Indian Economy

Module 1

An overview of Indian Economy

Introduction

Meaning of Economy:

An economy is the system according to which the money, industry, and trade
of a country or region are organized.
A country's economy is the wealth that it gets from business and industry.

Indian Economy:

Indian economy is a developing economy in which Agriculture is the back

bone of Indian economic. 60% of India’s population are on the below poverty
line. Majority of the people of India are leading a poverty line. Indian
economic is affected by it. Countries which are on the part of progress and
which have their potential for development are called developing economic.
So India is termed as developing economic by modern views

The Economy of India is the tenth-largest in the world by nominal GDP and
the thirdlargest by purchasing power parity (PPP). The country is one of
the G-20 major economies, a member of BRICS and a developing economy
among the top 20 global traders according to the WTO

India has emerged as the fastest growing major economy in the world as per
the Central Statistics Organisation (CSO) and International Monetary Fund
(IMF) and it is expected to be one of the top three economic powers of the
world over the next 10-15 years, backed by its strong democracy and
partnerships. India’s GDP is estimated to have increased 6.6 per cent in
2017-18 and is expected to grow 7.3 per cent in 2018-19.

Market size
India's gross domestic product (GDP) at constant prices grew by 7.2 per cent
in September-December 2017 quarter as per the Central Statistics
Organisation (CSO). Corporate earnings in India are expected to grow by
15-20 per cent in FY 2018-19 supported by recovery in capital expenditure,
according to JM Financial.
The tax collection figures between April 2017- February 2018 show an
increase in net direct taxes by 19.5 per cent year-on-year and an increase in
net direct taxes by 22.2 per cent year-on-year.
India has retained its position as the third largest startup base in the world
with over 4,750 technology startups, with about 1,400 new start-ups being
founded in 2016, according to a report by NASSCOM.
India's labour force is expected to touch 160-170 million by 2020, based on
rate of population growth, increased labour force participation, and higher
education enrolment, among other factors, according to a study by
ASSOCHAM and Thought Arbitrage Research Institute.
India's foreign exchange reserves were US$ 422.53 billion in the week up to
March 23, 2018, according to data from the RBI.

Recent Developments
With the improvement in the economic scenario, there have been various
investments in various sectors of the economy. The M&A activity in India
increased 53.3 per cent to US$ 77.6 billion in 2017 while private equity (PE)
deals reached US$ 24.4 billion. Some of the important recent developments in
Indian economy are as follows:
 India's merchandise exports and imports grew 11.02 per cent and 21.04
per cent on a y-o-y basis to US$ 273.73 billion and US$ 416.87 billion,
respectively, during April-February 2017-18.
 India's Foreign Direct Investment (FDI) inflows reached US$ 208.99
billion during April 2014 - December 2017, with maximum contribution
from services, computer software and hardware, telecommunications,
construction, trading and automobiles.
 India's Index of Industrial Production (IIP) rose 7.5 per cent
year-on-year in January 2018 while retail inflation reached a four month
low of 4.4 per cent in February 2018.
 Employment on net basis in eight key sectors in India including
manufacturing, IT and transport increased by 136,000 in July-September
quarter of 2017-18.
 The average salary hike of Indian employees is estimated to be 9.4 per
cent and that of key talents is estimated to be nearly 15.4 per cent in 2018,
backed by increased focus on performance by companies, according to Aon
Hewitt.
 Indian merchandise exports in dollar terms registered a growth of 4.48
per cent year-on-year in February 2018 at US$ 25.83 billion, according to
the data from Ministry of Commerce & Industry.
 Indian companies raised Rs 1.6 trillion (US$ 24.96 billion) through
primary market in 2017.
 Moody’s upgraded India’s sovereign rating after 14 years to Baa2 with a
stable economic outlook.
 The top 100 companies in India are leading in the world in terms of
disclosing their spending on corporate social responsibility (CSR),
according to a 49-country study by global consultancy giant, KPMG.
 The bank recapitalisation plan by Government of India is expected to
push credit growth in the country to 15 per cent, according to a report by
Ambit Capital.
 India has improved its ranking in the World Bank's Doing Business
Report by 30 spots over its 2017 ranking and is ranked 100 among 190
countries in 2018 edition of the report.
 India's ranking in the world has improved to 126 in terms of its per
capita GDP, based on purchasing power parity (PPP) as it increased to
US$ 7,170 in 2017, as per data from the International Monetary Fund
(IMF).
 India is expected to have 100,000 startups by 2025, which will create
employment for 3.25 million people and US$ 500 billion in value, as per
Mr T V Mohan Das Pai, Chairman, Manipal Global Education.
 The World Bank has stated that private investments in India is
expected to grow by 8.8 per cent in FY 2018-19 to overtake private
consumption growth of 7.4 per cent, and thereby drive the growth in India's
gross domestic product (GDP) in FY 2018-19.
 The Niti Aayog has predicted that rapid adoption of green mobility
solutions like public transport, electric vehicles and car-pooling could likely
help India save around Rs 3.9 trillion (US$ 60 billion) in 2030.
 Indian impact investments may grow 25 per cent annually to US$ 40
billion from US$ 4 billion by 2025, as per Mr Anil Sinha, Global Impact
Investing Network's (GIIN’s) advisor for South Asia.
 The Union Cabinet, Government of India, has approved the Central
Goods and Services Tax (CGST), Integrated GST (IGST), Union Territory
GST (UTGST), and Compensation Bill.
 The Nikkei India manufacturing Purchasing Managers’ Index increased
at the fastest pace in December 2017 to reach 54.7, signaling a recovery in
the economy.

Government Initiatives
The Union Budget for 2018-19 was announced by Mr Arun Jaitley, Union
Minister for Finance, Government of India, in Parliament on February 1, 2018.
This year’s budget will focus on uplifting the rural economy and strengthening
of the agriculture sector, healthcare for the economically less privileged,
infrastructure creation and improvement in the quality of education of the
country. As per the budget, the government is committed towards doubling
the farmers’ income by 2022. A total of Rs 14.34 lakh crore (US$ 225.43
billion) will be spent for creation of livelihood and infrastructure in rural areas.
Budgetary allocation for infrastructure is set at Rs 5.97 lakh crore (US$ 93.85
billion) for 2018-19. All-time high allocations have been made to the rail and
road sectors.

India's unemployment rate is expected to be 3.5 per cent in 2018, according to

the International Labour Organisation (ILO).
Numerous foreign companies are setting up their facilities in India on account
of various government initiatives like Make in India and Digital India. Mr.
Narendra Modi, Prime Minister of India, has launched the Make in India
initiative with an aim to boost the manufacturing sector of Indian economy, to
increase the purchasing power of an average Indian consumer, which would
further boost demand, and hence spur development, in addition to benefiting
investors. The Government of India, under the Make in India initiative, is
trying to give boost to the contribution made by the manufacturing sector and
aims to take it up to 25 per cent of the GDP from the current 17 per cent.
Besides, the Government has also come up with Digital India initiative, which
focuses on three core components: creation of digital infrastructure, delivering
services digitally and to increase the digital literacy.

Some of the recent initiatives and developments undertaken by the

government are listed below:
 The Union Cabinet gave its approval to the North-East Industrial
Development Scheme (NEIDS) 2017 in March 2018 with an outlay of Rs
3,000 crores (US$ 460 million) up to March 2020.
 In March 2018, construction of 321,567 additional houses across 523
cities under the Pradhan Mantri Awas Yojana (Urban) has been approved
by the Ministry of Housing and Urban Poverty Alleviation, Government of
India with an allocation of Rs 18,203 crore.
 The Ministry of Power, Government of India has partnered with the
Ministry of Skill Development & Entrepreneurship to provide training to
the manpower in six states in an effort to speed up the implementation of
SAUBHAGYA (Pradhan Mantri Sahaj Bijli Har Ghar Yojna).
 Prime Minister's Employment Generation Programme (PMEGP) will
be continued with an outlay of Rs 5,500 crore (US$ 844.81 million) for
three years from 2017-18 to 2019-20, according to the Cabinet Committee
on Economic Affairs (CCEA).
 In February 2018, The Union Cabinet Committee has approved setting
up of National Urban Housing Fund (NUHF) for Rs 60,000 crore (US$ 9.3
billion) which will help in raising requisite funds in the next four years.
 The target of an Open Defecation Free (ODF) India will be achieved by
October 2, 2019 as adequate funding is available to the Swachh Bharat
Mission (Gramin), according to Ms Uma Bharti, Minister of Drinking
Water and Sanitation, Government of India.
 The Government of India has succeeded in providing road connectivity
to 85 per cent of the 178,184 eligible rural habitations in the country under
its Pradhan Mantri Gram Sadak Yojana (PMGSY) since its launch in 2014.
 A total of 15,183 villages have been electrified in India between April
2015-November 2017 and complete electrification of all villages is expected
by May 2018, according to Mr Raj Kumar Singh, Minister of State (IC) for
Power and New & Renewable Energy, Government of India.
 The Government of India has decided to invest Rs 2.11 trillion
(US$ 32.9 billion) to recapitalise public sector banks over the next two
years and Rs 7 trillion (US$ 109.31billion) for construction of new roads
and highways over the next five years.
 The mid-term review of India's Foreign Trade Policy (FTP) 2015-20 has
been released by Ministry of Commerce & Industry, Government of India,
under which annual incentives for labour intensive MSME sectors have
been increased by 2 per cent.
 The India-Japan Act East Forum, under which India and Japan will
work on development projects in the North-East Region of India will be a
milestone for bilateral relations between the two countries, according to Mr
Kenji Hiramatsu, Ambassador of Japan to India.
 The Government of India will spend around Rs 1 lakh crore (US$ 15.62
billion) during FY 18-20 to build roads in the country under Pradhan
Mantri Gram Sadak Yojana (PMGSY).
 The Government of India plans to facilitate partnerships between gram
panchayats, private companies and other social organisations, to push for
rural development under its 'Mission Antyodaya' and has already selected
50,000 panchayats across the country for the same.
 The Government of India and the Government of Portugal have signed
11 bilateral agreements in areas of outer space, double taxation, and nano
technology, among others, which will help in strengthening the economic
ties between the two countries.
 India's revenue receipts are estimated to touch Rs 28-30 trillion
(US$ 436- 467 billion) by 2019, owing to Government of India's measures
to strengthen infrastructure and reforms like demonetisation and Goods
and Services Tax (GST).

Road Ahead
India's gross domestic product (GDP) is expected to reach US$ 6 trillion by
FY27 and achieve upper-mid2dle income status on the back of digitisation,
globalisation, favourable demographics, and reforms. India is also focusing on
renewable sources to generate energy. It is planning to achieve 40 per cent of
its energy from non-fossil sources by 2030 which is currently 30 per cent and
also have plans to increase its renewable energy capacity from 57 GW to 175
GW by 2022. India is expected to be the third largest consumer economy as its
consumption may triple to US$ 4 trillion by 2025, owing to shift in consumer
behaviour and expenditure pattern, according to a Boston Consulting Group
(BCG) report; and is estimated to surpass USA to become the second largest
economy in terms of purchasing power parity (PPP) by the year 2040,
according to a report by Price water house Coopers.

Exchange Rate Used: INR 1 = US$ 0.0153 as on March 29, 2018

National Income V K R V Rao The Indian economy has reached a high rate of
domestic saving and capital formation and yet poverty and unemployment
seem to be on the increase. The level of growth is nowhere near that reached
even by the middle level industrialised countries even though the rate of
saving and capital formation seems to be approaching their level. Why is it
that in spite of a high rate of capital formation, the rate of growth is low and
why is it that in spite of an increase in the rate of saving there is an increase in
poverty?

An overview of indian economy:

India's diverse economy encompasses traditional village farming, modern

agriculture, handicrafts, a wide range of modern industries, and a multitude of
services. Slightly less than half of the workforce is in agriculture, but services
are the major source of economic growth, accounting for nearly two-thirds of
India's output but employing less than one-third of its labor force. India has
capitalized on its large educated English-speaking population to become a
major exporter of information technology services, business outsourcing
services, and software workers. Nevertheless, per capita income remains
below the world average.

India is developing into an open-market economy, yet traces of its past

autarkic policies remain. Economic liberalization measures, including
industrial deregulation, privatization of state-owned enterprises, and reduced
controls on foreign trade and investment, began in the early 1990s and served
to accelerate the country's growth, which averaged nearly 7% per year from
1997 to 2017. India's economic growth slowed in 2011 because of a decline in
investment caused by high interest rates, rising inflation, and investor
pessimism about the government's commitment to further economic reforms
and about slow world growth. Rising macroeconomic imbalances in India and
improving economic conditions in Western countries led investors to shift
capital away from India, prompting a sharp depreciation of the rupee through
2016.

Growth rebounded in 2014 through 2016, exceeding 7% each year, but slowed
in 2017. Investors’ perceptions of India improved in early 2014, due to a
reduction of the current account deficit and expectations of post-election
economic reform, resulting in a surge of inbound capital flows and
stabilization of the rupee. Since the election, the government has passed an
important goods and services tax bill and raised foreign direct investment
caps in some sectors, but most economic reforms have focused on
administrative and governance changes largely because the ruling party
remains a minority in India’s upper house of Parliament, which must approve
most bills. Despite a high growth rate compared to the rest of the world,
India’s government-owned banks faced mounting bad debt in 2015 and 2016,
resulting in low credit growth and restrained economic growth.

The outlook for India's long-term growth is moderately positive due to a

young population and corresponding low dependency ratio, healthy savings
and investment rates, and increasing integration into the global economy.
However, long-term challenges remain significant, including: India's
discrimination against women and girls, an inefficient power generation and
distribution system, ineffective enforcement of intellectual property rights,
decades-long civil litigation dockets, inadequate transport and agricultural
infrastructure, limited non-agricultural employment opportunities, high
spending and poorly targeted subsidies, inadequate availability of quality
basic and higher education, and accommodating rural-to-urban migration.
Definition: This entry briefly describes the type of economy, including the
degree of market orientation, the level of economic development, the most
important natural resources, and the unique areas of specialization. It also
characterizes major economic events and policy changes in the most recent 12
months and may include a statement about one or two key future
macroeconomic trends.

Features of Indian Economy

Indian economy bags the seventh position among the other strongest and
largest economies among the world. Being one of the top listed countries
among the developing countries in terms of industrialization and economic
growth, India holds a robust stand with an average growth rate of approx 7%.
The Indian economy has emerged as a robust economic player among the
economic giants like-US, UK, China, etc. Even though the rate of growth has
been sustainable and comparatively stable, but there are still fair
opportunities of growth.
With the growing standards and opportunities in India, it is expected to very
soon capture a very dominant position among the others in the world. The
characteristic features of India Economy is discussed below in details:

Features of Indian Economy

1. India has a mixed economy

2.
Indian economy is a true example of complete mixed economy. This means
both private and public sectors co-exist and function here, simultaneously. On
one side, some of the fundamental and heavy industrial units are being
operated under the public sector. Whereas, due to the liberalization factors of
the economy, the private sector has gained further enhancements in terms of
scope. This makes it a perfect amalgamation of both public and private sectors
being operated and supported under a single economic cloud.

2. Agriculture plays the key role in supporting the Indian economy

Agriculture being the maximum pursued occupation in Indian plays an
important role in its economy as well. Around 70% of the occupational
practice in India is covered by the farmers and other agricultural units. This
gives a higher impact on the Indian economy, both directly and indirectly. In
fact, about 30% of our GDP today is earned from the agricultural sector itself.
Agricultural sector is thereby also called as the backbone of the Indian
economy. It forms as a major component of livelihood for maximum people in
India. The agricultural products being exported such as fruits, vegetables,
spices, vegetable oils, tobacco, animal hair, etc. also add to the economic
uphold with rise in the international trading.
3. Newly Industrialized Economy – good balance between agriculture and
industrial sector
Indian economy has been a true holder of newly imbibed innovations in the
formation of the country’s economy. Earlier agriculture used to be the prime
contributor as industrialization was at a lower edge during the time. With the
growing time, subsequently industrial took a high tide in the country making
it a very important contributor to it. Well the Indian economy keeps both
these in good balance. It amalgamates the agricultural outputs towards
enhancing the industries and contributing to the growth of the economy,
together.

4. An Emerging Market
Being a developing country with great level of economic well-being, India has
emerged as an emerging market for the other players. Holding a constant GDP
rate even in the downfall situations, it has kept its position intact making it a
lucrative spot for the other economies to invest. This has in turn also helped
the Indian economy exist as a robust economy among the other leaders. India
has a high potential with low investments and risk factors, this also makes it
an emerging market for the world.

5. A Major Economy
Emerging as a top economic giant among the world economy, India bags
the seventh position in terms of nominal Gross Domestic Product
(GDP) and third in terms of Purchasing Power Parity (PPP). These figures are
a representation of the Indian economy among the G20 countries. This is a
clear indication of the robustness Indian economy has gained over decades
and emerged as a major economy among the other leading economies on the
globe.

6. Federal in Character
Bearing a federal character in the economy upholds, in India both the centre
and state are economy growth drivers. They equally act as the operators of the
economies at their own levels. In fact, the Indian constitution gives the clear
permissions and guidelines to operate and regulate the economies and
economic standard of living of the people both at the center and the state level,
separately.

7. Fast Growing Economy

India’s economy is one of the world’s fastest growing economies on the globe.
India’s economy has emerged as the world’s fastest growing economy in the
last quarter of 2014 and has replaced the People’s Republic of China with a
growth rate of approx 7%.

8. Fast growing Service Sector

With growth in the service sector, Indian economy has formulated its growth
in the service sector as well. There has been a high rise growth in the technical
sectors like-e of Information Technology Sector, BPO, etc. The business in
these sectors has not only added and enhanced the contribution to the
economy, but has also helped in the multi-fold growth of the country a well.
These emerging service sectors have helped the country go global and helped
in spreading its branches around the world.

9. Unequal distribution of Income economic disparities

There exists a huge economic disparity in the Indian economy. There is a
huge difference in the distribution of income among the various categories of
people on the basis of income. This has lead to an increase in the poverty level
in the society and a maximum percentage of individuals are thus living under
the – Below Poverty Line (BPL). This unequal distribution of income has
created a huge gap and economic disparity among the various categories of
people in the Indian economy.

10. Instability of price – Cost of products is not stable

Even though there has been a constant growth rate in the GDP and growth
opportunities in the Indian economy, but there have been fluctuations in the
price concerns too. Being depended on the other bigger economic giants the
price of the products and services keep on fluctuating since decades. At times
the inflation grows high raising the prices of the commodities. This clearly
indicates the instability of the price concerns in the Indian economy.

11. Lacks proper infrastructure

Even though there has been a gradual and high scale improvement in the
infrastructural development in the past few decades, but there is still a scarcity
of the same. The industrial growth escalating in the country lacks proper
infrastructure growth. The rate at which the infrastructure is growing needs
proper infrastructure growth to support the growth process. This has been a
lacking point in the growth of the Indian economy. With the subsequently
supporting infrastructure the economy has grown a lot, but will definitely
need further growth support in the form of proper infrastructure.

12. Inadequate Employment opportunities

India is a growing country with a growing economy as well! Comparing the
growth rate of the economy in the last few decades there has been a gradual
high-rise in the same. The population rate has also grown on a large-scale; this
has been the biggest challenge for the growth of the economy. With growing
population there is a huge need of the employment opportunities too! But,
there have been inadequate employment opportunities in the country that has
affected the economy on a large-scale. Even though the conditions have
improved a lot in the past few decades, but still in comparison to the other
giant economies there is a lot of scope of improvement.

13. Large Domestic consumption

With the escalating growth rate in the economy the standard of living has
grown a lot. This in turn has resulted in increasing the domestic consumption
in the country. With the growing advancements and globalization, the
domestic consumption rate within the people of the country is already high,
this adds a lot to the Indian economy.

14. Rapid growth of Urban areas

Urbanization and planned development is a key ingredient towards the
growth of any of the economy around the world. There has been a rapid
growth of urban areas in India after independence. The growth acceleration in
the rate of urbanization after independence was due to the country’s adoption
of a mixed economy. This has given rise in complete development and rise of
the private sector that has played a key role in constituting the Indian
economy. Thus, urbanization is taking place at a quite faster rate in India
changing the shape of the Indian economy. The constant urbanization is a key
to the growth of the Indian economy.

15. Stable macro economy

The Indian economy has been projected and considered one of the most stable
macro economy around the world. It’s not just the saying, but the facts too
reflect the same. The current year’s survey represents the Indian economy to
be a “heaven of macroeconomic stability, resilience and optimism. According
to the last economic survey for the year 2014-15, 8%-plus GDP growth rate has
been predicted, with actual growth turning out to be a little less (7.6%). This is
a clear indication of a stable macro economic growth rate.

