution
Air pollution is the presence of materials in air in such concentration, which are harmful
to man and the environment.
 In India, air pollution is widespread in urban areas where vehicles are the major contributors,
and in a few other areas, which have a high concentration of industries and thermal power
plants.
 Vehicular emissions are of particular concern as these are ground level sources and have the
maximum impact on the general population.
 The number of motor vehicles increased from 3 lakh in 1951 to 6.7 crores in 2003 and 14.18
crores in 2011. Personal transport vehicles (two–wheeler vehicles and cars only) constitute
about 80% of the total number of registered vehicles, thus, contributing significantly to total
air pollution load.

Some Ways to Control Air Pollution

1) Promotion of public transport like use of Delhi Metro instead of private vehicles. Steps
should be taken for effective traffic planning and management.
2) Promotion of cleaner fuels in vehicles, like use of CNG instead of petrol and diesel.
3) Use of cleaner fuel such as LPG in households to reduce indoor air pollution.
4) Promotion of cleaner technologies, strengthening of emission standards, introducing
economic incentives and strengthening of the monitoring.

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Centre Director

Pollution Control Board

In order to address water and air pollution in India, the government set up the Central
Pollution Control Board (CPCB) in 1974. This was followed by states establishing their own state
level boards to address all the environmental concerns.

Main Functions of Pollution Control Board

 They investigate, collect and disseminate information relating to water, air and land
pollution, lay down standards for sewage/ trade effluent and emission.
 These boards provide technical assistance to governments in promoting cleanliness of
streams and wells by prevention, control and abatement of water and air pollution the
country.
 They also prepare manuals, codes and guidelines relating to treatment and disposal of sewage
and trade effluents.
 They assess the air quality through regulation of industries.
 They monitor the quality of water in 125 rivers (including the tributaries), wells, lakes,
creeks, ponds, tanks, drains and canals.
The various measures adopted by the ministry of environment and the central and state pollution
control boards may not yield reward unless we consciously adopt a path of ‘sustainable
development’.

Sustainable Development
Sustainable development is the development, which will allow all future generations to
have a potential average quality of life, that is, at least high, which is being enjoyed by the current
generation.

 The basic aim of sustainable development is to ensure that present generation should leave
stock of ‘quality of life’ for the next generation, which is no less than what we have
inherited.
 Environmentalists have used the term ‘sustainability’ is an attempt to clarify the desired
balance between economic growth on one hand and environmental preservation on the other.
 Sustainable development is a development, which–
 Meets the basic needs (employment, food, energy, water, housing) of all people,
particularly the poor people; and
 Ensures growth of agriculture, manufacturing and service sector, to meet these needs.

Sustainable Development Aims:

 Sustainable and equitable use of resources, to meet the needs of the present and future
generations, without causing damage to environment;
 To prevent further damage to our life-support systems;
 To conserve and nature the biodiversity and other resources for long-term food security.

How To Achieve Sustainable Development?

1. Restrict Use of Renewable Resources: Renewable resources should be extracted on a

sustainable basis. It means, rate of extraction should not exceed rate of regeneration.

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Centre Director

2. Substitute Non-Renewable with Renewable Resources: As non-renewable resources are

depleted, renewable substitutes must be developed, so as to maintain the flow of services
over time. It means, rate of depletion of non-renewable resources should not exceed the rate
of creation of renewable substitutes.

3. Become Input Efficient: Technological progress should be made to become input efficient
and not input consuming. It means, efforts should be made to produce more per unit of input.
It will reduce the exploitation of resources.

4. Control Pollution: Pollution emissions should be limited to the absorption capacity of the
environment.

Strategies For Sustainable Development

1. Use of Non-Conventional Sources of Energy: India is hugely dependent on thermal and

hydro power plants to meet its power need. But, both theses sources have adverse
environmental impacts.
 Non-conventional sources like wind power and solar rays are cleaner and greener
technologies, which can be effectively used to replace thermal and hydro-power.
 India is naturally endowed with a large quantity of solar energy in the form of sunlight.
With the help of photovoltaic cells, solar energy can be converted into electricity.
 Both the sources (wind power and solar rays) are totally free from pollution. Although,
their initial cost is high, but the benefits are such that the high cost gets easily absorbed.

