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PART V

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Economics

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Chapter 1 Development

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Chapter 2 Sectors of Indian Economics

20

14

Chapter 3 Money and Credit

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Chapter 4 Quadratic Equations

Chapter 5 Globalization and Indian

Economy
Chapter 6 Consumer Rights

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CHAPTER

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Development

Development

India Economy
Economy
India
14.00%
14.00%
35
35
12.00%
12.00%
30
30
10.00%
10.00%
25
25
8.00%
8.00%
20
20
6.00%
4.00%
15
15
4.00%
6.00%
10
10
2.00%
2.00%
55
0.00%
0.00%
Apr-08 Jul-08
Jul-08 Oct-08
Apr-08
Oct-08 Jan-08
Jan-08 Apr-08
Apr-08 00
2.00%
2.00%
Months
Months
Industrial Output
Output Inflation
Industrial
Exoports Imports
Imports
Inflation Exoports

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In
Percent (For
(For IIP
IIP &
&
In Percent
Inflation)
Inflation)

In Billinos
In
Billinos of
of US
US Dollars
Dollars
(For Export
(For
Export &
& Import)
Import)

We the people have needs and aspirations to have better life, better surroundings, better infrastructures, etc. Thus, development is
a long and complex process in a given human society. Economics
is a subject, which deals with an understanding of development
and seeking answers to these questions. It is through a democratic political process that these desired goals of equality and
justiceeconomic, social and politicalare to be achieved in our
real life too.

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Syllabus

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Define development. Define income and per capita income. Define national development and issues related
to national development. Define the concept of sustainable development

20

Introduction

is a complex issue as development means different things to different people.

Development is a comprehensive term, which involves development of political, social and economic life of the people.
To understand development, it is also important to understand
our past as the way we live today is influenced by the past.
We can achieve the goal of development through the democratic political process.
Development means all round changes for betterment.

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Development

DevelopmentDifferent People,
Different Goals
Different persons have different notions because each of them seeks
different things. They seek things that are most important for them,

i.e., which can fulfil their aspirations or desires. Different people

have different goals because they are different and they are leading their life in different situation but their general goal is progress.
There are two things (a) Different persons can have different development goals. (b) What may be development for one may not be
development for other. It may even be total destruction for other.

Traditional Notion of Development

(i) With the independence of the Third World countries, there
aro se a need for economic development. Till 1960s, the
term economic development was generally used as a synonym of economic growth. But now it is no longer considered identical with economic growth.
(ii) Definitely notion about the meaning of term development is
changing but it is also a hard fact that there is no unanimity
among economists with regard to the meaning on definition
of economic development.

PART V Economics
Similarly,

there are many things that are not easily measured

but they mean a lot to our lives.
Apart from income people requires freedom, security and
respect in the society, which are non-material goods.
There are many things that are not easily measured but they
mean a lot for our lives.
Sometimes people prefer regular and steady income, rather
than fluctuating income.
Thus, we can conclude that people look at mix of goals, for
development. Goals are not only about income.

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(iii) However, all agree that economic development is more than

the economic growth. Hence, it is taken to mean growth plus
progressive changes in certain variables of material welfare.

How to Compare Development Indifferent

Countries or States?

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For comparing countries, their income is considered to be one

of the most important attributes. Countries with higher income
are more developed than others with less income. To find the
income of a country, we have to find out the National Income of
that country and its per capita income.

National Income

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Changes In The Traditional Notion of

Development

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National Income is defined as the total value of all the goods and services produced within a country plus income coming from abroad.

Per Capita Income

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(i) The increase in income is not sufficient for a nation. Income can
be a major base of economic growth of a nation. But experiences had shown that economic growth could not automatically
translated into the improvement of levels of living of the poor
masses. Therefore, economists redefined the concept of economic development in terms of the reduction of poverty, unemployment and inequality in the context of a growing economy.
(ii) Now-a-days, redistribution and growth have become the
popular slogan in most of the progressive nations, including India. The concept of economic growth is related to the
increase in output of goods and services in an economy.
This can be expressed in two ways: (i) increase in total output or increase in gross domestic product (GDP): and (ii)
rise in per capita income or rise in per capita GDP.
(iii) Economic development is a broader concept than economic
growth. Development concerns not only mans material needs
but also the improvement of social conditions of life. It is,
therefore, not only economic growth but growth plus change
in social, cultural and institutional pattern. It includes both
growth aspect and distribution aspect. Development must,
therefore, be conceived of as a multi-dimensional concept.

Income and Other Goals

Sustained

increases in income through wages, decent price

for the crops are few primary goal of development.
Money, or material things that one, can buy with it, is one
factor on which our life depends.
But the quality of our life also depends on non-material things
mentioned above.
If it is not obvious to you, then just think of the role of your
friends in your life. You may desire their friendship.

When the total national income is divided by the total population it gives us the Per Capita Income. In World Development
Report 2006, brought out by the World Bank, this criterion is
used in classifying countries. Countries with per capita income
of `453000 per annum and above in 2004, are called developed
or rich countries and those with per capita income of Rs 37000
or less are called low-income countries. India comes in the category of low-income countries because its per capita income in
2004 was just Rs 28000 per annum

White Averages are Useful for Comparison,

They Also Hide Disparities
Let us consider two countries, A and B. For the sake of simplicity, we have assumed that they have only five citizens each.

Comparison of Two Countries

Country

Monthly incomes of citizens in 2007 (in rupees)

III
IV
V
Average
Country A 9500 10,500 9800 10,000 10,200 50,000
Country B 500 500
500 500
48,000 50,000
I

II

Will you be equally happy to live in both these countries? Are

both equally developed? Perhaps some of us may like to live
in country B if we are assured of being its fifth citizen but if
it is a lottery that decides our citizenship number then perhaps
most of us will prefer to live in country A. Even though both the
countries have identical average income, country A is preferred

Chapter 1 Development

because it has more equitable distribution. In this country people are neither very rich nor extremely poor. On the other hand,
most citizens in country B are poor and one person is extremely
rich. Hence, while average income is useful for comparison, it
does not tell us how this income is distributed among people.

and socially and environmentally sound. The United Nations

Development Programme (UNDP), in its first Human Development
Report, 1990 introduces the concept of Human Development
Index (HDI). The HDI is the cumulative measurement of the (a)
longevity, (b) knowledge and (c) decent standard of living.
Longevity is a choice to live a long and healthy life. It is
measured in terms of life expectancy (years).
Knowledge is a choice to acquire literacy/information. It is measured by educational attainment percentage, which is a combined
gross enrolment ratio in primary, secondary and tertiary levels.
Decent standard of living is a choice to enjoy a quality and
standard life. It is measured by national income or income per
capita in Purchasing Power Parity in US dollar (PPP, US $).
The rank of a country is determined by the overall achievements
in these three basic dimensions of human development. HD ranks
countries in relation to each other to tell them how far a country
has travelled, and how far it has yet to travel the path of development. In this way, HDI is indicative to the levels of human development and not the complete measurement of development.

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Income and Other Criteria

from income, people require basic services like health
and education facilities.
High income alone cannot guarantee these basic services.
These services are to be provided by the government then
only human development is possible.
For example, Punjab has a highest per capita income out of
three states Kerala is at the bottom has very low (11) infant
mortality rate as compared to Punjab (49).
In Kerala literacy rate is 91%, which is only 70% in Punjab.

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Apart

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Some Comparative Data on Punjab, Kerala

and Bihar

Punjab
Kerala
Bihar

49
11
60

70
91
47

81
91
41

Some Data Regarding India and its

Neighbours for 2004

nd

Net Attendance
Ratio for Class IV
(199596)

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Literacy
Rate (%)
(2001)

Country

Infant Mortality
Rate per 1,000
(2003)

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State

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Explanation of some of the terms used in this table:

Mortality Rate (or IMR) indicates the number of

children that die before the age years as a proportion of 1000
live children born in that particular year.
Literacy Rate measures the proportion of literate population
in the 7 and above age group.
Net Attendance Ratio is the total number of children of age
group 610 attending school as a percentage of total number
of children in the same age group.

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Infant

Bihar

Human Development Report

Today human development is the core of United Nations
Development Programme (UNDP), which presents it into a new
perspective of political and economic freedom and deepening
of democracy at global level, which is economically productive

Sri Lanka
India
Myanmar
Pakistan
Nepal
Bangladesh

Per
capita
income
in US$

Life
expectancy
at birth

Literacy
rate for
15+ yrs
population

Gross
enrolment
ration
for three
levels

HDI
rank
in the
world

4390
3139
1027
2225
1490
1870

74
64
61
63
62
63

91
61
90
50
50
41

69
60
48
35
61
53

93
126
130
134
138
137

Notes:
1. HDI stands for human development index. HDI ranks in
above table are out 177 countries in all.
2. Life expectancy at birth denotes, as the name suggests.
Average expected length of life of a person at the time of
birth.
3. Gross Enrolment Ratio for three levels means enrolment
ration for primary school, secondary school and higher
education beyond secondary school.
4. Per Capita Income is calculated in dollars for all countries so that it can be compared. It is also done in a way
so that every dollar would buy the same amount of goods
and services in any country.
On the basis of HDI, 177 countries of the world have been
classified into high, medium and low human development categories. India is placed into the group of medium
human development countries with 126th rank.
Life Expectancy in years = 64 years
Combined gross enrolment ratio = 60
GDP per capita US $ = 3139

PART V Economics
Sustainability

of development is a new area of knowledge in

which scientists, economists, philosophers and other social
scientists are working together.
Few examples to suggest the need for sustainable development.

