INDEX

S.NO CHAPTER P.NO

INDIAN ECONOMY-AT THE EVE OF
1. INDEPENDENCE 1
INDIAN ECONOMY 1950-1990
2. 7
3. LPG-1991 16
4. POVERTY 24
5. HCF 33
6. RURAL DEVELOPMENT 40
7. EMPLOYMENT 48
8. INFRASTRUCTURE 56
9. ENVIORNMENT-SUSTAINABLE 64
DEVELOPMENT
10. INDIA,CHINA,PAKISTAN- 72
COMPARITIVE STUDY

NOTE: EVERY CONTENT IN THE BOOK IS TAKEN FROM NCERT TEXT

BOOK ALL DATES AND DATA ARE AS PER NCERT 2020-2021 TEXT
BOOK . THE BOOK IS COMPILED BY TAKING EVERY POSSIBLE EFFORT
ANY ERROR IS DEEPLY REGRETED AND FEEL FREE TO SUGGEST ANY
CHANGES.

CHAPTER 1: INDIAN ECONOMY AT THE EVE OF INDEPENDENCE

TOPIC:1 LOW LEVEL OF ECONOMIC DEVELOPMENT
UNDER THE COLONIAL RULE
India had an independent economy before the advent of the British rule.
 Though agriculture was the main source of livelihood for most people, yet, the
country’s economy was characterised by various kinds of manufacturing activities.
 India was particularly well known for its handicraft industries in the fields of cotton
and silk textiles, metal and precious stone works etc.
 These products enjoyed a worldwide market based on the reputation of the fine
quality of material used and the high standards of craftsmanship seen in all
imports from India.

TOPIC: 2 AGRICULTURAL SECTOR

 India’s economy under the British colonial rule remained fundamentally agrarian
— about 85 per cent of the country’s population lived mostly in villages and
derived livelihood directly or indirectly from agriculture.
 However, despite being the occupation of such a large population, the agricultural
sector continued to experience stagnation and, not infrequently, unusual
deterioration.
 This stagnation in the agricultural sector was caused mainly because of the various
systems of land settlement that were introduced by the colonial government.
 Particularly, under the zamindari system which was implemented in the then
Bengal Presidency comprising parts of India’s present-day eastern states, the
profit accruing out of the agriculture sector went to the zamindars instead of the
cultivators.
 However, a considerable number of zamindars, and not just the colonial
government, did nothing to improve the condition of agriculture.
 The main interest of the zamindars was only to collect rent regardless of the
economic condition of the cultivators; as dates for depositing specified sums of
revenue were fixed, failing which the zamindars were to lose their rights.
 Besides this, low levels of technology, lack of irrigation facilities and negligible use
of fertilisers, all added up to aggravate the plight of the farmers and contributed
to the dismal level of agricultural productivity.
 There was, of course, some evidence of a relatively higher yield of cash crops in
certain areas of the country due to commercialisation of agriculture. But this
could hardly help farmers in improving their economic condition as, instead of
producing food crops, now they were producing cash crops which were to be
ultimately used by British industries back home.
CONCLUSION: Despite some progress made in irrigation, India’s agriculture was
starved of investment in terracing, flood-control, drainage and desalinisation of soil.

TOPIC:3 FOREIGN TRADE

 India has been an important trading nation since ancient times.
 But the restrictive policies of commodity production, trade and tariff pursued by
the colonial government adversely affected the structure, composition and
volume of India’s foreign trade.
 Consequently, India became an exporter of primary products such as raw silk,
cotton, wool, sugar, indigo, jute etc. and an importer of finished consumer goods
like cotton, silk and woollen clothes and capital goods like light machinery
produced in the factories of Britain.
 For all practical purposes, Britain maintained a monopoly control over India’s
exports and imports. As a result, more than half of India’s foreign trade was
restricted to Britain while the rest was allowed with a few other countries like
China, Ceylon (Sri Lanka) and Persia (Iran).
 The opening of the Suez Canal further intensified British control over India’s
foreign trade. The most important characteristic of India’s foreign trade
throughout the colonial period was the generation of a large export surplus.
 But this surplus came at a huge cost to the country’s economy. Several essential
commodities—food grains, clothes, kerosene etc. — were scarcely available in the
domestic market.
 Furthermore, this export surplus did not result in any flow of gold or silver into
India. Rather, this was used to make payments for the expenses incurred by an
office set up by the colonial government in Britain, expenses on war, again fought
by the British government, and the import of invisible items, all of which led to the
drain of Indian wealth.

