Indore Institute of law

Economics
BALLB III rd SEMESTER
Crash course
Synopsis
Unit I
Question.1 Describe the objects of Economic planning. Give your views on achievement
and failures of planning in India?

Answer
Economic development has been closely linked with planning. Planning has become a craze in
modern times, especially in under-developed and developing countries. The idea of planning
acquired a tremendous support after the end of World War II when advanced but disrupted
economies had to be rehabilitated and the underdeveloped economies were fired with the
ambition of rapid economic development. The idea of planning was not kindly taken up in some
countries by some people. It was perhaps due to the fact that planning came to be most actively
associated with socialist economies. Hatred of socialism was most actively transferred to
planning too. But such unreasoned opposition to planning has now almost vanished. Even in
capitalist countries, where the economy is governed and directed by market incentives, planning
are being practiced more or less in one or the other sector of the economy. About 20% of the
American economy may be considered as planned because to this extent current resources are
controlled and disposed of by the State. Although the distinction between planned and the
unplanned economy is there,yet planning has been universally accepted and the planned sector
is expanding almost everywhere. For the under developed countries, desirous of accelerating
development, planning is sine qua non of progress. As Robbin’s “Planning is the grand panacea
of our age” It is no longer a forbidden fruit.
Meaning of Planning:

The term “planning” is now so much in common use that it seems to be unnecessary to define it
or to explain its meaning. In fact, it is not possible to give it any precise or universally acceptable
definition. There is no unanimity among political thinkers and economists about the concept of
planning. As Raymond Burrows remarks, “Planning as a modern panacea is as perplexing to a
pedant as it is popular to a protagonist”.

Definition of Economic Planning :

degree of precision and acceptability to one and all. Hence different economists have defined
economic planning in a variety of ways by keeping in mind the goals to be achieved and the
techniques for achieving them. Apart from stating that planning is a method, a technique or a
means to an end, the end being the realization of clearly set targets, we discuss the number of
definitions which in their totality convey the full meaning and content of economic planning.

Mrs.Brbara Wooton defines it as “Economic planning is system in which the market

mechanism is deliberately manipulated with the object of producing a pattern other than which
would have resulted from its own spontaneous activity”.

Herman Levy defines it as “Economic planning means securing a better balance between
demand and supply by conscious and thoughtful control either of production
or distribution”.

Dr. Dalton says, “Economic planning in the widest sense is the deliberate direction by persons
in charge of large resources of economic activity towards chosen end”

Lewis Lorwin defines a planned economy “as a scheme of economic organization in which
individual and separate plants, enterprises and industries are treated as coordinate units of one
single system for purpose of utilizing all available resources to achieve for maximum satisfaction
of the people’s needs within a given time”

National Planning Commission of India- “Planning under a democratic system may be

defined as the technical co-ordination, by disinterested experts, of consumption, production ,
investment, trade and income distribution, in accordance with social objectives set by bodies
representative of the nation. Such planning is not only to be considered from the point of view of
economics and the raising of the standard of living but mist include cultural and spiritual and the
human side of life”.
H.D. Dickinson defines economic planning as below : “Economic Planning is the making of
major economic decisions what and how much is to be produced, how, when and where it is to
be produced, and to whom it is to be allocated by the comprehensive survey of the economic
system as whole”.
This is by far the most comprehensive definition as it describes the anatomy of planning. The
planning is done by central authority like state possessing the powers” for implementation. It is
to be preceded by a comprehensive survey of economic conditions which will point out the
defects and deficiencies of the prevailing economic system. After this survey, definite goals are
fixed. The manner and timing, quantitative aspects of achieving these goals are then outlined;
finally, the benefits accruing from such action are to be shared for the maximum satisfaction of
the largest number of people through deliberate decision, control and direction. To sum up,
planning comprises the following essential features:
1. Predetermined and well defied objectives or goals.
2. For economic planning deliberate control and direction of the economy by a central authority,
e.g., the state.
3. Optimum utilization of natural resources and capital which may be scarce and labour that
may be abundant.
4. The objectives are to be achieved within a given interval of time – 5 years, 7
years, etc.
5. The performance of the economic functions of increasing production, maximizing employment
and controlling population growth so that production
Out strips population growth.
Need For Planning in Underdeveloped Countries:
Planning is beneficial for both the developed and underdeveloped countries for the developed
countries to maintain or accelerate growth already achieved and for underdeveloped countries
to overcome poverty and to raise the standard of living. Unless the underdeveloped countries
wake up and follow the planning, they will be left far behind in the race of economic well-being.
The following arguments reveals an urgent need of planning in underdeveloped and developing
countries :

1. Remove the poverty and inequalities :

The economic vicious circle of poverty arising due to low income, low savings and high
propensity to consume, and further lower investment and low capital formation, low productivity,
low income and poverty must be broken and it can be done only by planning. Planning is like a
shot in the arm which enables a sick person to overcome 77 his sickness. Planning alone can
create more jobs and remove the wide spread unemployment and disguised unemployment
which is a common feature of underdeveloped countries. It is the sovereign remedy for raising
national and per capital income, for reducing inequities in income and wealth, for increasing
employment opportunities and for achieving as all round rapid economic development. It is
commonly said that the pendulum has swung too wide in favor of planning that is cannot swing
back against planning.

2. Development of Agriculture and Industrial Sector :

Planning alone can transform an agricultural and primary producing economy into a more
balanced economy with heavy, medium and light industries. Agriculture and industry stimulate
production in each other by creating demand for their products. Development of agriculture is
also essential to supply the raw material to the industrial sector. Economic planning held in
designing the plans of agricultural and industrial sectors of developing economies.
3. Development of Infrastructure :
Planning alone can help an underdeveloped economy to build up its infrastructure – irrigation
and power, transport and communication and schools and hospitals. The establishment of these
social economic overheads is essential for an all-round harmonious and integrated
development. The private enterprise is guided by profit motive and is not interested in these
items of social gain.
4.To increase the rate of Economic Development :
One of the principle objective of the planning in underdeveloped countries is to increase the rate
of economic development. In the words D.R.Gadgil “Planning for economic development implies
external direction or regulation of economic activity by the planning authority which in most
cases identify with the government of state.” It means planning increases the rate of capital
formation by raising the levels of income, saving and investment. It is only a central planning
authority which can control banking and other credit institutions when these are under private
enterprise they have a tendency to crowd in urban areas. The vast rural areas are completely
neglected and thrown to the wolves, the indigenous money-lender. A planned economy can
revolutionize the economy by providing financial institutions and by mobilizing savings and
investments 78 in the rural areas. Planning alone can remove the imbalance in foreign trade
which is generally unfavorable to the underdeveloped countries that are the exporters of primary
produce and imports of produced goods.
5. To improve and Strengthen Market Mechanism :
The rationale for planning arises in such countries to improve and strengthen the market
mechanism. The market mechanism works imperfectly in underdeveloped countries because of
the ignorance and unfamiliarity with it. A large part of the economy comprises the non monetized
sector. The product, factor, money and capital markets are not organized properly. The market
mechanism is required to be perfected in underdeveloped countries through planning.
6. Balanced Development of the Economy :
In the absence of sufficient enterprise and initiative, the planning authority is the only institution
for planning balanced development in the economy. For rapid economic development,
underdeveloped countries require the development of the agricultural and industrial sectors, the
establishment of social and economic overheads, the expansion of the domestic and foreign
trade sectors in a harmonious way. All this requires simultaneous investment in different sectors
which is only possible underdevelopment planning .
7. Development of Money and Capital Markets :
The expansion of the domestic and foreign trade requires not only the development of the
agricultural and industrial sectors along with social and economic overheads but also the
existence of financial institutions. Money and Capital market are underdeveloped countries are
primary stage. This factor acts as an obstacle to the growth of industries and trade. The
planning authority which can control and regulate the domestic and foreign trade in the best
interests of the economy

TYPES OF PLANNING :
There are various types of Economic Planning. There are so many types of plans as there are
patterns of economic systems. There are some plans which are functional, structural, Indicative,
Democratic and Decentralized planning, Physical planning, Regional and National Planning.
The following are the main types of economic planning.

Democratic Planning :

Individual Freedom is soul of democracy but central control is important in planning. Therefore
democracy and planning were different concepts, yet for the nation’s economic development
plan is implemented with co-operation of peoples. That we say that democratic planning is one
of important types of economic planning in democratic system of Government.In democratic
planning representatives of peoples control the economy.

Decentralized Planning :
In Decentralized planning, the central authority only fixes the overall targets of production and
investment, but considerable freedom is given to various bodies like State Government. On the
different levels like state level and district level they fix their own production targets within
national framework. There is freedom to fix the prices and wages. Such types of planning
prevail in Great Britain and France.In Decentralized planning, the planning authority may
endeavour to influence economic activities indirectly through incentives. Country like India
having conflicting interests and great differences in economic resources and backwardness of
the people,

Planning by Inducement
In this kind of Planning, there is no compulsion. The government uses persuasion to implement
certain schemes of projects and tries to influence investment decisions by offering incentives to
the entrepreneurs through fiscal and monetary policies. There is freedom for private enterprises
to produce and to consume with suitable controls. This kind of planning may exist in a
democratic set-up of a capitalist economy. Planning by inducement is also called flexible
planning.

Regional and National Planning:

A national plan is a plan for the country as a whole, whereas a regional plan comprehends a
particular region. In a vast country like India with a diversity of climate and physical resources,
regional planning, concerned primarily with the economic development of a region, becomes
inevitable. “Every country”, says Zewing, “whose area is large needs a high degree of regional
decentralization”. For each region a separate authority is set up for formulating and
implementing the regional plan. It is really decentralised panning as national planning
represents centralised planning. Even a regional plan must form an integral part of the national
plan and must be carried out within the framework of the overall plan and be in conformity with
its priorities

Functional Planning and Structural Planning

Planning may be attempted within the existing socioeconomic framework or it may seek to
change the economic structure radically. The former is known as functional planning and the
latter structural planning. Functional planning attempts to modify or improve the existing
structure or repair or rehabilitate it, if it is damaged of disrupted, e.g. Indian economy after the
partition. Functional planning assumes that planning is possible even in a capitalistic economy
whereas advocates of structural planning think that planning and capitalism are incompatible.
Quite respectable opinions have taken sides on this question. For instance Dr. Ludwig Von
Mises is of the view that “planning and capitalism are utterly incompatible” On the other hand,
Professor Landauer holds the opinion that planning and capitalism could be reconciled. We are
inclined to agree with the latter view and hold that even capitalist countries can have measure of
planning and benefit from its progress or eliminate serious imbalances in the economy.
Structural planning is therefore revolutionary, whereas functional planning is evolutionary.