Human Development and Economic

Development
(i) Economic development is a broader concept. It is economic growth plus something more than economic growth.
The basic ideas in economic development are rise in productivity decline in unemployment, poverty and inequality
from high levels. Economic development alone cannot promote human development. Human development is the process of both quantitative change and qualitative growth.
(ii) The concept of human development was taken into a broader
sense. It touches social, economic, political and cultural aspects
of human life with special emphasis on reduction in poverty
and minimizing gap between rich and poor. There should not
be unemployment problem in the economy. The concept of
human development touches all aspects of human life.

Income: Total value of all goods and services produced within a country plus income coming from abroad.
Per Capita Income (Average Income): It is obtained
by dividing the national income by the population of the
country,

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Per Capita Income =

National Income
Mid year Population

Other factors like equitable distribution of income should

also be taken into consideration while comparing per capita
income of different countries.
Infant Mortality Rate (IMR): In a year, number of children
that die before the age of one year per 1000 children born live.
Gross Enrolment Ratio: It refers to enrolment ratio for primary schools, secondary schools and higher education beyond
secondary schools.
Economic Development: A sustained increase in real per capita income that promotes economic welfare by reducing poverty, unemployment and inequalities in distribution of income.

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National

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4
137

Important Terms

The

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No. of years it
will last

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Middle East
USA
World

Reserve
(Billion)

vt.

Region / country

Sustainability of Development
concept of sustainability of development has gained
momentum due to environmental concerns and the rate of
resource depletion
Ground water is an example of renewable resource but the
rate at which we are using then it may not be replenished by
rain water.
Sustainability of development means that development should
take place at the same time environment should be conserved
from degradation.
Sustainability of development also means that needs of the
present generation should not be compromised and at the same
time resource should be conserved for coming generation.
Non-renewable resources are those resources, which will get
exhausted after years of use. So we have to use them judiciously.
The consequences of environmental degradation do not
respect national or state boundaries and is no longer region
or nation specific.

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Crude Oil Reserves

CHAPTER

Sectors of Indian Economics

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Sectors of Indian Economics

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Transportation
28%

nd

Industry &
Manufacturing
32%

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People are engaged in various economic activities. Some of these are activities producing goods. Some others are producing services. These activities
are happening around us every minute even as we speak. How do we understand these activities? One way of doing this is to group them using some
important criteria. These groups are also called sectors.

Ki

Commercial
18%

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Residential
22%

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Economic Activities

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Sectors of economic activities; comparing the three sectorsthe primary, secondary and tertiary sectors in India;
division of sectors as organized and unorganized. Features of different sectors. Types of unemployment.
Ways to remove unemployment.

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Activities, which provide us income in return, are known as

economic activities.
The economic activities can be divided into three sectors
primary, secondary and tertiary sectors.

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Primary Sector

When the economic activity depends mainly on exploitation of

natural resources then that activity comes under the primary
sector. Agriculture and agriculture-related activities are the primary sectors of economy.

Secondary Sector
When the main activity involves manufacturing then it is the
secondary sector. All industrial production where physical
goods are produced come under the secondary sector.

Tertiary Sector
When the activity involves providing intangible goods like services then this is part of the tertiary sector or service sector.
Financial services, management consultancy, telephony and IT
are good examples of service sector.

Comparing the Three Sectors

The

various production activities in the primary, secondary

and tertiary sectors produce a very large number of goods and
services. Also, the three sectors have a large number of people
working in them to produce these goods and services.
The next step, therefore, is to see how much goods and
services and produced and how many people work in each
sector.
In an economy, there could be one or more sectors, which
dominate in terms of total production and employment, while
other sectors are relatively small in size.

PART V Economics

Economists

In the past 100 years, there had been a further shift from
secondary to tertiary sector in developed countries. The service sector has become the most important in terms of total
production. Most of the working people are also employed
in the service sector. This is the general pattern observed in
developed countries.

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Interdependency of Sectors

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To understand this interdependency, let us take an example

of a cold drink. A cold drink contains water, sugar and artificial flavour. Suppose if there is no sugarcane production
then procuring sugar will become difficult and costly for the
cold drink manufacturer. Now to transport sugarcane to sugar
mills and sugar to the cold drink plant needs the services of a
transporter. A person or system of persons is required to maintain and monitor all these movements of goods from farm to
factory to shop in different locations. That is where role of
administrative staffs comes. Let us go back to the farmer. He
also needs fertilizers and seeds, which are processed in some
factory and which will be delivered to his doorstep by some
means of transportation. To top it all, at every step of these
activities we require the proper monetary and banking system.
So, in a nutshell this describes how interrelated all sectors of
an economy are closely observe the following figures. The
first figure shows the rupee wise turnover of various sectors
in 1973 and 2003. The second figure shows the share of three
sectors in the GDP during these 20 years and last graph shows
share in providing employment.

14

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suggest that the values of goods and services

should be used rather than adding up the actual numbers. For
example, if 10,000 kg of wheat is sold at `8/kg, the value of
wheat will be `80,000. The value of 5000 coconuts at `10/
piece will be `50,000. Similarly, the value of goods and services in the three sectors are calculated, and then added up.
Not every good (or service) that is produced and sold needs
to be counted. It makes sense only to include the final goods
and services. Take, for instance, a farmer who sells wheat to
a flour mill for `8/kg. The mill grinds the wheat and sells the
flour to a biscuit company for `10/kg. The biscuit company
uses the flour and things, such as sugar and oil to make four
packets of biscuits. It sells biscuits in the market to the consumers for `60 (`15/packet). Biscuits are the final goods, i.e.,
goods that reach the consumers.
The value of final goods already includes the value of all
the intermediate goods that are used in making the final
good.
The value of final goods and services produced in each sector during a particular year provides the total production of
the sector of the year. The sum of production in the three
sectors gives what is called the gross domestic product
(GDP) of a countryGDP shows how big the countrys
economy is.
If we include the value of intermediary goods, it will lead to
double counting.
The task of measuring GDP is undertaken by a Central
Government ministry (NSSO). With the help of all the Indian
states and union territories, collect information relating to
total volume of goods and services and their prices and the
estimates the GDP.
Secondary sector gradually became the most important in
total production and employment.
The service sector has become the most important in terms
of total production. Most of the working people are also
employed in the service sector.

20

Historical Change in Sectors

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At initial stages of development, primary sector was the most

important sector of economic activity. As the methods of
farming changed and agriculture sector began to prosper. It
produced much more food than before. Many people could
now take up other activities. Over a long time (more than 100
years), and especially because new methods of manufacturing were introduced, factories came up and started expanding.
Those people who had earlier worked on farms now began
to work in factories in large numbers. People began to use
many more goods that were produced in factories at cheap
rates. Secondary sector gradually became the most important
in total production and employment. Hence, over time, a shift
had taken place. This means that the importance of the sectors
had changed.

Value of Sectors in indian Economy

Rs. Crore
250000

Tertiary
sectot
Primary
sector

200000
150000
100000

Secondary
sector

50000
0

1973

Share of sector in GDP

120.00%
100.00%
80.00%

35%

60.00%

20%

40.00%
20.00%
0.00%

2003

45%

1973

55%

20%

Tertiary
sectot
Secondary
sector
Primary
sector

25%

2003

Share of Sectors in Employment

120.00%
100.00%
80.00%

15%
10%

60.00%
40.00%

75%

20.00%
0.00%

1973

22%
18%

60%

Tertiary
sectot
Secondary
sector
Primary
sector

2000

Growth and Status of Different Sectors in India

The first graph shows a massive increase in turnover for all

these sectors during 20 years, which shows the way our economy grew. The second graph shows that share of agriculture
decreased substantially and that of industry remained static and
share of services grew. Particularly the growth of share of services sector was phenomenal from 35% to 55%.

Chapter 2 Sectors of Indian Economics

Now the third graph paints a distressing picture. The share

in providing employment was not in tune with the share in
GDP. The agriculture provided employment to 75% workers
and this decreased to 60% in 2000, which is not as big a drop
as agricultures drop in GDP contribution. On the other hand,
the growth in employment provided by other two sectors was
substantially low.

Public Sector

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Companies which are run and financed by the Government comprise the public sector. After independence, India was a very poor
country. India needed huge amount of money to set up manufacturing plants for basic items like iron and steel, aluminium, fertilizers
and cements. Additionally infrastructure like roads, railways, ports
and airports also require huge investment. In those days, Indian
entrepreneurs were not cash-rich; so the government had to start
creating big public sector enterprises like SAIL (Steel Authority of
India Limited), ONGC (Oil & Natural Gas Corporation).

The meaning of this finding is as follows:

Private Sector

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Companies, which are run and financed by private people, comprise the private sector. Companies like Hero Honda, Tata are
from private sectors.