2. Use of Cleaner Fuels

 In Urban areas, use of Compressed Natural Gas (CNG) is being promoted to be used as
fuel. In Delhi, use of CNG in public transport has significantly lowered air pollution.
 In Rural areas, households generally use wood, dung cake or other biomass as fuel.
These fuels have several adverse implications like deforestation, reduction in green
cover, wastage of cattle dung and air pollution. To overcome this problem, use of LPG
and gobar gas is being promoted.

3. Establishment of Mini-Hydel Plant: In mountainous regions, perpetual streams can be found

almost everywhere.
 These streams can be used to generate electricity (via turbines) through Mini-hydel
plants.
 Such power plants are more or less environment-friendly and generate enough power to
meet local demands.

4. Traditional Knowledge and Practices: Traditionally, Indian people have been close to their
environment.
 The shift from the traditional systems has caused large-scale damage to the
environment and to our rural heritage.
 For example, India is well known for its AYUSH treatment with about 15,000 species
of plants, which have medical properties.
 However, with the advent of western system of treatment, we ignore our traditional
systems of Ayurveda, Unani, etc.
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Centre Director

5. Use of Bio-compost: The use of chemical fertilizers to increase the agricultural production has
not only adversely affected the large areas of productive land but also contaminated the water
bodies.
 Due to use of chemical fertilizers, demand for irrigation has been going up year after
year.
 With the rise in demand for organic food, farmers have again started using compost
made from organic wastes of different types.
 In certain parts of the country, cattles are maintained only because they produce dung,
which is an important fertiliser and soil conditioner.

6. Control of Biopest: The advent of green revolution has increased the use of chemical
pesticides, which not only contaminates the food products, but also pollutes the water bodies.
 To meet this challenges, better methods of pest control are promoted. For example,
neem based pesticides are environment friendly and free from side effects.
 In addition, awareness is being created for use of various animals and birds (likesnakes,
lizards, owls, peacocks) as natural pest controllers.

7. Changes in Unsustainable Patterns of Consumption and Production: With increasing

purchasing power, wasteful consumption, linked to market driven consumerism, is stressing
the resource base of developing countries further.
 It is important to counter this through education and public awareness.
 In several areas, desirable limits and standards for consumption and production need to
be established and applied through appropriate mechanisms, including education,
incentives and legislation.

Causes of Environmental Degradation

1. High Population Growth: Population explosion is one of the major causes for degradation
of environment
 Annual growth of about 2% has contributed to severe and accelerating degradation of
the natural resources.
 It is eating into natural resources more than desirable, and putting into the system more
wastes than they can absorb.

2. Industrial Pollution: Unplanned and uncontrolled growth of industries is creating huge

atmospheric pollution regularly. Moreover, industrial wastes of various factories are
constantly being discharged in rivers, lakes and seas, creating huge health hazards.

3. Increasing Urbanisation: Urbanisation has been too rapid in recent decades, with bigger
towns growing at a much faster rate.
 The infrastructural services have come under severe strain, thereby depleting the
precious environment resource base of cities.
 The overcrowding in cities (population, vehicles, etc.) has led to the increase of slums
and undesirable land-use changes.
 It has led to deterioration of air and water quality and generation of huge wastes.

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4. Mass Poverty
 There is a reckless felling of trees by the poor to be used as fuel.
 The poor people earn their living through activities like gathering of forest produce,
collection of firewood, excessively intensive use of small pieces of land or fishing in
various ponds and rivers.
 All these activities lead to loss of natural assets and environmental degradation.