16. Excellent human capital

The maximum population that constitutes the human capital of India is young.
This means that India is a pride owner of the maximum percentage of youth
human capital that is a great indicator of the growth. The young population is
not only motivated but skilled and trained enough to maximize the growth
situations. Creating vital opportunities to expand the business and other
economic opportunities this human capital plays a key role in maximizing the
growth opportunities in the country. Also, this has invited foreign investments
to the country and outsourcing opportunities too.

17. Large Population

India holds a top position in terms of population growth after China. The
population growth rate of India is very high and this affects the Indian
economy as well. The population growth rate in India is as high as 2.0%
annually, leading to the major leads towards poverty. This population,
however, has the highest percentage of the youth crowd which if monitored
and directed in the right direction can turn out to produce wondrous growth
results in the economy.

18. Unequal wealth distribution

The Indian economy bears a great disparity between the rich and the poor.
There is a complete lop-sided distribution of the wealth in the economy. This
is why the rich are becoming richer and the poor are growing even poor in the
economy levels. This unequal wealth distribution doesn’t affect the economy
on the whole, but definitely affects the per capita income and living standards
of the people in India. India tends to be the second most unequal wealth
distribution based economy in the world, after Russia. This increases the
political instability that affects the economy a lot.

19. Pursues labor intensive techniques

Due to a high potential population bank in India, there exist both merits and
demerits of the same. In order to offer employment opportunities to the
maximum population crowd in the country Indian economy focuses on labor
intensive techniques. These techniques help get the job done according to the
labor friendly standards contributing to maximizing the employment
opportunities in the country.

20. Technological use is less in comparison to the well-developed economies

India being a growing economy is in the stage of further growth. Even though
the technology and technical usage in the country is good enough, but is really
less as compared to the well-developed economies. The other reason behind
this is the use of labor intensive techniques and slow rate of acceptance to
innovation. Even though the capability standard of the country is high, but
due to the lack of speed in the transition process, things need time. In the
current scenario the country has grown a lot and coming up as a major
technological player among the others in the world.

Conclusion
These are the major characteristic feature of the Indian economy. India is an
active member in various economic groups’ like-BRICS and G-20. Not only
does India have the potential in the form of human capital and other raw
materials, but is also technically advanced to support maximum growth in the
country. This is a true indicator of inviting foreign investments and creating
the best growth situation for both the foreign and national crowds

Indian economy on the eve of independence

Introduction
The main purpose of this Topic is to make you familiar with India’s economy
in 1947 and present some important factors that leads to underdevelopment
and stagnation of the India’s Economy.
The structure of India’s present day economy is not just of current making,
It has it’s root steeped in the history specially British India.
It’s important for us to know country ‘s economic conditions before
Independence to understand present economic condition.

Two most important purpose of Britishers are-

To reduce the India to being a feeder economy for Great Britain’s own rapidly
expanding modern industrial base.
To protect and promote economy interest’s of Britain than with the
development of the Indian economy.

Overview of Indian economy during British rule

Before Britishers-Independent economy, agrarian society, India famous for
Handicraft Industries(silk, cotton, metal & precious stone works ).
The above two main policy transformed India into a net supplier of raw
material and consumer of finished Industrial product from Britain.
Country’s growth rate-less than 2 %(percent)
Per -capita output-less than half percent.

Agriculture sector
Indian society was mainly agrarian society about 85 % of population directly
or indirectly involved in agriculture.
Agriculture was continuously stagnated and deteriorated.
Little growth in agriculture due to expansion of area under cultivation .

Cause for low productivity and stagnation of agriculture during British rule
Low productivity in agriculture during British period is due to land settlement
system.

Zamindari system
Profit which came from agriculture went into the hands of Zamindars instead
of cultivators.
Zamindars did nothing for the development of agriculture sector because
there main aim was to gain profit ignoring whatever the economic condition of
cultivators.
Revenue settlement process-zamindars had to deposit fixed amount of money
within given date if they fail to do this they lose their rights.
It is one of the reason for the more harsh attitude of zamindars towards
cultivators .

Ryotwari System
Ryotwari System was introduced by Thomas Munro in 1820.
British Government collected taxes directly from the peasants.
ownership rights were handed over to the peasants.
The revenue rates of Ryotwari System were 50% where the lands were dry and
60% in irrigated land.

Mahalwari System
Mahalwari system was introduced in 1833 during the period of Warren
Hastings.
The villages committee was held responsible for collection of the taxes.

However, the British officers hardly cared of these rules. This created
widespread discontent among the Indians

Low levels of technology-There is negligible use of scientific techniques

Negligible use of fertilizers-fertilisers are rarely used

Lack of irrigation facility-irrigation facility and tools are not adequate .

Growth in Agriculture-commercialisation of agriculture results in high yield of

cash crops in some areas but in no way help farmers because it was used by
Britishers .
Partition-Highly irrigated and fertile land went to Pakistan this affects India’s
output.

Industrial sector
Like agriculture industrial sector could not develop during British rule.
World-wide famous Indian handicraft Industries declined during British rule
and to take it’s place no other modern industry was allowed to come.

Reason behind failure of industrial sector during British rule

British India wants to make India only exporter of raw material to Britain and
feeder of the finished products from Britain .

Results of failure of industrial sector during british rule

Unemployment, demand in the Indian consumer market this result in more
imports of cheap manufactured goods from Britain.

Hardly any Capital goods industry (which produce machine tools)

Lack of this lower the rate of industrial development in India.

Small growth rate-Growth rate of new industrial sector and it’s contribution to
the GDP remained very small .

Limited area of operation-new industrial sectors confined only to the railways,

communications, ports, power generation and some other departmental
undertaking.

Positive Signs
Modern industry began to grow during the second half of the 19 century but
it’s progress remained very slow.
In the beginning the major industry were cotton and textiles mills.
In the starting of 20 century The Tata Iron and Steel Company(TISCO) was
setup in 1907.
After second world-war-Paper, sugar , cement etc industries also setup.
Foreign Trade
Restrictive policies of commodity production,trade and tariff persuaded by the
colonial government adversely affected the structure,composition and volume
of India’s foreign trade.

Exports from India-raw silk,wool,sugar,jute, indigo etc

This export did not result in any gold or silver into India it is one way
development and that is towards Britain

Imports to India-Finished goods like cotton, silk and woolen cloths and
capital goods like machines.

Monopoly-Britain maintained monopoly control over India’s export and

imports.

Demographic Condition
Neither the total population nor the rate of population growth rate was very
high during colonial rule.
Overall literacy-16% (out of this female literacy was less than 7%)
Public Health facilities-Highly inadequate
Mortality rate-overall mortality rate was very high ,infant mortality rate was
about 2018 per thousand in contrast to present infant mortality rate of total:
44.6 deaths/1,000 live births
Life expectancy –it is very low 32 years in contrast to the present 67.3
years(2014)
Extensive poverty spread during colonial period .

Occupational structure
Agriculture sector accounted for the largest share of workforce,which is
usually remained at a high of 70-75 percent while the manufacturing and the
services sector accounted for only 10 and 10-15 percent respectively.
Infrastructure
Under the British rule basic infrastructure develops such as railways, ports,
water -transport, telegraphs and posts did develop, main motive behind it to
serve various colonial interests instead of providing basic amenities to the
people.

The British introduced the railway in India in 1850 most important

contribution.

It helps the people to travel long distance within short time and help in the
commercialisation of agriculture.

Conclusion-condition of economy during British rule is not very appreciating

the agricultural output is very low due to wrong policies of colonial
government ,Industrial sectors was crying for modernization, diversification,
capacity building and increased public investment.
In nutshell , the social and economic challenges before the country were
enormous

National Income Concept

• National Income is the total value of all final goods and services produced by
the country in certain year. The growth of National Income helps to know the
progress of the country.
• In other words, the total amount of income accruing to a country from
economic activities in a year’s time is known as national income. It includes
payments made to all resources in the form of wages, interest, rent and profits.
• From the modern point of view, national income is defined as “the net
output of commodities and services flowing during the year from the country’s
productive system in the hands of the ultimate consumers.”
National Income Accounting (NIA)
National Income Accounting is a method or technique used to measure the
economic activity in the national economy as a whole.
NIA is mainly done for:
• Policy Formulation: It helps in comparing the estimates of the past from the
future and also forecast the growth rates in future. For example, if a country
has a GDP of Rs. 103 Lakh which is 3 Lakh rupees higher than the last year, it
has a growth rate of 3 per cent.
• Effective Decision Making: To estimate the contribution of each of the
sectors of the economy. It helps the business to plan for production.
• International Economic Comparison: It helps in comparing the level of
development of countries and provides useful insight into how well an
economy is functioning, and where money is being generated and spent. One
can compare the standard of living of different nations and its growth rate.
There are various terms associated with measuring of National Income.
A. GDP (GROSS DOMESTIC PRODUCT)
• Here the catch word is ‘Domestic’ which refers to ‘Geographical Area’
• The total value of all final goods and services produced within the
boundary of the country during a given period of time (generally one year)
is called as GDP.
• In this case, the final produce of resident citizens as well as foreign
nationals who reside within that geographical boundary is considered.

Types of GDP: Real GDP and Nominal GDP

• Real GDP: Refers to the current year production of goods and services
valued at base year prices. Such base year prices are Constant Prices.
• Nominal GDP: Refers to current year production of final goods and services
valued at current year prices.
Which one is a better measure?
• Real GDP is a better measure to calculate the GDP because in a particular
year GDP may be inflated because of high rate of inflation in the economy.
• Real GDP therefore allows us to determine if production increased or
decreased, regardless of changes in the inflation and purchasing power of the
currency.
B. GROSS NATIONAL PRODUCT (GNP)
• Here the catch word is ‘National’ which refers to all the citizens of a country.
• GNP is the total value of the total production or final goods and services
produced by the nationals of a country during a given period of time
(generally one year).
• In this case, the income of all the resident and non-resident citizens (who
resides in abroad) of a country in included whereas, the income of foreigners
who reside within India is excluded.
• The GNP contains the income earned by Indian Nationals (both in Indian
Territory and Abroad) only.
GDP and GNP are measured on the basis of Market Price and Factor Cost.
a) Market Price
It refers to the actual transacted price which includes indirect taxes such as
custom duty, excise duty, sales tax, service tax etc. (impending Goods and
Services Tax). These taxes tend to raise the prices of the goods in an economy.
b) Factor Cost
It is the cost of factors of production i.e. rent for land interest for capital,
wages for labour and profit for entrepreneurship. This is equal to revenue
price of the final goods and services sold by the producers.
Revenue Price (or Factor Cost) = Market Price – Net Indirect Taxes
Net Indirect Taxes = Indirect Taxes – Subsidies
Hence, Factor Cost = Market Price – Indirect Taxes + Subsidies
C. Net National Product (NNP): NNP = GNP – Depreciation
• It is calculated by subtracting Depreciation from Gross National Product.
• Depreciation – Wear and Tear of goods produced.
• This deduction is done because a part of current produce goes to replace the
depreciated parts of the products already produced. This part does not add
value to current year’s total produce. It is used to keep the products already
produced intact and hence it is deducted.
D. Net Domestic Product (NDP): NDP = GDP – Depreciation
• It is the calculated GDP after adjusting the value of depreciation. This is
basically, Net form of GDP, i.e. GDP – total value of wear and tear.
• NDP of an economy is always lower than its GDP, since their depreciation
can never be reduced to zero. The concept of NDP and NNP are not used to
compare different economies because the method of calculating depreciation
varies from country to country.

E. National Income at Factor Cost (NIFC):

• It is the sum of all factors of income earned by the residents of a country
(Indian) both from within the country as well as abroad.
• National Income at Factor Cost = NNP at Market Price – Indirect Taxes +
Subsidies
• In India, and many developing countries across the world, National Income
is measured at factor cost instead of market prices. Some of the reasons for
the same are lack of uniformity in taxes, goods not being printed with their
prices, etc.
F. Transfer Payments
• A payment made by the government to individuals for whom there is no
economic activity is produced in return. For example: Old Age Pensions,
Scholarship etc.
G. Personal Income
• It refers to all of the income collectively received by all of the individuals or
households in a country.
• It includes compensation from a number of sources including salaries, wages
and bonuses received from employment or self employment; dividends and
distributions received from investments; rental receipt from real estate
investments and profit sharing from businesses.
• In National Income Accounting, some income is attributed to individuals,
which they do not actually receive. For Example: Undistributed Profits,
Employees’ contribution for social security, corporate income taxes etc. which
needs to be deducted from National Income to estimate the Personal Income.
• PI = NI + Transfer Payments – Corporate Retained Earnings, Income Taxes,
Social Security Taxes.
H. Disposable Personal Income
• It is the amount left with the individuals after paying Personal Taxes such as
Income Tax, Property Tax, and Professional Tax etc. to spend as they like.
• DPI = PI – Taxes (Income Tax i.e. Personal Taxes)
• DPI results into Savings and Expenditure i.e. (Spend and Save). This concept
is very useful for studying and understanding the consumption and saving
behaviour of the individuals.
WHAT ARE THE FACTORS THAT AFFECT NATIONAL INCOME?
Several factors affect the national income of a country. Some of them have
been listed below:
1. Factors of Production
Normally, the more efficient and richer the resources, higher will be the level
of National Income or GNP
(a) Land
Resources like coal, iron and timber are essential for heavy industries so that
they must be available and accessible. In other words, the geographical
location of these natural resources affects the level of GNP.
(b) Capital
Capital is generally determined by investment. Investment in turn depends on
other factors like profitability, political stability etc.
(c) Labour
The quality or productivity of human resources is more important than
quantity. Manpower planning and education affect the productivity and
production capacity of an economy.
(d) Entrepreneur
(e) Technology
This factor is more important for Nations with fewer natural resources. The
development in technology is affected by the level of invention and innovation
in production.
(f) Government
Government can help to provide a favourable business environment for
investment. It provides law and order, regulations.
(g) Political Stability
A stable economy and political system helps in appropriate allocation of
resources. Wars, strikes and social unrests will discourage investment and
business activities.
Methods of National Income Calculation
There are three approaches and methods of measuring National Income:
A. Income Method
• By this National Income is calculated compiling income of factors of
production viz., land, labour, capital and entrepreneur.
• National Income = Total Wage + Total Rent + Total Interest + Total Profit
• In Indian context, since 1993 as per the System of National Accounts (SNA),
National Income is total of the following:
• GDP = Compensation of Employees + Consumption of Fixed Capital +
(Other Taxes on Production – Subsidies of Production) + Gross Operating
Surplus
• Compensation of employees: (Wage) salaries paid in cash and kind and other
benefits provided to employees.
• Consumption of Fixed Capital: wear and tear of machinery which are
replaced by new parts.
• Other Taxes on Production minus Subsidies: Net tax on production.
• There is a difference between tax on products and tax on production. Tax on
products includes taxes like sales tax and excise duty. Tax on production is tax
imposed irrespective of production like license fees and land tax.
• Gross Operating Surplus: balance of value added after deducting the above
three components. It goes to pay rent of land and interest of capital.
B. Product Method (or Value Added Method, Output Method)
• It is used by economists to calculate GDP at market prices, which are the
total values of outputs produced at different stages of production.
Some of the goods and services included in production are:
• Goods and services actually sold in the market.
• Goods and services not sold but supplied free of cost. (No
Charge/Complementary)
Some of the goods and services not included in production are:
• Second hand items and purchase and sale of the same. Sale and purchase of
second cars, for example, are not a part of GDP calculation as no new
production takes place in the economy.
• Production due to unwarranted/ illegal activities.
• Non-economic goods or natural goods such as air and water.
• Transfer Payments such as scholarships, pensions etc. are excluded as there
is income received, but no good or service is produced in return.
• Imputed rental for owner-occupied housing is also excluded.
• Here the Gross Value of final goods and services produced in a country in
certain year is calculated.
• GDP is a concept of value added; it is the sum of gross value added of all
resident producer units (institutional sectors, or industries) plus that part of
taxes (total) less subsidies, on products which is not included in the valuation
of output.
• Gross Value Added = Output of Final Goods and Services – Intermediate
Consumption
• National Income = Gross Value Added + Indirect Taxes – Subsidies
C. Expenditure Method
• It measures all spending on currently-produced final goods and services only
in an economy.
• In an economy, there are three main agencies which buy goods and services:
Households, Firms and the Government.
This final expenditure is made up of the sum of 4 expenditure items, namely;
• Consumption (C): Personal Consumption made by households, the payment
of which is paid by households directly to the firms which produced the goods
and services desired by the households.
• Investment Expenditure (I): Investment is an addition to capital stock of an
economy in a given time period. This includes investments by firms as well as
governments sectors.
• Government Expenditure (G): This category includes the value of goods and
service purchased by Government. Government expenditure on pension
schemes, scholarships, unemployment allowances etc. are not included in this
as all of them come under transfer payments.
• Net Exports (X-IM): Expenditures on foreign made products (Imports) are
expenditure that escapes the system, and must be subtracted from total
expenditures. In turn, goods produced by domestic firms which are demanded
by foreign economies involve expenditure by other economies on our
production (Exports), and are included in total expenditure. The combination
of the two gives us Net Exports.
• National Income = Consumption (C) + Investment Expenditure (I) +
Government Expenditure (G) + Net Exports (X-IM)
• Calculating GDP (National Income) is extremely important as the
performance of the economy is fixed by means of this method. The results
would help the country to forecast the economic progress, determine the
demand and supply, understand the buying power of the people, the per
capita income, the position of the economy in the global arena. The Indian
GDP is calculated by the expenditure method.

Capital Formation: Meaning, Process and Other Details

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Meaning of Capital Formation:

Capital formation means increasing the stock of real capital in a country.
In other words, capital formation involves making of more capital goods such
as machines, tools, factories, transport equipment, materials, electricity, etc.,
which are all used for future production of goods.
For making additions to the stock of Capital, saving and investment are
essential.

Process of Capital Formation:

In order to accumulate capital goods some current consumption has to be
sacrificed. The greater the extent to which the people are willing to abstain
from present consumption, the greater the extent that society will devote
resources to new capital formation. If society consumes all that it produces
and saves nothing, future productive capacity of the economy will fall as the
present capital equipment wears out.
In other words, if whole of the current productive activity is used to produce
consumer goods and no new capital goods are made, production of consumer
goods in the future will greatly decline. To cut down some of the present
consumption and wait for more consumption in the future require
far-sightedness on the part of the people. There is an old Chinese proverb, “He
who cannot see beyond the dawn will have much good wine to drink at noon,
much green wine to cure his headache at dark, and only rain water to drink for
the rest of his days.”
Three Stages in Capital Formation:
Although saving is essential for capital formation, but in a monetized economy,
saving may not directly and automatically result in the production of capital
goods. Savings must be invested in order to have capital goods. In a modern
economy, where saving and investment are done mainly by two different
classes of people, there must be certain means or mechanism whereby the
savings of the people are obtained and mobilized in order to give them to the
businessmen or entrepreneurs to invest in capital.
Therefore, in a modern free enterprise economy, the process of capital
formation consists of the following three stages:

(a) Creation of Savings:

An increase in the volume of real savings so that resources, that would have
been devoted to the production of consumption goods, should be released for
purposes of capital formation.
(b) Mobilization of Savings:
A finance and credit mechanism, so that the available resources are obtained
by private investors or government for capital formation.
(c) Investment of Savings:
The act of investment itself so that resources are actually used for the
production of capital goods.

We shall now explain these three stages:

Creation of Savings:
Savings are done by individuals or households. They save by not spending all
their incomes on consumer goods. When individuals or households save, they
release resources from the production of consumer goods. Workers, natural
resources, materials, etc., thus released are made available for the production
of capital goods.

The level of savings in a country depends upon the power to save and the will
to save. The power to save or saving capacity of an economy mainly depends
upon the average level of income and the distribution of national income. The
higher the level of income, the greater will be the amount of savings.
The countries having higher levels of income are able to save more. That is
why the rate of savings in the U.S.A. and Western European countries is much
higher than that in the under-developed and poor countries like India. Further,
the greater the inequalities of income, the greater will be the amount of
savings in the economy. Apart from the power to save, the total amount of
savings depends upon the will to save. Various personal, family, and national
considerations induce the people to save.
People save in order to provide against old age and unforeseen emergencies.
Some people desire to save a large sum to start new business or to expand the
existing business. Moreover, people want to make provision for education,
marriage and to give a good start in business for their children.
Further, it may be noted that savings may be either voluntary or forced.
Voluntary savings are those savings which people do of their own free will. As
explained above, voluntary savings depend upon the power to save and the
will to save of the people. On the other hand, taxes by the Government
represent forced savings.
Moreover, savings may be done not only by households but also by business
enterprises” and government. Business enterprises save when they do not
distribute the whole of their profits, but retain a part of them in the form of
undistributed profits. They then use these undistributed profits for investment
in real capital.
The third source of savings is government. The government savings constitute
the money collected as taxes and the profits of public undertakings. The
greater the amount of taxes collected and profits made, the greater will be the
government savings. The savings so made can be used by the government for
building up new capital goods like factories, machines, roads, etc., or it can
lend them to private enterprise to invest in capital goods.