Government-Aided Schemes to Fight

Unemployment

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2. Secondary and Tertiary Sector have failed to generate

enough employment opportunities making a pressure on
primary sector. Although educated and skilled workforce
do get employed in secondary and tertiary sector but for
unskilled and semi-skilled workers there is still shortage of
employment avenues.

Ki

nd

Government, from time to time, announces and implements

various employment scheme to fight unemployment or hidden
employment to help the weaker section of society. Schemes like
NREG (National Rural Employment Guarantee) is the latest
announced by the UPA government in 2004. This programme
guarantees a minimum of 100 days of employment to at least one
person from every rural household. This is part of governments
effort to ensure the Right to Work to the rural poor citizen.

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Other Classifications of Economy

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Organized Sector

by

The sector, which carries out all activity through a system

and follows the law of the land, is called organized sector.
Moreover, labour rights are given due respect and wages are as
per the norms of the country and those of the industry. Labour
working organized sector get the benefit of social security net
as framed by the Government. Certain benefits like provident
fund, leave entitlement, medical benefits and insurance are provided to workers in the organized sector.
These security provisions are necessary to provide source
of sustenance in case of disability or death of the main breadwinner of the family. Otherwise, the dependents will face a
bleak future.

Important Terms

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20

Unorganized Sector

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The sectors, which evade most of the laws and do not follow
the system, come under unorganized sector. Small shopkeepers,
some small scale manufacturing units keep all their attention
on profit-making and ignore their workers basic rights. Workers
do not get adequate salary and other benefits like leave, health
benefits and insurance are beyond the imagination of people
working in unorganized sectors.

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1. Majority of people are still employed in agricultural activities. As agriculture provides seasonal employment during cropping season so chances of hidden employment are
big. Moreover, as history suggests a developed nations
dependency shifts from primary sector towards tertiary
sector in all aspects of economic development, so it can
be said that India is still way behind because majority still
depend on agriculture.

Poverty:

It implies the inability to secure the minimum

consumption need for life.
Poverty Line: It is defined as the minimum intake of 2400
calories in rural areas and 2100 calories in urban areas per
person per day.
Unemployment: It refers to a situation in which all able
and willing persons do not get suitable jobs.
Technological Unemployment: Unemployment caused by
technological improvements or advances is called technological unemployment.
Frictional Unemployment: Unemployment caused by the
rigidities and frictions in the economy.
Structural Unemployment: Unemployment caused by the
fact that the economy is going through structural changes.
Deficit Financing: Spending more than its earning by the
government.
Workforce: It means labour force minus the unemployed.

CHAPTER

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Money and Credit

Money and Credit

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Money is a fascinating subject and full of curiosities. It is important to capture this element for the students. The history of money and how
various forms have been used at different times is an interesting story. At this stage, the purpose is to allow students to realize the social situation in which these forms have been used.
Modern forms of money are linked to the banking system.
Credit is a crucial element in economic life and it is, therefore, important to first understand
this in a conceptual manner. The world around us offers a tremendous variety of such arrangements and it would be ideal to explain these aspects of credit from situations that are
familiar to your students.
The other crucial issue of credit is its availability to all, especially the poor, and on reasonable
terms. We need to emphasize that this is a right of the people and without which a large section of them would be kept out of the development process.

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Syllabus

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Barter system, problems created by barter system. Modern forms of money. How it has solved the problem
of barter system? Need for credit. Formal and informal sources of credit. Problems of informal sources of
credit.

20

Key Points

use of money spans a very large part of our everyday life.

many transactions, goods are being bought and sold with
the use of money.
For some, there might not be any actual transfer of money
taking place now but a promise to pay money later.
A person holding money can easily exchange it for any commodity or service that he or she might want.
Thus everyone prefers to receive payments in money and then
exchange the money for things that they want.

The

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In

Problems Created By The Barter System

Barter

system was a system of exchange that was prevalent

before the use of money in ancient and medieval period.
It was a system in which good was exchange with other good.
There was no common medium of exchange.

This

created many problems, which can be illustrated by an

example.
Take the case of a shoe manufacturer. He wants to sell shoes
in the market and buy wheat.
Imagine how much more difficult it would be if the shoe manufacturer had to directly exchange shoes for wheat without
the use of money.
He would have to look for a wheat growing farmer who not
only wants to sell wheat but also want to buy the shoes in
exchange.
That is, both parties have to agree to sell and buy each others
commodities.
This is known as double coincidence of wants. What a person
desires to sell is exactly what the other wishes the need for
double coincidence to buy.
In a barter system where good are directly exchanged without
the use of money, double coincidence of wants is an essential
feature.

PART V Economics

Importance of Money

specialized capital to reap economics of scale. The fruits of

this are high standards of living and productivity. All this specialization will not be possible without an equal highly developed system of exchange and trade, i.e., the use of money.
(vi) Money serves the economy of the country performing the
following four most important functions:
(a) A unit of value
(b) Medium of exchange
(c) A standard deferred payments and
(d) Store of value

A person holding money can easily exchange it for any commodity or service that he or she might want. Everyone prefers
to receive payments in money and then exchange the money for
things that they want.

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Double Coincidence of Wants

Modern Forms of Money

is something that can act as a medium of exchange in
transactions.
Before the introduction of coins, a variety of objects was used
as money.
For example, since the very early ages, Indians used grains
and cattle as money.
Thereafter came the use metallic coinsgold, silver, copper
coinsa phase, which continued well into the last century.

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Money

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Money as Medium of Exchange

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Why Currency is Accepted as A Medium of

Exchange?
(i) It is accepted as a medium of exchange because the currency is authorized by the government of the country.
(ii) The law legalizes the use of rupee as a medium of payment
that cannot be refused in settling transactions in India. No individual in India can legally refuse a payment made in rupees.

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Since money acts as an intermediate in the exchange process, it

is called a medium of exchange.
(i) Medium of exchange is an important function of money. It
means that money acts as an intermediary for the goods and
services in an exchange of transaction. Use of money as a
medium of exchange has removed the major difficulty of
double coincidence of wants in the barter system.
(ii) The medium of exchange, function of money has classified
all transactions on the basis of time and place. Now, the
seller of goods need not sell his goods at a particular time
and place and buy goods of the same value as well.
(iii) The medium of exchange function of money implies that
money is generally acceptable by the people. They can buy
goods and services they need using money. That is, money
facilitates multilateral trade.
(iv) Money also offers economic freedom to the people.

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vt.

Double coincidence of wants mean both parties i.e., the

buyer and the seller have to agree to sell and buy each others
commodities.
In a barter system where goods are directly exchanged without the use of money, double coincidence of wants is an essential feature. In an economy where money is in use, money by
providing the crucial intermediate step eliminates the need for
double coincidence of wants.

14

Role of Money in an Economy

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(i) Money plays an important role in the economy of a country.

The use of money is at every step of life. In fact it would be
hard to imagine life without money.
(ii) The main function of money in an economic system is to
facilitate the exchange of goods and services, i.e., to lessen
the time and effect required to carry on trade.
(iii) Without exchange of goods and services nobody can fulfill
all his needs and requirements. Without money, exchange is
not easy. Barter system has many problems.
(iv) We are living in world, with a very large group of countries and their population. As the group becomes larger and
larger, problems begin to emerge more and more with the
barter system.
(v) Modern economies are highly specialized. There is specialization of firms, of business, of regions, of types of capital,
etc. Such specialization allows the utilization of each person at the best of his or her ability and skill, each region to
the maximum advantage, and the use of large amounts of

Monetary System Adopted By India

(i) India has adopted paper currency standard, which is also
referred as the managed currency standard.
(ii) The monetary standard means the types of standard money
used and the standard refers to legal money in which the
government discharges its obligations. The monetary
standard is, thus, synonymous with the standard money
adopted. Thus in India paper currency is the unlimited legal
tender i.e., it is used to settle debts and make payments to
an unlimited amount.
(iii) Reserve Bank of India issues all currency notes and coins
except one rupee notes and coins, which are issued by ministry of finance.
(i v) The system governing note issue is the minimum reserve system, which means that we have kept a reserve of 200 crore and
the Central Bank is permitted to issue notes to any extent.

Deposits With Banks

The

other form in which people hold money is as deposits

with banks.
At a point of time, people need only some currency for their
day-to-day needs.
The extra cash available with the people is deposited in the
bank account in their names.

Chapter 3 Money and Credit

CENTRAL BANK

vt.

accept the deposits and also pay an interest rate on the

deposits.
In this way peoples money is safe with the banks and it earns
an interest.
People also have the provision to withdraw the money as and
when they require.
Since the deposits in the bank accounts can be withdrawn on
demand, these deposits are called demand deposits.
Demand deposits offer another interesting facility. It is this
facility, which lends it the essential characteristics of money
(that of a medium of exchange).

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(v)Banks promote agriculture by providing loans to the

farmers who can increase their production by bringing
new farm implements and make better arrangements for
the irrigation of their fields without which they cannot
survive.
(vii) The banks are the backbone of the countrys trade also.
(viii)Banks employ a large number of people and as such they
solve the employment problem also.

Banks

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Banks boost the countrys industry also by providing cheap

loans to the industrialists, etc.
Is an apex institution in the banking and financial structure of a
country. It plays a leading role in controlling, regulating, supervising and developing the banking and financial structure of the
economy.