TOPIC:4 OCCUPATIONAL STRUCTURE

 During the colonial period, the occupational structure of India, i.e., distribution of
working persons across different industries and sectors, showed little sign of
change.
 The agricultural sector accounted for the largest share of workforce, which usually
remained at a high of 70-75 per cent while the manufacturing and the services
sectors accounted for only 10 and 15-20 per cent respectively.
 Another striking aspect was the growing regional variation. Parts of the then
Madras Presidency (comprising areas of the present-day states of Tamil Nadu,
Andhra Pradesh, Kerala and Karnataka), Bombay and Bengal witnessed a decline
in the dependence of the workforce on the agricultural sector with a
commensurate increase in the manufacturing and the services sectors.
 However, there had been an increase in the share of workforce in agriculture
during the same time in states such as Orissa, Rajasthan and Punjab.

TOPIC:5 INDUSTRIAL SECTOR

 India could not develop a sound industrial base under the colonial rule. Even as
the country’s world famous handicraft industries declined, no corresponding
modern industrial base was allowed to come up.
 The primary motive of the colonial government behind this policy of
systematically deindustrialising India was two-fold.
 The intention was, first, to reduce India to the status of a mere exporter of
important raw materials for the upcoming modern industries in Britain and,
 second, to turn India into a sprawling market for the finished products of those
industries so that their continued expansion could be ensured to the maximum
advantage of their home country — Britain. The impact of these practices are as
follows.
 In the unfolding economic scenario, the decline of the indigenous handicraft
industries created not only massive unemployment in India but also a new
demand in the Indian consumer market, which was now deprived of the supply of
locally made goods.
 This demand was profitably met by the increasing imports of cheap manufactured
goods from Britain
 During the second half of the nineteenth century, modern industry began to take
root in India but its progress remained very slow. Initially, this development was
confined to the setting up of cotton and jute textile mills. The cotton textile mills,
mainly dominated by Indians, were located in the western parts of the country,
namely, Maharashtra and Gujarat, while the jute mills dominated by the
foreigners were mainly concentrated in Bengal.
 Subsequently, the iron and steel industries began coming up in the beginning of
the twentieth century. The Tata Iron and Steel Company (TISCO) was incorporated
in 1907. A few other industries in the fields of sugar, cement, paper etc. came up
after the Second World War.
 However, there was hardly any capital goods industry to help promote further
industrialisation in India. Capital goods industry means industries which can
produce machine tools which are, in turn, used for producing articles for current
consumption. The establishment of a few manufacturing units here and there was
no substitute to the near wholesale displacement of the country’s traditional
handicraft industries.
 Furthermore, the growth rate of the new industrial sector and its contribution to
the Gross Domestic Product (GDP) remained very small. Another significant
drawback of the new industrial sector was the very limited area of operation of
the public sector. This sector remained confined only to the railways, power
generation, communications, ports and some other departmental undertakings.

TOPIC:6 DEMOGRAPHIC CONDITION

 Various details about the population of British India were first collected through a
census in 1881. Though suffering from certain limitations, it revealed the
unevenness in India’s population growth. Subsequently every ten years such
census operations were carried out.
 Before 1921, India was in the first stage of demographic transition. The second
stage of transition began after 1921. However, neither the total population of
India nor the rate of population growth at this stage was very high.
 The various social development indicators were also not quite encouraging.
 The overall literacy level was less than 16 per cent. Out of this, the female literacy
level was at a negligible low of about seven per cent.
 Public health facilities were either unavailable to large chunks of population or,
when available, were highly inadequate. Consequently, water and air-borne
diseases were rampant and took a huge toll on life.
 The overall mortality rate was very high and in that, particularly, the infant
mortality rate was quite alarming—about 218 per thousand in contrast to the
present infant mortality rate of 40 per thousand.
 Life expectancy was also very low—44 years in contrast to the present 68 years.
 In the absence of reliable data, it is difficult to specify the extent of poverty at that
time but there is no doubt that extensive poverty prevailed in India during the
colonial period which contributed to the worsening profile of India’s population of
the time.