Mobilization of Savings:
The next step in the process of capital formation is that the savings of the
households must be mobilized and transferred to businessmen or
entrepreneurs who require them for investment. In the capital market, funds
are supplied by the individual investors (who may buy securities or shares
issued by companies), banks, investment trusts, insurance companies, finance
corporations, governments, etc.
If the rate of capital formation is to be stepped up, the development of capital
market is very necessary. A well- developed capital market will ensure that the
savings of the society-will be mobilized and transferred to the entrepreneurs
or businessmen who require them.

Investment of Savings in Real Capital:

For savings to result in capital formation, they must be invested. In order that
the investment of savings should take place, there must be a good number of
honest and dynamic entrepreneurs in the country who are able to take risks
and bear uncertainty of production.
Given that a country has got a good number of venturesome entrepreneurs,
investment will be made by them only if there is sufficient inducement to
invest. Inducement to invest depends on the marginal efficiency of capital (i.e.,
the prospective rate of profit) on the one hand and the rate of interest, on the
other.
But of the two determinants of inducement to invest-the marginal efficiency of
capital and the rate of interest—it is the former which is of greater importance.
Marginal efficiency of capital depends upon the cost or supply prices of capital
as well as the expectations of profits.
Fluctuations in investment are mainly due to changes in expectations
regarding profits. But it is the size of the market which provides scope for
profitable investment. Thus, the primary factor which determines the level of
investment or capital formation, in any economy, is the size of the market for
goods.

Foreign Capital:
Capital formation in a country can also take place with the help of foreign
capital, i.e., foreign savings.
Foreign capital can take the form of:
(a) Direct private investment by foreigners,
(b) Loans or grants by foreign governments,
(c) Loans by international agencies like the World Bank.
There are very few countries which have successfully marched on the road to
economic development without making use of foreign capital in one form or
the other. India is receiving a good amount of foreign capital from abroad for
investment and capital formation under the Five-Year Plans.

Deficit Financing:
Deficit financing, i.e., newly-created money is another source of capital
formation in a developing economy. Owing to very low standard of living of
the people, the extent to which voluntary savings can be mobilised is very
much limited. Also, taxation beyond limit becomes oppressive and, therefore,
politically inexpedient. Deficit financing is, therefore, the method on which
the government can fall back to obtain funds.
However, the danger inherent in this source of development financing is that
it may lead to inflationary pressures in the economy. But a certain measure of
deficit financing can be had without creating such pressures.
There is specially a good case for using deficit financing to utilise the existing
under-employed labour in schemes which yield quick returns. In this way, the
inflationary potential of deficit financing can be neutralized by an increase in
the supply of output in the short-run.

Disguised Unemployment:
Another source of capital formation is to mobilize the saving potential that
exists in the form of disguised unemployment. Surplus agricultural workers
can be transferred from the agricultural sector to the non-agricultural sector
without diminishing agricultural output.

The objective is to mobilize these unproductive workers and employ them on

various capital creating projects, such as roads, canals, building of schools,
health centres and bunds for floods, in which they do not require much more
capital to work with. In this way’, the hitherto unemployed, labour can be
utilised productively and turned into capital, as it were.

Capital Formation in the Public Sector:

In these days, the role of government has greatly increased. In an
under-developed country like India, government is very much concerned with
the development of the economy. Government is building dams, steel plants,
roads, machine-making factories and other forms of real capital in the country.
Thus, capital formation takes place not only in the private sector by individual
entrepreneurs but also in the public sector by government.
There are various ways in which a government can get resources for
investment purposes or for capital formation. The government can increase
the level of direct and indirect taxation and then can finance its various
projects. Another way of obtaining the necessary resources is the borrowing by
the Government from the public.

The government can also finance its development plans by deficit financing.
Deficit financing means the creation of new money. By issuing more notes and
exchanging them with the productive resources the government can build real
capital. But the method of deficit financing, as a source of development
finance, is dangerous because it often leads to inflationary pressures in the
economy. A certain measure of deficit financing, however, can be had without
creating such pressures.

Another source of capital formation in the public sector is the profits of public
undertakings which can be used by the government for further investment. As
stated above, government can also get loans from foreign countries and
international agencies like World Bank. India is getting a substantial amount
of foreign assistance for investment purposes under the Five-Year Plans.
 Sectoral composition of indian economy:

Three types of classification are:

Classification of economic activities on the basis of nature of activity

1. Primary Sector
2. Secondary sector
3. Tertiary sector
Classification of economic activities on the basis of conditions of work
1. Organised sector
2. Unorganised sector
Classification of economic activities on the basis of ownership of assets
1. Public sector (government’s control)
2. Private sector (controlled by individual or group of individuals)
People around us are engaged in different activities to earn a livelihood, some
may be producing goods while others may be delivering services.

SECTORS OF INDIAN ECONOMY

Three Sectors of Indian Economy: Primary, Secondary & Tertiary
On the basis of nature of activity Indian economy can be classified into primary,
secondary and tertiary sectors.

Primary Sector of Indian Economy

» Primary Sector is directly dependent on the environment for manufacture
and production.
» A primary sector is a sector whereby the raw materials are extracted from
the earth.
» Primary Sector includes those activities which lead to the production of
goods by exploitation of natural resources.
» Examples of primary sector activities are agriculture, fishing, mining,
animal husbandry etc.
» In India, agriculture is the biggest example of the primary sector.
» However, forestry and fishing can also be cited as other examples of this
particular sector.
» Primary sector is also known as agriculture and related sector.
» It produces natural products like cotton, milk, fruits, wheat, fish, rubber etc.

Primary sector are activities undertaken by directly using natural

resources. Example—Agriculture , Mining, Fishing, Forestry, Dairy
etc. It is called primary sector because it forms the base for all
other products that we subsequently make. Since most of the
natural products we get are from agriculture, dairy, forestry,
fishing it is also called Agriculture and related sector .

The Secondary Sector

» A secondary sector is a sector whereby the raw material that is extracted
from earth is converted to semi- finished goods or finished goods.
» Secondary sector activities of the secondary sector follow the primary
activities, in which the natural products are changed to manufacture different
commodities.
» 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 thus, the secondary sector is also called the industrial sector.
» An agricultural product like cotton is woven into cotton fabric or sugar cane
is processed to produce sugar.
» Secondary Sector covers activities in which natural products are changed
into other forms through ways of manufacturing that we associate with
industrial activity.
» Product is not produced by nature but has to be made and therefore some
process of manufacturing is essential.
» It includes those activities which result in the transformation of natural
products into other forms by manufacturing.
» It produces manufactured goods like cloth, sugar, bricks etc.
» It is also called the industrial sector as this sector has come to be associated
with different kinds of industries.
» In the secondary sector of the national economy, natural ingredients are
used to create products and services that are consequently used for
consumption.
» Examples of secondary sector activities are manufacturing and construction.

It covers activities in which natural products are changed into

other forms through ways of manufacturing that we associate with
industrial activity. It is a next step after the primary, where the
product is not produced by nature but has to be made. Some
process of manufacturing is essential, it could be in a factory, a
workshop or at home. Example: Using cotton fibre from a plant, we
spin yarn and weave cloth; using sugarcane as a raw material we
make sugar , we convert earth into bricks. Since this sector is
associated with different kinds of industries, it is also called
industrial sector.

Tertiary Sector
» Tertiary Sector activities help in the development of the primary and
secondary sectors.
» These activities, by themselves, do not produce a good but they are an aid or
a support for the production process.
» For example, goods that are produced in the primary or secondary sector
would need to be transported by trucks or trains and then sold in wholesale
and retail shops also called the service sector.
» A tertiary sector is a sector that transports and distributes goods to retailers
or wholesalers.
» Like the secondary sector, it also provides value addition to a product.
» This sector is also known as the service sector.
» Tertiary Sector includes those activities that in the development of the
primary & secondary sectors by supporting the production process.
» Tertiary Sector does not produce goods but generates services like
transportation, communication, basting etc.
» Examples of tertiary sector activities are banking, insurance, finance etc.
» Tertiary sector also includes certain new services based on information
technology like cyber cafes, ATM booths, call centres, software companies.

When the activity involves providing intangible goods like services

then this is part of the tertiary sector. Financial services, management
consultancy, telephony and IT are good examples of the service sector.
Like the secondary sector, it also provides value addition to a product.
This sector is also known as the service sector.

The value of final goods and services produced in each sector during a
particular year provides the total production of the sector for that year and the
sum of production in the three sectors gives what is called the Gross Domestic
Product (GDP) of a country.
GDP- the value of all final goods and services produced within a country
during a particular year.
GDP shows how big the economy is.

During early civilisation, all economic activity was in the primary sector.
When the food production became surplus people’s need for other products
increased. This led to the development of the secondary sector. The growth of
secondary sector spread its influence during the industrial revolution in the
nineteenth century. After growth of economic activity, a support system was
the need to facilitate the industrial activity. Certain sectors like transport and
finance play an important role in supporting the industrial activity. Moreover,
more shops were needed to provide goods in people’s neighbourhood.
Ultimately, other services like tuition, administrative support developed.
 Sectors of Indian Economy: Organised
and Unorganised Sectors

The three economic sectors (Primary, secondary and tertiary) can be further
classified under the Organised or Unorganised sectors.
» Organised Sector is a sector where the employment terms are fixed and
regular, and the employees get assured work. Unorganised sector is one
where the employment terms are not fixed and regular, as well as the
enterprises, are not registered with the government.
» The unorganised sector, covers most of the rural labour and a substantial
part of urban labour. lt includes activities carried out by small and family
enterprises, partly or wholly with family labour.
» An unorganised worker is a home-based worker or a self-employed worker
or a wage worker in the unorganized sector and includes a worker in
the organized sector who is not covered by any of the Acts pertaining to
welfare Schemes as mentioned in Schedule-II of Unorganized Workers
Social Security Act, 2008
» The Organised sectors can also be define as a sector, which is registered with
the government is called an organised sector. In this sector, people get
assured work, and the employment terms are fixed and regular. A number of
acts apply to the enterprises, schools and hospitals covered under
the organised sector.

» Protection and support for the unorganised sector workers is very necessary
for both economic and social development.

Sectors of Indian Economy: Public and Private Sectors

The three economic sectors (Primary, secondary and tertiary) can be further
classified under the Public and Private sector on the basis of who owns the
assets (company) and who is responsible for delivering the service.
» The public sector is the part of the economy concerned with providing
various governmental services. The composition of the public sector varies
by country, but in most countries the public sector includes such services as
the military, police, infrastructure (public roads, bridges, tunnels, water
supply, sewers, electrical grids, telecommunications, etc.), public
transit, public education, along with health care and those working for the
government itself, such as elected officials. The public sector might provide
services that a non-payer cannot be excluded from (such as street lighting),
services which benefit all of society rather than just the individual who uses
the service.
» The purpose of the public sector is not just to earn profits. Governments
raise money through taxes and other ways to meet expenses on the services
rendered by it.
» The private sector is the part of the economy, sometimes referred to as
the citizen sector, which is run by private individuals or groups, usually as a
means of enterprise for profit, and is not controlled by the State (areas of the
economy controlled by the state being referred to as the public sector).

» Activities in the private sector are guided by the motive to earn profits. To
get such services we have to pay money to these individuals and companies.

Which is the largest sector in India?

India is also the third largest startup hub in the world with over 3,100
technology start-ups in 2014-15 The agricultural sector is the largest employer
in India's economy but contributes to a declining share of its GDP (17% in
2013-14). India ranks second worldwide in farm output.

Which sector contributes the maximum to India's GDP?

India accounts for 7.68 percent of total global agricultural output. GDP of
Industry sector is $495.62 billion and world rank is 12. In Services sector,
India world rank is 11 and GDP is $1185.79 billion. The contribution of
Agriculture sector in the Indian economy is much higher than world's average
(6.1%).

What is the service sector in India?

India's services sector covers a wide variety of activities such as trade, hotel
and restaurants, transport, storage and communication, financing, insurance,
real estate, business services, community, social and personal services, and
services associated with construction.

Human Development Index in India.

What is Human Development Index?

HDI is an index which ranks the countries on the basis of three parameters.
The HDI is measured to check the overall development of the country, along
with the economic growth and total well-being of its citizens. Human
Development Index is one such index which measures three dimensions -
1. Healthy Life
2. Access to Knowledge
3. Decent Living Standards.
Note - Human Development Index was created by Indian economist Amartya
Sen and Pakistani economist Mahbub Ul Haq and published by United
Nations Development Program (UNDP).

India's Rank in Human Development Index

Year Rank
2016 131
2015 130
2014 131
How is Human Development Index Calculated?
The Human Development Index is calculated on many dimensions. Some of
which are given below.
 A Long and Healthy Life – Life expectancy at birth
 Education Index – Mean years of schooling and expected years of
schooling
 A Decent Standard of Living – GNI (Gross National Income) per capita

Human Development Index - India & World

India’s rank compared to other countries :
1. Ranks 3rd in South Asian countries behind Srilanka and
Maldives
2. Ranks second in BRICS country after China.

Other Index Released along with Human Development Index

INDEX INDIA’S RANK

Multidimensional 37th Report releases by Oxford
Poverty and Human Development
Poverty index
Initiative.
 Inequality Adjusted Human 0.454 value
Development Index
Gender Inequality Index 2015 125

HDI Ranks of Other Countries

COUNTRY HDI
RANKS

Norway 1

Singapore 5
China 90
USA 10
Pakistan 147
Srilanka 73
Brazil 79

Human Development Index Report

Important achievements that were praised by Human

development Report are -
 Improved Life Expectancy
 India’s Reservation Policy
 Mahatma Gandhi National Rural Employment Guarantee Act
National Food Security Act
 Right to Education Act
 Right to Information
 India's promise on Clean Energy Investments
Infrastructure Development
in India
I we will discuss about Infrastructure development in
India. After reading this you will learn about:
1. Subject-Matter of Infrastructure
2. Growth of Infrastructure during the Planning
Period
3. Recent Strategy Adopted by the Government.
1. Subject-Matter of Infrastructure:
Development of a country depends very much on the availability of its
infrastructural facilities. The development of agriculture and industry depends
solely on its infrastructure. Without having a sound infrastructural base a
country cannot develop its economy. More important and difficult job in the
development process of the country is to provide the basic infrastructural
facilities.
These infrastructural facilities include various economic and social overhead
viz., Energy (Coal, Oil, Electricity), Irrigation, Transportation and
Communication, Banking, Finance and Insurance, Science and Technology
and other social overheads like education, health and hygiene.All these
facilities jointly constitute the infrastructure of the country. Like other
countries, the developmental process of India put much emphasis on the
growth of infrastructure.
In this connection Dr. V.K.R.V. Rao observed, “The link between
infrastructure and development is not a once for all affair. It is a
continuous process and progress in development has to be
preceded, accompanied and followed by progress in infrastructure,
if we are to fulfil our declared objectives of a self-accelerating
process of economic development.”
However, the prosperity and progress of a country largely depends upon the
development of agriculture and industry. While the agricultural development
requires facilities like irrigation, power, credit, transportation etc. but the
industrial production also needs machines, equipment, energy, skilled
manpower, management personnel, marketing, banking and insurance
facilities, transportation services etc.
All these facilities and services helping the agricultural and industrial sector
jointly constitute the infrastructure of a country. During the last 200 year or
more, industrial and agricultural revolutions in England and other countries
were accompanied by large scale development of infrastructural facilities.

2.Growth of Infrastructure during the Planning Period:

In Indian planning high priority was given to the development of
infrastructure from the very beginning, thus a huge amount of fund was
allocated in different plans for building various infrastructural facilities. In the
First Six Plans, about 55 to 61 per cent of the total plan outlay was devoted to
the development of infrastructure.
Seventh Plan allocated about 63 per cent of the total plan outlay to
infrastructure. Eighth plan also allocated about 16.1 per cent of the total outlay
to infrastructure. Table 10.1 shows the allocation of outlay of the Sixth, Seventh
and Eighth plan to infrastructure.
Due to continuous heavy investment of the infrastructural projects during the
four decades of planning, infrastructural facilities in the country has recorded
a phenomenal increase. Accordingly, the gross irrigated area has increased
significantly from 23 million hectares or 17 per cent of gross cropped area in
1950-51 to 89.4 million hectares or 53 per cent in 1995-96.
Similarly, power generation also increased from 5 billion kWh in 1950-51 to
380 billion kWh in 1995-96. Similarly, tremendous growth of other
infrastructural facilities has also been recorded during these plan periods.

This is mainly due to this rapid development of these infrastructural facilities

in India. The agricultural production has recorded a three-fold increase and
industrial output has also recorded more than seven fold increase during these
four decades of planning.
Whatever infrastructural facilities that have been developed in the country
have mostly benefitted the urban areas and the richer section of the population
has derived maximum benefit out of it.

3. Recent Strategy Adopted by the Government for Infrastructure

Development:
In the past, the responsibility for providing infrastructure services was vested
solely with the Government. This was mostly due to a number of reasons
including lumpiness of capital investments, long gestation periods,
externalities, high risks and low rates of return.
But in recent times the old paradigm of infrastructure being a public sector
monopoly has been challenged by fiscal constraints and technological
innovations. Limits on budgetary allocations and public debt, and the
dismantling of the allocated system of credit have catalysed the
encouragement of private entry in infrastructure provision.
The Government has recently announced guidelines for private investment in
highway development through the Build Operate Transfer (BOT) route.
Besides simplifying procedures and providing more financial concessions,
these measures would facilitate preparation of detailed feasibility reports,
clearances for the right way of land, relocation of utility services, resettlement
and relocation of the effected establishments, environmental clearance and
equity participation in the highway sector. The Government has also approved
clear and transparent guidelines for encouraging private sector participation in
ports and is in the process of setting up a tariff regulatory authority in 11 major
ports.

New Initiatives for Infrastructure Development, 1999-2000 and

thereafter:
Following are some of the new initiatives undertaken by the
Government for the development of infrastructure sector:
1.General Measures:
The Government has introduced certain general measures:
(a) Introduction of uniform tax holiday for 15 years for all infrastructure
projects;
(b) Creation of Foreign Investment Implementation Authority to smoothen
flow of FDI into the infrastructure sector;
(c) The import duty structure for project imports rationalised;
(d) Progressive corporatization of public sector service providers in the areas
of telecommunication and ports;
(e) Custom duty has been reduced to boost InfoTech, Telecom industries and
other knowledge based industries.

2.Power:
New initiatives for the power sector include:
(a) Announcement of Mega Power Project policy;
(b) Restructuring of SEBs to be encouraged;
(c) New transmission and distribution system to get fiscal benefits given to
infrastructure sector;
(d) Increased budgetary support provided for the Tehri Hydro and the Naptha
Jakhri Hydro Projects to ensure its commissioning by March 2002;
(e) Assistance provided to States’ power sector reforms and for undertaking
investments or renovation and modernisation of old and inefficient plants and
for strengthening the distribution system;
(f) Scheme for securitization of dues of Central Sector Power and Coal utilities
to assist the SEBs to clear these dues. Central Government support is linked to
reforms in the operation of SEBs.

3. Telecom:
The Government has announced the New Telecom Policy and
thereby the policy observed:
(a) Domestic long distance calls to be opened up;
(b) Department of Telecom Services (DTS) is to be corporatized by 2001;
(c) DTS/MTNL are to enter as third cellular operators;
(d) TRAI reconstructed through an ordinance;
(e) Specific targets for Telecom is announced so as to provide phone on
demand by 2002, achieve telecom coverage of all villages in the country by
2002, provide internet access to all district headquarters by 2002 etc.
(f) Domestic Long Distance Service has been opened up without any restriction
on the number of operators;
(g) Department of Telecom Services (DTS) and Department of Telecom
Operations (DTO) have been corporatized; and
(h) BSNL and MTNL are permitted to enter as third cellular operator in their
respective circles.

4.Roads:
A new cess of Rs 1 per litre on HSD is imposed by the Government to generate
funds which will be transferred to Central Road Fund. Most of it will be used
for development and maintenance of State Roads and National Highways etc.
The Government has announced a major initiative for road development, the
National Highways Development Project (NHDP). The cost of the project is
estimated at around Rs 54,000 crore. Moreover, steps are taken for
accelerated implementation of Prime Minister’s NHDP project from Petrol and
Diesel cess and additional fund raising measures are undertaken for NHAI
.
5.Railways:
Indian Railway Catering & Tourism Corporation (IRTC) Ltd. is incorporated as
a Government Company with the objective of upgrading and managing rail
catering and hospitality. Indian Railways have issued letters of intent for
ownership, operation and management of two luxury trains in private sector.
For improving passenger’s safety and comfort the following
measures are undertaken by the Government:
(a) For improving safety, riding comfort and reliability, planned up-gradation
of track structure is being undertaken using heavier and higher tensile
strength rails;
(b) For detection of any hidden flows in the rails not visible in the naked eye,
Ultrasonic Flaw Detectors (USFD) are now being used;
(c) Track circuiting has been completed on berthing portion at all stations on A,
B, C, D spl. and D routes of Indian Railways;
(d) Walkie-talkie sets have been provided to drivers and guards of all trains for
faster and better means of communication;
(e) Simulators ate being installed for training of drivers.