Cheque and its Advantages

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Demand deposits offer another interesting facility. Any person who has an account with the bank can make his payments
through cheques. A cheque is a paper instructing the bank to
pay a specific amount from the persons account to the person
in whose name the cheque has been made.

Function of A Central Bank

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(i) It issues the currency notes.

(ii) It acts as a banker to the government.
(iii) Central Bank acts as a banker of banks.
(iv)Central Bank also functions as the custodian of foreign
exchange reserve of a country.
(v) It controls credit.
(vi) It also performs developmental and promotional functions.
(vii)It maintains relation with the international organizations,
such as the World Bank, IMF, etc.
(viii)It conducts research studies and surveys and publishes
reports.
(ix)It formulates an appropriate monetary policy for the
country.
(x)It provides training facilities to the staff working in a various banking institutions in the country.

A Cheque leaf

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(i) It is the safest mode of transactions.

(ii) It is easy to carry a cheque as compare to money.
(iii) The facility of cheques against demand deposits makes it
possible to directly settle payments without the use of cash.

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Cred it card

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ROLE THE BANKS PLAY IN THE ECONOMY OF

A COUNTRY
The banks play an important role in the economy of a country
(i) They keep the money of the people in safe custody otherwise people can become an easy prey of thieves or robber.
(ii) They give interest on the money deposited by the people.
Thus they add to the income of the depositor. Many families survive on the bank interest.
(iii) T
he banks mediate between those who have surplus money
and those who need money.
(iv) B
anks provide cheap loans to a large number of people.

Commercial Banks
A banking company is one, which transacts the business of banking, which means accepting deposits for the purpose of Indian companies lending or investment, deposits of money from the public,
repayable on demand or otherwise withdrawable by cheque, draft
etc. Commercial banks are also called joint stock banks because
they are organized in the same manner as joint stock companies.
The main features of commercial banks are as follows:
(i) It deals with money; it accepts deposits and advances loans.
(ii) It also deals with credit. It has the power to create credit.
(iii) It is a commercial institution, whose aim is to earn profit.
(iv) It is a unique financial institution that creates demand.
(v) It deals with the general public.

Loan Activities of Banks

What

do the banks do with the deposits which they accept

form the public?
Banks keep only a small proportion of their deposits as cash
with themselves.

PART V Economics

For

example, banks in India these days hold about 15 per cent

of their deposits as cash.
This is kept as provision to pay the depositors who might
come to withdraw money from the bank on any given day.
Since, on any particular day, only some of its many depositors
who might come to withdraw cash, the bank is able to manage
with this cash.
Banks use the major portion of the deposits to extend loans.
There is a huge demand for loans for various economic
activities.
Banks make use of the deposits to meet the loan requirements
of the people.
In this way, banks mediate between those who have surplus
funds (the depositors) and those who are in need of these
funds. (Investors).
Banks charge a higher interest rate on loans than what they
offer on deposits.
The difference between what is charged from borrowers and
what is paid to depositors is their main source of income.

Swapnas Problem

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Swapna, a small farmer, grows groundnut on her three acres

of land. She takes a loan from the moneylender to meet the
expenses of cultivation, hoping that her harvest would help
repay the loan. Midway through the season the crop is hit by
pests and the crop fails. Though Swapna sprays her crops with
expensive pesticides, it makes little difference. She is unable to
repay the moneylender and the debt grows over the year into
a large amount. Next year, Swapna takes a fresh loan for cultivation. It is a normal crop this year. But the earnings are not
enough to cover the old loan. She is caught in debt. She has to
sell a part of the land to pay off the debt.

g
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Credit (loan) refers to an agreement in which the lender supplies

the borrower with money, goods or services in return for the
promise of future payment.

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Credit

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Terms of Credit

Two Different Credit Situations

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(i) During the situation of a sudden demand, the producers

obtain credit to meet the working capital needs for production. The credit helps him to meet the ongoing expenses
of production on time, and thereby increases his earning. Credit therefore plays a vital and positive role in
this situation.
(ii) In rural areas, the main demand for credit is for crop cultivation. Farmers usually take crop loans at the beginning of the
season and repaythe loan after harvest. Repayment of the
loan is crucially dependent on the income from farming. The
failure of the crop makes the loan repayment impossible.
Credit instead helping them in improving their earnings, left
those worse off. This is an example of what is commonly
called debt trap. Credit in this case pushes the borrower
into a situation from which recovery is very painful.

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Role of Credit for Development

(i) It plays a major role in the development of a country by
creating better facilities for agricultural and industrial
activities.
(ii) Moreover, it helps people from all walks of life insetting
up their business, increase their earnings and support their
families.
(iii) To some people, loans help a lot in constructing their houses
and get rid of monthly rents.
(iv) To others, loans or credit help a lot in raising their social status by enabling them to buy cars, scooters, televisions etc.

Interest rate, collateral and documentation requirement, and the

mode of repayment together comprise what is called the terms
of credit. The terms of credit vary substantially from one credit
arrangement to another. They may vary depending on the nature
of the lender and the borrower,

Collateral
Is an asset that the borrower owns (such as land, building, vehicle, livestock, deposits with banks) and uses this as a guarantee
to a lender until the loan is repaid? If the borrower fails to repay
the loan, the lender has the right to sell the asset or collateral
to obtain payment. Property, such as land titles, deposits with
banks, livestock are some common examples of collateral used
for borrowing.

Loans From Cooperatives

Besides banks, the other major sources of cheap credit in rural
areas are the cooperative societies (or cooperatives). Members
of a cooperative pool their resources for cooperation in certain
areas. There are several types of cooperatives possible, such as
farmers cooperatives, weavers cooperatives, industrial workers cooperatives, etc. Krishak Cooperative functions in a village
not very far away from Sonpur. It has 2300 farmers as members.
It accepts deposits from its members. With these depositions as
collateral, the Cooperative has obtained a large loan from the
bank. These funds are used to provide loans to members. Once
these loans are repaid, another round of lending can take place.

Chapter 3 Money and Credit

Krishak Cooperative provides loans for the purchase of agricultural implements, loans for cultivation and agricultural trade,
fishery loans, loans for construction of house and for a variety
of other expenses.

This

would lead to higher incomes and many people could

then borrow cheaply for a variety of needs.
They could grow crops, do business, set up small-scale industries etc.
They could set up new industries or trade in goods. Cheap and
affordable credit is crucial for the countrys development.

Formal and Informal Sector Credit in India

The various types of loan can be conveniently grouped as formal sector loans and informal sector loans.

Formal Sector

people are divided into four groups, from poor to rich.

per cent of the loans taken by poor households in the urban
areas are from informal sources.

the formal sectors are loans from banks and

cooperatives.
The Reserve Banks of India supervises the functioning of formal sources of loans.
For instance, we have seen that the banks maintain a minimum cash balance out of the deposits they receive.
The RBI monitors the banks in actually maintaining cash
balance.
Similarly, the RBI sees that the banks give loans not just to profit-making businesses and traders but also to small cultivators.

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Traders

3% Relatives and
7% Friends

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7% Others

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27%
25%
Commercial Cooperative
Societies
Banks

scale industries, to small borrowers etc.

Periodically, banks have to submit information to the RBI on
how much they are lending, to whom, at what interest rate, etc.
This sector changes very low rate of interest.

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Small

14

Informal Sector

is no organization, which supervises the credit activities of lenders in the informal sector.
They can lend at whatever interest rate they choose. There
is no one to stop them from using unfair means to get their
money back.
Compared to the formal lenders, most of the informal lenders
charge a much higher interest on loans.
Thus, the cost of the borrower of informal loans is much
higher.
Higher cost of borrowing means a larger part of the earnings
of the borrowers is used to repay the loan. Hence, borrowers
have less income left for themselves.
In certain cases, the high interest rate of borrowing can mean
that the amount to be repaid is greater than the income of the
borrower.
This could lead to increasing debt and debt trap.
For these reasons, banks and cooperative societies need to
lend more.

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Among

30%
Moneylenders

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Formal and Informal Credit: Who

Gets What?

Rural credit
Compare

this with the rich urban households.

10 per cent of their loans are from informal sources,
while 90 per cent are from formal sources.
A similar pattern is also found in rural areas.
The rich households are availing cheap credit from formal
lenders, whereas the poor households have to pay a heavy
price for borrowing.
First, the formal sector still meets only about half of the total
credit needs of the rural people.
The remaining credit needs are met from informal sources.
Most loans from informal lenders carry a very high interest
rate and do little to increase the income of the borrowers.
Thus, it is necessary that banks and cooperatives increase
their lending particularly in the rural area, so that the dependence on informal sources of credit reduces.
Secondly, while formal sector loans need to expand, it is also
necessary that everyone receives these loans.
At present, it is the richer households who receive formal credit,
whereas the poor have to depend on the informal sources.
Only

SELF-HELP GROUP FOR THE POOR

(i) A typical self-help group can have 15 to 20 members usually belonging to the same village.
(ii) The main motive of self-help group is to pool the savings of
the poor people.