Financial Planning:
The planning is also classified as Functional planning and physical planning. In financial
planning the allocation of resources and measurement of resources is made in terms of money.
Physical planning implies the allocation of resources in terms of men, material and machinery,
which we generally call the natural and human resources. In the first, finance is the key to
economic planning. If sufficient finances are not available, the physical targets of any plan may
be difficult to achieve. The outlay is fixed in terms of money and the estimates are made
regarding the growth of the national income arising out of this outlay in financial planning. The
finances are raised through taxation, savings and borrowings. In financial planning, a number of
balances are worked out.

Planning strategy
First year plan
Second year Plan
Third Year Plan
Fourth Year plan
Fifth year plan
Sixth year plan
Seventh year plan

Success of economic planning in India.

1. Increase in the national per capital income
2. Increases in saving and interest rate
3. Progress in Agriculture Area
4. Progress in Industrial sphere
5. .Increases in Electricity Production
6. Development and means of Transport and communication
7. Expansion Of Public sector
8. .Increases in Foreign Trade
Failure of Economic planning in India
1. Inequality in the distribution of money and Income
2. Increase in the centralization of Economic power
3. Slow progress in the income per capital
4. Increase in unemployment
5. Failure of the public sector
6. Increase in the dependence over the foreign aid
7. Defective Control policy
Suggestion to make the plans successful
1Mutual cooperation
2 Stability in prices
3 Public co- operations
4 Development of Technical knowledge
5 Political stability
6 Development of Non Agriculture Area in villages
7 Increases the efficiency of public sector
Conclusion
Question.2 Discuss the effect of globalizations on Indian Economy
Answer:
Indian economy had experienced major policy changes in early 1990s. The new economic
reform, popularly known as, Liberalization, Privatization and Globalization (LPG model)
aimed at making the Indian economy as fastest growing economy and globally competitive. The
series of reforms undertaken with respect to industrial sector, trade as well as financial sector
aimed at making the economy more efficient.
With the onset of reforms to liberalize the Indian economy in July of 1991, a new chapter has
dawned for India and her billion plus population. This period of economic transition has had a
tremendous impact on the overall economic development of almost all major sectors of the
economy, and its effects over the last decade can hardly be overlooked. Besides, it also marks the
advent of the real integration of the Indian economy into the global economy.
Globalization has many meanings depending on the context and on the person who is talking
about. Though the precise definition of globalization is still unavailable a few definitions are
worth viewing, Guy Brainbant: says that the process of globalization not only includes opening
up of world trade, development of advanced means of communication, internationalization of
financial markets, growing importance of MNCs, population migrations and more generally
increased mobility of persons, goods, capital, data and ideas but also infections, diseases and
pollution. The term globalization refers to the integration of economies of the world through
uninhibited trade and financial flows, as also through mutual exchange of technology and
knowledge. Ideally, it also contains free inter-country movement of labor. In context to India, this
implies opening up the economy to foreign direct investment by providing facilities to foreign
companies to invest in different fields of economic activity in India, removing constraints and
obstacles to the entry of MNCs in India, allowing Indian companies to enter into foreign
collaborations and also encouraging them to set up joint ventures abroad; carrying out massive
import liberalization programs by switching over from quantitative restrictions to tariffs and
import duties, therefore globalization has been identified with the policy reforms of 1991 in
India.
It means to open the Trade and Economy for the international players. In other words, every

manufacturer or producer of goods can compete for sale of their products without restrictions or

without any imposed control.

For example, think of a small village market or meal where all are free to come and sell their

products at their desired price, irrespective of places from where they come. There are no

restrictions on control on their products or the prices. This is the globalised trade. Any country

can participate to set up, acquire, merge industries, invest in equity and shares, sell their products

and services in India.

Therefore, globalization should not be considered in isolation, but should be considered in

totality with liberalization of the industrial policy towards lifting of trade control and restrictions,

influence of trade block and simultaneous privatization.

Global market treats the world as a single market. With the advent of information technology and

its strategic application, the world is focused as a global village and all traders are therefore

globalised.

The Earlier (pre 1990s) concept:

Before 1990s India followed a patch of restricted trade. Such restrictions were that certain

products would not be allowed to be imported as they were manufactured in India. For example,

General Engineering goods, Food items, toiletries, Agricultural products etc. were in the banned

list of import.

Some other kinds of products which were produced in restricted quantity in the country or are

expensive and categorized as luxuries were subjected to heavy import duty to make them costlier

in order to dissuade flow of foreign exchange and give protection to local producers. For

example, VCR, Music sets, Air-conditioners, Computers etc., these items were subject to 150%

import duty.
Globalization in India:

In the 1990s due to change in world economic order and due to heavy pressures from rich

countries like USA, Japan, European countries dominating the WTO (World Trade Organisation

having 135 members, established in 1995) and IMF (International Monetary Fund) and World

Bank engaged in development financing activities, the developing and the poor countries all over

the world were forced to open their trade and market and allow foreigners to share their major

chunk of a business. Thus, India first started the process of globalisation and liberalisation in

1991 under the Union Finance Minister, Shri Manmohan Singh.

The first 5 years in globalisation did not yield appreciable results. The coming of Multinational

cold drinks manufacturers like Coke, Pepsi, and others like Mc. Donald, KFC, Boomer Chewing

gums, Uncle Chips, Cornflakes only dominated the show. Due to further liberalization of trade

and the privatization, the late 1990s showed the effect to globalisation by the coming of giant car

manufacturers like Daewoo Motors, Ford, Honda, Hyundai which resulted in availability of

varieties of cars and reduction of domestic car prices.

Electronic giants like IBM and world leaders in the telecommunication sector like Ericsson,

Nokia, Aiwa etc., delivered wide range of quality products at affordable prices and brought a

major revolution in Indian electronic industries. In the power sector Enron, AES-CESCO are

dominating the show. The resultant effects were tremendous boost to industrial sector economy.

The price level came down due to cut throat competition and Indian consumers are so far happy.

Recently in May 2001, the Indian Government also opened the defence sector towards

globalisation and privatisation.

Globalisation, but for whose benefit?

Due to globalisation and liberalisation, the Indian market is flooded with quality foreign

products, affecting the Indian industries adversely. This has also resulted in the loss of jobs to

many poor workers. Toys, bicycles and motor bikes from China, soaps and toiletries from

Indonesia and Malaysia, cheese and fruits from Australia and many more await the Indian

consumers with the lifting of trade restrictions.

Globalisation has turned out to be a bonanza for consumers but a grave for Indian producers,

especially small-scale sectors, because of their age-old technology and financial bottlenecks to

update their machines and technology. The import of edible oils, grains at lower prices have

affected the Indian farmers heavily.

Now farming is no more profitable because of marginal remuneration. Indian manufacturers are

no longer able to compete with their global counterparts. The closing of industries and manpower

lay off have become very common.

Let us study the sector wise effects:

(1) Effect of Globalisation on Students and Education Sectors:

Due to globalisation, the availability of study books and information on the internet or the World

Wide Web (www) have increased tremendously. However, the exorbitant cost factors have made

higher and specialised education beyond the reach of poor and middle class students.

Hundreds of foreign universities have started collaborating with Indian universities and study

institutions. This has affected the course fees. For Engineering, Medical and Management

studies, the course fees are hovering around Rs.20 to Rs.50 lakhs. Intelligent students from

middle and poor class may have to settle for daily wages earning in future as they cannot afford

for the same.

(2) Effect on Health Sectors:

It is unbelievable that in India, poor people have to spend a minimum of Rs.200 for a mere

seasonal cold or minor stomach ailments, thanks to the multinationals pharmaceutical companies

engaged in sky rocketing cost of common medicines under their brand names.

The private sector hospitals like Apollo, Medicare will be only too happy to prepare a bill of Rs.5

lakh to Rs.10 lakh for heart or Kidney operation. The monitoring of health electronically through

the internet will worsen the situation further in the years to come. Death will be the easiest option

for poor following the effect of globalisation in health sector.

(3) Effect on Agricultural sector:

The globalisation of trade in the agricultural sector is perhaps proving to be a big blunder. The

farmers will have to pay a very heavy price, for better variety of imported seeds having

resistance to diseases, because of the patent rights imposed by WTO.

Over and above, the Indian farmer cannot export their products to rich countries because of

inferior technology and stringent quality parameters imposed by foreign consumers. The large

scale suicide by Indian farmers in Karnataka, Punjab and Haryana under the burden of heavy

loans is directly attributed to this.

The Indian agriculture is almost on its deathbed. The minimum cost of eatable rice is Rs.12 per

kg and apples from Australia at Rs. 100 to Rs.150 per kg cannot be afforded by poor.

(4) Effect on Employment sector:

The employment scenario in India is probably the worst in recent years due to globalization. The

restrictions of use of child labour and fair pay to workers have a badly affected the traditional

industries like cottage, handloom, artisans and carving, carpet, jewellery, ceramic, and glassware

etc., where the specialized skills inherited for generations were passed on to the next generation
from the early age of 6 to 7 years. The globalization and trade restrictions under the influence of

WTO have virtually killed business in these sectors.

Conclusion: (Positive aspects):

Though globalisation and liberalisation of trade have resulted in the availability of large number

of quality products at reasonable price, the overall economic benefits are negated due to the slow

death of small scale and traditional goods producing sectors employing a large population.

The rising cost of basic sustenance products like garments, footwear, cereals, edible oils, petrol
and kerosene, medicines and health care items, decrease in farm output, decrease in purchasing

power of poor are some of the alarming issues that have given rise to serious doubts about the

benefits of globalisation.

The increasing wide gap between the poor and the rich is a major cause of concern as ” will

attribute to the increase in crime rates, lawlessness, anti-national activities, terrorism, abduction,

black mailing etc. The globalisation process, that enables investment of foreign money, may turn

out to be a serious ‘debt rap’ in future as was experienced in Indonesia, Brazil, Korea and some

other countries.