6. Civil Aviation:
The Government has made necessary arrangement for restructuring of
airports and Airport Authority of India (AAI) through long term leasing route:
(a) It is proposed to divest government equity in Indian Airlines and Air India;
(b) It is proposed to lease out international airport at Mumbai, Delhi, Chennai
and Kolkata on long term basis;
(c) It is decided to set up new international airport at Bangalore, Hyderabad
and Goa with private sector participation.

7.Urban Infrastructure:
The Government has introduced special package for Housing Construction and
Services, which will facilitate development of urban infrastructure. In order to
improve urban infrastructure, the Government enhanced the tax benefits for
housing and also extended tax holiday to urban infrastructure.

Regional imbalances in Development

Meaning of Regional Imbalance:

Meaning: Regional imbalances or disparities means wide differences in per
capita income, literacy rates, health and education services, levels of
industrialization, infrastructural facilities etc. between different regions.
Regions may be either States or regions within a State.

The co-existance of relatively developed and economically depressed states

and even regions within each state is known as regional imbalance.

India is facing the problem of acute regional imbalances and the indicators of
such imbalances are reflected by the factors like per capita income, the
proportion of population living below the poverty line, the percentage of
urban population of total population, percentage of working population
engaged in agriculture, the percentage of workers engaged in industries,
infra-structural development etc.
A region may be known as economically backward as it is indicated by the
symptoms like excessive pressure of population on land, too much
dependence on agriculture, high incidence of rural employment and high
degree of under-employment, low productivity in agriculture and cottage
industry, under urbanisation, absence of basic infra-structural facilities etc.
In India, some important socio-economic indicators arc very prominent to
reflect the regional imbalances between various regions or states of the
country.
The following table reveals such socio-颅 economic indicators:
1. State per Capital Income as an Indicator of Regional Imbalance:
The most important indicator of regional imbalance and disparity among the
different states of India is the difference in per capita state income figures. It
is revealed from Table 6.8 that in 2000-01, the national average per capita
income in India was Rs. 10,254. The states whose per capita income figures
were higher than this national average include Punjab, Goa, Haryana,
Maharashtra, Gujarat, Karnataka, Tamil Nadu and Kerala.
Among these nine states, Punjab, Haryana, Maharashtra and Gujarat have
attained a high degree of agricultural as well as industrial development.
Although West Bengal and Karnataka attained per capita income higher than
the all India average in 1094-95 but it started trailing behind the all India
average in recent years due to its poor rate of economic growth.
In 2002-03, the per capita income of the bottom poorest states, lying below
the national average of Rs. 11,088 were Rs. 4,048 for Bihar, Rs. 5,836 for
Orissa. Rs. 7,015 for Madhya Pradesh, Rs. 5,610 for Uttar Pradesh, Rs. 6,221
for Assam and Rs. 7,608 for Rajasthan. In 1971-72, all these states also
remained at the bottom stage.
Moreover, the range of regional disparity in India has been widening
continuously is reflected from the differences between per capita income of
Bihar at the bottom and that of Punjab at the top. In 1971-72, the per capita
income of Bihar at the bottom was only Rs. 406 as compared to that of Rs.
1,084 of Punjab at the top and in 2002-03, the per capita income of Bihar at
the bottom was Rs. 4,048 as compared to that of Rs. 15,264 of Punjab at the
top. While in the former case, the ratio between the two lowest and highest
figures was 1 : 2.7 and in the second case the same ratio stood at 1 : 3.8. This
shows how the regional disparity between the states is widening gradually.
The present trend of growing income disparity among various States of India
has been continuing in recent years. In 2004-05, the per capita income figures
at current prices of different major Indian states reveals that Delhi tops the
list having the per capita income of Rs. 53,976 followed by Punjab at Rs.
30,701, which is 135 per cent higher than the all India average per capita
income of Rs. 22,948.
At the bottom of the ladder comes Bihar with per capita income of Rs. 5,772,
which, is less than half the national average. The states whose per capita
income figures was lower than that of all India average include Bihar, Jammu
& Kashmir, Orissa, Uttar Pradesh, Rajasthan, Madhya Pradesh. Assam, West
Bengal, Kerala, Andhra Pradesh, Himachal Pradesh and Karnataka.
In 2004-05, the per capita income of Bihar at the Bottom (at current prices)
was only Rs. 5,772 as compared to that of Rs. 53,976 of Delhi at the top
showing the ratio between the two lowest and highest figures at 1 : 9.35. This
again proves how the income disparity among the major Indian states is
widening gradually with the passage of time.
2. Inter-State Disparities in Agricultural and Industrial Development:
Another important indicator of regional disparities is the differences in the
levels of agricultural and industrial development between different states of
the country. In India, states like Punjab, Haryana- and part of Uttar Pradesh
had recorded a high rate agricultural productivity due to its high proportion of
irrigated areas and higher level of fertilizer use.
In 1987-88, net irrigated area as per cent of net area sown in Punjab was as
high as 91 per cent in Punjab, 80 per cent in Haryana as compared to that of
only 14 per cent in Kerala, 17 per cent in Himachal Pradesh and 21 per cent in
Assam.
Due to the adoption of HYVP or New Agricultural Strategy the combined
share of Punjab and Haryana in total production of food grains of the country
increased from 7.5 per cent in 1964-65 to 16.8 per cent in 1992-93 and more
particularly the share in wheat production was as high as 34.3 per cent in
1992- 93 although these two states accounted for only 4.3 per cent of the total
population of the country.

Accordingly, in 1990-91, the per capita output of food grains in Punjab and
Haryana were 968.1 kg and 577.6 kg respectively as compared to that of
national per capita output of 197.4 kg. Moreover, the pace of industrialization
is also an important indicator of regional imbalance. Before independence,
West Bengal and Maharashtra were the two most industrialized states of India.
But after independence Gujarat, Punjab and Tamil Nadu have developed the
industrial sector considerably by developing industrial units of all different
sizes.
On the other hand, states like Assam. Bihar, Orissa and Uttar Pradesh have
been lagging behind in respect of the pace of industrialization. Taking
Western region and West Bengal together, their combined share was 59.25 per
cent of total productive capital. 63.03 per cent of total persons employed,
60.41 per cent of gross ex-factory value of output and 63.95 per cent of value
added by manufacturing sector of the country.
3. Population below Poverty Line:
Percentage of population living below the poverty line in different states is
another important indicator of regional imbalance or disparities. Table 6.8
shows that the percentage of population living below the poverty line for the
whole country was 26 per cent in 1999-2000 and there were 12 states whose
percentage of population living below the poverty line have exceeded this
all-India average.
Bihar, Orissa, Madhya Pradesh and Uttar Pradesh are the four states which
have the highest percentage of population below the poverty line as well as
they have the lowest per capita income in the country.
Again there are some states like Andhra Pradesh, West Bengal, Karnataka and
Tamil Nadu which have achieved a comparatively higher per capita income
but instead they maintain higher percentage of population living below the
poverty line. The main reasons behind such poverty are greater inequality of
incomes and the neglect of the backward classes of population.
Again Punjab is the state which is maintaining the highest per capita income
among all the states and the lowest percentage of population living below the
poverty line i.e., only 6.16 per cent as compared to that of 42 per cent for Bihar,
47 per cent for Orissa and 26 per cent for all India.
The main reasons behind this low percentage of poverty in Punjab and
Haryana arc their strong production base and better distribution of income.
Although Maharashtra, Tamil Nadu and West Bengal are having a strong
production base but they did not experience a fair distribution of income. This
has resulted a comparatively higher degree of poverty in these states in spite
of having strong production base.
4. Spatial Distribution of industries:
Another important indicator of regional imbalance is the uneven pattern of
distribution of industries. Since independence, states like Karnataka, Andhra
Pradesh, Kerala, Gujarat, Punjab and Haryana have achieved considerable
development in its industrial sector. But West Bengal could not keep pace in
its industrial growth as much as other industrially developed states. In this
way disparities in industrial growth between different states have been
reduced to some extent.
One more thing that is to be noticed is that as the country as a whole has
achieved industrial development at a fair rate since independence but the
spatial distribution of such industrial development between different states
remained almost uneven.

The above table reveals that there is a gross imbalance in the regional location
of industries in India. The five major industrial states of India, i.e.,
Maharashtra, Tamil Nadu, Gujarat, West Bengal and Andhra Pradesh jointly
accounted 40 per cent of total location of all large factories, 55 per cent of total
industrial employment, 59 per cent of total industrial output and 58 per cent
of value-added.
All other states and Union Territories jointly accounted the remaining 60 per
cent of total location of large factories, 45 per cent of total industrial
employment, 41 per cent of total industrial output and 42 per cent of
value-added. Thus the present trend reveals that industrially advanced states
achieved much industrial progress and industrially backward states have
remained backward leading to uneven spatial distribution of industries.
In respect of small scale industries, there has been a considerable
concentration of such industrial unit in these five major industrially advanced
states. But due to repeated efforts of the government to disperse such
concentration, the degree of such concentration has been declining gradually.
In recent years, the states like Punjab, Haryana, Kerala and Karnataka have
recorded considerable development of industries, especially in the small scale
sector.
5. Degree of Urbanisation:
Disparities in the degree of urbanisation are another important indicator of
regional imbalance. In respect of urbanisation, the percentage of urban
population to total population is an important indicator. The all-India average
of such percentage of urban population stands at 26 per cent in 1991.
The states which are maintaining higher percentage of urban population than
the national average include Maharashtra, Tamil Nadu and Gujarat and then
followed by Karnataka, Punjab, Andhra Pradesh and West Bengal. Whereas,
the states which are having a lower degree of urbanisation include Himachal
Pradesh, Assam, Bihar, Orissa, Arunachal Pradesh etc.
6. Per Capita Consumption of Electricity:
Per capita consumption of electricity is also another important indicator of
regional disparities. States like Punjab, Gujarat, Haryana, Maharashtra etc.,
having higher degree of industrialisation and mechanisation of agriculture,
have recorded a higher per capita consumption of electricity than the
economically backward states like Assam, Bihar, Orissa, Madhya Pradesh and
Uttar Pradesh. Thus the per capita consumption of electricity of Punjab was as
high as 790 kWh in 1996-97 as compared to that of only 108 kWh in Assam.
7. Employment Pattern:
Employment pattern of workers is also an important indicator of regional
disparities. States attaining higher degree of industrialisation are maintaining
higher proportion of industrial workers to total population. Average daily
employment of factory workers per lakh of population as shown in Table 6.8 is
an important indicator in this regard.
It is found that industrially developed states like Maharashtra, Gujarat,
Haryana, Punjab, Tamil Nadu and West Bengal are maintaining a higher
average daily employment of factory workers per lakh of population as
compared to that of lower average maintained in industrially backward states
like Assam, Orissa, Uttar Pradesh, Rajasthan etc.
In 1985, the average daily employment of factory workers per lakh of
population was as high as 1,890 for Gujarat, 1,750 for Maharashtra, 1,630 for
Haryana as compared to that of only 400 for Assam and Orissa, 470 for Uttar
Pradesh, 520 for Rajasthan and 600 for Bihar.
Even the industrially developed states like Gujarat, Maharashtra, Tamil Nadu
and West Bengal are still maintaining a higher proportion of agricultural
labourers to total workers as the industrial sector of these states has failed to
enlarge the scope of employment sufficiently to engage more and more rural
workers.
8. Intra-State Imbalance:
Intra-state imbalance is another important indicator of regional imbalance
existing within each particular state. There is a growing tendency among most
of the advanced states to concentrate its developmental activities towards
relatively more developed, urban and metropolitan areas of the states while
allocating its industrial and infra-structural projects.
As for example, in West Bengal, about 70 per cent of its new industrial
concentration was located in the Hoogly district. Similarly, about 86 per cent
of registered factories in Maharashtra were mostly concentrated in a few
urban areas, leaving the other potential areas untouched.
In Punjab such concentration of industries in a few urban areas is as high as
96 per cent. Therefore, a huge proportion of small scale industrial units are
gradually being located in relatively more advanced districts having better
infra-structural facilities and comparatively more urbanized. Thus a high
degree of intra-state imbalances or disparities exists within almost all the
states of the country.

Causes for Regional imbalances in India

The nine major causes responsible for regional imbalances in
India.

1. Historical Factor:
Historically, regional imbalances in India started from its British regime. The
British rulers as well as industrialists started to develop only those earmarked
regions of the country which as per their own interest were possessing rich
potential for prosperous manufacturing and trading activities.
British industrialists mostly preferred to concentrate their activities in two
states like West Bengal and Maharashtra and more particularly to three
metropolitan cities like Kolkata, Mumbai and Chennai. They concentrated all
their industries in and around these cities neglecting the rest of the country to
remain backward.
The land policy followed by the British frustrated the farmers to the maximum
extent and also led to the growth of privileged class like zamindars and money
lenders for the exploitation of the poor farmers. In the absence of proper land
reform measures and proper industrial policy, the country could not attain
economic growth to a satisfactory level. The uneven pattern of investment in
industry as well as in economic overheads like transport and communication
facilities, irrigation and power made by the British had resulted uneven growth
of some areas, keeping the other areas totally neglected.
2. Geographical Factors:
Geographical factors play an important role in the developmental activities of a
developing economy. The difficult terrain surrounded by hills, rivers and dense
forests leads to increase in the cost of administration, cost of developmental
projects, besides making mobilization of resources particularly difficult. Most
of the Himalayan states of India, i.e., Himachal Pradesh. Northern Kashmir,
the hill districts of Uttar Pradesh and Bihar, Arunachal Pradesh and other
North-Eastern states, remained mostly backward due to its inaccessibility and
other inherent difficulties.
Adverse climate and proneness to flood are also responsible factors for poor
rate of economic development of different regions of the country as reflected
by low agricultural productivity and lack of industrialization. Thus these
natural factors have resulted uneven growth of different regions of India.
3. Locational Advantages:
Locational advantages are playing an important role in determining the
development strategy of a region. Due to some locational advantages, some
regions are getting special favour in respect of site selections of various
developmental projects.
While determining the location of iron and steel projects or refineries or any
heavy industrial project, some technical factors included in the locational
advantage are getting special considerations. Thus regional imbalances arise
due to such locational advantages attached to some regions and the locational
disadvantages attached to some other backward regions.
4. Inadequacy of Economic Overheads:
Economic overheads like transport and communication facilities, power,
technology, banking and insurance etc. are considered very important for the
development of a particular region. Due to adequacy of such economic
overheads, some regions are getting a special favour in respect of settlement of
some developmental projects whereas due to inadequacy of such economic
overheads, some regions of the country, viz., North-Eastern Region, Himachal
Pradesh, Bihar etc. remained much backward as compared to other developed
regions of the country. Moreover, new investment in the private sector has a
general tendency to concentrate much on those regions having basic
infrastructural facilities.
5. Failure of Planning Mechanism:
Although balanced growth has been accepted as one of the major objectives of
economic planning in India since the Second Plan onwards but it did not make
much headway in achieving this object. Rather, in real sense, planning
mechanisms has enlarged the disparity between the developed states and less
developed states of the country.
In respect of allocating plan outlay relatively developed states get much favour
than less developed states. From First Plan to the Seventh Plan, Punjab and
Haryana have received the highest per capita plan outlay, all along. The other
three states like Gujarat, Maharashtra and Madhya Pradesh have also received
larger allocation of plan outlays in almost all the five year plans.
On the other hand, the backward states like Bihar, Assam, Orissa, Uttar
Pradesh and Rajasthan have been receiving the smallest allocation of per
capita plan outlay in almost all the plans. Due to such divergent trend,
imbalance between the different states in India has been continuously
widening, inspite of framing achievement of regional balance as one of the
important objectives of economic planning in the country.
6. Marginalization of the Impact of Green Revolution to Certain
Regions:
In India, the green revolution has improved the agricultural sector to a
considerable extent through the adoption of new agricultural strategy. But
unfortunately the benefit of such new agricultural strategy has been
marginalized to certain definite regions keeping the other regions totally
untouched. The Government has concentrated this new strategy to the heavily
irrigated areas with the idea to use the scarce resources in the most productive
manner and to maximize the production of food grains so as to solve the
problem of food crisis. Thus the benefit of green revolution is very much
restricted to the states like Punjab, Haryana and plain districts of Uttar
Pradesh leaving the other states totally in the dark about the adoption of new
agricultural strategy.This has made the well-off farmers much better off,
whereas the dry land farmers and non-farming rural population remained
totally untouched. Thus in this way new agricultural strategy has aggravated
regional imbalances due to its lack of all-embracing approach.
7. Lack of Growth of Ancillary Industries in Backward States:
The Government of India has been following a decentralized approach for the
development of backward regions through its investment programmes on
public sector industrial enterprises located in backward areas like Rourkela,
Barauni, Bhilai, Bongaigaon etc. But due to lack of growth of ancillary
industries in these areas, all these areas remained backward in spite of huge
investment made by the Centre.
8. Lack of Motivation on the Part of Backward States:
Growing regional imbalance in India has also been resulted from lack of
motivation on the part of the backward states for industrial development.
While the developed states like Maharashtra. Punjab, Haryana, Gujarat, Tamil
Nadu etc. are trying to attain further industrial development, but the backward
states have been showing their interest on political intrigues and
manipulations instead of industrial development.
9. Political Instability:
Another important factor responsible for regional imbalance is the political
instability prevailing in the backward regions of the country. Political
instability in the form of unstable government, extremist violence, law and
order problem etc. have been obstructing the flow of investments into these
backward regions besides making flight of capital from these backward states.
Thus this political instability prevailing in same backward regions of the
country are standing as a hurdle in the path of economic development of these
regions.
The Failure of Regional Planning in India

Major factors responsible for the failure of regional planning in India:

(a) Refusal of the richer states to transfer some of their surplus resources to
the poorer states;
(b) Lack of self-reliance on the part of poorer states and thereby too much
dependence on the transfer of resources from richer states;
(c) Area development programmes for the backward areas are lacking an
integrated approach;
(d) Failure of large central projects located in the backward areas to improve
their economies;
(e) Non-approaching attitude of the entrepreneurs to seek concessional
finance from the public sector financial institutions;
(f) Too much concentration of Central Government investment subsidy meant
for specific backward areas into a few areas of some districts and too much of
such investment subsidy on capital related investments leading to creation of
lesser employment opportunities;
(g) Lack of infrastructural facilities like power, transport, communication etc.
and lack of adequate fiscal and monetary incentives from the State
Governments have led to no development of ancillary industries, secondary
and tertiary industries in and around these major central industrial
undertakings;
(h) Lack of proper incentives offered by the State Government for tackling the
problem of intra-state imbalances existing within a state;
(i) Inadequacy of fund allotted by the State Governments for the development
of backward and other special problem areas;
(j) Non-utilisation of plan outlays and loans and advances given to the states
for the development of backward areas.
Considering the above weaknesses of the regional planning strategy in
India, the problem of regional imbalances has to be considered not only in
financial terms but also in physical terms. In order to develop these backward
regions, the central assistance should be directly linked with specific
programmes. Development potentials of the backward areas should be clearly
identified and proper steps should be taken to develop such potentialities in
order to remove such relative backwardness of those areas.
Moreover, the industrial development alone cannot tackle the problem of
these backward areas. Rather proper steps must be taken for the agricultural
development of these backward areas and for that adequate infrastructural
facilities in the form of irrigation facilities, command area development, land
reclamation measures, development of dry land farming etc. must be
undertaken along with the growth of agro-based industries.
Thus, necessary co-ordination must be made between the agricultural and
industrial development of these backward regions so that benefit of such
development can percolate to the appropriate level and the people of those
backward areas can reap the direct and indirect benefits of such development.
However, a recent study by the International Monetary Fund (IMF) on the
Regional Economic Growth and convergence over 1961-91 in India reveals
that the poorer regions of India are catching up with richer regions in terms of
rate of growth. As per this study, the initially poor economies of Indian states
have grown faster than their initially rich counterparts between 1961 and 1991.
The study titled, “Internal Migration, Centre-State Grants and Economic
Growths in the States of India” found after taking into account the sectoral
composition of 20 States that about 1.5 per cent of the gap between real per
capita incomes in rich and poor States was closed each year during 1961- 91.