5. Pattern of Economic Growth

The great emphasis on the development of basic and capital goods industries and the
technologies used for them, have depleted natural resources and damaged the eco-system,
besides contaminating water, air and land resources.

6. Vehicular pollution
The transport system in India is based on the intensive use of petroleum products. It has
immensely increased the air pollution. Increased road traffic and their sound have also
resulted in noise pollution.

7. Increase in use of chemical fertilizers and pesticides: Agricultural development due to

environmentally-unfriendly farming methods (high use of chemical fertilizers and pesticides)
adversely affect the environment, by causing soil erosion, land salivation and loss of fertility.

Measures to Control Environment Degradation

1. Public Participation: The First step to control environment degradation is to encourage

public participation in protection of environment. Increasing awareness amongst people for
safety of environment will reduce further degradation of environment.

2. Control Population There is a serious need to control the growth rate of population to a
level, which is within the carrying capacity of the environment.

3. Control of Vehicular, Industrial and Agricultural Pollution

 Vehicular Pollution may be controlled by adopting the following strategies;
 Expansion of public transport;
 Traffic planning and management
 Taxes on fuels and vehicles;
 Further tightening of emission norms and fuel quality specifications;
 Promotion and use of alternative fuels like CNG/ LPG battery operated vehicles.
 Strengthening of an inspection and maintenance system.
 Industrial Pollution should be controlled through measures like promotion of cleaner
Technologies, strengthening of emission standards, introducing economic incentives,
etc.
 Agricultural Pollution can be controlled by minimizing the use of chemical fertolisers
and pesticides.

4. Protect Biodiversity: Most of the legal provisions are focused on use and exploitation of
biological resources, than their conservation.

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Centre Director

 So, a greater emphasis needs to be given to the conservation aspect in the rules
pertaining to biodiversity.
 A comprehensive legislation on biodiversity conservation and uses should be
implemented.

5. Environmental Education, Training and Awareness: The government proposes to rely on

both formal and non-formal educational channels for creating environmental awareness.
 In formal education system, it intends to involve NCERT for schools and UGC for
universities.
 In non-formal education, National Museum of Natural History would play an
important role.

6. Poverty Eradication: Poverty and a degraded environment are closely interrelated,

especially where people depend primarily on the natural resource base for their livelihood.
 The survival needs of the poor force them to continue to degrade an already degraded
environment.
 Therefore, removal of poverty is a prerequisite for the protection of environment.

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Anurag Sharma
Centre Director

Chapter 11 - Comparative Development Experiences of India

and its Neighbours
Development Path of India, Pakistan and China

India, Pakistan and China have many similarities in their developmental strategies.
 All the three nations started their developmental path at the same time.
 India and Pakistan got independence in 1947 and People’s Republic of China was
established in 1949.
 All the three countries had started planning their development strategies in similar ways.
India announced its first Five Year Plan in 1951, Pakistan announced in 1956 and China in
1953.
 India and Pakistan adopted similar strategies, such as creating a large public sector and
raising public expenditure on social development.
 Till 1980s, all the three countries had similar growth rates and per capita incomes.

China

Historical Background
China has one of the world’s oldest people and continuous civilizations, consisting of states
and cultures dating back more than six millennia. The people’s Republic of China (PRC), commonly
known as China, was established in 1949.
Geography
China is situated in eastern Asia, bounded by the Pacific in the east. It is the third largest
country in the world, next to Canada and Russia, with an area of 9.6 million square kilometers.
Population and Language
China is the most populous country in the world with 1,303.7 million people (as per 2000-01
estimates) and a growth rate of 1% per annum. Most languages in China belong to the Sino-Tibetan
language family, spoken by 29 ethnicities.
Economy
Being one of the oldest civilizations in the world, China has been the World’s largest
economy. After the establishment of people’s Republic of China under one-party rule, all the critical
sectors of the economy, enterprises and lands owned and operated by individuals, were brought
under government control.