Moreover, for a common man, the globalisation is of no meaning. He wants a secured source in

terms of earning money, maintains his livelihood, has reasonable savings and appreciates a

trouble free life. Therefore, globalisation may only add to the India’s woes.

Conclusion: (Positive aspects):

The biggest contribution of globalisation is in the field of quality and development of products

with various features to suit the Indians. There are varieties of semi-processed food products to

suit every taste in the market which has helped us to save time. Globalisation has contributed

tremendously to have access to important information towards quality education Due to

globalisation; the communication sector has got a tremendous boost.

We have now cell phones; internet and the availability of latest drugs are helping to save

valuable lives along with good doctors sitting across the Web to advice. Due to globalisation, the

car manufacturer like Maruti is not able to take us as for ride.

Now, wide choices are available to select electronic goods. Life is more comfortable with

cheaper air conditioners. Most importantly, the unscrupulous Indian manufacturers are not able

to take us for a ride. Thanks to globalization, we are able to dream to send a man to the moon due

to a better economy and technological competence.

Obstacles to Globalization

1. Government policy and procedures

2. High cost

3. Poor Infrastructure

4. Obsolescence

5. Resistance to change

6. Poor quality Images

7. Supply Problems

8. Small size

9. Lack of experience

10. Growing competition

11. Trade barriers

Factors favoring Globalization

1. Human resources

2. Wide base

3. Growing Entrepreneurship

4. Growing domestic Market

5. Niche Markets

6. Expanding Market

7. Transnationalisation of world Economy

8. NRIS

9. Economic Liberalization

10. Competition

Conclusion

Short note:

New Economic Policy in 1991

The main characteristics of new Economic Policy 1991 are:
1. Delicencing. Only six industries were kept under licensing scheme.
2. Entry to Private Sector. The role of public sector was limited only to four industries; rest all
the industries were opened for private sector also.

3. Disinvestment. Disinvestment was carried out in many public sector enterprises.

4. Liberalization of Foreign Policy. The limit of foreign equity was raised to 100% in many

activities, i.e., NRI and foreign investors were permitted to invest in Indian companies.

5. Liberalization in Technical Area. Automatic permission was given to Indian companies for

signing technology agreements with foreign companies.

6. Setting up of Foreign Investment Promotion Board (FIPB). This board was set up to promote

and bring foreign investment in India.

7. Setting up of Small Scale Industries. Various benefits were offered to small scale industries.

Impact of Changes in Economic Policy on the Business or Effects of Liberalization and

Globalization:

The factors and forces of business environment have lot of influence over the business. The

common influence and impact of such changes in business and industry are explained below:

1. Increasing Competition:

After the new policy, Indian companies had to face all round competition which means
competition from the internal market and the competition from the MNCs. The companies which

could adopt latest technology and which were having large number of resources could only

survive and face the competition. Many companies could not face the competition and had to

leave the market.

For example, Weston Company which was a leader in Т. V. market with more than 38% share in

T.V. market lost its control over the market because of all round competition from MNCs. By

1995-96, the company almost became unknown in the T.V market.

2. More Demanding Customers:

Prior to new economic policy there were very few industries or production units. As a result

there was shortage of product in every sector. Because of this shortage the market was producer-

oriented, i.e., producers became key persons in the market. But after new economic policy many

more businessmen joined the production line and various foreign companies also established

their production units in India.

As a result there was surplus of products in every sector. This shift from shortage to surplus

brought another shift in the market, i.e., producer market to buyer market. The market became

customer- oriented and many new schemes were made by companies to attract the customer.

Nowadays products are produced/manufactured keeping in mind the demands of the customer.

3. Rapidly Changing Technological Environment:

Before or prior to new economic policy there was a small internal competition only. But after the

new economic policy the world class competition started and to stand this global competition the

companies need to adopt the world class technology.

To adopt and implement the world class technology the investment in R & D department has to

increase. Many pharmaceutical companies increased their investment in R and D department

from 2% to 12% and companies started spending a large amount for training the employees.

4. Necessity for Change:

Prior to 1991 business enterprises could follow stable policies for a long period of time but after

1991 the business enterprises have to modify their policies and operations from time to time.

5. Need for Developing Human Resources:

Before 1991 Indian enterprises were managed by inadequately trained personnel’s. New market

conditions require people with higher competence skill and training. Hence Indian companies

felt the need to develop their human skills.

6. Market Orientation:

Earlier firms were following selling concept, i.e., produce first and then go to market but now

companies follow marketing concept, i.e., planning production on the basis of market research,

need and want of customer.

7. Loss of Budgetary Support to Public Sector:

Prior to 1991 all the losses of Public sector were used to be made good by government by

sanctioning special funds from budgets. But today the public sectors have to survive and grow by

utilizing their resources efficiently otherwise these enterprises have to face disinvestment. On the

whole the policies of Liberalisation, Globalisation and Privatisation have brought positive

impacts on Indian business and industry. They have become more customer focus and have

started giving importance to customer satisfaction.

8. Export a Matter of Survival:

The Indian businessman was facing global competition and the new trade policy made the

external trade very liberal. As a result to earn more foreign exchange many Indian companies

joined the export business and got lot of success in that. Many companies increased their

turnover more than double by starting export division. For example, the Reliance Company,

Videocon, MRF, Ceat Tires, etc. got a great hold in the export market.

3 Question: explain the meaning of regional disparity. What are causes of

regional disparities in Indian economy?

Ans : Regional imbalances in a country may be natural due to unequal distribution of natural
resources and/or man-made in the sense of neglect of some regions and preference for others for
investment and infrastructural facilities. In India, apart from uneven distribution of geographical
advantages, historical factors have also contributed to regional inequities.

India’s successive Five Year Plans have stressed the need to develop backward regions of the
country. In promoting regional balanced development, public sector enterprises were located in
backward areas of the country during the early phase of economic planning. In spite of pro-
backward areas policies and programmers, considerable economic and social inequalities exist
among different States of India, as reflected in differences in per capita State Domestic Product.
While income growth performance has diverged, there is welcome evidence of some
convergence in education and health indicators across the states.

Extend of inequalities:

1. Studies during the first two decades of the planning period

2. Studies during 17th and 18th centuries
3. Studies of income inequalities

Causes of inequalities
1. Private ownership of property
2. Inequalities in professional training
3. Inheritance of law
4. Difference in natural qualities
5. Social stratification
6. Increasing unemployment
7. Inflation and price rise
8. Credit policy of banks and financial corporation
9. Absence of social security
10. Dualism
11. Concentration of economic power
12. Defect of income tax net
13. Tax evasion
14. Poverty
15. Inadequate development
16. Inequality distribution of the means of production
17. Capital intensive technology
18. Low productivity

Measure to reduce economic inequalities

1 land reform and redistribution of agriculture land.
2. Control over monopolies and restrictive trade practices
3. Employment and wage policies
4. Minimum needs programmed
5. Programmes for the uplift of the rural poor
6. Taxation
7. Social security measure
8. Backward Area
9. Price policy
10. Population control
11. Labour intensive technique
Conclusion
 Unit II
4. What do you understand by human capital formation? Explain its
importance in economic development?

Or

What is capital formation? Why the rate of capital formation is is low in

India?

Ans. Meaning
Capital includes all forms of reproductive goods as physical plants and stock of equipments
construction and producers inventories of raw material and semi finished and finished goods that
are used directly or indirectly in the production of a large volume of output of production. Thus
capital is the reproducible wealth used for the purpose of production. Capital is the major
determinant of economic growth.

Definitions

Measurement of capital formation

1. Accumulation of fund
2. Calculate the revenue and expenditure
3. Estimate of capital assets
4. Commodity flow approach

Role of capital formation

1. Rapid growth of capital formation
2. Investment opportunity are likely to fast
3. Technical process
4. Saving process
5. Capital accumulation
6. Create employment
7. Welfare policy

Reasons for low rate of capital formation in India.

1. Low Income
2. Demographic reasons
3. Low productivity
4. Unproductive expenditure pattern
5. Inequalities in income distribution
6. Small size of the market
7. Lack of capital equipment
8. Lack of enterprises
9. Lack of financial institute
10. Technological backwardness
11. High level of taxation
12. Social security’s measure
13. Demonstration effect
14. The threat of nationalization
15. The public sector
16. Inflationary situation
17. Availability of cheap labour
18. High rates of interest
19. Unfavorable laws

Sources of mobilization of savings for capital formation in India

1. Household saving
1 peasant classes
2. The middle class
3. Land owing classes
4. Profit earning classes
2 saving of the corporate sector
3 saving of the public sector
1 Taxation
2. Public Borrowing
3. Profit from public enterprises
4. Deficit Financing

4 Government measure to promote capital formation

5. Human capital formation in India

Conclusion

Que.6 State the cause of economic backwardness with reference to India and describe the
determinants of economic development?

Ans.
Economic backwardness is the simplest to define. If income does not suffice to meet the
basic needs Social backwardness is people belonging to a certain group are considered to be
inferior to other groups. This ultimately results in economic backwardness as because of
this prejudice the group is denied opportunities and face unequal treatment in all walks of
life.
Economic backwardness is what the Govt defines it. People who live below a certain
income level are economically backward. Earlier, those below 2.5lacs per annum were
considered economically backward of society. Now people above 4.5 lacs are considered
cream of society. That is those below 4.5 lacs per annum are to be considered
as economically backward.

Some causes of economic backwardness:

A. UNEMPLOYMENT

1. THE MARKET WAGE RATE PROCESS

2. THE LABOR UNION WAGE RATE CONCEPT
3. THE CAUSE OF UNEMPLOYMENT
4. THE REMEDY FOR MASS UNEMPLOYMENT
5. THE EFFECTS OF GOVERNMENT INTERVENTION
6. THE PROCESS OF PROGRESS
B. PRICE DECLINES AND PRICE SUPPORTS

1. THE SUBSIDIZATION OF SURPLUSES

2. THE NEED FOR READJUSTMENTS
C. TAX POLICY

1. THE ANTI-CAPITALISTIC MENTALITY

D. GOLD PRODUCTION

1. THE DECLINE IN PRICES

2. INFLATION AS A “REMEDIES”

Obstacles to Economic Development

Problems such as poverty, inequality, unemployment, and the lack of rural development are the
result of economic, political, and social forces, both internal and external, which limit economic
development. This section identifies some of the most significant economic, political, and social
obstacles to development and the next section provides policy options to address them.