TOPIC:7 INFRASTRUCTURE
 Under the colonial regime, basic infrastructure such as railways, ports, water
transport, posts and telegraphs did develop.
 However, the real motive behind this development was not to provide basic
amenities to the people but to sub-serve various colonial interests.
 Roads constructed in India prior to the advent of the British rule were not fit for
modern transport. The roads that were built primarily served the purposes of
mobilising the army within India and drawing out raw materials from the
countryside to the nearest railway station or the port to send these to far away
England or other lucrative foreign destinations. There always remained an acute
shortage of all weather roads to reach out to the rural areas during the rainy
season. Naturally, therefore, people mostly living in these areas suffered
grievously during natural calamities and famines.
 The British introduced the railways in India in 1850 and it is
considered as one of their most important contributions. The railways affected the
structure of the Indian economy in two important ways. On the one hand it
enabled people to undertake long distance travel and thereby break geographical
and cultural barriers while, on the other hand, it fostered commercialisation of
Indian agriculture which adversely affected the self-sufficiency of the village
economies in India. The volume of India’s exports undoubtedly expanded but its
 benefits rarely accrued to the Indian people. The social benefits, which the Indian
people gained owing to the introduction of the railways, were thus outweighed by
the country’s huge economic loss.
 Along with the development of roads and railways, the colonial
dispensation also took measures for developing the inland trade and sea lanes.
However, these measures were far from satisfactory. The inland waterways, at
times, also proved uneconomical as in the case of the Coast Canal on the Orissa
coast. Though the canal was built at a huge cost to the government exchequer,
yet, it failed to compete with the railways, which soon traversed the region
running parallel to the canal, and had to be ultimately abandoned.
 The introduction of the expensive system of electric telegraph in
India, similarly, served the purpose of maintaining law and order. The postal
services, on the other hand, despite serving a useful public purpose, remained all
through inadequate.

TOPIC: 8 POSITIVE CONTRIBUTION MADE BY BRITISHERS

There were various positive contributions that were made by the British in India. The
contributions were not intentional but purely the effects of colonial exploitation of the
British. The following are the positive contributions made by the British:
1. Introduction of Railways: The introduction of railways by the British was a
breakthrough in the development process of Indian economy. It opened up the cultural
and geographical barriers and facilitated commercialisation of Indian agriculture.
2. Introduction of Commercialisation of Agriculture : The introduction of commercial
agriculture is an important breakthrough in the history of Indian agriculture. Prior to the
advent of the British, Indian agriculture was of subsistence nature. But with the
commercialisation of agriculture, the agricultural production was carried out as per the
market requirements. It was due to this factor that today India can aim at attaining self-
sufficiency in food grains production.
3. Introduced Free Trade to India: British forced India to follow free trade pattern
during the colonial rule. This is the key concept of globalisation today. The free trade
provided domestic industry with a platform to compete with the Britain industries. The
introduction of free trade led to an increase in the volume of India's export rapidly.
4. Development of Infrastructure: The infrastructure developed in India by the British
proved as useful tool to check the spread of famines. The telegram and postal services
served Indian public.
5. Promoted Western Culture: English as a language promoted westernised form of
education. The English language acted as a window to the outside world. This has
integrated India with the rest of the world.
6. Role Model: The way and the technique of British administration acts as a role
model for the Indian politicians and planners. It helped Indian politicians to govern the
country in an efficient and effective manner.

TOPIC: 9 SHORT NOTE ON TEXTILE INDUSTRY IN BENGAL:

Textile Industry in Bengal Muslin is a type of cotton textile which had its origin in Bengal,
particularly, places in and around Dhaka (spelled during the pre-independence period as
Dacca), now the capital city of Bangladesh. ‘Daccai Muslin’ had gained worldwide fame as
an exquisite type of cotton textile. The finest variety of muslin was called malmal.
Sometimes, foreign travellers also used to refer to it as malmal shahi or malmal khas
implying that it was worn by, or fit for, the royalty.

TOPIC 10: SHORT NOTE ON SUEZ CANAL:

Trade Through the Suez Canal Suez Canal is an artificial waterway running from north to
south across the Isthmus of Suez in north-eastern Egypt. It connects Port Said on the
Mediterranean Sea with the Gulf of Suez, an arm of the Red Sea. The canal provides a
direct trade route for ships operating between European or American ports and ports
located in South Asia, East Africa and Oceania by doing away with the need to sail around
Africa. Strategically and economically, it is one of the most important waterways in the
world. Its opening in 1869 reduced the cost of transportation and made access to the
Indian market easier.
 EXTRA QUESTIONS
QUES:1 What was the focus of the economic policies pursued by the colonial
government in India? What were the impacts of these policies?
Answer: The main focus of the economic policies pursued by the colonial government
was to make India a mere supplier of Britain's own flourishing industrial base. The
policies were concerned mainly with the fortification and advancement for their home
country. The interests of the Indian economy were completely ignored. Such policies
brought structural changes in the Indian economy by transforming it to a supplier of
raw materials and consumer of finished products from Britain. The impacts of these
policies are discussed as follows in detail;
i. Low Economic Development
Throughout the British rule, Indian economy experienced very low level of
economic development. As per some researches, Indian economy grew at even less
than two percent during 1900-50. The reason for such a low level of development
was that the British government was more concerned with the promotion of
economic interests of their home country. Consequently, the colonial rule
transformed India's agriculture sector to a mere supplier of raw materials for the
British industries. This not only affected the production of the agricultural sector
but also ruined the small manufacturing units like handicrafts and cotton industries.
These manufacturing units faced a stiff competition from the British machine made
textiles and handlooms.