1. Great Leap Forward (GLF) Campaign

In 1958, a programme named “The great Leap forward (GLF)’ campaign was
initiated by Mao to modernize China’s economy.
 The aim of this campaign was to transform agrarian economy into a modern economy
through the process of repaid industrialization
 Under this programme, people were encouraged to set up industries in their
backyards.

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Centre Director

2. Great Proletarian Cultural Revolution

In 1965, Mao introduced the Great Proletarian Cultural Revolution (1966-76), under
which students and professionals were sent to work and lean from the countryside.

3. Reforms Introduced in China

The present day fast industrial growth in china can be traced back to the reforms
introduced in 1978. China introduced reforms in phases.
 In the initial phase, reforms were initiated in agriculture, foreign trade and investment
sectors.
 In the later phase, reforms were initiated in the industrial sector.

4. Dual Pricing in the Reforms Process

The reform process also involved dual pricing. This means fixing the prices in two ways –
 Farmers and industrial units were required to buy and sell fixed quantities of inputs
and outputs on the basis of prices fixed by the government.
 For other transactions, the inputs and outputs were purchased and sold at market
price.
5. Special Economic Zone (SEZ)
In order to attract foreign investors, special economic zones were set up.

Pakistan
Historical Background
Pakistan officially the Islamic Republic of Pakistan, gained independence on 14 th August,
1947. In 1971, a civil war in East Pakistan resulted in the independence of Bangladesh. Pakistan’s
history has been characterized by periods of economic growth, military rule and political instability.

Geography
Pakistan is located in South Asia and borders Central Asia and the Middle East. Its
borders are with China in the North and towards West and Northwest are Iran and Afghanistan and
towards East and South East, its borders are with India.

Population and Language

Pakistan is the sixth most populous in the world with 162.4 million people (as per 2000-01
estimates) with a growth rate of 2.5% per annum. One third of total population lives below the
official poverty line. It has the largest Muslim population in the world after Indonesia. The national
language is Urdu and English is the official language.

Economy
 Mixed Economic System
Pakistan follows the mixed economy model with co–existence of public and private
sectors.

 Introduction of Various Policies

In the late 1950s and 1960s, Pakistan introduced a variety of regulated policy
framework for growth of domestic industries.
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Anurag Sharma
Centre Director

 Importance to role of private sector in late 1970s

In the late 1970s, there was a shift in the government policy, when it adopted the
policy of denationalization. Government encouraged the private sector and also offered
various incentives to them.

 Financial Support During Late 1970s

During this period, Pakistan also received financial support from (a) Western Nations,
(b) Remittances from emigrants to the Middle–east. This helped the country in stimulating
economic growth.

 Reforms
In 1988, reforms were initiated in the country.

Comparative study – India, China and Pakistan

Demographic indicators

Estimated Annual growth

Density Sex Fertility
Country population of population Urbanization
(Per sq. km) Ratio Ratio
(in millions) (1990–2003)
India 1,103.6 1.7 358 933 3.0 27.8
China 1,303.7 1.0 138 937 1.8 36.1
Pakistan 162.4 2.5 193 922 5.1 33.4

 Growth rate of population

Though, China is the most populated country, but its annual growth rate of population
is the lowest (1%) as compared to India (1.7%) and Pakistan (2.5%). The reason for the low
growth of population is the ‘One–Child Policy’ introduced in China in the late 1970s.

 Density of population
China is the third largest country in the world and growth rate of population is lowest
in China as compared to India and Pakistan.
 Sex ratio
Due to preference of son, sex ratio is low and biased against females in all the three
countries. In the recent times, all the three countries are adopting various measures to
improve the situation.

 Fertility rate
Fertility rate is calculated as the number of children borne by a woman in the
reproductive age (15–45 years) on an average.