1. Poverty cycle:
Low incomes --> Low savings --> Low investment --> Low productivity --> low income..
 Absolute poverty: inability to just meet basic physical human necessities/needs of food/nutrition,
clothing, health and shelter in order to survive
 because this is so difficult to measure accurately, many researchers simply estimate that 20% of
the world’s population falls below this line
 UNDP reports that most live in 10 countries, with the proportions falling below the poverty line
in brackets: Bangladesh (80%), Ethiopia (60%), Vietnam (55%), Philippines (54%), Brazil
(49%), India (40%), Nigeria (40%), Pakistan (29%), Indonesia (24%) and China (10%)
 A characteristic of most LEDCs is the unequal distribution of income
 what is interesting is the middle income LEDCs appear to have greater income inequality than
very poor or high income countries

2. Economic obstacle:
Although they are often linked, economic obstacles can be divided into those which are largely
the result of domestic policies (internal) and those which are related to the structure of the
international economy (external).
A). Internal Obstacles
There are five main internal obstacles to economic development: underdeveloped financial
systems, the lack of economic freedom, macroeconomic instability, and an underdeveloped
infrastructure.

Underdeveloped Financial Systems

Lack of Economic Freedom

Macroeconomic Instability

Balance of payments.

Infrastructure

B). External Obstacles:

External obstacles also limit economic development. In contrast to developed countries,

developing countries are very vulnerable to fluctuations in the global economy. For example.
Africa's economic growth slowed in 2001 as a global economic slowdown impacted both aid and
foreign direct investment in the region. This situation is the result of the following factors:
dependence on exports of primary products, unequal terms of trade, changes in export
demand, and dependence on external funding.

Dependence on Primary Product Exports

Unequal Terms of Trade

 Changes in Export Demand

Dependence on External Funding

Since most developing countries rely heavily on exports to generate governmental income and
repay loans, a reduction in exports reduces government revenue. Consequently, the government
either has to cut expenditures or run a budget deficit. Both hurt the poor and limit economic
development. If the government takes out a loan to finance a deficit, it will have divert scarce
funds to pay back the loans—reducing the amount of money available for schools, health care,
investment, and so forth. In other words, internal and external economic obstacles are
connected.

3. Political obstacles:
In developing countries, political obstacles have a much larger impact on economic development
than economic obstacles. This is because economic policies are created and implemented by
politicians. Political obstacles include underdeveloped institutions and too much government
intervention in the economy.
Political instability
 Important to attract FDI
 Important that the next government assume the debt obligations of outgoing government
 Rule by the will of the people OR for the government in power - who is the government working
for?

4. Underdeveloped Institutions:
In most developing countries, governmental institutions are either absent, inefficient, or
extremely weak. Even in countries with the requisite institutions, incompetent and/or unqualified
civil servants, burdensome bureaucratic procedures, resistance to change, inept management,
departmental rivalries, and pervasive cronyism greatly limit the government's effectiveness.
Poor governance has three main consequences:
1. Unstable economic and political policies
2. Creates obstacles to economic growth
3. Fosters corruption

5. Social obstacles:
Social and cultural factors acting as barriers

 religion
 culture
 tradition
 gender issues
 Periods of economic growth are associated with structural transformation and social and
ideological changes. In the past, 1/3 of growth came from population increases and 2/3s from
productivity increases
 Productivity increased due to technological change in terms of capital and human skills,
encouraging research and development which led to further growth
 The rise in income led to increased consumption:
 Demand for income elastic industrial products rose quickly
 Demand for income inelastic agricultural goods grew only slowly
 This led to a rapid rural-urban shift which often destroyed traditional values

While not primary obstacles to economic development, social obstacles can also slow economic
growth and limit economic development. Three of the most important obstacles are population
growth, lack of access to education and environmental devastation.

6. Population Growth:
As noted in the Population Section 80 percent of the world's population lives in the developing
world (i.e. the part of the world with the least amount of resources). In many developing
countries, the population is growing faster than the ability of society to provide the education and
skills necessary to improve economic growth. In addition, a rapidly growing population lowers
per capita income growth, especially for those who are already poor, live in rural areas, and
depend on agriculture.

7. Lack of Access to Education:

Since human resources ultimately determine the character and pace of economic development, a
poorly educated workforce limits increases in productivity and competitiveness, thus slowing
economic growth. There are two major factors which limit educational access: poverty and a
rapidly expanding population. The former prevents poor families from sending their children to
school and the latter dilutes educational expenditures, diminishing their effectiveness.

8. Environmental Devastation:

In traditional economic growth models, the cost of destroying the natural resources base was not
included in GDP figures. However, as a result of increasing environmental degradation and
declining economic growth rates in developing countries, more attention has been directed to the
links between environmental issues and development. Damage to water supplies, land, and
forests slows economic development by increasing health related costs, reducing agricultural
productivity, and increasing the income gap between rich and poor. In other words, the
destruction of environmental resources lessens developmental potential.

9 .Macroeconomic Instability:

As a result of ineffective government policies and/or changes in the international economy,

macro-economic instability has a devastating effect on economic development. Inflation leads to
demands for wage increases that in turn can foster industrial unrest, slowing economic growth
and investment.
Macroeconomic stabilization polices typically include three features:
1. Limiting inflation
2. Restoring fiscal balance through reduced government expenditures, raising personal and
business taxes, and reforming the financial system
3. Eliminating the current-account deficit by devaluing the currency exchange rate and
promoting exports.

10. Poor Governance:

Economic development is greatly affected by the quality of government. A country without a
government that has an open policy-making process, an effective bureaucracy, published rules,
and a transparent regulatory structure will limit economic development. (This link sends you to
another section in this course. Use the browser Back button to return)

11. Population Growth:

Economic development begins with the individual. In many parts of the world, the population is
growing at rates that make it difficult to provide the population with the education and skills
necessary to improve economic output. To overcome this situation, governments need to limit
population growth.

12. Restrictions on trade and investment:

Rules and regulations, both official and unofficial, have a significant impact on economic
development.

Because many developing countries do not have the requisite resources to foster economic
growth, both domestic and international investment and trade are necessary for economic
development. The flow of capital and goods in and out of countries improves living standards
and helps expand local businesses.

13. Lack of the rule of law:

Research shows economic development is strongly affected by the quality of legal institutions.
The rule of law creates a predictable and secure environment for people to produce, trade, and
invest. This expands employment opportunities and incomes.

14. Educational Impediments:

It is generally accepted that the human resources of a country, not its physical capital or natural
resources, ultimately determine the character and pace of economic development. Therefore, a
poorly educated and trained workforce limits increases in productivity and competitiveness,
slowing

15. Environmental Devastation:

In the traditional economic growth model, the cost of destroying the natural resources base was
not included in GDP figures. However in recent years, experts have become increasingly aware
of links between environmental issues and economic development. Environmental degradation
slows economic development by weakening self-sufficiency, increasing health related costs,
reducing agricultural productivity, and increasing the gap between rich and poor. In addition to
these costs, the destruction of resources lessens future growth potential.
 16. Ineffective taxation structure:
 Taxation is often a difficult problem in LEDCs:
 In many countries very little tax revenue is collected and government is forced to raise revenue
by printing money or imposing export tariffs which inevitably reduces the incomes of rural
people because most LEDCs export raw materials and agricultural products
 A proper income tax system can provide the revenue for govt. and reduce inequality by making
the wealthy pay a fair share for running the country
17. Lack of property rights:
 And rule of law in general, including reasonable, predictable contract enforcement
 No clear title to real property (land, houses) and high-value assets
 Inheritance of property often cloudy
 Capital gains from sales often subject to negotiation, thus not predictable
19.Corruption:
 an issue worldwide; many different forms; some quite subtle in nature
 most involving bribes for getting imports into a country or in bidding on government contracts
 Transparency International
19. Unequal distribution of income:
 Redistribution of assets often does not happen or does not happen fairly (transparently)
 If the most important cause of inequality is an unequal distribution of land, natural resources and
capital, attempts must be made to redistribute at least some natural resources such as land
 Land reform can often lead to a dramatic increase in farm productivity and incomes for the rural
poor
 Children of the elite have greater access to education and to the best jobs:
 Policies to open access to education for the poor, to reduce absenteeism and improve the quality
of education can lead to great increases in productivity
 Gini coefficient/Lorenz Curve
20.Formal and informal markets:
 Percentage of population engaged in a money economy v. subsistence/barter economy
 The less informal markets operating, the more grasp on the macro economy the government has
21.Lack of infrastructure:
 Important to attract FDI
 Key to allow access to markets, schools, hospitals, wider world (even if just the capital
city/urban area) Rescheduling & Restructuring
 Market mechanisms: supply side measures increase output and investment
 Lower inflation which stabilizes the exchange rate and creates enough confidence that the elite
repatriate money lost through capital flight
 Domestic interest rates fall leading to greater domestic investment and an improvement in the
economy
 Restructuring simply extends the length of the repayment problem, it does not eliminate the
debt:


22. External Obstacles:

 External obstacles also limit economic development. Since many developing countries rely
heavily on export tariffs to generate governmental income, a reduction in exports reduces
government revenue. As a consequence, the government will either have to cut expenditures or
run a budget deficit. Both hurt the poor. If the government takes out loans to finance a deficit, it
will have divert scarce funds to pay back the loans—reducing the amount of money available for
schools, health care, investment, and so forth. A large deficit also fuels the demand for imports
(because goods are not being produced domestically), causes a current account deficit, and
worsens the country’s current balance of payments.

A) International trade barriers

 Overdependence on primary products
 Consequences of adverse terms of trade
 Consequences of a narrow range of exports
 Protectionism in international trade

B) International finance & indebtedness

 Economic development has been promoted since 1960 as the best route for LEDCs to follow,
justifying borrowing from banks to spend on projects:
 The risky nature of lending to LEDCs requires: higher interest rates, much more expensive than
the rate charged by the World Bank or aid agencies
 Stock of debt: the ratio of debts to exports has averaged 125% to 150%
 Debt servicing flow: includes interest payments and repayments of principal, and often exceeds
40% of exports for certain poorer LEDCs

C) Poor project evaluation

 MEDC banks were only interested in securing loans through government guarantees, there was
little checking of the projects the money was to be used for
 Much of the borrowed money had been wasted on military arms or projects which did not have
any hope of paying interest on the debt or ever repaying the principal
 Many LEDCs printed money to cover the deficits which led to extremely high rates of inflation
in some countries

Que.7 Explain fully the importance of Human resources development with special
reference to industrial development in public sector of India?
 Ans: The part of human resource management that specifically deals with training and
development of the employees. Human resource development includes training an individual
after he/she is first hired, providing opportunities to learn new skills, distributing resources that
are beneficial for the employee's tasks, and any other developmental activities.