ii. Backwardness of Indian Agriculture

Under the colonial rule, India was basically an agrarian economy employing nearly
85% of its population. Nevertheless, the growth of the agriculture sector was
meager. This was due to the prevalence of various systems of Land Settlement,
Particularly Zamindari system. Under this system, the zamindars (owners of land)
were required to pay very high revenue (lagaan) to the British government, which
they used to collect from the peasants (landless labourers, who were actually
cultivating). The zamindars were mainly concerned with extracting high revenues
from the peasants but never took any steps to improve the productivity of the land.
Moreover, in order to feed British industries with cheap raw materials, the Indian
peasants were forced to grow cash crops (such as, indigo, cotton, etc.) instead of
food crops (such as, rice and wheat). This commercialisation of agriculture not only
increased the burden of high revenues on the poor peasants but also led India to
face shortage of food grains. Therefore, Indian agriculture remained backward and
primitive.

iii. Deindustrialisation of IndianEconomy

India failed to develop a sound and strong industrial base during the colonial rule.
The status of industrial sector during the British rule can be well defined by the term
 'systematic deindustrialisation'. The cause of deindustrialisation can be attributed to
the downfall of India's handicraft industry and the cause of bleak growth of modern
industry was the lack of investment. On one Hand, the British government imposed
heavy tariffs on the export of Indian handicraft products and on the other hand,
allowed free exports of Indian raw materials to Britain and free imports of British
products to India. As a result of the heavy tariffs, the Indian exports became costlier
and its demand in the international market fell drastically that led to the collapse of
Indian handicrafts industries. Simultaneously, the demand for the handicrafts
products also fell in the domestic markets due to stiff competition from the machine
made textiles of Britain. As a result, the domestic industries lacked investment and
growth initiatives.

iv. Regression in ForeignTrade

During the colonial rule, the British government owned the monopoly power over
India's foreign trade. The British government used the trade policy according to the
interests of their home country. The exports and imports transactions were
restricted only to India and Britain. On one hand, the exports from India provided
the cheap raw materials to the British industries and on the other hand, India's
imports from Britain provided a virgin market for Britain's products. In either
ways, British industries were benefitted. Moreover, the surplus generated from the
foreign trade was not invested in the Indian economy; instead it was used in
administrative and war purposes by Britain to spread their colonial power.
Ques:2 Name some notable economists who estimated India's per capita
income during the colonial period.
Answer :As the British government was never interested in upliftment of our country,
so they never took any initiative to measure India's national and per capita income.
Though some of the economists tried to estimate India's national income and per capita
income during the colonial rule, but the results are mixed and conflicting. The following
are some of the notable economists who were engaged in estimation of national income
and per capita income: Dadabhai-Naroji , WilliamDigbay ,FindlayShirras
,V.K.R.VRao , R.C.Desai
Out of these, V.K.R.V Rao's estimates are considered to be significant. Most of these
studies revealed that Indian economy grew at even less than two percent during 1900-
50 with half per cent growth in per capita output per year.

Q3:What were the main causes of India's agricultural stagnation during the
colonial period?
Answer:Under the colonial rule, India was basically an agrarian economy, employing
nearly 85% of its population. Nevertheless, the growth of the agriculture sector was
meager. The following are the causes explaining stagnancy in Indian agriculture sector
during the colonial rule
1. Introduction of Land Revenue System:
 This was due to prevalence of various systems of Land Settlement, particularly
Zamindari system. This system was introduced by Lord Cornwallis in Bengal in
1793. Under this system, the zamindars(owners of land) were required to pay very
high revenue (lagaan) to the British government, which they used to collect from the
peasants (landless labourers, who were actually cultivating). The zamindarswere
mainly concerned with extracting high revenues from the peasants but never took
any steps to improve the productivity of the land. This resulted in low agricultural
productivity and worsened the peasants economically.