The authors of the study, Mr. Paul Cashin and Mr. Ratna Sahay, in an article
in the latest issue of the IMF Journal, Finance and Development, observed,
“This implies that in India, it Would take about 45 years to close half the gap
between any State’s initial per capita income and the State’s common long-run
level of per capita income.” ……….. In an industrial country it would take only
about 35 years. Thus, it shows that this pattern contrasts sharply with that
found in the industrial countries such as Australia, Japan and the USA.
They observed, “Grants from India’s Central Government to the States did
ensure that the dispersion of States’ real per capita disposable incomes was
narrower than the dispersion of States’ real per capita income, as relatively
more grants were transferred to poor States than to their rich counterparts.”
They add, “Net immigration across States responded weakly to differentials in
State per capita incomes, which indicates that there are sizable barriers to
labour flows across the States of India.”
The study further reveals that the annualized per capita real income
percentage growth rate between 1961 and 1991 for some of the States are:
Andhra Pradesh 2.04; Assam 1.04; Bihar 0.93; Delhi 1.63; Gujarat 1.74;
Haryana 3.00; Himachal Pradesh 2.21; Karnataka 1.77; Kerala 1.85; Madhya
Pradesh 1.89; Maharashtra 2.17; Manipur 3.32; Orissa 1.39; Punjab 2.99;
Rajasthan 1.46; Tamil Nadu 1.61; Uttar Pradesh 1.34 and West Bengal 0.89.
Delhi, the richest region in 1961 as well as in 1991, was clearly an exception in
that its per capita income in both years was more than double the average of
the remaining States. The study further reveals that apart from Delhi, six
other States (Maharashtra, West Bengal, Punjab, Gujarat, Tamil Nadu and
Haryana) had above average per capita incomes in 1961 and all, with the
exception of West Bengal, remained above average in 1991. Thus it is found
that although the regional planning in India had achieved some degree of
success but it is still far from its desired goal.
Regional Imbalances in the Pre-Globalization Period
• Fifth Plans (1974- 79): This Plan grouped backward areas broadly into
two categories: (a) Areas with unfavourable physioeographic conditions,
terrain, and regions including drought-prone, tribal areas and hill areas; and
(b) Economically backward areas, marked by adverse land man ratios, lack of
infrastructure and inadequate development of resource potential.
Programmes like Drought Prone Area Programme (DPAP), Tribal Area
Development Programme (TADP), Hill Area Development Programme (HADP)
etc., were introduced during this plan with provision of earmarked funding. •
Sixth Five Year Plan (1980-85): Introduction of Integrated Rural
Development Programme (IRDP) and submission of the report of a “High
level National Committee for Development of Backward Area”.

This committee was set up to

(a) Examine and identify backward areas and
(b) (b) Review the working of existing schemes for stimulating industrial
development in backward areas. •

The Seventh Five Year Plan (1985-90): It laid major emphasis on

employment generation and poverty alleviation programmes.

However, Seventh Plan ended up with major economic crisis followed by

economic reforms that affected a policy shift towards market oriented
development strategy.

Regional Imbalances in the Post-Globalization:

Post-Globalization:
Eighth Five Year Plan (1992-97): Market driven development strategy
was introduced in the Eighth plan, it recognized that planning process has to
manage the flow of resources across regions for accelerated removal of
“regional disparities”.
Ninth Five Year Plan (1997-2002): The Ninth plan emphasized that the
States to operate in a spirit of cooperative federalism and to arrive at a set of
public policy and action in which state-level initiatives at attracting private
investment in a competitive manner will be acceptable, but they should safe
guard the interests of backwards areas.
Tenth Five Year Plan (2002-07): This was most explicit on regional
disparity by setting the State specific GSDP growth targets for the first time.
For the first time, the national growth target was disaggregated to the
state-level growth targets in consultation with State governments. NAREGA
was introduced during this plan to guarantee the “Right to work”.
The Eleventh Five Year Plan (2007-12): It adopted an Inclusive Growth
Model.
Twelfth Plan (2012-17): This Plan seeks to fulfill the economy at a faster,
sustainable and more inclusive growth.

Types of Disparities/Imbalances & Indicators of Regional

Imbalances in India:
Types of Disparities/Imbalances: They are:
1. Global Disparity (Disparity between Nations)
2. 2. Inter-State Disparity (Disparity between States)
3. Intra-State Disparity (Disparity within States)
4. 4. Rural-Urban Disparity (Disparity between Rural & Urban) Indicators of

Regional Imbalances in India:

1. State Per - Capita Income: For most of the years States like Punjab, Haryana,
Maharashtra, Gujarat, Karnataka, Tamil Nadu and Kerala have achieved
higher per capita income when compared with Orissa, Bihar, M.P, UP, Assam
and Rajasthan. In 2016, Delhi’s per capita income stood at Rs. 2,01,083 as
compared to Bihar’s Rs. 22,890. PCI for 6 Indian states is not available,
including Gujarat, Kerala, Mizoram, Chandigarh, Rajasthan and Goa. In 2012,
Goa had the highest Per Capita Income followed by Delhi.
2. Inter - State Disparities in Agricultural and Industrial Development: Punjab,
Haryana and part of U. P has recorded high rate of productivity due to its high
proportion of irrigated area and higher level of fertilizer use. On the other
hand, states like Assam. Bihar, Orissa and part of U. P have been lagging
behind in respect of the pace of industrialization.
3. Intra - State imbalance: There is a growing tendency among most of the
advanced states concentrate its development activities towards relatively more
developed urban, and metro cities of the states while allocating its industrial
and infrastructural projects by neglecting the backward areas.
4. Spatial Distribution of Industries: States like Punjab, Haryana,
Maharashtra, Gujarat, Kerala, and Karnataka have achieved considerable
development in its industrial sector. But West Bengal could not keep pace in
its industrial growth as much as other industrially developed states.
5. Population below poverty line: The high rural poverty can be attributed to
lower farm incomes due to subsistence agriculture, lack of sustainable
livelihoods in rural areas, impact of rise in prices of food products on rural
incomes, lack of skills, underemployment and unemployment. Total poverty
(Rural & Urban) is more in M.P, Assam, Odisha, Arunachal Pradesh, Manipur,
Jharkhand and Chhattisgarh.
6. Degree of Urbanization: In respect of urbanization the percentage of urban
population to total population is an important indicator. The all India
percentage share of urban population stands at 27.81% in 2001 and 31.6 in
2011.
7. Per Capita Consumption of Electricity: Punjab, Gujarat, Haryana,
Maharashtra etc., having higher degree of industrialization and mechanization
of agriculture, have recorded a higher per capita consumption of electricity
than the economically backward states like Assam, Bihar, Orissa, Madhya
Pradesh and Uttar Pradesh.
8. Employment Pattern: Maharashtra, Gujarat, Haryana, Punjab, Tamil Nadu
and West Bengal are maintaining a higher average daily employment of
factory workers per lakh of population as compared to that of lower average
maintained in industrially backward states like Assam, Orissa, Uttar Pradesh,
Rajasthan etc.
9. 9. Foreign Direct Investment: High FDI States: Maharashtra, Dadra nagar
Haveli, Daman & Div, Delhi, Haryana, Tamilnadu, Pondicherry, Karnataka,
Gujarat, Andhra Pradesh. Medium FDI States: West Bengal, Sikkim,
Andaman & Nikobar islands, Rajasthan, Chandhighadh, Punjab, Haryana,
Himachal Pradesh, Madhya Pradesh, Chatiishghadh, Kerala, Lakshadweep.
Low FDI States: Goa, Orissa, UP, Uttaranchal, Assam, Arunachal Pradesh,
Manipur, Meghalaya, Mizoram, Nagaland, Tripura, Bihar and Jharkhand.
10. Human Development Index: It is a composite statistic of life expectancy,
education, and income per capita indicators. It is also an important indicator
of regional disparities. Kerala, Delhi, H.P, Goa, Punjab are very highly
developed. NE (excluding Assam), M.S, Tamilnadu, Haryana, J&K, Gujarat,
Karnataka are highly developed. West Bengal, Uttarakhand, Andhra Pradesh,
Assam, Rajasthan are medium developed. UP, Jharkhand. M.P, Bihar,
Chhattisgarh are low developed, which clearly shows regional imbalances
between the States in India.

Consequences of Regional Imbalances in India:

1. Inter - States and Intra State Agitations: Uneven regional development or
regional imbalances lead to several agitations with in a State or between the
States. The erstwhile combined State of Andhra Pradesh can be sited as the
best example of the consequences of intra - state regional imbalance in terms
of development. According to HDI (2005-06) , Telangana Region had only 3
districts namely Hyderabad, Ranga Reddy and Karimnagar with in 10 HDI
Ranks. Whereas, Seemaandhra Region had 6 districts (i.e. double the districts
than the Telangana had with in 10 HDI Ranks), namely Krishna, Guntur,
Nellore, Chittore, West Godavari, and Kadapa. There were several agitations
for separate Telangana State for several decades from 1969 – 2014 finally it
was formed as a separate State on 2 – 06 – 2014 as 29th State of India. Still
now and then, there are are agitations for separate Vidhrbha State in
Maharashtra and Bodoland movement in Assam for separate Bodo State for
Bodos.
2. Migration: Migration takes from backward areas to the developed areas in
search livelihood. For example, migration from rural to urban. Because, urban
areas will provide better quality of life and more job opportunities when
compared to rural.
3. Social Unrest: Differences in prosperity and development leads to friction
between different sections of the society causing social unrest. For example
Naxalism. Naxalites in India function in areas which have been neglected for
long time for want of development and economic prosperity.
4. Pollution: Centralization of industrial development at one place leads to
air ,sound and water pollution.
5. Housing & Water Problem: Establishment of several industries at one place
leads to shortage of houses as a result rental charges will increase abnormally.
For example, Mumbai, New Delhi, Chennai and Hyderabad and over
population leads to water crisis.
6. Frustration among Rural Youth: In the absence of employment
opportunities in rural and backward areas leads to frustration especially
among educated youth.
7. Under – Developed Infrastructure: Rural and backward areas do not have
24 hours power, proper houses, safe drinking water,sanitation, hospitals,
doctors, telephone and internet facilities.
8.Aggregation of the imbalance: Once an area is prosperous and has adequate
infrastructure for development, more investments pour-in neglecting the less
developed regions. So an area which is already prosperous develops further.
For examples, the rate of growth of the metropolitan cities like Mumbai, Delhi,
Kolkata, Chennai, Bangalore and Hyderabad is higher compared to other
metro cities of India.

Indian Public Finance

Meaning of Public Finance

The word public refers to general people and the word finance means
resources.So public finance means resources of the masses,how they are
collected and utilized.Thus, Public Finance is the branch of economics that
studies the taxing and spending activities of government.The discipline of
public finance describes and analyses government services,subsidies and
welfare payments,and the methods by which the expenditures to these
ends are covered through taxation,borrowing,foreign aid and the creation
of money.

Definition

According to Findlay Shirras

“Public finance is the study of principles underlying the spending and

raising of funds by public authorities”.

According to H.L Lutz

“Public finance deals with the provision,custody and discursement of

resources needed for conduct of public or government function.”

According to Hugh Dalton

“Public finance is concerned with the income and expenditure of public

authorities,and with the adjustment of the one to the other.

Nature of Public Finance

Nature of public finance implies whether it is a science or art or both.

Public Finance as Science

Science is the systematic study of any subject which studies relationship
between facts. Public finance has been held as science which deals with the
income and expenditure of the government’s finance.It studies the
relationship between facts relating to revenue and expenditure of the
government.

Arguments in support of Public Finance as Science:

 Public finance is systematic study of the facts and principles relating

to government expenditure and revenue.
 Principles of Public finance are empirical.
 Public finance is studied by the use of scientific methods.
 Public finance is concerned with definite and limited field of human
knowledge.
Public Finance as Art

Art is application of knowledge for achieving definite objectives. Fiscal

Policy which is an important instrument of public finance makes use of the
knowledge of government’s revenue and expenditure to achieve the
objectives of full employment, economic development and equality. Price
stability etc. To achieve the goal of economic equality taxes are levied which
are likely to be opposed. Therefore it is important to plan their timing and
volume. The process of levying tax is therefore an art. Study of Public
finance is helpful in solving many practical problems. Public finance is
therefore an art also.

From the above discussion it can be concluded that public finance is both
science and art. It is positive science as well as normative science.

It is a positive science as by the study of public finance factual

information about the problems of government’s revenue and expenditure
can be known. It also offers suggestions in this respect.
It is also normative science as study of public finance presents norms or
standards of the government’s financial operations . It reveals what should
be the quantum of taxes,kind of taxes and on what items less of public
expenditure can be incurred.

Scope of Public Finance

Public finance not only includes the income and expenditure of the
government but also the sources of income and the way of expenditure of
various government corporations, public companies and quasi government
ventures. Thus the scope of public finance extends to the study of
independent bodies acting under the government’s direct and indirect
control. The Scope of public finance includes:

1. Public Revenue
Public finance deals with all those sources or methods through which a
government earns revenue. It studies the principles of taxation, methods of
raising revenue, classification of revenue, deficit financing etc.

1. Public Expenditure
Public expenditure studies how the government distributes the resources
for the fulfillment of various expenses. It also studies principles that the
government should keep in view while allocating resources to various
sectors and effects of such expenditure.

1. Public debt
It deals with borrowing by the government from internal and external
sources. AT any time government may exceed its revenue. To meet the
deficit, government raises loans. The study of public fiancé focuses on the
problems of raising loans and the methods of repayment of loans.

1. Financial/Fiscal administration
The scope of financial administration is wider. It covers all the financial
functions of the government. It includes drafting and sanctioning of the
budget, auditing of the budget, etc. Financial administration is concerned
with the organization and functioning of the government machinery
responsible for performing the various financial functions of the state. The
budget is the master financial plan of the government.

1. Economic Stabilization and Growth

In the present times, public finance is mainly concerned with the economic
stability and other related problems of a country. For the attainment of
these objectives, the government formulates its fiscal policy comprising of
various fiscal instruments directed towards the economic stability of the
nation.

1. Federal Finance
Distribution of the sources of income and expenditure between the central
and the state governments in the federal system of government is also
studied as the subject matter of the public finance. This branch of public
finance is popularly known as Federal Finance.

It is a positive science as by the study of public finance factual

information about the problems of government’s revenue and expenditure
can be known. It also offers suggestions in this respect.

It is also normative science as study of public finance presents norms or

standards of the government’s financial operations . It reveals what should
be the quantum of taxes,kind of taxes and on what items less of public
expenditure can be incurred.
 Public Expenditure: Meaning & Nature,Canons
of public expenditure/Principles of Public
Expenditure

Meaning

Public expenditure is spending made by the government of a country on

collective needs and wants such as pension, provision, infrastructure, etc.
Throughout the 19th Century, most governments followed laissez faire
economic policies & their functions were only restricted to defending
aggression & maintaining law & order. The size of pubic expenditure was very
small.But now the expenditure of governments all over has significantly
increased. In developing countries, public expenditure policy not only
accelerates economic growth & promotes employment opportunities but also
plays a useful role in reducing poverty and inequalities in income distribution.

Definition

“Public expenditure refers to the expenditure incurred by the central,state or

local government of a country for its own administration,social
welfare,economic development and for providing help to other countries.”

Nature of Public Expenditure

The nature of public expenditure differs from country to country as per the
needs and requirements of the country.In developing country,like
India,government has a unique role to play with a vision of socio-economic
makeover and attainment of higher rate of growth with social justice. Public
spending in developed countries is basically undertaken to check the
fluctuation in effective demand.In developing countries public expenditure has
the objective of socio-economic transformation and positioning a leading big
emerging economy in the global setting in a developed country status.Public
expenditure has multiplier effect on level of output and employment.As the
public expenditure is made by the government for public goods,it also raises
the real income and quality of life.But on one hand it has potential to raise the
standard of living at the same time it also has the tendency to push up the
price by injecting the purchasing power.So cost of living also increases.

Canons of public expenditure/Principles of Public Expenditure

There are several principles suggesting maximization of gains of public

expenditure.These principles are called canons of public expenditure.

1.Canon of Benefit

Findly Shirras states “ Other things being equal,public expenditure should be

made in such a way that society gets major benefits which, in turn,may
increase production,protect against external aggressions maintain the internal
order,and may possibly reduce the economic inequalities. “

Acheivement of these objectives can be possible only when public expenditure is

made not for an individual or a class,but for the whole society.By studying
the effect of public expenditure on the distribution of income and wealth
productioneconomic development etc. assessment can be made regarding their
benefits.A major canon of public expenditure is the canon of maximum social
benefit.

2. Canon of Economy

It implies that public expenditure should be incurred carefully and

economically. Economy here means avoidance of extravagance and wastages in
public spending. Public expenditure must be productive and efficient.

Hence, it must be incurred only on very essential items of common benefit,

without duplication, in a way that involves minimum cost. An efficient system
of financial administration is, therefore, very essential in any country.

3.Canon of Sanction

Another important principle of public expenditure is that before it is actually

incurred, it should be sanctioned by a competent authority. Unauthorised
spending is bound to lead to extravagance and over-spending. It also means
that the amount must be spent on the purpose for which it was sanctioned. As
a rule, therefore, money must be spent on the purpose for which it is
sanctioned by the highest authority and accounts be properly audited.

4. Canon of Surplus

Findly Shirras states “ Other things being equal,public expenditure should be

made in such a way that society gets major benefits which, in turn,may
increase production,protect against external aggressions maintain the internal
order,and may possibly reduce the economic inequalities.”

This canon suggests that saving is a virtue even for the government, so an ideal
budget is one which contains an element of surplus by keeping public
expenditure below public revenue. In other words, it means that the
government should avoid deficit budgeting in the interest of its own
creditworthiness.

5. Canon of elasticity

Another same principle of public expenditure is that it should be fairly

elastic. It should be possible for public authorities to vary the expenditure
according to the needs. A rigid level of expenditure may prove a source of
trouble and embarrassment in bad times. Alteration in the upward direction
is not difficult. But elasticity is needed most in the downward direction. It is
not so easy to cut down expenditure. When the economy axe is applied, it is a
very painful process. Retrenchment of a widespread character creates serious
social discontent. Perfect elasticity is out of question. But a fair degree of
elasticity is essential if financial breakdown is to be avoided at the time of
shrinking revenue.

6.Canon of Productivity

Public expenditure should stimulate productivity.Public expenditure should be

made in such a way that it fosters capital formation and generated
employment opportunities alongwith increases levels of productivity and
employment opportunities.

7. Canon of Equitable Distribution

Public expenditure should help equitable distribution of wealth.The

government should make expenditure so as to provide more benefit to the
backward section of the society.
8. Canon of Certainty

The areas in which public expenditure is to be made should be certain so that

the development works may be carried out properly.The government should
determine with certainty the allocation of public expenditure to various uses.

9. Canon of Co-ordination

The items and amounts on which public expenditure is to be made by

central,state and local self governments should be clearly demarcated.Their
should be proper co-ordination among different governments so that dual
expenditure on same item can be avoided.

10. Miscellaneous

Some other canons are:

i. While making expenditure various works should be given priority according

to their relative importance.

ii. Mode of expenditure should alos be kept in mind

iii. Both short term and long term effects of public expenditure should be kept
in mind

iv. While making public expenditure,population of the country,its area,its

physical resources etc. should be kept in mind.

Classification of public expenditure

Budget or Public expenditure refers to estimated expenditure of the

Government on its ‘developopment and non-development programmes’, or on
its ‘plan and non-plan programmes’ during the fiscal year.Public expenditure
of the Government is broadly classified as:

1. Revenue Expenditure
2. Capital Expenditure
1. Revenue Expenditure

Revenue expenditures of the government are those expenditures which have

the following two characteristics:

 These expenditure do no create assets for the government.For

example,expenditure by the government on old-age pensions,salaries
and scholarships are to be teated as revenue expenditure.Because these
are just routine expenditures,not creating assets of any sort.
 These expenditures do not cause any reduction of liability of the
government.Expenditure on the repayment of loans,for example,causes
reduction of government liability.According,this is not to be treated as
revenue expenditure.
In short,revenue expenditure refers to estimated expenditure of the govenmnet
in a a fiscal year which does not either create assets or cause a reduction in
liabilities.

2. Capital Expenditure

Those expenditures of the government are capital expenditures which:

 Create assets for the government. Equity(or shares) of the domestic or

multinational corporations purchased by the government may be cited
as an example.
 Cause reduction in liabilities of the government.Repayment of loans
certainly reduces liability of the government. According this is to be
treated as capital expenditure.
In short, capital expenditure refers to the estimated expenditure of the
government in a fiscal year which either creates assets or causes a reduction in
liabilities.

Other Types of public Expenditure

Public expenditure are classifies in may ways.However,principal types of public

expenditures are as under:

1. Development Productive Expenditure

This relates to growth and development activities of the government.It results
in the improvement of productive capacity.This includes expenditure on
eduction,health,industry,agriculture,transport,roads,canals,rural
development,water works and generation of power.

2. Non-development or Unproductive expenditure

Non-development expenditure of the government related to non-development

activites of the government,It does not raise the productive capacity of the
nation.This includes expenditure on administration,police and military,law and
order, collection of taxation,interest on loans,payment of old age pensions, etc.