Definitions of HRD:

1. According to South Pacific Commission ‘human resource development is equipping people

with relevant skills to have a healthy and satisfying life’.

2. According to Watkins, ‘human resource development is fostering long-term work related

learning capacity at individual, group and organizational level’.

3. The American Society for Training and Development defines HRD as follows: ‘human
resource development is the process of increasing the capacity of the human resource through
development. It is thus the process of adding value to individuals, teams or an organization as a
human system’.

Why Human Development?

1. Human development is the end while economic growth is only a means to this end

2. Human development is a means to higher productivity

3. It helps in lowering the family size by slowing human reproduction

4. Human development is good for physical environment

5. Human development and reduce poverty contributes to a healthy civil society

increased democracy and greater social stability

Features of HRD:

1. Systematic approach:

HRD is a systematic and planned approach through which the efficiency of employees is
improved. The future goals and objectives are set by the entire organization, which are well
planned at individual and organizational levels.
2. Continuous process:

HRD is a continuous process for the development of all types of skills of employees such as
technical, managerial, behavioural, and conceptual. Till the retirement of an employee
sharpening of all these skills is required.

3. Multi-disciplinary subject:

HRD is a Multi-disciplinary subject which draws inputs from behavioural science, engineering,
commerce, management, economics, medicine, etc.

4. All-pervasive:

HRD is an essential subject everywhere, be it a manufacturing organization or service sector

industry.

5. Techniques:

HRD embodies with techniques and processes such as performance appraisal, training,
management development, career planning, counselling, workers’ participation and quality
circles.

Scope of HRD:

Human resource management (HRM) deals with procurement, development, compensation,

maintenance and utilization of human resources. HRD deals with efficient utilization of human
resources and it is a part of HRM.

Human resource being a systematic process for bringing the desired changes in the
behaviour of employees involves the following areas:

1. Recruitment and selection of employees for meeting the present and future requirements of an
organization.

2. Performance appraisal of the employees in order to understand their capabilities and

improving them through additional training.

3. Offering the employees’ performance counselling and performance interviews from the
superiors.

4. Career planning and development programmes for the employees.

5. Development of employees through succession planning.

6. Workers’ participation and formation of quality circles.

7. Employee learning through group dynamics and empowerment.

8. Learning through job rotation and job enrichment.

9. Learning through social and religious interactions and programmes.

10. Development of employees through managerial and behavioral skills.

Objectives of HRD:

The prime objective of human resource development is to facilitate an organizational

environment in which the people come first. The other objectives of HRD are as follows:

1. Equity:

Recognizing every employee at par irrespective of caste, creed, religion and language, can create
a very good environment in an organization. HRD must ensure that the organization creates a
culture and provides equal opportunities to all employees in matters of career planning,
promotion, quality of work life, training and development.

2. Employability:

Employability means the ability, skills, and competencies of an individual to seek gainful
employment anywhere. So, HRD should aim at improving the skills of employees in order to
motivate them to work with effectiveness.

3. Adaptability:

Continuous training that develops the professional skills of employees plays an important role in
HRD. This can help the employees to adapt themselves to organizational change that takes place
on a continuous basis.

Essential components of human development

1Equity

2Sustainability

3Productivity

4 Empowerment
HRD Functions:

HRD functions include the following:

1. Employee training and development,

2. Career planning and development,

3. Succession planning,

4. Performance appraisal,

5. Employee’s participation in management,

6. Quality circles,

7. Organization change and organization development.

 Human Development Index

 Gender related Index
 Gender Empowerment Measure
 Human Poverty Index

Link between Economics growth and human development

1. Provision of remunerative employment to people

2. More equitable distribution of income and economic opportunities

3. Access to productive assets

4. Investment in the education health and skills of the people

5. Gender equality

6. Population Policy

Recasting planning in Term of human development

1. The plans would start with a human balance sheet

2. Plan target would first be expressed in term of basic human needs and only later
translated in to physical targets for production and consumption
 3. Recasting to plan of human development requires placing equal on production and
distribution objectives

4. If human being are to be declared the ultimate objectives of economic planning, adequate
steps are required to ensure their full participant in planning.

5. A comprehensive set of social and human development indicators needs to be evolved to

monitor plan progress

Conclusion

Unit III

Que.8 Explain the present population policy in connection with population control in
India?

Ans.

Introduction: Meaning and definition

1. Present policy (present policy of population in India)

2. Size of population

3. Growth rate of population

4. Sex composition of population

5. Density of population

6. Literacy rate

2. Causes for population Explosion

A. High birth rate

B. Relatively low rate.

C. Immigration

Causes of the decline in the mortality rate:

1. Control of epidemics
2. Elimination of famines

3. Decline in the incidence of malaria and tuberculosis

4. Supplies of pure drinking water

5. Improved sanitary conditions

6. Improved sanitary condition

7. Improvement in transport and communication

8. Spread of education and expanded medical facilities

Causes of high birthrate in India

Economic Factor

1. Poverty

2. Predominance of agriculture

3. Slow urbanization

Social Factor

1. Universal Marriage Lower age of the time of marriage

2. Joint Family System

3. Illiteracy and ignorance

III Religious Superstitions

IV Other Factors

1. Tropical Conditions

2. The Improvement in health facilities

Demographic Features of India

Sex Composition of population

Age Composition
 Life Expectancy

Literacy Rate

Urbanization

Occupational Structure

1. Primary Sector

2. Secondary Sector

3. Tertiary Sector

Population Growth and economic development

1. Population and per capital Income

2. Population and the per capital availability of the essential commodities

3. Population and the burden of unproductive consum

Effects of Growing Population

Population Policy in India

Family planning and five year plan

Causes of the failure of population control in India

Suggestions to boost the family planning programme

Conclusion

Que.9 What is monetary policy? Discuss its objectives in detail.

Ans. Monetary policy is concerned with the measures taken to regulate the supply of money,
the cost and availability of credit in the economy. Further, it also deals with the distribution of
credit between uses and users and also with both the lending and borrowing rates of interest
of the banks. In developed countries the monetary policy has been usefully used for
overcoming depression and inflation as an anti-cyclical policy.However, in developing
countries it has to play a significant role in promoting economic growth. As Prof. R. Prebisch
writes, “The time has come to formulate a monetary policy which meets the requirements of
 economic development, which fits into its framework perfectly.” Further, along with
encouraging economic growth, the monetary policy has also to ensure price stability,
because the excessive inflation not only has adverse distribution effect but hinders
economic development also.

It is important to understand the distinction between objectives or goals, targets and instru
ments of monetary policy. Whereas goals of monetary policy refer to its objectives which, as
men tioned above, may be price stability, full employment or economic growth, targets refer
to the variables such as supply of money or bank credit, interest rates which are sought to
be changed through the instruments of monetary policy so as to attain these objectives.

The various instru ments of monetary policy are changes in the supply of currency,
variations in bank rates and other interest rates, open market operations, selective credit
controls, and variations in reserve require ments. We shall first explain below the objectives
or goals of monetary policy in a developing economy with special reference to those
adopted by Reserve Bank of India.

After having explained the objectives we shall explain role of monetary policy in promoting
economic growth in a developing country like India. In the end we will explain monetary
policy of reserve Bank of India in different periods of planned development, especially soft
interest and liberal credit policy adopted by Reserve Bank of India since 1996.

Monetary policy refers to the credit control measures adopted by the central bank of a country.
Johnson defines monetary policy “as policy employing central bank’s control of the supply
of money as an instrument for achieving the objectives of general economic policy.” G.K.
Shaw defines it as “any conscious action undertaken by the monetary authorities to change
the quantity, availability or cost of money.”

Objectives or Goals of Monetary Policy:

The following are the principal objectives of monetary policy:

1. Full Employment:

Full employment has been ranked among the foremost objectives of monetary policy. It is an

important goal not only because unemployment leads to wastage of potential output, but also

because of the loss of social standing and self-respect.

2. Price Stability:

One of the policy objectives of monetary policy is to stabilise the price level. Both economists

and laymen favour this policy because fluctuations in prices bring uncertainty and instability to

the economy.

3. Economic Growth:

One of the most important objectives of monetary policy in recent years has been the rapid

economic growth of an economy. Economic growth is defined as “the process whereby the real

per capita income of a country increases over a long period of time.”

4. Balance of Payments:

Another objective of monetary policy since the 1950s has been to maintain equilibrium in the

balance of payments.

Instruments of Monetary Policy:

The instruments of monetary policy are of two types: first, quantitative, general or indirect; and

second, qualitative, selective or direct. They affect the level of aggregate demand through the

supply of money, cost of money and availability of credit. Of the two types of instruments, the

first category includes bank rate variations, open market operations and changing reserve

requirements. They are meant to regulate the overall level of credit in the economy through

commercial banks. The selective credit controls aim at controlling specific types of credit. They

include changing margin requirements and regulation of consumer credit. We discuss them as

under:

Bank Rate Policy:

The bank rate is the minimum lending rate of the central bank at which it rediscounts first class

bills of exchange and government securities held by the commercial banks. When the central
bank finds that inflationary pressures have started emerging within the economy, it raises the

bank rate. Borrowing from the central bank becomes costly and commercial banks borrow less

from it.

The commercial banks, in turn, raise their lending rates to the business community and

borrowers borrow less from the commercial banks. There is contraction of credit and prices are

checked from rising further. On the contrary, when prices are depressed, the central bank lowers

the bank rate.

It is cheap to borrow from the central bank on the part of commercial banks. The latter also lower

their lending rates. Businessmen are encouraged to borrow more. Investment is encouraged.

Output, employment, income and demand start rising and the downward movement of prices is

checked.