PART V Economics

to Crowther, Money can be defined as anything

that is generally accepted as a means of exchange and at the
same time acts as a measure and as a store of value.
Barter exchange/Barter system: It implies direct exchange
of goods against goods without use of money is called barter
exchange. It is also called CC economy, i.e., commodity for
commodity exchange economy. When a weaver gives cloth to
the farmer in return for getting wheat from that farmer, this is
called barter exchange.
Money as Legal tender money: Currency (coins and notes)
is bound to accept it and it is in exchange for goods and services and in discharge of debts. None can refuse to accept
it because non-acceptance is an offence. It is issued by the
government or duly authorized Central Bank.
Demand Deposits: Deposits in a bank, which are payable
on demand are called demand deposits. It also provides the
facility of medium of exchange, which is a function of money,
when payments are made by cheques.
Cheque: It is a paper instructing the bank to pay a specific
amount from the persons account to the person in whose
name the cheque has been made.
Loan activities of banks: Basically, banks borrow money
to lend. Banks pay interest (suppose x per cent) from whom
it borrows. After keeping a portion of deposits as reserves,
banks lend to people who demand money as loan and bank
charges interest (suppose y per cent) from them. The difference between what is changed from borrowers (y per cent) and
what is paid to depositors is their main sources of income.
Credit (loan): Credit refers to an agreement in which the
lender supplies the borrower with money, goods or services
in return for the promise of future payment. Main demand for
credit is for crop production in case of rural areas.
Debt trap: Suppose a person takes a loan and due to unavoidable circumstances he is not able to repay his loan. Now he
faces a difficult situation and has to take a loan to repay the
previous loan. This situation is called debt trap.

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(iii) Saving per member can vary from `25 to `100 or more
depending on the ability of the people and the strength of
the group.
(iv) The self-help groups provide loans to their members at a
reasonable rate.
(v)After a year or two, if the group is regular in savings, it
becomes eligible for bank loans.
(vi) Loan is sanctioned in the name of the group with the main
motive to create self-employment opportunities for the
members.
(vii)In the recent years, many commercial and cooperative
banks have provided loan to these self-help groups for
releasing mortgaged land, for meeting working capital
needs, for housing materials, for acquiring assets like
sewing machines, handlooms, cattle etc.
(viii)Most of the self-help groups work in a democratic way,
i.e., it is the group, which decides regarding the loans to
be granted, interest to be charged, schedule etc.
(ix)A case of non-repayment of loan by any member is followed up seriously by other members in the group and
because of this feature the commercial banks do not hesitate to lend loans to these groups.
(x)The most important feature of self-help groups is that most
of these groups are being organized by women. These are
helping women to become financially self-reliant. The
regular meetings of the group provide a platform to discuss and act on a variety of social issues, such as health,
dowry, domestic violence, child marriage etc.

ed

Grameen Bank of Bangladesh

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Grameen Bank of Bangladesh is one of the biggest success stories

in reaching the poor to meet their credit needs at reasonable rates.
Started in the 1970s as a small project, Grameen Bank now has
over 6 million borrowers in about 40,000 villages spread across
Bangladesh. Almost all of the borrowers are women and belong to
poorest sections of the society. These borrowers have proved that not
only are poor women reliable borrowers, but that they can start and
run a variety of small income-generating activities successfully.

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If credit can be made available to the

poor people on terms and conditions that
are appropriate and reasonable these
millions of small people with their millions
of small pursuits can add up to create the
biggest development wonder.
Professor Muhammad Yunus,
the founder of Grameen Bank,
and recipient of 2006 Nobel Prize for Peace

Important Terms
Money:

Money may be defined as anything, which is generally accepted by the people in exchange of goods and services
or in repayment of debts.

Mind-Map
Limitation of Barter System
When goods were exchanged for goods
Lack of double coincidence of wants
Lack of divisibility
Difficulty in storing wealth
Functions of money
As a medium of exchange
Measure of value
Standard of offered payment
Store of value
Loan Activity
Formal sources
Banks collects money from depositors and gives for investment and charges interest.
Rate of interest is low.

Chapter 3 Money and Credit

Needs

collateral
sources
Not registered by the government
Charges high rate of interest
No requirement of collateral
Forms of Money
Paper works and coins, which has been authorized by the
government
Deposit with bank
Amount of money people hold in banks which they can
withdraw on demand.
Cheque

Paper,

which authorizes a bank to pay a certain amount

from once account
Debit cards
Money that can be withdrawn from ATM from one
account
Self -Help Groups
Consists of 1520 members
They pool their resources.
Members get the credit at a very low rate of interest.
Banks also provide loan to them.
It is a micro-level credit policy and programmer in rural
areas.

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Informal

CHAPTER

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Globalization and Indian Economy

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Globalization and Indian Economy

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.

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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
GLOBALIZATION
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.

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Ideally, it also contains free inter-country movement of labour. 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.

Syllabus

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What is globalization? Role played by MNCs in globalization. How MNCs take control of local market? What made
globalization possible? What do you mean by liberalization, role of WTO, positive and negative impact of globalization, suggestion for fair globalization.

Indias Development Strategy Prior

to 1991

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(i) India followed mixed economy approach.

(ii)Industries critically important for the economy were
retained by the government.
(iii)Private sector was allowed to operate, but was subjected to
control and regulations to prevent concentration of wealth
in few hands.
(iv)Government outlay in public sector enterprises increased
from `81.1 crore in First Five Year Plan (195051) to
`34,200 crore in Ninth Five year Plan (19972002).
(v)Governments aim was to eliminate poverty, reduce inequality in the distribution of income and to achieve economic
growth with social justice.
(vi)Most of the government revenue went in the financing Public
Sector Enterprises rather than development purposes.

Positive Aspects
(i)A large industrial base was created, which helped in industrial development.
(ii)Problem of unemployment and poverty declined
substantially.
(iii)Self-sufficiency was achieved in food production.
(iv)Base for export oriented industries was created.
(v)We were able to generate our own resources for
development.
(vi)A large pool of scientists and technically skilled persons
was created.

Negative Aspects
(i) Industrialization did not take place as expected.
(ii)Industrial growth rate declined to 4 per cent ( 196580)
from 8 per cent (195065).

PART V Economics

and developing countries. Most of the underdeveloped

countries suffer from lack of capital. Consequently,
their rate of economic growth is low. MNCs set up factories, and offices for production in these developing
and underdeveloping countries and made high investments. The money that is spent to buy assets, such as
land, buildings, machines and other equipment, is called
investment. Investment made by these MNCs is called
foreign investment.
(ii)Availability of foreign exchange: MNCs can be helpful in
solving the problem of foreign exchange of the underdeveloped and developing countries. In 90s, India faced a
huge shortage of foreign exchange but, with the entry of
MNCs it has surplus foreign exchange reserves.
(iii)Promotion of Small Scale Industries: Most of the MNCs
take help from small scale and local industries in manufacturing. Garments, footwear, sports items etc. are examples
of industries where production is carried out by a large
number of small producers around the world. The products
are supplied to the MNCs, which then sell these under their
own brand names to the customers.
(iv)Foreign Trade and Integration of Markets: MNCs helps in
the integration of world markets. With the entry of MNCs
even the small countries have opened up their domestic
markets for other countries.
(a) MNCs increase foreign trade.
(b)Foreign trade by the MNCs creates an opportunity for
the local producers to reach beyond the domestic markets, i.e., markets of their own countries.

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(iii)Corruption, lack of efficiency in work and ineffective,

management became common features in Public Sector
Enterprises.
(iv)Government invested `18,207 crore in 198081 in central public sector enterprises but incurred losses of Rs.203
Crore.
(v)Government failed to reduce concentration of economic
power in few hands in private sector.

In
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Conditions Which Led to Reforms in Indian

Economy

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(i)Rising prices, shortage of adequate capital, slow economic

development and technological backwardness.
(ii)Borrowings from abroad increased to such a level that we
were finding difficulty in paying even the interests, there
was nothing left to pay for the imports.
(iii)Indian government was forced to borrow more money
from International Banks.

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A multi-national company (MNC) is a company that owns or

controls productions in more than one nation. MNCs set up
offices and factories for productions in regions where they can
get cheap labour and other resources. This is done so that the
cost of productions is low and the MNCs can earn greater profits.
Multi-national corporations has changed the world economy.
(i)Before the entry of MNCs production was largely organized within a country.
(ii)Countries used to trade in raw material, foodstuff and finished goods.
(iii)But with the entry of MNCs, economic activities of companies are getting spread over many countries.
(iv)The goods and services are being produced globally.

nd

Multi-National Corporations

Interlinking Production Across Countries

set up production where it is close to the markets;
where there is skilled and unskilled labour available at low
costs; and where the availability of other factors of production is assured.
MNCs might look for government policies that look after their
interests. MNCs set up factories and offices for production.
The money that is spent to buy assets, such as land, building, machines and other equipment is called investment.
Investment made by MNCs is called foreign investment.
MNCs set up production jointly with some of the local companies of these countries.
MNCs can provide money for additional investments, like
buying new machines for faster production. MNCs might
bring with them the latest technology for production.