3. Plan Expenditure

Plan expenditure refers to that expenditure which is incurred by the

government within the purview of its planned development progrmmes. This
includes both consumption as well as investment expenditure by the
government or pLanning commission of the government.Expenditure on
agriculture,power,communication,industry,transport,public utilities,health
and education are some of the notable examples of plan expenditure.

4. Non-plan Expenditure
This refers to all such government which happened to be beyond the purview of
its planned development programmes.This includes both consumption as well
as investment expenditure by the government.This includes expenditure on
subsidies,defence,law and order as well as payment of interest on loans by the
government.

5. Transferable and non-transfereable Expenditure

Prof. Pigou has classified public expenditure into transferebale and

non-transferebale expenditure.

 Transferable Expenditure
These are the expenditure by the government which are not related to the
production of goods and services or generation of income in the economy.These
expenditure cause transfer of income from government to the individual and
households. Scolarships and unemployment allowance by the government are
two notable examples of transferable expenditures.

 Non-Transferable Expenditure
These are the expenditures which result in the exchange of goods and services
for money.These are called real expenditures.These include mainly the
payments made by the government on the use of factor services for productive
activities.Expenditure on armaments,education,post and telegraph,agricultural
development and railways are some important examples of non-transferable
expenditures.

6. Current and Capital Expenditure

Current expenditure is that expenditure which is met out of the current

revenue and does not lead to creation of some capital assets.Government
expenditure on defence,administration,etc. are the example of current
expenditure.

7. Primary an dSecondary Expenditure

On the basis of importance,public expenditure can be classified as primary and
secondary expenditure.Primary expenditure are those expenditure which are
necessary for the existence of a country.On the contrary,secondry expenditure
are meant for achieving welfare and development of the country.In the
modern times both primary and secondary expenditure are necessary for the
development of a country.

8. Progressive,proportional and Regressive Public Expenditure

On the basis of effects of public expenditure on society,Prof. Dalton classified

public expenditure as progressive,proportional and regressive.In case of
progressive public expenditure higher income bracket people get less benefit out
of the government expenditure.Government expenditure on education,health
care ,fair,price shops, etc. benefits most to the poor than rich.Proportional
public expenditure are those expenditure which benefited proportionately
irrespective of the level of income.A fixed percentage increase in the salary will
have proportional effect on every.

Effects of Public Expenditure on production,

distribution and economic stability
聽

Effects of Public Expenditure on Production

Public expenditure has a great bearing on economic development and social

welfare of a country.Following observations may be noted in this regard.

 Effect on Production
According to Dr.Dalton,public expenditure tends to affect the level of
production in the following manner:

1.Capacity to work and save

As a result of public expenditure,capacity to work and save tends to
rise.Government expenditure provides various kinds of social and economic
facilities stimulating the capacity to work of the people.Increased capacity
implies increased efficiency and greater employment. Level of income and
saving tends to rise facilitating greater investment and adding to the pace of
growth.

2. Desire to Work and save

Expenditure incurred by the government promotes the will to work and

save.As a result,their income and standard of living tent to rise.

3. Productive Utilization of Resources

Public expenditure restores a balance in the economy by focusing on those

areas of production which generate maximum linkages effect.Public
expenditure acts as a pump-priming,attracting idle resources to their
productive utilization.Accordingly,production level tends to raise the resources
from unproductive activities to productive ones.This results in increase in
production.

 聽 Effect on Distribution
Public expenditure affects distribution in the following possible ways:

1. Regional Inequality

This is how public expenditure can promote equality across different regions of
a country :

i. The government expenditure should focus on development of backward

areas,increasing the level of production and income of the people of those
areas.Their standard of living will increase to catch up with the living
standards in developed regions of the country.
ii. Public expenditure should include financial help to the small-scale and
cottage industries.These industries have the merit of easy-diversification across
different parts of the country.Accordingly regional inequality is expected to
improve.

2. Distribution of the Dividends of Industrial Development

As a result of public expenditure,public sector industries in the country.The

workers employed in these industries are paid higher wages.They get some
facilities also,better than others.Following the public sector industries,private
sector industries also provide higher wages and other facilities to the
workers.Increase in the workers wages will lead to the reduction in economic
inequality.

3. Benefit to the Weaker Section

If the government makes public expenditure on social services like

education,medical care,unemployment allowance,labour welfare etc. after
collecting resources by way of taxes from the rich class,it will result in the
increase in real income of the poor people,thus tilting the distribution further
in their favour.

4. Increase in the Ability to work of the Poor

Distribution of income can also be influences by increasing the ability to work

of the poor with the help of public expenditure.This objective can be achieved in
two ways:

i. Direct Help : The government can provide direct help to the poor people in
the form of cash,commodities and service.

ii. Indirect Help: The government can provide loans to the poor at a low rate of
interest.It can provide them food at fair price.It can provide more social
services to them.As a result of it,their efficiency will be increased.With rise in
their income level their standard of living will improve.

 Public Expenditure and Economic Stability

Cyclical changes are an inherent character of a market economy.These changes
are called Trade Cycles,and are manifested as the state of
recession,depression,recovery and boom.The states of recession and depression
are particularly dangerous for restricting the pace of growth.Inflation is equally
bad when it tends to be galloping or hyper.Note the following observations to
understand how public expenditure facilities economic stability:

1. Public Expenditure and depression

During depression,the prices of commodities tend to fall. Accordingly there is a

fall in production and employment.Unemployment increases.Both the
producers and the consumers become pessimistic.Producers reduce output
because of the lack of demand.Consumers,hoping for a further fall in
prices,suspend their existing consumption needs.Accordingly,reduction in
demand is compounded.As a consequence,the vicious circle of reduced
demand,reduced production,and reduced employment sets in.Here comes the
significance of public expenditure.According to Keynes, in the state
depression,the government should plan for a comprehensive increase in public
expenditure.It can be of twp types:

i. Compensatory Expenditure

It includes those spending which the government makes on public works so as

to increase employment and aggregate demand.Such spending generate
multiplier effect on income.Income rises in consonance with increased
employment,acting as an anti-dote the situation of depression.

ii. Pump Priming Expenditure

During the depression periods,investment is low.If investment is made in public
sector,it will prompt private investment as well.Public expenditure thus made
is called pump priming.Initial expenditure by the government particularly on
infra-structural facilities,tends to be conductive for an all round growth of
private investment.

Taylor categories public expenditure during depression as

(a)Home Relief

(b) Unemployment Compensation Plans, and

(c) Work Projects.

a) Home relief is provided to the poor so as to increase their

consumption,without getting their services.This is a kind of transfer payments
expected to raise consumption expenditure.

b) Unemployment Compensation Fund is set with the help of the

employers,employees and the government.Help is provided to the workers
during the period of unemployment out of this fund.

c) Work projects include public works like construction of roads,bridges and

dams, etc. Expenditure on such projects will projects will generate income to
combat deflation through increased demand.

2. 聽 Public Expenditure and Inflation

Public expenditure can be used as a policy instrument to curb inflation.It

should focus on the following areas:

i. Increase in Production

Public expenditure should be utilized for increasing production. Increase in

production during inflation implies increased flow of goods and services in the
economy.In the backdrop of rising prices,increased flow of goods and services
will help strike a balance between demand and supply.

ii. Reduction in Consumption

In a state of price-rise,the government should reduce its consumption

expenditure.This will reduce the pressure of demand on the goods and
services.Accordingly prices are expected to fall,or at least their pace of rise will
be arrested.

Tax revenue-Meaning,Definition,Features and

Objectives

Meaning

Tax revenue is the income that is gained by governments through taxation.To

meet the increasing public expenditure public authorities raises resources
through public revenue. There are several sources of revenue and one among
them is taxes.Tax is a compulsory payment by the citizens to the government
to meet the public expenditure. It is legally imposed by the government on the
tax payer and in no case tax payer can deny to pay taxes to the government.

Definition

“A Tax is a compulsory payment made by a person or a firm to a

government without reference to any benefit the payer may derive from the
government.”

-Anatol Murad
“A Tax is a compulsory contribution imposed by public authority,irrespective of
the exact amount of service rendered to the tax payer in return and not
imposed as a penalty for any legal offence.”

-Dalton

Features/Characteristics of a Tax

1.Compulsory payment

A tax is a compulsory payment to be paid by the citizens who are liable to pay
it. Hence, refusal to pay a tax is a punishable offence

2. Public Welfare

Tax revenue is spent for the general and common benefit e.g. the construction
of a hospital and railway line,supply of water and electricity, etc. It does not
benefit any single individual in particular,rather entire society is benefitted by
it.

3. No direct Service

The tax payer does not get any direct service as quid-pro-quo. In other
words,the tax is not in any way related to the benefit received from the
government expenditure and the tax payer cannot expect any benefit from the
government in proportion the tax paid by him But this is not true in all cases
as there are certain taxes from whom the collected revenue is spent on those
persons from whom these taxes have been collected.For example,the major
portion of the revenue collected from road tax or petrol tax is spent on the
repair and upkeep of roads.

4. No proportionate relation between the tax and the benefit

It is also not necessary that a tax payer gets the benefits form the government
proportionately to the amount paid by him as tax.Thus taxes are not paid
because an individual receives a benefit from the government or are taken
from him because the government has rendered any services to him.But there
are certain qualifications to its, e.g. a land tax is paid only by those individuals
who possess land or derive benefit from land.Similarly entertainment tax will
be paid by only those who receive the benefits.

5. Personal Responsibility of an Individual

Tax has to be paid by a person even though the basis of its imposition may be
goods.In other words a tax imposes personal obligation on the tax payer.

6. Legal Procedure

Taxes are imposed legally and properly.Taxes are levied according to legal
procedure.

Objectives of Taxation

1. To get Income

The fundamental objective of taxation is to finance government expenditure.

The government requires carrying out various development and welfare
activities in the country. For this, it needs a huge amount of funds. The
government collects funds by imposing taxes. So, raising more and more
revenues has been an important objective of tax.

2. To regulate and Control

Taxation also aims at regulating consumption,imports,exports,profit etc. For

example,in order to control or prohibit the consumption of liquor or other
intoxicants government imposes heavy taxes on these goods.Similarly goods
whose imports are to be discouraged are burdened with heavy import duties.
3. Prevent Concentration Of Wealth In A Few Hands

Tax is imposed on persons according to their income level. High earners are
imposed on high tax through progressive tax system. This prevents wealth
being concentrated in a few hands of the rich. So, narrowing the gap between
rich and poor is another objective of tax.

4. Boost Up The Economy

Tax serves as an instrument for promoting economic growth, stability and

efficiency. The government controls or expands the economic activities of the
country by providing various concessions, rebates and other facilities. The
effective tax system can boost up the economy. Similarly, taxes can correct
for externalities and other forms of market failure (such as monopoly). Import
taxes may control imports and therefore help the country’s international
balance of payments and protect industries from overseas competition.

5. Allocation of resources

Change in the allocation of resources is another objective of taxation.If

government wants to withdraw the resources from the production of luxuries
and utilize the same for producing more of necessities,it imposes heavy taxes
on luxuries and remove taxes from necessaries.As a result of more taxes on
luxuries their prices rise and demand falls.Less demand means less production
of these goods and less use of resources.These resources can be used for the
production of necessities.

6. Control over prices

Taxation alos increase the rise in prices.One of the causes of price rise is the
expansion of the supply of money.when there ismore money with the people
there is more demand and hence rise in prices. Through taxes,government
reduces the voulume of money with the people.Consequently,there is fall in
demand and also fall in the price level.
 Direct and Indirect Taxes

Direct Taxes

As the name suggests, are taxes that are directly paid to the government by
the taxpayer. It is a tax applied on individuals and organizations directly by
the government e.g. income tax, corporation tax, wealth tax, Estate Duty, Gift
tax etc.

Definition:

“A direct tax is really paid by the person on whom it is legally imposed.”

-Dalton

“Direct Taxes are those taxes which cannot be shifted and which,therefore,fall
directly on the persons from whom the government extracts the payment.”

-A
natol Murad

Types of Direct taxes

1.Income Tax

Income Tax is paid by an individual based on his/her taxable income in a given

financial year. Under the Income Tax Act, the term ‘individual’ also includes
Hindu Undivided Families (HUFs), Co-operative Societies, Trusts and any
artificial judicial person. Taxable income refers to total income minus
applicable deductions and exemptions.Tax is payable if the taxable is above the
minimum taxable limit and is paid as per the differing rates announced for
each tax slab for the financial year.

2.Corporation Tax

Corporation Tax is paid by Companies and Businesses operating in India on the

income earned worldwide in a given financial year. The rates of taxation vary
based on whether the company is incorporated in India or abroad.

3. Wealth Tax

Wealth tax is applicable on individuals, HUFs or companies on the value of their

assets in a given financial year on the date of valuation. Wealth tax payable
is 1% of the net value of taxable wealth if it exceeds Rs 30 lakh as on valuation
date for the financial year. The due date for filing wealth tax return is the
same as for income tax return.

‘Net wealth’ here includes, unproductive assets like cash in hand above Rs
50,000, second residential property not rented out, cars, gold jewellery or
bullion, boats, yachts, aircrafts or urban land. It does not include productive
assets like commercial property, stocks, bonds, fixed deposits, mutual funds
etc.

4. Capital Gains Tax

The profits made on sale of property are taxable under Capital Gains Tax.
Property here includes stocks, bonds, residential property, precious metals etc.
It is taxed at two different rates based on how long the property was owned by
the taxpayer – Short Term Capital Gains Tax and Long Term Capital Gains
Tax. This deciding period of ownership varies greatly for different classes of
property.
Merits of Direct Taxes

1. The larger burden of the direct taxes falls on the rich people who have
capacity to bear these and the poor people with less ability to pay have
to bear less burden.
2. Direct taxes are important instrument of reducing inequalities of
income and wealth.
3. Unlike indirect taxes, direct taxes do not cause distortion in the
allocation of resources. As a result these leave the consumers better off as
compared to indirect taxes.
4. Revenue elasticity of direct taxes, especially if they are of progressive
type is quite high. As the national income increases, the revenue on these
taxes also rises a great deal.
5. Collection of these taxes are not expensive.The tax payer himself has to
deposit these taxes with the government.
6. These taxes are based on the principle of certainty. The tax payer knows
how much tax,when,where or how he has to pay.Even the government is
certain to a large extent about the revenue collected from these taxes.
Demerits of Direct Taxes

1. In the direct taxation, people are aware of their tax liability and
therefore they would try to avoid or even evade the taxes. The practice
and possibility of tax evasion and avoidance is more in direct taxes than
in case of indirect taxes.
2. Direct taxes are generally payable in lump sum or even in advance and
become quite inconvenient.
3. Another demerit of direct taxes is their supposed effect on the will to
work and save. It is assessed that work (given Income) and leisure are
two alternatives before any taxpayer. If therefore, a tax is imposed say
on income, the taxpayer will find that the return from work has
decreased as compared with return from leisure. He therefore tries to
substitute leisure for work.
 4. Sometimes the collection of these taxes is very expensive.If there is a
great number of people who pay only small amounts as tax,the
expenditure on the collection of the tax revenue will be enormous.For
example,land revenue in India is adirect tax.Since this tax is collected
from millions of farmers in small amounts of money,its collection is very
expensive.
5. Such type of taxes may discourage capital formation.If the rate of these
taxes is very high,it affects saving adversely reducing the rate of capital
formation.
6. These taxes are not popular because the tax payer has to bear their
burden directly.These taxes seem to be more oppressive.A lot of amount
has to be paid in the form of these taxes.
Indirect Taxes

These are applied on the manufacture or sale of goods and services. These are
initially paid to the government by an intermediary, who then adds the
amount of the tax paid to the value of the goods / services and passes on the
total amount to the end user.Examples of these are sales tax, service tax, excise
duty etc.

Definition:

“A indirect tax is imposed on one person,but paid partly or wholly by another’.

-Dalton

“AN indirect tax is demanded from the person in the expectation and
intention that he shall indemnify himself at the expense of another”.

Types of Indirect Taxes

1.Sales Tax
Sales Tax is charged on the sale of movable goods. It is collected by the Central
Government in case of inter-state sales (Central Sales Tax or CST) and by the
State Government for intra-state sales (Value Added Tax or VAT). The rates of
taxation vary depending on the product type.

2. Service Tax

Service tax is applicable on all services provided in India except a specified

negative list of services that are exempt. It is paid by the service provider to the
government who in turn collects it from the end user by the service provider at
the time of provision of such service. Service tax is applied generally at the rate
of 12.36%, which has been revised to 14% from April 2015. This type of
indirect tax is levied by the service tax provider and paid by the recipient of
the services. However, in some cases the liability for the tax is divided between
the recipient as well as the provider of service.

There is also a provision for abatement of service tax if the final price is a
mixture of services as well as material, such as restaurant bills. In general,
restaurants levy service tax on 40% of the bill amount as 60% of the amount is
considered to be cost of materials. Service taxes fall under the ambit of the
central government.

3. Excise Duty

The tax imposed by the government on the manufacturer or producer on the

production of some items is called excise duty. The liability to pay excise duty is
always on the manufacturer or producer of goods. The duty being a duty on
manufacture of goods, it is normally added to the cost of goods, and is
collected by the manufacturer from the buyer of goods. Therefore it is called an
indirect tax. This duty is now termed as “Cenvat”. There are three types of
parties who can be considered as manufacturers-

 Those who personally manufacture the goods in question

 Those who get the goods manufactured by employing hired labour
  Those who get the goods manufactured by other parties For example,
excise duty on the production of sugar is an indirect tax because the
manufacturers of sugar include the excise duty in the price and pass it on
to buyers. Ultimately it is the consumers on whom the incidence of excise
duty on sugar falls, as they will pay higher price for sugar than before
the imposition of the tax.
In order to attract Excise duty liability, following four conditions must be
fulfilled:

a) The duty is on “goods”.

b) The goods must be “excisable”

c) The goods must be “manufactured” or produced. d) Such manufacture or

production must be “in India”

Merits of Indirect Taxes

1. Indirect taxes are usually hidden in the prices of goods and services
being transacted and, therefore their presence is not felt so much.
2. If the indirect taxes are properly administered, the chances of tax
evasion are less.
3. Indirect taxes are a powerful tool in molding the production and
investment activities of the economy i.e. they can guide the economy in
its resource allocation.
4. Variety is found in these taxes. Every citizen of the country has to pay
these taxes in one form or the other.
5. By imposing these taxes on harmful goods such as wine,cigarettes etc.
prices of these items can be made prohibitive.It may check their
consumption and save the society of their harmful affect.
6. These taxes are convenient. Taxes are paid only when goods are
purchased.This tax is convenient to the government also because the
 government realizes the amount of these taxes straight from the
producers or importers.
Demerits of Indirect taxes

1. It is claimed and very rightly that these taxes negate the principle of
ability- to-pay and are therefore unjust to the poor. Since one of the
objectives is to collect enough revenue, they spread over to cover the
items, which are purchased generally by the poor. This makes them
regressive in effect.
2. If indirect taxes are heavily imposed on the luxury items then this will
only help partially because taxing the luxuries alone will not yield
adequate revenue for the State.
3. Direct taxes take away a part of the purchasing power of the taxpayer
and that has the effect of reducing demand and prices. On the other
hand, indirect taxes are added to the sale prices of the taxed goods
without touching the purchasing power in the first place. The result is
that in their case inflationary forces are fed through higher prices, higher
costs and wages and again higher prices.

Inflation In India

What is Inflation?
Inflation is a rise in the general level of prices of goods and services in an
economy over a period of time.
When the general price level rises, each unit of currency buys fewer goods and
services. Therefore, inflation also reflects an erosion of purchasing power of
money.
According to Crowther, “Inflation is State in which the Value of Money is
Falling and the Prices are rising.”
In Economics, the word ‘inflation’ refers to General rise in Prices Measured
against a Standard Level of Purchasing Power.
Here are several variations on inflation used popularly to indicate specific
meanings.
Deflation is when the general level of prices is falling. It is the opposite of
inflation. Also referred to as Disinflation.The lack of inflation may be an
indication that the economy is weakening.
Hyperinflation is unusually rapid inflation in very short span of time. In
extreme cases, this can lead to the breakdown of a nation’s monetary system
with complete loss of confidence in the domestic currency. One of the earlier
examples of hyperinflation occurred in Germany in early 1920s after the First
World War, when prices rose 2,500% in one month.
Stagflation is the combination of high unemployment with high inflation. This
happened in industrialized countries during the 1970s, when a bad economy
was combined with OPEC raising oil prices led to low growth.

Inflation is all about prices going up, but for healthy economy wages
should be rising as well. The question shouldn’t be whether inflation is
rising, but whether it’s rising at a quicker pace than your wages, if
the answer is a Yes only then inflation is problematic.