Open Market Operations:

Open market operations refer to sale and purchase of securities in the money market by the

central bank. When prices are rising and there is need to control them, the central bank sells

securities. The reserves of commercial banks are reduced and they are not in a position to lend

more to the business community.

Further investment is discouraged and the rise in prices is checked. Contrariwise, when

recessionary forces start in the economy, the central bank buys securities. The reserves of

commercial banks are raised. They lend more. Investment, output, employment, income and

demand rise and fall in price is checked.

Changes in Reserve Ratios:

This weapon was suggested by Keynes in his Treatise on Money and the USA was the first to

adopt it as a monetary device. Every bank is required by law to keep a certain percentage of its
total deposits in the form of a reserve fund in its vaults and also a certain percentage with the

central bank.

When prices are rising, the central bank raises the reserve ratio. Banks are required to keep more

with the central bank. Their reserves are reduced and they lend less. The volume of investment,

output and employment are adversely affected. In the opposite case, when the reserve ratio is

lowered, the reserves of commercial banks are raised. They lend more and the economic activity

is favorably affected.

Selective Credit Controls:

Selective credit controls are used to influence specific types of credit for particular purposes.

They usually take the form of changing margin requirements to control speculative activities

within the economy. When there is brisk speculative activity in the economy or in particular

sectors in certain commodities and prices start rising, the central bank raises the margin

requirement on them.

The result is that the borrowers are given less money in loans against specified securities. For

instance, raising the margin requirement to 60% means that the pledger of securities of the value

of Rs 10,000 will be given 40% of their value, i.e. Rs 4,000 as loan. In case of recession in a

particular sector, the central bank encourages borrowing by lowering margin requirements.

Conclusion:

For an effective anti-cyclical monetary policy, bank rate, open market operations, reserve ratio

and selective control measures are required to be adopted simultaneously. But it has been

accepted by all monetary theorists that (i) the success of monetary policy is nil in a depression

when business confidence is at its lowest ebb; and (ii) it is successful against inflation. The

monetarists contend that as against fiscal policy, monetary policy possesses greater flexibility

and it can be implemented rapidly.

Question:10 Explain the various function of Reserve Bank?

Answer

Meaning : The RBI was established in 1935. It was nationalised in 1949. The RBI plays role of
regulator of the banking system in India. The Banking Regulation Act 1949 and the RBI Act
1953 has given the RBI the power to regulate the banking system.
The RBI has different functions in different roles. Below, we share and discuss some of the
functions of the RBI.

RBI is the Regulator of Financial System

The RBI regulates the Indian banking and financial system by issuing broad guidelines and
instructions. The objectives of these regulations include:
 Controlling money supply in the system,
 Monitoring different key indicators like GDP and inflation,
 Maintaining people’s confidence in the banking and financial system, and
 Providing different tools for customers’ help, such as acting as the “Banking
Ombudsman.

RBI is the Issuer of Monetary Policy

The RBI formulates monetary policy twice a year. It reviews the policy every quarter as well. The
main objectives of monitoring monetary policy are:
 Inflation control
 Control on bank credit
 Interest rate control

The tools used for implementation of the objectives of monetary policy are:
 Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR),
 Open market operations,
 Different Rates such as repo rate, reverse repo rate, and bank rate.

RBI is the Issuer of Currency

Section 22 of the RBI Act gives authority to the RBI to issue currency notes. The RBI also
takes action to control circulation of fake currency.

RBI is the Controller and Supervisor of Banking Systems

The RBI has been assigned the role of controlling and supervising the bank system in India.
The RBI is responsible for controlling the overall operations of all banks in India. These
banks may be:
 Public sector banks
 Private sector banks
 Foreign banks
 Co-operative banks, or
 Regional rural banks

The control and supervisory roles of the Reserve Bank of India is done through the
following:
 Issue Of License: Under the Banking Regulation Act 1949, the RBI has been given
powers to grant licenses to commence new banking operations. The RBI also grants
licenses to open new branches for existing banks. Under the licensing policy, the RBI
provides banking services in areas that do not have this facility.
 Prudential Norms: The RBI issues guidelines for credit control and management. The
RBI is a member of the Banking Committee on Banking Supervision (BCBS). As such,
they are responsible for implementation of international standards of capital adequacy
norms and asset classification.
 Corporate Governance: The RBI has power to control the appointment of the
chairman and directors of banks in India. The RBI has powers to appoint additional
directors in banks as well.
 KYC Norms: To curb money laundering and prevent the use of the banking system
for financial crimes, The RBI has “Know Your Customer“ guidelines. Every bank has to
ensure KYC norms are applied before allowing someone to open an account.
 Transparency Norms: This means that every bank has to disclose their charges for
providing services and customers have the right to know these charges.
 Risk Management: The RBI provides guidelines to banks for taking the steps that are
necessary to mitigate risk. They do this through risk management in basel norms.
 Audit and Inspection: The procedure of audit and inspection is controlled by the RBI
through off-site and on-site monitoring system. On-site inspection is done by the RBI on
the basis of “CAMELS”. Capital adequacy; Asset quality; Management; Earning;
Liquidity; System and control.
  Foreign Exchange Control: The RBI plays a crucial role in foreign exchange
transactions. It does due diligence on every foreign transaction, including the inflow and
outflow of foreign exchange. It takes steps to stop the fall in value of the Indian Rupee.
The RBI also takes necessary steps to control the current account deficit. They also give
support to promote export and the RBI provides a variety of options for NRIs.
 Development: Being the banker of the Government of India, the RBI is responsible
for implementation of the government’s policies related to agriculture and rural
development. The RBI also ensures the flow of credit to other priority sectors as well.
Section 54 of the RBI gives stress on giving specialized support for rural development.
Priority sector lending is also in key focus area of the RBI.

Apart from the above, the RBI publishes periodical review and data related to banking. The
role and functions of the RBI cannot be described in a brief write up. The RBI plays a very
important role in every aspect related to banking and finance. Finally the control of NBFCs
and others in the financial world is also assigned with RBI.

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Major functions of the RBI are as follows:

1. Issue of Bank Notes:

The Reserve Bank of India has the sole right to issue currency notes except one rupee notes

which are issued by the Ministry of Finance. Currency notes issued by the Reserve Bank are

declared unlimited legal tender throughout the country. This concentration of notes issue function

with the Reserve Bank has a number of advantages: (i) it brings uniformity in notes issue; (ii) it

makes possible effective state supervision; (iii) it is easier to control and regulate credit in

accordance with the requirements in the economy; and (iv) it keeps faith of the public in the

paper currency.

2. Banker to Government:

As banker to the government the Reserve Bank manages the banking needs of the government. It

has to-maintain and operate the government’s deposit accounts. It collects receipts of funds and
makes payments on behalf of the government. It represents the Government of India as the

member of the IMF and the World Bank.

3. Custodian of Cash Reserves of Commercial Banks:

The commercial banks hold deposits in the Reserve Bank and the latter has the custody of the

cash reserves of the commercial banks. . Custodian of Country’s Foreign Currency Reserves:

The Reserve Bank has the custody of the country’s reserves of international currency, and this

enables the Reserve Bank to deal with crisis connected with adverse balance of payments

position.

5. Lender of Last Resort:

The commercial banks approach the Reserve Bank in times of emergency to tide over financial

difficulties, and the Reserve bank comes to their rescue though it might charge a higher rate of

interest.

6. Central Clearance and Accounts Settlement:

Since commercial banks have their surplus cash reserves deposited in the Reserve Bank, it is

easier to deal with each other and settle the claim of each on the other through book keeping

entries in the books of the Reserve Bank. The clearing of accounts has now become an essential

function of the Reserve Bank.

7. Controller of Credit:

Since credit money forms the most important part of supply of money, and since the supply of

money has important implications for economic stability, the importance of control of credit

becomes obvious. Credit is controlled by the Reserve Bank in accordance with the economic

priorities of the government.

Conclusion
 Question:11 State the causes of economic Backwardness with reference to India and describe the
determinants of economic development?

Answer

Economic backwardness is the simplest to define. If income does not suffice to meet the basic
needs. Social backwardness is people belonging to a certain group are considered to be inferior
to other groups. This ultimately results in economic backwardness as because of this prejudice
the group is denied opportunities and face unequal treatment in all walks of life.
Economic backwardness is what the Govt defines it. People who live below a certain income
level are economically backward. Earlier, those below 2.5lacs per annum were considere
economically backward of society. Now people above 4.5 lacs are considered cream of society.
That is those below 4.5 lacs per annum are to be considered as economically backward.

Some causes of economic backwardness:

A. UNEMPLOYMENT

1. THE MARKET WAGE RATE PROCESS

2. THE LABOR UNION WAGE RATE CONCEPT

3. THE CAUSE OF UNEMPLOYMENT

4. THE REMEDY FOR MASS UNEMPLOYMENT

5. THE EFFECTS OF GOVERNMENT INTERVENTION

6. THE PROCESS OF PROGRESS

B. PRICE DECLINES AND PRICE SUPPORTS

1. THE SUBSIDIZATION OF SURPLUSES

2. THE NEED FOR READJUSTMENTS

C. TAX POLICY
 1. THE ANTI-CAPITALISTIC MENTALITY

D. GOLD PRODUCTION

1. THE DECLINE IN PRICES

2. INFLATION AS A “REMEDIES”

Obstacles to Economic Development

Problems such as poverty, inequality, unemployment, and the lack of rural development are the
result of economic, political, and social forces, both internal and external, which limit economic
development. This section identifies some of the most significant economic, political, and social
obstacles to development and the next section provides policy options to address them.

1. Poverty cycle:

Low incomes --> Low savings --> Low investment --> Low productivity --> low income..

Absolute poverty: inability to just meet basic physical human necessities/needs of food/nutrition,
clothing, health and shelter in order to survive

· Because this is so difficult to measure accurately, many researchers simply estimate that 20%
of the world’s population falls below this line

· UNDP reports that most live in 10 countries, with the proportions falling below the poverty
line in brackets: Bangladesh (80%), Ethiopia (60%), Vietnam (55%), Philippines (54%), Brazil
(49%), India (40%), Nigeria (40%), Pakistan (29%), Indonesia (24%) and China (10%)

· A characteristic of most LEDCs is the unequal distribution of income

· What is interesting is the middle income LEDCs appear to have greater income inequality
than very poor or high income countries

2. Economic obstacle:
Although they are often linked, economic obstacles can be divided into those which are largely
the result of domestic policies (internal) and those which are related to the structure of the
international economy (external).