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MNCs

Advantages of Multinational Corporations

(i)Availability of capital and foreign investment: Multinational corporations help to solve the problem of
capital and foreign investment of under-developed

Disadvantages of Multi-National
Corporations
(i)Harmful for host country: The main objective of the
MNCs is to earn maximum profit. To achieve this objective
they invest their capital in underdeveloped and developing
countries. These MNCs over-exploit the natural resources
of the host country. Bug chunk of profits earned in underdeveloped countries go to the headquarters of MNCs.
(ii)Harmful for the local producers: MNCs place orders for
production with small producers. The products produced
are sold by MNCs undertheir own brand names. MNCs
have tremendous power to determine manufacturing conditions for the local producers. The history has shown that
most of the local producers have failed to compete with
the MNCs so, either they have sold their units to MNCs or
have been wiped off.
(iii)Harmful for Economic Equality: MNCs have been
proved harmful to the goal of economic equality, in more
than one way:
(a)Regional inequality has further aggravated because
of them. MNCs are interested in setting up industries
in particular regions and hence, these regions develop
very rapidly and other regions remain undeveloped.

Chapter 4 Globalization and Indian Economy

(b)MNCs pay more salaries and perks to their employees

than other employees. This widens the gap between
the incomes of the labourers giving rise to economic
inequality.

Liberalization
To make economy-free from director physical controls imposed
by the government.
(a) Two components or steps taken under liberalization:

(iv)Harmful for freedom: MNCs also prove detrimental to

the economic and political freedom of the host countries.
These dabble in the politics of the country. MNCs were
at the back of armed insurgence of many host countries.
These corporations make all efforts to bring to power in the
host county a political party that is favourably inclined to
them. Thus, it is not possible for the rulers of host countries
to pursue nationalistic, economic and political policies.

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(i)To allow private sector to run those industries, which

were earlier restricted only to public sector.
Many industrial activities are now opened for private
sector also.
Number of industries reserved for public sector has
been reduced from 17 to 3.
Private sector can also enter in core industries.
(ii)Relaxation in all the rules and regulationsprivate
sector was freed from:
Licensing
Permission to import raw materials
Regulation in price and distribution
Restriction
on investment by large business
companies

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(b)Developed countries want developing countries to

liberlize their trade and investment

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(i)Developed countries wanted to invest in developing

countries to earn high rate of returns.
(ii)According to developed countries, trade barriers are harmful as they hinder growth of trade and
investments.
Developed countries want that all developing countries
should liberate their trade but they themselves have retained
trade barriers. Developing countries should align with other
developing countries with similar interests to fight against
the domination of developed countries. They should negotiate with the WTO and other organizations for `fairer rules.

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a long time, foreign trade have been the main channel

connecting countries.
In history, you would have read about the trade routes connecting India and South Asia to markets both in the East
and West and the extensive trade that took place along these
routes.
Foreign trade creates an opportunity for the producers to
reach beyond the domestic markets, i.e., markets of their own
countries.
Producers can sell their produces not only in markets located
within the country but can also compete in markets located in
other countries of the world.
Similarly, for the buyers, import of goods produced in another
country is one way of expanding the choice of goods beyond
what is domestically produced.
With the opening of trade, goods travel from one market to
another. Prices of similar goods in the two markets tend to
become equal.
Producers in the two countries now closely compete against each
other even though they are separated by thousands of miles.
Foreign trade, thus, results in connecting the markets or integration of markets in different countries.

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Foreign Trade and Integration

of Markets

Chinese Toys in India

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Chinese manufacturers learn an opportunity to export toys to

India, where toys are sold at a high price. They start exporting plastic toys to India. Buyers in India now have the option
of choosing between Indian and the Chinese toys. Because of
the cheaper prices and new designs, Chinese toys become more
popular in the Indian markets. Within a year, 70 to 80 per cent of
the toy shops have replaced Indian toys with Chinese toys. Toys
are now cheaper in the Indian markets than earlier.
As a result of trade, Chinese toys come into the Indian markets. In the competition between Indian and Chinese toys, Chinese
toys prove better. Indian buyers have a greater choice of toys and
at lower prices. For the Chinese toy makers, this provides an
opportunity to expand business. The opposite is true for Indian
toy makers. They face losses, as their toys are selling much less.

(c)Liberalizations of trade and investment policies helped

the globalization process.
Liberalization means following a liberal policy in the filed of
industry and trade. Liberalization of trade and investment policies helped the golbalization process in a number of ways:
(i)Since 1991, the Government of India began to follow a
liberal policytowards foreign trade and foreign investments. As a result of the removal of the barriers on
foreign trade and foreign investments, foreign companies were able to set up their factories and offices here.
Like wise Indian companies were able to set up their
factories and offices in other countries.
(ii)As a result of liberalization, businessmen from India
and abroad were allowed to make decisions freely
about what they wanted to produce, import or export.
(iii)As a result of liberalization of trade and investment, the
government of India established many Special Economic
Zones (SEZs) where all sorts of facilities were made
available to foreign companies and relaxation of taxes
for an initial period of five years was given.

PART V Economics

(iv)Foreign companies were allowed flexibility in labour

laws so that they could employ workers for short periods and cut off the cost of their production.

improved quality and lower prices for several products. These

people today, enjoy much higher standards of living than was
possible earlier. Among producers and workers, the impact of
globalizations has not been uniform.

All the above steps of liberalization of trade and investment

policies greatly helped the globalization process.

(i)MNCs have increased their investments in India over the

past 15 years, which means investing in India has been
beneficial for them. New jobs have been created. Local
companies supplying raw materials, etc. to these industries
have prospered.

Globalization

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(ii)Several of the top Indian companies have been able to benefit from the increased competition. They have increased
competition. They have invested in newer technology and
production methods and raised their production standards.
Some have gained from successful collaborations with foreign companies.

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(iii)Globalization has enabled some larger Indian companies

to emerge as multi-national themselves.

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(iv)Globalization has also created new opportunities

for companies providing services, particularly those
involving IT.

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Liberalization of Foreign Trade and Foreign

Investment Policy
Government

puts tax on import of certain items. Suppose

the Indian government puts tax on the import of Chinese
toys. This will raise the price cert these toys. Chinese toys
will no longer be cheap in Indian market and its import
will automatically reduce. Indian toy maker will, automatically proper.
Tax on imports is an example of trade barrier. It is called a barrier because some restrictions have been set up. Government
can use trade barrier to regulate foreign trade.
The Indian government, after independence, had put barriers
to foreign trade and foreign investment. This was considered
necessary to protect our industries.
Industries were just coming up in the 1950s and 1960s
and competition from imports at that stage would not have
allowed these industries to come up. India allowed the
imports of only essential item, such as machinery, fertilizers
petroleum etc.
All developed countries, during the early stages of development, have given protection to domestic producers through a
variety of means.
The government decided that the time had come for Indian
producers to compete with producers around the globe. It feet
that competition would improve the performance of Indian
companies as they had to improve the quality.
Thus, barriers on foreign trade and foreign investment were
removed to a large extent.
Removing barriers or restrictions set by the government is
what is known as liberalization. With liberalization of trade,
businesses are allowed to make decisions freely about what
they wish to import or export.

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means integrating Indian economic with the

world economic so that there can be free flow of goods, services and investment from the rest of the World.
Foreign investment by MNCs in Asia and Africa has been
increasing at the same time foreign trade between countries
has been rising.
A large part of the foreign trade is also controlled by MNCs.
For instance, the car manufacturing plant of Ford Motors in
India not only produces cars for the Indian markets, it also
exports cars to other developing countries and exports car
components for its many factories around the world.
The result of greater foreign investment and greater foreign
trade has been greater integration of production and markets
across countries.
Globalization is this process of rapid integration or interconnection between countries.
More and more goods and services, investments and technology are moving between countries.
People usually move from one country to another in search of
better income, better jobs or better education.
In the past few years, however, there has not been much
increase in the movement of people between countries due to
various restrictions.

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Globalization

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Factors that have Enabled Globalization

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(i)Rapid improvement in technology has been one major factor that has stimulated the globalization process. Several
improvements in transportation technology have made
much faster delivery of goods across long distances possible at lower costs.

(ii)Information and communication technology has played a

major role in spreading out production of services across
countries.

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(iii)Starting around 1991, some far-reaching changes in policy

were made in India. The government decided that the time
had come for Indian producers to compete with producers around the globe. Barriers on foreign trade and foreign
investment were removed to a large extent. This meant that
goods could be imported and exported easily and also foreign companies could set up factories and offices here.

Impact of Globalization in India

Globalization and greater competition among producersboth
local and foreign producershas been of advantage to consumers, particularly the well-off sections in the urban areas.
There is greater choice before these consumers who now enjoy

Chapter 4 Globalization and Indian Economy

Export Quotas: Government put restrictions on exports to protect their local consumers.
WTO wants to abolish import and export quota, and to have
multi-national agreement instead of bilateral agreements.

Struggle for a Fair Globalization

The

above evidence indicates that not everyone has benefited

from globalization.
People with education skill and wealth have made the best
use of the new opportunities.
On the other hand, there are many people who have not shared
the benefits.
Fair globalization would create opportunities for all, and also
ensure that the benefits of globalization are shared better.
The government can play a major role in making this
possible.
The government can ensure that labour laws are properly
implemented and the workers get their rights.
The government can use trade and investment barriers. It can
negotiable at the WTO for fairer rules.
It can also align with other developing countries to fight
against the domination of developed countries in the WTO.
Peoples organizations have influenced important decisions
relating to trade and investments at the WTO.