Finally, inflation is a sign that an economy is growing. The RBI considers the
range of 4-5 % as comfort zone of inflation in India.
Impact or Effect of Inflation :
Inflation affects the pattern of production, a shift in production pattern takes
place from consumer goods to luxury goods.
On Investment: Inflation discourages entrepreneurs in investing as the risk
involved in the future production would be very high with less hope for
returns.Uncertainty about the future purchasing power of money discourages
investment and savings.
Inflation also results in black marketing. Sellers may stock up the goods to be
sold in the future, anticipating further price rise.
The effect of inflation is felt on distribution of income and wealth and on
production.
People with fixed income group are the worst sufferers of inflation.Those
living off a fixed-income, such as retirees, see a decline in their purchasing
power and, consequently, their standard of living.
The entire economy must absorb repricing costs (“menu costs”) as price lists,
labels, menus and more have to be updated.
If the inflation rate is greater than that of other countries, domestic products
become less competitive.
They add inefficiencies in the market, and make it difficult for companies to
budget or plan long-term.
On Exchange rate and trade: There can also be negative impacts to trade from
an increased instability in currency exchange prices caused by unpredictable
inflation.
On Taxes: Higher income tax rates on taxpayers. Government incurrs high
fiscal deficit due to decreased value of tax collections.
On Export and balance of trade: Inflation rate in the economy is higher than
rates in other countries; this will increase imports and reduce exports, leading
to a deficit in the balance of trade.

Causes of Inflation:
There is no one cause that’s universally agreed upon, but at least two theories
are generally accepted while the debate still goes on:

Demand Pull Inflation

Demand-pull inflation is caused by increases in aggregate demand due to
increased private and government spending, etc.
Demand-pull inflation is constructive to a faster rate of economic growth since
the excess demand and favourable market conditions will stimulate
investment and expansion. Demand-pull theory states that the rate of
inflation accelerates whenever aggregate demand is increased beyond the
ability of the economy to produce (its potential output). Hence, any factor that
increases aggregate demand can cause inflation. However, in the long run,
aggregate demand can be held above productive capacity only by increasing
the quantity of money in circulation faster than the real growth rate of the
economy.
Cost Push Inflation
Cost-push inflation, also called “supply shock inflation,” is caused by a drop in
aggregate supply (potential output). This may be due to natural disasters, or
increased prices of inputs. For example, a sudden decrease in the supply of oil,
leading to increased oil prices, can cause cost-push inflation.
Producers for whom oil is a part of their costs could then pass this on to
consumers in the form of increased prices.
Built in Inflation
Built-in inflation is induced by adaptive expectations, and is often linked to
the “price/wage spiral”. It involves workers trying to keep their wages up with
prices (above the rate of inflation), and firms passing these higher labor costs
on to their customers as higher prices, leading to a ‘vicious circle’. Built-in
inflation reflects events in the past, and so might be seen as hangover
inflation.

Measurement of Inflation
Inflation is measured by calculating the percentage rate of change of
a price index, which is called the inflation rate.

Inflation is often measured either in terms of Wholesale Price Index

or in terms of Consumer Price Index.

 Wholesale Price Index(WPI) : The Wholesale Price Index is an

indicator designed to measure the changes in the price levels of
commodities that flow into the wholesale trade
intermediaries.The index is a vital guide in economic analysis
 and p olicy
formulation. It is a basis for price adjustments in business
contracts and projects. It is also intended to serve as an
additional source of information for comparisons on the
international front.
 Consumer Price Index (CPI) : Consumer price index is specific
to particular group in the population. It shows the cost of living
of the group. It is based on the changes in the retail prices of
goods or services. Based on their incomes, consumer spends
money on these particular set of goods and services. There are
different
 consumer price indices. Each index tracks the changes in the
retail prices for different set of consumers.

Measures to control inflation:

Effective policies to control inflation need to focus on the underlying
causes of inflation in the economy.There are two broad ways in
which governments try to control inflation. These are-
1. Fiscal measures.

Monetary Policy: Monetary policy can control the growth of demand through
an increase in interest rates and a contraction in the real money supply. For
example, in the late 1980s, interest rates went up to 15% because of the
excessive growth in the economy and contributed to the recession of the early
1990s.
Monetary measures of controlling the inflation can be either quantitative or
qualitative. Bank rate policy, open market operations and variable reserve
ratio are the quantitative measures of credit control, by which inflation can be
brought down. Qualitative control measures involve selective credit control
measures.
Bank rate policy is used as the main instrument of monetary control during
theperiod of inflation. When the central bank raises the bank rate, it is said to
haveadopted a dear money policy. The increase in bank rate increases the cost
ofborrowing which reduces commercial banks borrowing from the central
bank.Consequently, the flow of money from the commercial banks to the
public getsreduced. Therefore, inflation is controlled to the extent it is caused
by the bankcredit.
Cash Reserve Ratio (CRR) : To control inflation, the central bank raises the
CRR which reduces the lending capacity of the commercial banks.
Consequently,flow of money from commercial banks to public decreases. In
the process, ithalts the rise in prices to the extent it is caused by banks credits
to the public.
Open Market Operations: Open market operations refer to sale and
purchaseof government securities and bonds by the central bank. To control
inflation,central bank sells the government securities to the public through the
banks.This results in transfer of a part of bank deposits to central bank
account andreduces credit creation capacity of the commercial banks.

 Fiscal Policy:
 Higher direct taxes (causing a fall in disposable income).
 Lower Government spending.
 A reduction in the amount the government sector borrows
each year .
 Direct wage controls – incomes policies Incomes policies (or
direct wage controls) set limits on the rate of growth of wages
and have the potential to reduce cost inflation.
 Government can curb it’s expenditure to bring the inflation in
control.
 The government can also take some protectionist measures
(such as banning the export of essential items such as pulses,
cereals and oils to support the domestic consumption,
encourage imports by lowering duties on import items etc.).

WHAT IS FDI ?

Foreign direct investment (FDI) in its classic form is defined as a company

from one country making a physical investment into building a factory in
another country. Include investments made to acquire lasting interest in
enterprises operating outside of the economy of the investor.
Generally speaking FDI refers to capital inflows from abroad that invest in the
production capacity of the economy and are • Usually preferred over other
forms of external finance because they are • Non-debt creating, non-volatile
and their returns depend on the performance of the projects financed by the
investors. • FDI also facilitates international trade and transfer of knowledge,
skills and technology.The FDI relationship consists of a parent enterprise and
a foreign affiliate which together form a multinational corporation (MNC). In
order to qualify as FDI the investment must afford the parent enterprise
control over its foreign affiliate. The IMF defines control in this case as
owning 10% or more of the ordinary shares or voting power of an incorporated
firm or its equivalent for an unincorporated firm.

Foreign Direct Investment (FDI) is permitted as under the following forms of

investments• Through financial collaborations. • Through joint ventures and
technical collaborations. • Through capital markets via Euro issues. • Through
private placements or preferential allotments.

FDI - Concept Long term investment by a foreign direct investor in an

enterprise resident in an economy other than that in which the foreign direct
investor is based The FDI relationship, consists of a parent enterprise and a
foreign affiliate which together form a transnational corporation (TNC)
Parent enterprise investment must afford the parent enterprise control over
its foreign affiliate (owning 10% or more of the ordinary shares or voting
power of an incorporated firm or its equivalent for an unincorporated firm-
UN definition) FDI FII
• Direct investment by a controlling Parent
• Investment in the capital/debt stock of a enterprise in the assets of an
affiliate enterprise company/govt securities by an investor that is from or
located in an economy other than where Parent registered in a country outside
of the one in which it is enterprise is based investing
• Investment by any Corporation
• Includes hedge funds, insurance companies, pension carry out business in
the country other than its own funds and mutual funds
• Long term & direct investment in plant &
• Short term investment (generally) made under machinery aimed to carry
out/expand business in portfolio management to earn profits from value the
affiliate’s country appreciation
• Regulated by RBI and FIPB (Foreign Investment • SEBI registration is
required to operate as an FII in Promotion Board) of the Dept of Commerce
under India Ministry of Finance • Aggregate investment ceiling for FII
investment is 10% • Sector specific limits prescribed for FDI under (5% for
single) of the paid up capital of a company (upto automatic/approval route
24% in case of listed Indian companies under a General Body Resolution
4. Types of FDI Greenfield Investment Direct investment in new facilities/
expansion of existing facilities Objective to create new production capacity
and jobs, transfer technology and know-how and form linkages to the global
marketplace Leads to crowding out of local industry due to production of
goods more cheaply (due to advanced technology and efficient processes) and
uses up resources (labor, intermediate goods, etc) Profits from production do
not feed back into the local economy but to the multinational's home economy
Mergers & Acquisitions Primary type of FDI involving transfer of existing
assets from local firms to foreign firms Assets and operation of firms from
different countries are combined to establish a new legal entity (Cross-border
merger) Control of assets and operations is transferred to foreign company by
its local affiliate company (Cross-border acquisition) No long term benefits to
the local economy, unlike Greenfield investment, as mostly the owners of the
local firm are paid in stock from the acquiring firm Horizontal Foreign Direct
Investment Investment in the same industry abroad as a firm operates in at
home Vertical Foreign Direct Investment Backward vertical: Industry abroad
provides inputs for a firm's domestic production processes Forward vertical:
Industry abroad sells the outputs of a firm's domestic production processes

5. FDI – Advantages Vs Disadvantages Advantages Disadvantages Inflow

of equipment & technology Crowding of local industry Competitive
advantage & innovation Financial resources for expansion Loss of
control Employment generation Repatriation of profits/dividends by
Contribution to exports growth investor Access to global marketplace for
domestic Conflicts of codes/laws players Possible exploitation of
resources- Access to low cost resources for investor material/ wages
Access to new market/distribution channel for products Effect on local
culture/sentiments – Improved consumer welfare through socio cultutal
effect reduced costs, wider choice and improved Effect on natural
environment quality

6. FDI Procedure in India Foreign Direct Investment (FDI) is permitted as

under the following forms of investments: Through financial collaborations
Through joint ventures and technical collaborations Through capital
markets via Euro issues Through private placements or preferential
allotments Forbidden Territories: FDI is not permitted in the following
industrial sectors: Arms and ammunition Atomic Energy Railway
Transport Coal and lignite Mining of iron, manganese, chrome, gypsum,
sulphur, gold, diamonds, copper, zinc Foreign Investment through GDRs is
treated as Foreign Direct Investment Indian companies are allowed to raise
equity capital in the international market through the issue of Global
Depository Receipt (GDRs) GDRs are designated in dollars and are not
subject to any ceilings on investment Applicant company seeking approval
should have consistent track record for good performance (financial or
otherwise) for a minimum period of 3 years (this condition is relaxed for
infrastructure projects such as power generation, telecommunication,
petroleum exploration and refining, ports, airports and roads) GDR
proceeds can be used for financing capital goods imports, capital expenditure
including domestic purchase/installation of plant, equipment and building
and investment in software development, prepayment or scheduled
repayment of earlier external borrowings, and equity investment in JV/WOSs

7. FDI Procedure in India Foreign direct investments in India are approved

through two routes: Automatic approval by RBI: The Reserve Bank of India
accords automatic approval within a period of two weeks (provided certain
parameters are met) to all proposals involving: foreign equity up to 50% in
3 categories relating to mining activities foreign equity up to 51% in 48
specified industries foreign equity up to 74% in 9 categories The lists are
comprehensive and cover most industries of interest to foreign companies.
Investments in high- priority industries or for trading companies primarily
engaged in exporting are given almost automatic approval by the RBI. The
FIPB Route: Processing of non-automatic approval cases by FIPB (Foreign
Investment Promotion Board) where the parameters of automatic approval
are not met Normal processing time is 4 to 6 weeks Liberal approach for
all sectors and all types of proposals with few rejections Non-mandatory for
foreign investors to have a local partner, even when the foreign investor
wishes to hold less than the entire equity of the company. The portion of the
equity not proposed to be held by the foreign investor can be offered to the
public

8. Current Indian FDI Limits Sector Specific Foreign Direct Investment in

India Hotel & Tourism: FDI in Hotel & Tourism sector in India - 100% FDI
is permissible in the sector on the automatic route. The term hotels include
restaurants, beach resorts, and other tourist complexes providing
accommodation and/or catering and food facilities to tourists. Tourism
related industry include travel agencies, tour operating agencies and tourist
transport operating agencies, units providing facilities for cultural, adventure
and wild life experience to tourists, surface, air and water transport facilities
to tourists, leisure, entertainment, amusement, sports, and health units for
tourists and Convention/Seminar units and organizations. For foreign
technology agreements, automatic approval is granted if i. up to 3% of the
capital cost of the project is proposed to be paid for technical and consultancy
services including fees for architects, design, supervision, etc. ii. up to 3% of
net turnover is payable for franchising and marketing/publicity support fee,
and up to 10% of gross operating profit is payable for management fee,
including incentive fee Private Sector Banking: Non-Banking Financial
Companies (NBFC) - 49% FDI is allowed from all sources on the automatic
route subject to guidelines issued from RBI from time to time in19 NBFC
activities - Merchant banking, underwriting, portfolio management services,
investment advisory services, financial consultancy, stock broking, asset
management, venture capital, custodial services, factoring, credit reference
agencies, credit rating agencies, leasing & finance, housing finance, foreign
exchange brokering, credit card business, money changing business, micro
credit and rural credit There are separate prescribed minimum capitalization
norms for fund/non-fund based NBFCs Insurance Sector: Up to 26% FDI is
allowed on the automatic route subject to obtaining licence from Insurance
Regulatory & Development Authority (IRDA)

9. Current Indian FDI Limits Telecommunication Sector: Limited to 49%

in basic, cellular, value added services and global mobile personal
communications by satellite, subject to licensing and security requirements
and adherence by the companies (by both investor & investee companies) to
the license conditions, up to 74% in ISPs with gateways, radio-paging and
end-to-end bandwidth, up to 100% is allowed subject to the condition that
such companies would divest 26% of their equity in favor of Indian public in 5
years, if these companies are listed in other parts of the world Trading
Companies: Up to 51% under automatic route provided it is primarily export
activities, and the undertaking is an export house/trading house/super
trading house/star trading house. However, under the FIPB route, 100% FDI
is permitted in case of trading companies for activities like exports, bulk
imports with ex-port/ex-bonded warehouse sales, cash and carry wholesale
trading etc. Power Sector: Up to 100% FDI allowed in respect of projects
relating to electricity generation, transmission and distribution, other than
atomic reactor power plants. There is no limit on the project cost and
quantum of foreign direct investment Drugs & Pharmaceuticals: Up to
100% under automatic route for manufacture of drugs and pharmaceutical,
provided the activity does not attract compulsory licensing or involve use of
recombinant DNA technology, and specific cell / tissue targeted formulations,
otherwise prior Government approval is required

10. Current Indian FDI Limits Pollution Control and Management: Up to

100% under automatic route in both manufacture of pollution control
equipment and consultancy for integration of pollution control systems Call
Centers/BPO in India: Up to 100% is allowed subject to certain conditions
Roads, Highways, Ports and Harbors: Up to 100% under automatic route in
projects for construction and maintenance of roads, highways, vehicular
bridges, toll roads, vehicular tunnels, ports and harbors Retail Sector: The
proposal for FDI in Retail sector has loomed into a controversy with the
proposal being put on the backburner

11. FDI Trend in India FDI Inflows Cumulative amount of FDI inflows
(from August 1991 to July2006) Rs. 1,74,466 crores (USD 41.79 billion)
(equity capital components only) Amount of FDI inflows during 2006-07
(from April 2006 to July2006) Rs. 13,055 crore (USD 2.89 billion) (equity
capital components only) Year wise FDI Trend Current Year FDI Trend
70,000 6000 60,000 5000 50,000 4000 40,000 Rs. Crores Rs. Crores
30,000 3000 20,000 2000 10,000 1000 - 1991- 2000- 2001- 2002- 2003-
2004- 2005- 2006- 0 2000 2001 2002 2003 2004 2005 2006 2007* Jan-06
Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 * 2006-07 amount includes
FDI received upto July06 124% growth in FDI over last year comparative
period
12. FDI Trend in India The share of top investing countries FDI inflows is as
shown below: (Amounts in INR crores / USD’MM) * Includes inflows under
NRI Schemes of RBI, stock swapped and advances pending issue of shares

13. FDI Trend in India The top 10 sectors in India attracting highest FDI are
as shown below: (Amounts in INR crores / USD’MM)

14. FDI Trend in India The statement on region-wise /state-wise break-up for
FDI inflows is as shown below:

15. Global FDI Trend Global FDI inflows rose to $916 billion in 2005,
driven by significant increase in both, value and no. of deals in both developed
and developing countries Share of developing countries in world FDI
inflows fell slightly (to 36%), thereby increasing the gap in FDI inflows
between developed and developing countries to over $200 billion in 2005
FDI inflows, global and by group of economies, 1980–2005 (in USD billion) is
as shown below: FDI has spread to become a truly global phenomenon with
FDI stocks now constituting over 20% of global GDP

16. Global FDI Trend United Kingdom was the largest recipient of FDI in
2005, ahead of the United States, China and France Distribution of FDI by
region and selected countries (in USD billion) is as shown below:

17. Global FDI Trend Amongst the developing regions, Asia & Oceania
regions witnessed steep increase in FDI inflows while there has been a
declining trend observed in Africa & Latin America 48% of FDI inflows to
developed countries went to 5 countries – China, Hong Kong, Singapore,
Brazil & Mexico Equity is the main constituent of FDI (65%), followed by
intra-company loans (23%) and reinvested earnings (12%) Investment in
services (mainly finance) continued to grow rapidly Current FDI growth
seems to be led primarily by a few specific industries, rather than being
broad-based sectorally. Specifically, in 2005, oil and gas, utilities (e.g.
telecommunications, energies, transport), banking and real estate were the
leading industries in terms of inward FDI The sectoral breakdown of cross
– border M&A sales (in USD billion) from 1987-2005 is as shown below:

18. Global FDI Trend FDI Outflows FDI outflows stood at USD 779 billion
in 2005 50% of the outflows were from the firms based in USA, UK &
Luxembourg Developing countries invested USD 117 billion (Mostly China
& West Asia) Bulk of the outflows from developing countries was
intra-regional; or in Africa & Latin America Reasons for growth in FDI
Cross border M & A Better Investment environment Intense competition
pressure Desire to control & develop rich natural resources in developing
countries Green FDI

19. FDI Case Study – Coca Cola RBI’s move on Foreign Non-strategic
category of Coke at Logger Heads with the Equity Regulation foreign
companies Indian Government In 1974, Multinationals Coke, which operated
in Since this was not in line with operating in low priority India through a
branch FERA, which permitted not more areas like consumer goods office,
submitted its plan than a 40% holding in all operations for stepping down ,
Coke was asked to comply properly were asked by RBI (under equity to the
RBI. It with the new norms. FERA) to step down offered to hold 40% Coke
decided to wind up its equity to 40% either equity in its bottling and
operations in India, but quit making through equity dilution or distribution
units, but allegations that the Indian through equity sale refused to step down
Government was forcing it to share equity in its technical its secret formula for
making its and administrative unit concentrate Coke re enters India Blame
Game in a Bad Blood Coke factored in all these issues at Coke exits India The
Indian government slapped the time of its re-entry. In its its counter charges
and accused In 1977, Coke left application to India's Foreign the parent of
bleeding profits India and did not Investment Promotion Board (FIPB) and
repatriating large sums of return for nearly two in 1997, it voluntarily offered
to funds abroad (as administrative decades. By which divest 49 percent in
favor of the charges) even when the Indian time, the economic Indian pubic
through an IPO at the operations were posting losses. situation had end of
three years. This was despite Further, there were allegations undergone a
major the fact that the FDI norms for the of Coke abusing import licenses
transformation. More soft drink sector did not require - against which it
imported the importantly, the mandatory divestment of stake and concentrate
- all of which particular provision in nobody was forcing it to do so resulted in
bad blood between FERA had been diluted completely the two parties.