A). Internal Obstacles

There are five main internal obstacles to economic development: underdeveloped financial
systems, the lack of economic freedom, macroeconomic instability, and an underdeveloped
infrastructure.

Underdeveloped Financial Systems

Lack of Economic Freedom

Macroeconomic Instability

Balance of payments.

Infrastructure

‘B). External Obstacles:

External obstacles also limit economic development. In contrast to developed countries,

developing countries are very vulnerable to fluctuations in the global economy. For example.
Africa's economic growth slowed in 2001 as a global economic slowdown impacted both aid and
foreign direct investment in the region. This situation is the result of the following factors:
dependence on exports of primary products, unequal terms of trade, changes in export
demand, and dependence on external funding.

Dependence on Primary Product Exports

Unequal Terms of Trade

Changes in Export Demand

Dependence on External Funding

Since most developing countries rely heavily on exports to generate governmental income and
repay loans, a reduction in exports reduces government revenue. Consequently, the government
either has to cut expenditures or run a budget deficit. Both hurt the poor and limit economic
development. If the government takes out a loan to finance a deficit, it will have divert scarce
funds to pay back the loans—reducing the amount of money available for schools, health care,
 investment, and so forth. In other words, internal and external economic obstacles are
connected.

3. Political obstacles:

In developing countries, political obstacles have a much larger impact on economic development
than economic obstacles. This is because economic policies are created and implemented by
politicians. Political obstacles include underdeveloped institutions and too much government
intervention in the economy.

Political instability

· Important to attract FDI

· Important that the next government assume the debt obligations of outgoing government

· Rule by the will of the people OR for the government in power - who is the government
working for?

4. Underdeveloped Institutions:

In most developing countries, governmental institutions are either absent, inefficient, or

extremely weak. Even in countries with the requisite institutions, incompetent and/or unqualified
civil servants, burdensome bureaucratic procedures, resistance to change, inept management,
departmental rivalries, and pervasive cronyism greatly limit the government's effectiveness.
Poor governance has three main consequences:

1. Unstable economic and political policies

2. Creates obstacles to economic growth

3. Fosters corruption

5. Social obstacles:

Social and cultural factors acting as barriers

Religion

· culture

· tradition
· gender issues

· Periods of economic growth are associated with structural transformation and social and
ideological changes. In the past, 1/3 of growth came from population increases and 2/3s from
productivity increases

· Productivity increased due to technological change in terms of capital and human skills,
encouraging research and development which led to further growth

· The rise in income led to increased consumption:

· Demand for income elastic industrial products rose quickly

· Demand for income inelastic agricultural goods grew only slowly

· This led to a rapid rural-urban shift which often destroyed traditional values

While not primary obstacles to economic development, social obstacles can also slow economic
growth and limit economic development. Three of the most important obstacles are population
growth, lack of access to education and environmental devastation.

6. Population Growth:

As noted in the Population Section 80 percent of the world's population lives in the developing
world (i.e. the part of the world with the least amount of resources). In many developing
countries, the population is growing faster than the ability of society to provide the education and
skills necessary to improve economic growth. In addition, a rapidly growing population lowers
per capita income growth, especially for those who are already poor, live in rural areas, and
depend on agriculture.

7. Lack of Access to Education:

Since human resources ultimately determine the character and pace of economic development, a
poorly educated workforce limits increases in productivity and competitiveness, thus slowing
economic growth. There are two major factors which limit educational access: poverty and a
rapidly expanding population. The former prevents poor families from sending their children to
school and the latter dilutes educational expenditures, diminishing their effectiveness.

8. Environmental Devastation:

In traditional economic growth models, the cost of destroying the natural resources base was not
included in GDP figures. However, as a result of increasing environmental degradation and
declining economic growth rates in developing countries, more attention has been directed to the
links between environmental issues and development. Damage to water supplies, land, and
forests slows economic development by increasing health related costs, reducing agricultural
productivity, and increasing the income gap between rich and poor. In other words, the
destruction of environmental resources lessens developmental potential.

9 .Macroeconomic Instability:

As a result of ineffective government policies and/or changes in the international economy,

macro-economic instability has a devastating effect on economic development. Inflation leads to
demands for wage increases that in turn can foster industrial unrest, slowing economic growth
and investment.

Macroeconomic stabilization polices typically include three features:

1. Limiting inflation

2. Restoring fiscal balance through reduced government expenditures, raising personal and
business taxes, and reforming the financial system

3. Eliminating the current-account deficit by devaluing the currency exchange rate and
promoting exports.

10. Poor Governance:

Economic development is greatly effected by the quality of government. A country without

agovernment that has an open policy-making process, an effective bureaucracy, published rules,
and a transparent regulatory structure will limit economic development. (This link sends you to
another section in this course. Use the browser Back button to return)

11. Population Growth:

Economic development begins with the individual. In many parts of the world, the population is
growing at rates that make it difficult to provide the population with the education and skills
necessary to improve economic output. To overcome this situation, governments need to limit
population growth.

12. Restrictions on trade and investment:

Rules and regulations, both official and unofficial, have a significant impact on economic
development.Because many developing countries do not have the requisite resources to foster
economic growth, both domestic and international investment and trade are necessary for
economic development. The flow of capital and goods in and out of countries improves living
standards and helps expand local businesses.
 13. Lack of the rule of law:

Research shows economic development is strongly affected by the quality of legal institutions.
The rule of law creates a predictable and secure environment for people to produce, trade, and
invest. This expands employment opportunities and incomes.

14. Educational Impediments:

It is generally accepted that the human resources of a country, not its physical capital or natural
resources, ultimately determine the character and pace of economic development. Therefore, a
poorly educated and trained workforce limits increases in productivity and competitiveness,
slowing economic growth

15. Environmental Devastation:

In the traditional economic growth model, the cost of destroying the natural resources base was
not included in GDP figures. However in recent years, experts have become increasingly aware
of links between environmental issues and economic development. Environmental degradation
slows economic development by weakening self-sufficiency, increasing health related costs,
reducing agricultural productivity, and increasing the gap between rich and poor. In addition to
these costs, the destruction of resources lessens future growth potential.

16. Ineffective taxation structure:

· Taxation is often a difficult problem in LEDCs:

· In many countries very little tax revenue is collected and government is forced to raise
revenue by printing money or imposing export tariffs which inevitably reduces the incomes of
rural people because most LEDCs export raw materials and agricultural products

· A proper income tax system can provide the revenue for govt. and reduce inequality by
making the wealthy pay a fair share for running the country

17. Lack of property rights:

· And rule of law in general, including reasonable, predictable contract enforcement

· No clear title to real property (land, houses) and high-value assets

· Inheritance of property often cloudy

· Capital gains from sales often subject to negotiation, thus not predictable

18. Corruption:
· An issue worldwide; many different forms; some quite subtle in nature

· Most involving bribes for getting imports into a country or in bidding on government
contracts

· Transparency International

19. Unequal distribution of income:

· Redistribution of assets often does not happen or does not happen fairly (transparently)

· If the most important cause of inequality is an unequal distribution of land, natural resources
and capital, attempts must be made to redistribute at least some natural resources such as land

· Land reform can often lead to a dramatic increase in farm productivity and incomes for the
rural poor

· Children of the elite have greater access to education and to the best jobs:

· Policies to open access to education for the poor, to reduce absenteeism and improve the
quality of education can lead to great increases in productivity

· Gini coefficient/Lorenz Curve

20. Formal and informal markets:

· Percentage of population engaged in a money economy v. subsistence/barter economy

· The less informal markets operating, the more grasp on the macro economy the government
has

21. Lack of infrastructure:

· Important to attract FDI

· Key to allow access to markets, schools, hospitals, wider world (even if just the capital
city/urban area) Rescheduling & Restructuring

· Market mechanisms: supply side measures increase output and investment

· Lower inflation which stabilizes the exchange rate and creates enough confidence that the elite
repatriate money lost through capital flight

· Domestic interest rates fall leading to greater domestic investment and an improvement in the
economy

· Restructuring simply extends the length of the repayment problem, it does not eliminate the
debt:
· 22. External Obstacles:

· External obstacles also limit economic development. Since many developing countries rely
heavily on export tariffs to generate governmental income, a reduction in exports reduces
government revenue. As a consequence, the government will either have to cut expenditures or
run a budget deficit. Both hurt the poor. If the government takes out loans to finance a deficit, it
will have divert scarce funds to pay back the loans—reducing the amount of money available for
schools, health care, investment, and so forth. A large deficit also fuels the demand for imports
(because goods are not being produced domestically), causes a current account deficit, and
worsens the country’s current balance of payments.

A) International trade barriers

· overdependence on primary products

· consequences of adverse terms of trade

· consequences of a narrow range of exports

· protectionism in international trade

B) International finance & indebtedness

· Economic development has been promoted since 1960 as the best route for LEDCs to follow,
justifying borrowing from banks to spend on projects:

· The risky nature of lending to LEDCs requires: higher interest rates, much more expensive
than the rate charged by the World Bank or aid agencies

· Stock of debt: the ratio of debts to exports has averaged 125% to 150%

· Debt servicing flow: includes interest payments and repayments of principal, and often
exceeds 40% of exports for certain poorer LEDCs

C) Poor project evaluation

· MEDC banks were only interested in securing loans through government guarantees, there
was little checking of the projects the money was to be used for

· Much of the borrowed money had been wasted on military arms or projects which did not
have any hope of paying interest on the debt or ever repaying the principal
· Many LEDCs printed money to cover the deficits which led to extremely high rates of
inflation in some countries

Conclusion

Unit IV

Que. 12 What are the main cause of concentration of economic power in India? How
control of corruption can help in solving this problem?

Ans. Meaning

The term “ concentration of economic power means the economic position which enable a
concern to command control over production or market exzchange or employment in respect of
any goods of services.

Types of concentration

1 Country wise concentration

2 product wise concentration

Forms According to MRTP Act.