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Impact of WTO on Indian Economy

Positive impacts

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Negative impacts:

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(i) Increased opportunities to have trade with other countries.

(ii) Availability of modern technology at reduced rates.

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(i) Benefits to developing countries are very limited.

(ii) Companies of developing countries would not be able to
compete with international companies, can face closure,
reducing employment opportunities.
(iii) Developed countries will interfere in the domestic economy of developing countries.
(iv) Prices of many essential and life-saving drugs may go up.

Summing Up

GATT (General Agreement on Tariffs and Trade) is a multilateral treaty or arrangement, which was instituted in 1948 by
102 countries with the objective of bringing dow tarrif and nontarrif barriers to international trade by providing a multi-laterally accepted framework of principles and norms to govern the
trade relations among member countries. India was one of the
original members of GATT. Untill 1994; the main concerns of
GATT of GATT were to regulate dumping and unfair business
practices and to ensure that member nations gradually reduce
protectionist measures. Moreover, it is only now (1944) that
GATT members have accepted the commitment to establish and
international organization to implement the objectives ad provisions of GATT. The original GATT agreements were revised
several times through the Kennedy Round in 1960s and the
Tokyo Round in 1970s. The latest round of talks for wide ranging revision started in Uruguay in 1986. The prolonged talks and
negotiations under the Uruguay round has resulted in a comperhensive, radical revision of GATT. The draft for this comprehensive revision was prepared by the ex-chairman of GATT, Arther
Dunkef. Hence, it is popularly known as the Dunkel Draft. The
Uruguay Round Agreements envisage the establishment of an
institution called World Trade Organization (WTO) to provide a common institutional framework to conduct trade relations among member nations in accordance with the provisions
of these agreements.

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World Trade Organization

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this chapter, we looked at the present phase of

globalization.
Globalization is the process of rapid integration of countries.
MNCs are playing a major role in the globalization process.
More and more MNCs are looking for locations around the
world that are cheap for their production.
As a result, production is being organized in complex ways.
Technology, particularly IT, has played a big role in organizing production across countries.
Liberalization of trade and investment has facilitated globalization by removing barriers to trade and investment.
At the international level, WTO has put pressure on developing countries to liberalize trade and investment.
While globalization has benefited well-off consumers and
also producers with skill, education and wealth.
But many small producers and workers have suffered as a
result of the rising competition.
Fair globalization would create opportunities for all, and also
ensure that the benefits of globalization are shared better.

Expectations of Wto from its Member

Countries
Bilateral agreements are held between two countries for the
smooth flow of trade.
Import Quotas: Government put restrictions on imports to protect their local manufacturers.

Important Terms
Economic

Reforms: By economic reforms, we mean a

change in the set of economic policies.
Liberalization: Liberalization means lifting of controls
imposed by the government. In other words, liberalization
means giving greater freedom to economic agents to take
their own decisions.
Globalization: Globalization means increasing integration
between different economics of the world.
Privatization: Privatization is closely associated with liberalization. It signifies a greater role for private sector in the
functioning of an economy.

PART V Economics

Bilateral

Mind-Map
Globalization
Foreign

investments by the MNCs

trade is controlled by MNCs
Integration is the result of greater foreign investment and
greater foreign trade.

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Foreign

in the information and communication technology

Telecommunication facilities (telegraph telephone, mobile
phones, fax)
Internet (e-mail, voice mail)

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TechnologyDevelopment

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Factors enabling globalization

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World Trade Organization

liberalization of foreign trade in India supported by

international organization
The aim of WTO is to liberalize international trade.
149 countries of the world are the members of the WTO
WTO is supposed to allow free trade.

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Liberalization of Foreign Trade and

Investment Policy
Tax

on imports reduced
coming up
Indian produces to compete with producers around the globe.
Removal of barriers on the foreign trade and foreign investment.
Industries

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Agreement: When a country makes trade relation

with other country then it makes an agreement with the country separately. This is called bilateral agreement.
Import Quota: When a country puts restriction on the amount
of commodities to be imported them it is called import quota.
This is done in the interest of the domestic consumers.
Export Quota: When a country imposes restriction on
the quality of a commodity to be exported then it is called
export quotas. This is done in the interest of the domestic
consumers.
MRTP: Following the recommendations of Monopoly
Inquiry Committee (1965), an act was passed in 1970.
The act was called Monopolies and Restricted Trade
Practices Act.
Laissez Faire : It is a French term, which means leave us
alone. It denotes the view that government should interfere
as little as possible in economic activity and leave decision
to the market.
Foreign Investment: Foreign investment is of two types.
The first is investment of foreign capital into new productive activity. This is known as direct foreign investment. The
other is foreign capital, purchasing the shares of Indian companies. This is known as Port Folio Investment.
Direct Foreign Investment: Direct foreign investment
creates additional capacity and contributes to additional
production.
Intellectual Property Rights: Laws governing patents, copyrights, trade secrets, electronic media and other commodities,
comprised primarily of information.
Mixed Economy: Under this economy, both public sector
and private sectors work together.
Sustainable Economic development: It means that the
development should take place without damaging the
environment.
Hard Currencies: Currencies of those countries, which are
in great demand.
Development Strategy: Development strategy refers to a
basic long-term policy to realize certain objectives.

Competition and Uncertain Employment

Globalization

and pressure changed the lives of workers.

garment exporters try hard to cut their own cost.
Jobs have become less secure.
Indian

Steps to Attract Foreign Investment

Central and state government in India talking steps to attract

foreign companies.
allowed flexibility in the labour laws.
Exclusive economic zones formed.
Government

CHAPTER

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Consumer Rights
Consumer Rights

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There are many aspects of unequal situations in a market and poor enforcement of rules and regulations. There is a need to sensitize
learners and encourage them to participate in the consumer movement. This chapter provides
case historieshow some consumers were exploited in a real life situation and how legal institutions help consumers in getting compensated and in upholding their rights as consumers.
The case histories would enable the students to link these narratives to their life experiences. This
chapter also provides details of a few organizations helping consumers in different ways. Finally,
it ends with some critical issues of the consumer movement in India.

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Syllabus

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What is globalization? Role played by MNCs in globalization. How MNCs take control of local market? What made
globalization possible? What do you mean by liberalization? Role of WTO, positive and negative impact of globalization, suggestion for fair globalization.

14

Consumers in the Marketplace

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Consumers consciousness towards his rights and the social and

legal obligation of the business community and government
towards consumer is known as consumer awareness. If the
consumer is not provided the amount of goods and services for
which he/she has paid, it is called consumer exploitation.

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How Consumers are Exploited?

Moneylenders in the informal sector that you have read earlier

adopt various tricks to bind the borrower: they could make the
producer sell the produce to them at a low rate in return for a
timely loan;

Consumers Montage

Many

people who work in the unorganized sector have to

work at a low wage and accept conditions that are not fair and
are also often harmful to their health.
Rules and regulations are required for the protection of the
consumers in the marketplace.
Whenever there is a complaint regarding a good or service
that had been bought, the seller tries to shift all the responsibility on to the buyer.
Exploitation in the marketplace happens in various ways. For
example, sometimes traders indulge in unfair trade practices,
such as when shopkeepers weigh less than what they should
or when traders add charges that were not mentioned before,
or when adulterated/defective goods are sold.
Markets do not work in a fair manner when producers are few
and powerful, whereas consumers purchase in small amount
and are scattered.
At times, false information is passed on through the media,
and other sources to attract consumers. For example, a company for years sold powder milk for babies all over the world

PART V Economics

(iv)After 1991, the Government of India has withdrawn it self

from most of the productivities and allowed the private
sector to take over. So it was felt that there is a greater need
to enforce discipline and regulations in the market and to
make the consumers aware not only of the commercial
aspects of sale and purchase of goods but also the health
and security aspects.
(v)There is a need for rules and regulations because most of
goods and services are being produced by private sector
with profit as a main motive.

Consumer Movements

Consumer Rights

Safety is Everyones Right

suffering shows how a hospital, due to negligence by

the doctors and staff in giving anaesthesia, crippled a student
for life.

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Rejis

Consumer Protection Act, 1986

Social consumer movements

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In India, the consumer movement as a social force originated

with the necessity of protecting and promoting the interests of
consumers against unethical and unfairtrade practices. Rampant
food shortages, hoarding, black marketing, adulteration of
food and edible oil gave birth to the consumer movement in
an orgainsed form in the 1960s. Till the 1970s consumer organizations were largely engaged in writing articles and holding
exhibitions. They formed consumer groups to look into the malpractises in ration shops and overcrowding in the road passenger transport. More recently, India witnessed an upsurge in the
number of consumer groups. Because of all these efforts, the
movement succeeded in bringing pressure on business conduct,
which may be unfair and against the interests of consumers at
large. A major step taken in 1986 by the Indian government was
the enactment of the Consumer Protection Act, 1986, popularly
known as COPRA.