Growth Indicators
Growth Rate of Gross Domestic Product (GDP)
GDP growth rate is considered as the single most important indicator of an economy
during the period. When many developed countries were finding it difficult to maintain a growth rate
of even 5%, China was able to maintain near double digit growth for more than two decades.
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Anurag Sharma
Centre Director

Country 1980–90 1990–2002-03

India 5.7 5.8
China 10.3 9.7
Pakistan 6.3 3.6

Explore More – PPP (Purchasing Power Parity)

PPP shows the equality of purchasing power among countries, i.e., quantity of goods and
services that can be bought with a unit of money.
 At the international level, the unit of money of India, Pakistan and China are Indian Rupee,
Pakistani Rupee and Yuan respectively.
 The value of each domestic currency is different in different countries. For example, one
Indian rupee cannot buy the same quantity of goods and services in Pakistan or China as
it can buy in India. Similar is the case with Pakistani rupee and China’s Yuan.
 US Dollar is the universally accepted currency. Therefore, GDPs of different countries are
expressed in US Dollars ($) and called PPP US $.

Conclusions
 In the last two decades, the contribution of agriculture sector to GDP, which employs the
largest proportion of workforce in all the three countries has declined.
 In the industrial sector, China has maintained a double–digit growth rate, whereas for India
and Pakistan, growth rate has declined.
 In the case of service sector, India has been able to raise its rate of growth in the 1990s, while
China and Pakistan reduced their service sector growth.
so, China’s growth is mainly contributed by the manufacturing sector and India’s
growth by service sector. during this period, Pakistan has shown deceleration in all
the three sectors.

Human Development Indicators

Items India China Pakistan
Human Development Index (Value) 0.602 0.755 0.527
Rank 127 85 135
Life Expectancy at birth (Years) 63.3 71.6 63.0
Infant Mortality Rate 63 30 81
Adult Literacy Rate (% aged 15 and above) 61.0 90.9 48.7
People below Poverty Line (%) (PPP 1$ a day) 34.7 16.6 13.4
Maternal Mortality Rate
GDP per capita (PPP US$) 540 56 500
Population with sustainable access to an 2.892 5,003 2,097
improved water source (%)
Population with sustainable access to improve 86 77 90
Population with sustainable access to improved
30 44 54
Sanitation (%)
Population undermourished (% of total) 21 11 20

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Anurag Sharma
Centre Director

Liberty Indicators
Liberty Indicator may be defined as the measure of the extent of demographic participation in the
social and political decision making.

Examples of liberty indicators:

(i) Measures of the extent of the Constitutional Protection Rights given to the citizens;
(ii) Extent of the Constitutional Protection of the independence of the Judiciary and rule of Law.

Conclusions
India, China and Pakistan have travelled more than five decades of developmental path with
varied results. Till the late 1970s, all of them were maintaining the same level of low
development. The last three decades have taken these countries to different levels.

INDIA
 Indian economy performed moderately, but majority of its people still depend on
agriculture.
 Infrastructure is lacking in many parts of the country.
 It is yet to raise the standard of living of more than one-fourth of its population that lives
below the poverty line.

PAKISTAN
 Political instability, over-dependence on remittances and foreign aid along with volatile
performance of agriculture sector are the reasons for the showdown of the Pakistan
economy.
 In the recent past, it is hoping to improve the situation by maintaining high rates of GDP
growth.
 It is also a great challenge for Pakistan to recover from the devastating earthquake in
2005, which took the lives of nearly 75,000 people and also resulted in enormous loss to
property.

CHINA
 In China, the lack of political freedom and its implications for human rights are major
concerns.
 However, in the last three decades, it used the ‘market system without losing political
commitment’ and succeeded in raising the level of growth along with alleviation of
property.
 China has used the market mechanism to create additional social and economic
opportunities.
 By retaining collective ownership of land and allowing individuals to cultivate lands,
China has ensured social security in rural areas.
 Public intervention in providing social infrastructure brought positive results in human
development indicators in China.

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