1. Considerable share of productive capacity
2. Control over market
3. Considerable share of employment
4. Large Assets

Cause of concentration
1 Growth of joint companies & technology advance

2 Inter connections
3 Inherent opportunity

4 Assistance from financial institutions

5. Controls

6. Managing Agency Product wise concentration

Product wise concentration

1The product with high concentration

2 the product with medium concentration

3 The product with low concentration

4 Country wise concentrations

Remedial measures
1 Regulation of private business

2 The companies Act

3.The industrial Act.

4The essential commodities Act.

5.The capital issues act. And securities contracts act.

6. Encouragement of small & new entrepreneurs

7. Expansion of public, Co operative & Joint Sectors

8. Ceiling of property

9Progressive taxation

10 Other measures

Conclusion

Que.13. Black money creates a parallel economy Explain this statement and describe thye
steps which are taken to solve this problem in modern time in india?

Ans. Parallel economy in India

Parallel economy, based on the black money or unaccounted money, is a big menace to the Indian
economy. It is also a cause of big loss in the tax-revenues for the government. As such, it needs to be
curbed. Its elimination will benefit the economy in more than one way. In a general way, we can define
black economy as the money that is generated by activities that are kept secret, in the sense that these
are not reported to the authorities. As such, this money is also not accounted to (he fiscal authorities
i.e., taxes are not paid on this money.

HARMFUL EFFECTS OR Impact of black money

1. Misdirection of precious natural resources

2. Enormously worsen the income distribution
3. Difficult to make correct economic analysis
4. Erodes the value system of the society
5. Loss to the state exchequer
6. A threat to price stability
7. Transfer funds from India to foreign countries
8. Corrupting the political system

Causes factors responsible for the generation of black money

1Black marketing

2Consequence of controls

3Transactions in urban real estate

4High Tax rates and defective tax structure

5Increase in public expenditure

6 Expectation of higher net rate of return

7 Donation to political parties

8 Expansion of public sector

Black money in India

Measure taken by the government to unearth black money

1Measure to check tax evasion

2Demonetization

3Voluntary disclosure income schemes

4Special bearer bond scheme

Suggestion to eliminate black money

Conclusion

Unit V

Que. 14 Write an essay on central state financial relation in India?

Ans The Financial relationship between the Centre (Union) and the States is provided in the
constitution. The constitution gives a detailed scheme of distribution of financial resources
between Union and the States.

The Indian constitution makes a broad distinction between the power to levy a tax and the power
to appropriate the proceeds of a tax. Thus, the legislature which levies a tax is not necessarily the
authority which retains the proceeds of a tax levied.

The constitution grants the Union Parliament exclusive power to levy taxes on several items. The
state legislatures enjoy similar power with regard to several other specified items. In general, the
Union Parliament levies taxes on items mentioned in the union list while the state legislatures
levy taxes on items mentioned in the state list.

The subjects on whom the union government has the exclusive powers to levy taxes are:

a. customs duty,

b. corporation tax,

c. capital gains,

d. surcharge on income tax,

e. Railway fares etc.

State’s exclusive powers to Tax include:

a. land revenue
 b. stamp duty,

c. estate duty,

d. agricultural income,

e. entry tax,

f. sales tax,

g. Taxes on vehicles and luxuries etc.

The residuary power of taxation belongs to the centre. It means that the subjects which have
not been included either in the union or in the state list may be taxed only by the union
government.

In the matter of taxation, the constitution recognizes no concurrent jurisdiction. Hence there
is no subject who may be taxed both by the union and the state governments.

Besides the exclusive power of taxation of the union and the state governments, there are 3
other categories of taxes.

a. Taxes levied by the union government but collected and appropriated by the states.
Stamp duties on bills of exchange, excise duties on medicinal and toilet preparations fall
in this category.

b. Secondly, certain duties are levied and collected by the union but the net proceeds of
such taxes are distributed among the states. Each state gets that amount of the tax as is
collected within its territory. Succession duty, estate duty on property other than
agricultural land, taxes on railway fares and freights, taxes on newspaper sales and
advertisements etc. fall in this category.

c. Thirdly, certain taxes are levied and collected by the union but the proceeds are
distributed between the centre and the states. Taxes on non-agricultural incomes (Art.
270) and excise duties on items in the union list accept medicinal and toilet preparations,
fall in this category.

In this scheme of resource distribution, the central government in India, indeed in every
federation has more money than it needs. This is because, the central government is the
government at a distance whereas the state governments are the governments at hand to the
people. The most productive sources of revenue in every federation are with the centre while the
most expensive heads of expenditure are with the states. For the State Governments are directly
responsible for the maintenance of law and order and are charged with the responsibility of
carrying on welfare activities such as education, health care, etc. consequently the states have
less revenue incomes than they need. This makes the states financially dependent on the centre
which the ruling party at the centre may use to serve its political ends.

To relieve this dependence, the constitution provides for grants-in-aid to the states. Parliament
decides which states are in need of grants-in-aid. Art. 275 of the constitution provides for grants-
in-aid to some states for the promotion of welfare of the tribal people. States also receive grants-
in-aid in cases of natural calamities like floods or draughts.

The constitution provides for constitution of a Finance Commission to advice the President on
distribution of financial resources between the Union and the States. A Finance Commission is
appointed every five years. The first Finance Commission submitted its report in 1952. The
Finance Commission advises the President, what percentage of the income tax should be retained
by the centre, and what principles should be adopted to distribute the divisible pool of the
income tax among the states. The commission also advises the President on the question of
grants-in-aid to be given to the states.

The scheme of division of financial resources adopted in India is certainly very complicated. It
also has the effect of making the states financially dependent on the centre. Such a scheme is
certainly corrosive of autonomy of the states. States should be given more financial autonomy
than is given now to make their political autonomy real.

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Financial Relations between the Union and the States

Ideally speaking, the best system of federal finance would be one which effected a clear-cut division of
sources of the revenue between the Federal and the State Governments so as to make each of the parties
financially independent of each other. Indian Constitution make elaborate provisions regarding the
distribution of revenues between the Centre and the States. The financial relations between the Union and
the States can be studied under the following heads:

1 Duties levied by the Union but Collected and Appropriated by the States: Stamp duties and
duties of excise on the medical and toilet preparations are levied by the Government of India, but
collected and appropriated by the States within which such duties are leviable except in the
Union Territories where they are collected by the Union Government. Art. 268

2 Taxes Levied and Collected by the Union but Assigned to the States within which they are
leviable: Succession duty in respect of property other than agriculture land Estate duty in respect
of property other than agricultural land Terminal taxes on goods or passengers carried by
railways, sea or air Taxes on railway fares and freights Taxes on transactions in stock exchanges
Taxes on sale and purchase of newspapers, including advertisements published therein Taxes on
the sale and purchase of goods other than newspapers, where such purchase takes place in the
course of inter-state trade or commerce. Art. 269

3 Taxes Levied and collected by the Union and distributed between the Union and the States:
Certain taxes are levied as well as collected by the Union, but their proceeds are divided between
the Union and the States in a certain proportion in order to effect an equitable distribution of the
financial resources. There are: taxes on income other than agricultural income excise duties as
are included in the Union List, excepting medicinal and toilet preparations.

4 Surcharge: The Parliament is, however, authorized to levy surcharge on the taxes mentioned at
(2) above and on income-tax for the purpose of the Union.

5Grants-in-Aid: Parliament may make grants-in-aid from the Consolidated Fund of India to such
States as are in need of assistance, particularly for the promotion of welfare of tribal areas,
including special grant to Assam.

6Copy Loans the Union Government may make loan to any State or give guarantees with respect
to loans raised by any States.

7. Previous Sanction of the President: No Bill or amendment can be introduced or moved in

either House of Parliament without the previous sanction of the President, if:

it imposes or varies any tax in which the States are interested; or

it varies the meaning of the expression “Agricultural Income” as defined in the Indian
Income-Tax Act; or

it affects the principles on which money are distributed to the States; or

it imposes a surcharge on the State taxes for the purpose of the Union.

8 According to Article 301, freedom of trade, commerce and intercourse throughout the territory
of India is guaranteed, but the Parliament has the power to impose restrictions in public interest.

9 Although taxes on income, other than agricultural income, are levied by the Union, yet the
State Legislatures can levy taxes on profession, trade, etc. provided that the total amount of such
taxes payable in respect of anyone person should not exceed Rs. 2500 per month.
10 Provision has been made for the constitution of a Finance Commission to recommend to the
President certain measures for the distribution of financial resources between the Union and the
States.

Conclusion

Que. 15 Agriculture production in India is low because inputs are low “ Discuss this
statement,

Or

Why the agriculture productivity is low in India as comparison to other countries? What
efforts have been made to increase it?

Meaning .

Basic characteristics of Indian economy

1 Low per capital income

2 Inadequacy of capital

3 Growth of poverty

4 unemployment and underemployment

5 Predominance of agriculture

6industrial backwardness

7Poor economic organizations

8Lack of entrepreneurship and managerial talent

9 Unequal distribution of personal income

10 low level of technologies

Role of Agriculture in Indian economy

1 Source of food for our people

2 Largest employment providing sector

3 Major components of National Income

4 Supplies raw material to our industry

5Important in International trade

.6 Sources of government revenue

7 Agriculture and capital formation

8Social and political importance

Causes of low agriculture productivity

General causes
1 Overcrowding in agriculture

2 Unfavorable rural environments

3 Lack of finance storage and marketing facilities

4 Lack of improved seeds manure and plant protections

5 Weaknesses in policy perceptions

Institutional Factors
1 Uneconomical size of holdings

2 faulty land system

Technological Factors

1 Poor technique of production

2 Inadequacy irrigation facilities facilities

3 Lack of research

4 Subsistence farming

5 Rural indebtedness

Suggestion

Conclusion
Que. 16 “Foreign debt and foreign aid is a necessary evil for India” Explain this statement
and suggest a suitable policy regarding foreign debt?

Ans. Meaning

United or Programme Aid

Tied Project Aid

Impact of Foreign Aid on Indian Economic development

1 Raise in the level of irrigation and power

2 Enlargement of irrigation and power potential

3 stabilized food prices and import raw material

4 Building up the steel industry

5 Foreign exchange requirements

6Improving Transport

7 Building up of productive capacity

Limitations or danger of foreign Aid

1Dependence on Foreign aid is dangerous

2External aid

3Political diplomacy

4 Project to Creditors countries

5Growth of public sector

6 Specific projects

Commercial borrowing

Govt. Policy towards foreign Investment

Conclusion