20. FDI Case Study – IBM IBM at loggerheads with Indian IBM’s discontent
with FERA government IBM pulls out of India regulation provisions
International Business Machines (IBM), IBM closed its IBM took this step in
believed that government regulation Indian response to the FERA which
mandated 60% domestic ownership subsidiaries in regulation , which limited
of IBM's Indian operations was multinational companies to 1977-78, leaving
unreasonable. However, according to a maximum of 40% behind a host
ownership stake in their some Indian views, IBM was asked to leave because
Big Blue charged too much of Indian ex- Indian subsidiaries, and money,
brought in outdated equipment, IBMers looking specified policies for access
and was not interested in negotiating for something to foreign exchange for
better terms to do imports, and the use of foreign exchange earned through
exports IBM sets up an Indian subsidiary – high on India Exit in a bad temper
IBM's proposal to set up a MNCs had to either choose wholly-owned
subsidiary in A new beginning in India between reducing their India through
its Hong Kong- stake to this level by based subsidiary IBM Products selling
their shares to the AP Ltd for undertaking trading Under the Industrial policy
1991 liberalizing Indian public, or leave the activities involving FDI worth
country. Rs 66 crore cleared by FIPB in FDI flow into India, IBM May2005.
IBM plans to triple its restarted India operations Several MNCs chose to
investments in India over the in 1992 and became the dilute their stakes
through next 3 years by pumping in $6 largest country operation public
offerings on the billion FDI in India operations outside IBM’s US base, as
Bombay stock exchange, part of global strategy for but IBM decided to quit
emerging markets India

21. FDI Destination – India : A Reality Check India, among the European
investors, seen as a good investment despite political uncertainty,
bureaucratic hassles, shortages of power and infrastructural deficiencies A
vast potential for overseas investment attracting the entrance of foreign
players into this market slated to become one of the top three emerging
economies In terms of market potential based on purchasing power parity,
India is the fifth largest economy in the world (ranking above France, Italy,
UK and Russia) and has the third largest GDP in the Asian continent. It is also
the second largest among emerging nations India is also one of the few
markets in the world which offers high prospects for growth and earning
potential in practically all areas of business Yet until fairly recently, India
failed to get the kind of enthusiastic attention from investors, as generated by
other emerging economies such as China due to reasons such as - a highly
protected, semi-socialist autarkic economy, structural and bureaucratic
impediments and distrust of foreign business Present climate in India has
seen a sea change, smashing barriers and actively seeking foreign investment,
many companies still see it as a difficult market. India is rightfully quoted to
be an incomparable country and is both frustrating and challenging at the
same time. Foreign investors should be prepared to estimate India’s potential
with due consideration to the inherent difficulties, contradictions and
challenges in the system
22. FDI Destination – India : Future Potential Investment opportunity of
USD 500 billion expected to emerge in India in the next 5 years in major
economic sectors, of which USD 250 billion is expected in the infrastructure
sector alone Indian auto industry with a turnover of USD 12 billion and the
auto parts industry with a turnover of USD 3 billion offer excellent scope for
FDI Investment commission has identified 93 foreign companies across
various sectors as potential investors. These include Norsk Hydro, Singapore
Power, select Japanese and Korean companies for road development projects,
Deutsche Telecom, China Telecom, SK Telecom, BT, NEC and Toshiba, Alcan,
RusAl, Burlington, Petronas, Sumitomo, Hanwa, Degussa, Renault, Scania
and EADS among others In Power sector, peak demand is expected to increase
by a staggering 77% to 157,107 MW by 2012. Similarly, the energy requirement
is also expected to increase by 274% to 975,222 MU by 2012. The total
investment required in over 100,000 MW capacity creation, along with
necessary investments in T&D segments is estimated at USD 200 billion Total
estimated investment opportunity in the retail sector is around USD 5-6
billion in the next five years. Certain segments that promise a high growth are
Food and Grocery (91 per cent), Clothing (55 per cent), Furniture and Fixtures
(27 per cent), Pharmacy (27 per cent), Durables, Footwear & Leather, Watch &
Jewellery (18 per cent)

23. FDI Destination – India : Future Potential The Indian pharmaceutical

market has been forecast to grow to as much as USD 25 billion by 2010 as per
Organization of Pharmaceutical Producers of India (OPPI) estimates.
However, Espicom's market projections forecast more modest but stable
annual market growth of around 7.2 per cent, putting the market at USD 11.6
billion by 2009 Health tourism presents significant investment potential. At
the current pace of growth, medical tourism, currently pegged at USD 350
million, has the potential to grow into a USD 2 billion industry by 2012
Healthcare sector provides another investment outlet and could rise from
USD 22.2 billion currently (5.2 percent of GDP) to USD 50 billion- 69 billion
(6.2-8.5 percent of GDP) by 2012 . Healthcare spending in the country will
double over the next 10 years. Private healthcare will form a large chunk of
this spending, rising from USD 14.8 billion to USD 33.6 billion in 2012. This
figure could rise by an additional USD 8.4 billion if health insurance cover is
available to the rich and the middle class Total investment opportunity in the
port sector is estimated at USD 20 billion upto 2012. The Maritime sector
(Ports and Shipping, Inland waterways) requires an investment of USD 22
billion for future development

24. FDI - India Vs China comparison China opened its doors to FDI in 1979
and has been progressively liberalizing its investment regime. India allowed
FDI long before that but did not take comprehensive steps towards
liberalization until 1991 Different development strategies - China has focused
on export-oriented industrialization and favored more export-oriented FDI,
while India has historically been more inclined toward import-substitution
industrialization and has encouraged FDI mostly in high tech sectors and has
been restrictive towards FDI in export-oriented sectors China has “more
business-oriented” and better FDI policy framework along with more
attractive macroeconomic environment and market opportunities compared
to India. China has more flexible labor laws, better consumer purchasing
power, better labor climate, better rate of return and tax regime and better
entry and exit procedures for business China has a higher per capita GDP,
higher literacy rate, large natural resource endowment, better physical
infrastructure augmented with a gigantic domestic market – all enabling a
system of mass production with substantially reduced cost of production
China is a large recipient of FDI mostly because of the investments from her
non-resident Chinese (NRC), chiefly resident in East Asian countries against
non-resident Indian (NRI), who have mostly preferred to invest in bank
deposits in India as opposed to FDI China scores better than India only in
macro management and low taxes. But India scores better than China in

25. FDI - India Vs China comparison China India China India Economic
Indicators Institutional indicators GDP per capita 2962.1 3843.8 Govt
stability 0.69 0.55 FDI/GDP 0.016 0.003 Corruption 0.5 0.64 Per
capita GDP growth 0.062 0.026 Inflation 3.86 8.01 Law and Order 0.67
0.51 Wage 575.5 880.7 Democracy 0.41 0.73 Schooling 1.24 0.64
Bureaucracy 0.52 0.74 Openness 22.87 18.47 Political right 0.06 0.79
Trade protection 0.09 0.36 Civil Liberty 0.09 0.62 Infrastructure 34.59
13.59 Population 1,054,798 771,155 Population growth 1.45 2.08 Sectoral
Composition of FDI

26. FDI - India Vs China comparison Year FDI net inflow % of GDP % of
gross capital (USD’MM) formation China India China India China India 1994
33,787 973 6.2 0.3 15.1 1.3 1995 35,849 2144 5.1 0.6 12.5 2.3 1996 40,180 2426
4.9 0.6 12.4 2.8 1997 44,237 3577 4.9 0.9 12.9 3.8 1998 43,751 2635 4.6 0.6
12.3 2.8 1999 38,753 2169 3.9 0.5 10.4 2.0 2000 38,399 2315 3.6 0.5 9.9 2.1
2001 44,240 3403 3.8 0.7 10.1 3.2 Note: India's FDI inflows were not adjusted
for equality capital and reinvestment earning. Source: World Development
Indicators 2003 Comparability of Statistics on FDI IMF definition of FDI
includes 12 different elements: equity capital, reinvested earnings of foreign
companies, inter-company debt transactions, ST & LT loans, financial leasing,
trade credits, grants, bonds, non-cash acquisition of equity, investment made
by foreign venture capital investors, earnings data of indirectly held FDI
enterprises and control premium, non-competition fee, and so on. Indian FDI
definition includes issue/transfer of equity/preference shares to foreign direct
investors and excludes all others while China includes all of above China's FDI
inflows are somewhat inflated - over-valuation of capital equipment
contributed and because of ’round-tripping’ through Hong Kong (to avail
preferential tax treatment) in form of under-invoicing exports, over-invoicing
imports, and overseas affiliates of Chinese companies borrowing funds or
raising capital in the stock market and reinvesting them in China
Module 2
Planning in India

Introduction
Economic Planning is the making of major economic decisions. What and how
is to be produced and to whom it is to be allocated – by the conscious decision
of a determinate authority, on the basis of a comprehensive survey of the
economic system as a whole.
In an economy like India, the basis socioeconomic problems like poverty,
unemployment, stagnation in agricultural and industrial production and
inequality in the distribution of income and wealth can hardly be solved
within the framework of an unplanned economy planning is required to
remove these basic maladies.

We can identify the following characteristic features of

economic planning:
Fixation of definite socio-economic targets;
Prudent efforts to achieve these targets within a given time period;
Existence of a central planning authority;
Complete knowledge about the economic resources of the country;
Efficient utilization of limited resources to get maximum output and welfare.

The Planning Commission of India is of the opinion that, “Planning is

essentially a way of organizing and utilizing resources to get maximum
advantage in terms of defined social ends. The two main-constituents of the
concept of planning are:
(a) a system of ends to be pursued, and
(b) knowledge of available resources and their optimum allocation to achieve
these ends. The availability of resources conditions the ends to be effectively
achieved.”

Mixed economy and planning

Mixed economy is the outcome of the compromise between the two
diametrically opposite schools of thought—the one which champions
the ,cause of capitalism and the other which strongly pleads for the
socialization of all the means of production and of the control of the entire
economy by the state.
Thus, the concept of mixed economy accepts the possibility of the co-existence
of private enterprise and public enterprise.
India is regarded as a good example of a mixed economy. Under the Directive
Principles of the Indian Constitution, it has been laid down that the State
should strive “to promote the welfare of the people by securing and protecting
as effectively as it may a social order in which justice, social, economic and
political, shall inform all the institutions of national life.”
In the economic sphere, the State is to direct its policy to secure a better
distribution of ownership and control of the material resources of the
community and to prevent concentration of wealth in the hands of a. few and
the exploitation of labor. It would be impossible for the State to attain these
ends implied in the directive principles unless the State itself enters the fields
of production and distribution. This explains the rationale behind of economic
planning. To protect the weaker sections, the State is also expected to control
the distribution of essential commodities.
Similarly, by controlling the financial system, viz., insurance and banking, the
State can endeavour to direct investment in socially desirable channels.
Besides, in a poor and under-developed country like India, market forces
based on profit motive cannot, by themselves, induce the private sector to
move into infrastructural development (which involves heavy capital
investment, long gestation period, low rate of return, etc.) Accordingly, the
State has to promote infrastructural facilities like hydro-electric projects,
irrigation; road and railway transport, and have to create conditions
conducive to a higher level of investment so that national and per capita
incomes of the people can be improved continuously.
Rationale of Planning in India
In India, comprehensive national planning is required to fulfil some broad
social and economic objectives.

The followings are some principal reasons for planning in

India:
(a) Rapid Economic Development: Before Independence, the long period of
British rule and exploitation had made India one of the poorest nations in the
world. The main task before the national government was to undertake some
positive development measures to initiate a process of development, which
can be done .effectively only through the instrument of planning. The state
planning mechanism has been proved to be much superior to private market
operations in bringing about it a quick transition in the less-developed
economics. The spectacular success of planning in some countries had
inspired the national leaders to adopt the path of planning for an accelerated
development of the shattered economy.

(b) Quick Improvement in the Standard of Living: The fundamental objective

of planning is to bring about a quick improvement in the standard of living of
the people in the less-developed countries. In an unplanned economy the
country’s resources and materials cannot be employed for increasing the
people’s welfare as the private capitalists in such an economy direct their
activities in increasing their own profits. The path of planning has been
chosen to promote a rapid rise in the standard of living of the people by
efficient exploitation of resources, increasing production of most goods, and
offering employment opportunities to the people.

(c) Removal of Poverty: Planning in India is necessary for the early removal of
abject poverty of the people. This can be effectively done through –
Planned increase in the employment opportunities of the people,
Planned production of mass consumption goods and their planned
distribution among the people,
Fulfilment of minimum needs programme by providing essential facilities
(e.g., housing, roads, drinking water, public health, primary education, slum
improvement, etc.), and,
Planned increase in the consumption of the poorest section of the people.

(d) Rational Allocation and Efficient Utilization of Resources: India is rich in

natural resources, but these resources are not fully exploited to get maximum
advantages. In the unplanned economy resources tend to be engaged in the
production of these goods and services which yield maximum profits, as a
result rational allocation of resources is not possible. An unplanned economy
faces frequently the problem of either shortages in some sectors or surpluses
in others. But such misallocation of resources can be rectified in a planned
economy in which the planning authority determines the pattern of the
investment of resources. In fact, the development plans in the country are now
utilized for the rational allocation of investable resources.

(e) Increasing the Rate of Capital Formation: Planning can also raise the rate
of capital formation in the less-developed countries like India. The surpluses
of public enterprises as found in the planned economy can be utilized for
investment and capital formation. In India, the governments have been
increasing the rate of capital formation through the planned investment in the
construction of roads, bridges, manufacturing of machineries and transport
equipments etc.

(f) Reduction in Unequal Distribution of Income and Wealth: Income and

wealth are not evenly distributed in India as in other less-developed countries.
In the absence of planning such inequality tends to increase due to growing
concentration of economic resources at the hands of a few capitalists. Besides,
the capitalists in the unplanned society increase their own profits by paying
less to the labourers and other suppliers of raw materials. Planning can
reverse this trend through the proper guidance and control of production,
distribution, consumption and investment. The development works can be so
planned and so executed that the greater equality is established with the
increase of income and employment.

(g) Reduction of Unemployment and Increase in Employment

Opportunities: The backwardness of the different, sectors of the economy
accounts for the presence of widespread unemployment, both open and
disguised, in the country. The rate of economic growth usually becomes low in
the unplanned society; as a result it becomes a difficult task to mitigate this
serious problem without proper planning. The government can, however,
increase the employment opportunities by undertaking development
programs for the different sectors like agriculture, industries, social services,
transport and communications, etc. Besides, labor-intensive development
projects and job-oriented programs can also be undertaken to provide relief
for the problem of unemployment.
The development plans in India have already given proper stress for
increasing employment. The steps have been taken to create both short-term
and long-term employment opportunities in various sectors like agriculture,
industry, small and village industries, irrigation works, construction, etc.

(h) Reorganization of Foreign Trade: Economic planning in the less-developed

countries can bring about fundamental Changes in the foreign trade structure
of such countries like India. The foreign trade structure may be reoriented
from primary producing economy to the industrialized economy. Through
proper controls of import and effective promotion of export of industrial
goods the development plans can reorganize the foreign trade structure. In
India, the trade policy has been reoriented to realize some cardinal objectives
such as import control and substitution, export promotion and growth of
economy. Owing to such development the trade structure is no longer
regarded as colonial as it was before Independence.
(i) Regional Balanced Development: Economic planning in India can correct
the regional imbalances in development. Proper development programs may
be taken for the all-round development of backward areas, so that all the
regions are sufficiently developed. More and more industries are to be set up
in the less-developed areas and the Plans should provide for dispersal of
industries.

(j) Other Considerations: Indian economy requires planning for other purpose
also such as the removal of the shortages of essential goods, attainment of
self- sufficiency in essential goods such as food grains and key materials,
economic self-reliance, establishment of social justice for increasing economic
facilities for weaker and neglected sections of the people etc.
The aforesaid discussion points to the supreme necessity of economic
planning in India. It is now fully realized that without planning the country
would not be able to initiate a process of quick economic growth.

Objectives of planning in India

In India, the First Five year plan began in the year 1951-52. Although the
objectives of these plans were different, we can identify some of the basic
long-term and broad objectives of Indian planning. These
are:
(i) Raising the growth rate: The economic planning in India was to bring
about rapid economic growth through the growth in agriculture, industry,
power, transport and communications and different other sectors in our
economy. Further, the growth in real national income was considered to be
the basis for an increase in per Capita real income and an improvement in the
physical quality of life for, the maximum number of people. The growth, in
national output must be higher than the growth rate in population for an
increase in per capita output. Indian planners aimed at increasing national
income and per capita income on the assumption that the continuous growth
in national income and per capita income would remove the problem of
poverty and raise the standard of living for the maximum people of the
country.

(ii) Raising the investment-income ratio: Growth in investment as a

proportion of national income was also one of the important long-term
objectives of Indian five year plans.

(iii) Achieving self-reliance: This objective was considered to be an important

objective for keeping the growth activity free from political pressures of
dominant capitalist countries of the world. India had to import a huge
quantity of food grains from abroad for a considerable period. Again, she had
to depend on foreign countries for the import of heavy machinery, transport
equipment, machine tools, electrical instruments, etc. This was required for
the expansion of the industrial sector and for building, a strong infrastructural
base in India after independence. Hence, it was quite natural that the
developed capitalist countries, supplying food grains, machinery and capital to
India, used to take full advantage of their strong bargaining power, by
imposing different conditions while extending such help. In many cases, the
domestic economic policies are also influenced by such conditions. Because of
all these reasons, a self-reliant economic growth became a major objective of
economic planning in India, particularly since the inception of the Third Five
Year Plan.

(iv) Removing unemployment: Removal of unemployment and

underemployment can be regarded as a precondition for the elimination of
poverty.
It was assumed by Planning Commission that an increase in investment would
accompany not only an increase in national output but also a rise in
employment opportunities. This argument was put forward by the Planning
Commission quite explicitly during the Third Five Year Plan. The planning
commission however, believed that the removal of unemployment would lead
to increase in GDP, on the one hand and improve the standard of living of the
people on the other.

(v) Reducing the incidence of poverty: Various plan documents have all along
indicated that the policy of the Government of India is to reduce the incidence
of poverty. The problem of poverty has been conceived as one of low
productivity of a large section of the people. Hence, to remove these handicaps
of the poor and to integrate them in the growth process, alleviation of poverty
became one of the broad objectives of Indian planning. So, the long run
objective was to free the economy from the vicious circle of poverty which
encircles the economy, not only with poor purchasing power, low savings, low
capital formation, low productivity and low level of national output, but also
with a poor physical quality of life.

(vi) Reducing income inequalities: Indian planners visualized the creation of a

socialistic pattern of society where each member of the society would get equal
opportunities in the fields of education, health, nutrition, occupation, etc.
Hence, they felt the need for reducing income and wealth inequalities in our
society. These inequalities have their roots in the feudal system. Hence,
reduction in income and wealth necessitated the abolition of semi-feudal
relations of production in Indian villages. Thus; the objective was to abolish
 the ‘Zamindari’ system, impose ceilings on land-holdings and distribution of
surplus land among the landless in rural areas.
Income and wealth inequalities arising out of industrialization and growth
were far more complex. The Planning Commission felt the need for imposing
some restrictive and fiscal measures e.g., by imposing higher rates of direct
taxes on high incomes, to tackle this problem. Further, to reduce the disparity
between urban and rural sectors, the Planning Commission suggested various
measures to raise agricultural productivity, development of agro-based
industries, a fair price to farmers for their products, etc.
The Planning Commission stated its policy towards income inequalities in the
Fourth Plan document. It emphasized economic growth with the hope that the
poor will benefit from it and thus, income inequalities would be reduced.
A part from these long-term objectives the Sixth plan of India recognized one
more objective of modernizing the production process. The implications of
this modernization were to shift the sectoral comparison of national income,
diversification of productive activities and advancement of technology.
Modernization, as per the view of the Planning Commission, also implied
introduction of modern technology, both in industrial and agricultural
activities. It also implied an emergence of new types of banking, insurance and
marketing institutions, which would facilitate the dynamics of growth process.
In the following sections, we will discuss how far the above mentioned broad
objectives have been fulfilled. We shall also focus on the Ninth Plan of India.

Features of Indian Planning

Five Year Planning

 India’s plans are of 5-year period. The five year plans integrated the
short term objectives with long term objectives.
Comprehensive Planning

 The focus of the planning was not only on economic parameters but
also on social parameters of growth and development. On one side, it
focused on acceleration of the pace of growth, on other side, it focussed to
minimize vertical and horizontal disparities. The focus of comprehensive
planning was to achieve ‘inclusive growth’.
A Tilt towards the Public Sector and Regulation of the Market Forces

 Even though India adopted mixed economy, it encouraged more

participation of public sector in development process. Private sector was
 controlled through legislative restrictions like MRTP Act (to check on
growth of monopolies). Public sector involved in provision of food grains
and essential goods to people through a comprehensive public distribution
system (PDS).

 Since 1990’s the strategy was changed. Now the private sector is
encouraged more to participate in development process.
Democratic Planning
 At the formulation level as well as at the implementation level of
plans, India followed the democratic approach. Planning commission
prepares the draft plan and it was approved by the National
Development Council(NDC) body, which included stakeholders from state
governments. Opinions of various organisations and experts are taken into
consideration while formulating the plans. While implementing the plans,
bottom-up approach was followed with involvement of democratic bodies
at village and district level.
Prospective and Perspective Planning

 Indian planning incorporated both short-term and long-term

programmes of growth and development. The integration of both the
strategies is required to exploit the potential of growth process.
Central Planning Authority

 Planning Commission was established in 1950 as a central authority

to develop the plans and to oversee the implementation.
Economic and Social Spheres of Planning

 In planning objectives along with economic development goals, social

development goals are included.
Financial Planning

 Indian planning involves allocation of funds to various sectors and

activities, rather than achieving the physical targets of the plan.