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as the most scientific product claiming this to be better than

mothers milk.
It took years of struggle before the company was forced to
accept that it had been making false claim.
Similarly, a long battle had to be fought with court cases to
make cigarette-manufacturing companies accept that their
product could cause cancer.
Hence, there is a need for rules and regulations to ensure protection for consumers.

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Need for Rules and Regulations to Save the

Consumers

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(i)Due to the expansion of the business activities and globalization there are variety of goods available in the market
and producers are spending a lot of money to influence
the consumers, which makes it difficult for the consumers
to make a correct choice. So there is a need for consumer
awareness.
(ii)Producers do not provide sufficient information to the consumers and sometime even harass them.
(iii)Consumer awareness is also must because at times
greedy traders begin to play with the health of the people
by indulging in adulteration of edible oils, milk, butter,
ghee etc.

While

using many goods and services we have the right to

be protected against the marketing of goods and delivery of
services that are hazardous to life and property.
Producers need to strictly follow the required safety rules and
regulations.
There are many goods that require special attention to safety.
For example, pressure cookers have a safety valve, which if it
is defective, can cause a serious accident. The manufacturers
of the safety valve have to ensure high quality.
You also need public or government action to see that this
quality is maintained.
Information about Goods and Services Consumers have the

right to be informed about the particulars of goods and services that they purchase. Consumers can then complain and
ask for compensation or replacement if the product proves
to be defective in any manner. Similarly, one can protest and
complain if someone sells a good at more than the printed
price on the packet. This is indicated by MRP maximum
retail price. In fact, consumers can bargain with the seller
to sell the product at less than the MRP. In October 2005,
the Government of India enacted a law, popularly known
as RTI (Right to Information) Act, which ensures its citizens all the information about the functions of government
departments.
When Choice is Denied Any consumer who receives a service
in whatever capacity, regardless of age, gender and nature of

Chapter 5 Consumer Rights

(b) Administrative steps:

(i)Public distribution system has been established for preventing the exploitation of consumers.
(ii)Government tries to prevent illegal ways of making
profit like hoarding and black marketing.
(c) Technical steps:
Government has established various agencies for developing standard for various products and to check and certify
the products according to the standards. In India, two agencies are responsible for it.
(i)BIS or Beureau of Indian standards: Sets the standards
for industrial products, checks them and certifies them
with ISI mark. Through regular surveillance and taking samples both from market and factories ensures the
standards of the products.
(ii)AGMARK: Established under the Ministry of
Agriculture is responsible for certifying the food and
agricultural products.

service, has the right to choose whether to continue to receive

the service. Consumer can choose the products from the given
alternatives. In case of a single supplier, consumer must be
assured of quality and price of the good.

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Where should consumers go to get justice?

These are some examples in which consumers are denied
their rights. Such instances occur quite often in our country.
Consumers have the right to seek redressal against unfair
trade practices and exploitation.
If any damage is done to a consumer, she has the right to get
compensation depending on the degree of damage.

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At International level

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us take the case of Prakash. He had sent a money order

to his village for his daughters marriage. The money did not
reach his daughter at the time when she needed it nor did it
reach months later. Prakash filed a case in a district level consumer court in New Delhi.
The consumer movement in India has led to the formation of
various organizations locally known as consumer forums or
consumer protection councils.
If you are living in a residential colony, you might have
noticed name boards of Resident Welfare Association.
If there is any unfair trade practice meted out to their members they take up the case on their behalf.
Under COPRA, three-tier quasi-judicial machinery at the
district, state and national levels were set up for redressal of
consumer disputes.
The district level court deals with the cases involving claims
upto `20 lakh, the state level courts between `20 lakh and `1
crore and the national level court deals with cases involving
claims exceeding `1 crore.
Thus, the Act has enabled us as consumers to have the right to
represent in the consumer courts.

(i)ISO or International Standards Organization: Anon-govern

mental organization with its headquarters located in Geneva,
creates standards through international agreements and certifies
companies, goods and institutions with ISO 6000, ISO 14000,
etc. certificates, which indicates specific levels of standards.
(ii) Codex Alimentarius Commission: It was created in 1963 by
FAO and WHO. It develops food standards, guidelines and
codes of practices for production and international trade in
food products.

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Redressal

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Steps Taken by Government for Protection

of Consumers
At National level
(a) Legislative steps:
Various Acts have been formed, the most important Act is:
(i)Consumer Protection Act, 1986: To solve the consumer
grievances in a speedy, simple and inexpensive manner.
Under this three types of courts have been established.
(ii)Separate departments for consumer welfare have been
established in both central and state government.

Learning to become Well-Informed

Consumers
When

we as consumers become conscious of our rights, while

purchasing various goods and services, we will be able to discriminate and make informed choices.
This calls for acquiring the knowledge and skill to become a
well-informed consumer.
The enactment of COPRA has led to the setting up of separate departments of Consumer Affairs in central and state
governments.
ISI and Agmark While buying many commodities, on the cover,
you might have seen a logo with the letters ISI, Agmark or Hallmark.
These logos and certification help consumers get assured of quality
while purchasing the goods and services. The organizations that
monitor and issue these certificates allow producers to use their
logos provided they follow certain quality standards.

Bhattar Cable Industries

Pure Ghee as per Agmark

PART V Economics
Consumer

Exploitation: Consumer exploitation signifies a

situation in which the consumer is cheated, misbehaved or
harassed by the business community.
Adulteration: Mixing up of inferior goods with the costlier
superior goods with a view to make profit.
Hoarding: Illegal storing of essential commodities by the
traders in their godowns with a view to sell them in future at
a higher price.
National Consumer Commission: A consumer court at
national level.
State Consumer Commission: A state level consumer
court.
District Form: It is a consumer court at district level.
Consumer Protection Act: Consumer Protection Act, 1986
provides a legal procedure concerning consumer rights.
Bureau of Indian Standards (BIS): It is an institution or setting up the standard for making and producing various products and enforcing them.
Indian Standard Institution (ISI) : It is an institution whose
headquarters is located in New Delhi. It lays down the standards for industrial and consumer goods on a scientific basis.
It certifies the goods, which meet these standards.
Standardization: Maintaining quality, grades, size and constituents of the product is called standardization.
Agmark: Agmark sign is an assurance of conformity to the
specification while producing the commodity. It is meant for
agricultural products.
Limited Competitions: It signifies a situation when there is
only one producer or a group of producers who are in position
to control the supply of goods.
AAY: Antyodaya Anna Yojana
NGOs: Non-Governmental Organization
FAO: Food and Agricultural Organization
WHO: World Health Organization
FPS: Fair Price Shops
DMI: Directorate of Marketing and Inspection

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Though these organizations develop quality standards for many

products, it is not compulsory for all the producers to follow
standards. However, for some products that affect the health and
safety of consumers or of products of mass consumption like
LPG cylinders, food colours and additives, cement packaged
drinking water, it is mandatory on the part of the producers to
get certified by these organizations.

Features of Copra 1986

COPRA 1986, a separate department called consumer affairs department has been formed at the union
and state level.
A three-tier quasi judicial system popularly called consumer courts has been established at the national, state and
district level.
At the national level it is called national consumer court. It
can try cases, which deal with claims exceeding `1 crore.
At the district level it is called district consumer courts or
consumer forums. It can solve dispute, which involves a
claim of `20 Lakh and less.
At the state level it is called the state consumer commission.
It can solve disputes, which involves a claim of `20 lakh one
crore.
Job of these courts is to provide speedy justice at a very low
cost within a time limit.

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Under

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Taking the Consumer Movement Forward

has been observing 24 December as the National

Consumers Day.
It was on this day that the Indian Parliament enactment the
Consumer Protection Act in 1986.
The consumer movement in India has made some progress in terms of numbers of organized groups and their
activities.
There are today more than 700 consumer groups in the country of which only about 2025 are well organized and recognized for their work.
The consumer redressal process is becoming cumbersome,
expensive and time consuming.
Many a times, consumers are required to hire lawyers.
These cases require time for filling and attending the court
proceedings.
In most purchases, cash memos are not issued; hence, evidence is not easy to gather.
The existing laws also are not very clear on the issue of compensation to consumers injured by defective products.
It is often said that consumer movements can be effective
only with the consumers active involvement.

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Mind-Map

Important Terms
Consumer Awareness:

Consumer awareness means the consciousness or awakening among consumers towards their
rights and duties.

Factors causing exploitation of consumers

Limited

information
supplies
Limited competition
Low literacy
Limited

Consumer Exploitation
Underweight
Substandard
High

and under measurement

quality

prices
articles
Adulteration and impurity
Duplicate

Chapter 5 Consumer Rights

Lack

of safety devices
scarcity
False or incomplete information
Unsatisfactory after sale service
Rough behaviour

Rights of consumer

Artificial

Right

to safety
to be informed
Right to choose
Right to be heard
Right to seek redressal
Right to consumer education

Consumer Duties
check the quality as well as guarantee by preferably
buying AGMARK products
Should ask for cash memo
From consumer organization
To make complaint for genuine grievances should know
their rights

vt.

To

Legislative

In
dia
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Measures for consumer protection

measures: COPRA 1986
measures: PDS
Technical measures: AGMARK

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Right