2. Forceful Commercialisation:
Initially before the British rule, the farmers were practicing conventional
subsistence farming. They used to grow crops like rice and wheat for their own
consumption. But afterwards, in order to feed British industries with cheap raw
materials, the Indian farmers were forced to grow commercial crops (like indigo
required by British industries to dye textiles) instead of food crops (like rice and
wheat). This led to the commercialisation of Indian agriculture. This
commercialisation of Indian agriculture not only increased the burden of high
revenues on the poor farmers but also led India to face shortage of food grains,
resources, technology and investment. Therefore, Indian agriculture remained
backward and primitive.

3. Lack of Irrigation Facilities and Resources:

Besides the above factors, Indian agricultural sector also faced lack of irrigation
facilities, insignificant use of fertilisers, lack of investment, frequent famines and
other natural calamities, etc. that further exaggerated the agricultural
performance and made it more vulnerable.
Q4 : Name some modern industries which were in operation in our country
at the time of independence.
Answer : The second half of the nineteenth century witnessed the emergence of
modern industries. At the initial stage, development was confined to setting up of
cotton and jute textile mills. The western parts of the country Maharashtra and
Gujarat was the hub for cotton textile mills which were mainly dominated by the
Indians whereas the jute industries were mainly concentrated in Bengal and were
dominated by the British. In the beginning of the 20thcentury, Iron and steel
industries also started emerging gradually. It was incorporated in 1907. Some other
industries that were operating at a smaller scale during the British era were sugar
industry, cement industry and paper industry.

Q5 : What was the two-fold motive behind the systematic deindustrialisation

affected by the British in pre - independent India?
Answer :The following are the two-fold motives behind the systematic
deindustrialization affected by the British:
1. Making India a Supplier of Raw Materials: The main motive of the British
 government was to make India a mere supplier of cheap raw materials to feed its
own flourishing industrialbase.
2. Making India a Market for Finished Goods: Another important objective of the
British government was to use India as a virgin market to sell the finished goods
produced by the Britishindustries.
Q6 : The traditional handicrafts industries were ruined under the British rule.
Do you agree with this view? Give reasons in support of your answer.
Answer : Yes, we do agree with the above statement that the traditional handicrafts
industries were ruined under the British times. The following are the reasons in favour
of the statement.
1. Discriminatory Tariff Policy: The British rule in India corresponded with its
industrialisation. The British rule used India both as a source of cheap raw
materials as well as easy accessible market for their finished products. Thereby,
they imposed heavy tariffs (export duties) on India's export of handicraft products,
while allowed free export of India's raw material to Britain and free import of
British products into India. This made Indian exports costlier and its international
demand fell drastically leading to the collapse of handicrafts industries.
2. Competition from Machine made Britain Goods: The demand for
the handicrafts products experienced a downward trend in the domestic markets
as well. This was due to stiff competition from the machine made textiles from
Britain. This was because of the reason that the goods produced mechanically in
Britain were comparatively cheaper and of superior quality than the Indian
handicraft goods. This narrowed the market for Indian industries.

3. Emergence of New Class: The British rule in India popularised western

lifestyle in India. There was an emergence of a new section of population (consisting
mainly of zamindars) in India who liked the British goods. This section used to
spend lavishly on the British products that provided impetus for the development
of British industries at the cost of the domestic industries. Hence, gradually Indian
industries perished away.
4. Disappearance of Princely State: Prior to the advent of British, India was
ruled by princely states. They used to patronise handicrafts industries and
consequently, Indian handicrafts gained reputation in the international markets.
But during the British rule, these princely states were ruined thereby ruining the
protection of these handicrafts industries. Thus, gradually Indian handicrafts lost
its reputation and its importance deteriorated.
Q7 : What objectives did the British intend to achieve through their policies of
infrastructure development in India?
Answer : One cannot deny the fact that under the British rule, there was significant
change in the infrastructural development in the country. But the bonafide motive of
the British behind the infrastructure development was only to serve their own colonial
 interests.
1:There was infrastructural development in the fields of transport and communication.
The roads served the purpose of facilitating transportation of raw materials from
different parts of the country to ports, and ports were developed for easy and fast
exports to and imports from Britain.
2: Similarly, railways were introduced and developed for the transportation of finished
goods of British industries to the interiors of India. Railways assisted British industries
to widen the market for their finished products.
3: Post and telegraphs were developed to enhance the efficiency and effectiveness of the
British administration. Hence, the aim of infrastructural development was not the
growth and development of the Indian economy but to serve their own interest.

Q8 :Critically appraise some of the shortfalls of the industrial policy pursued by

the British colonial administration.
Answer :The focus of the industrial policies pursued by the colonial government in
India was to make our country a mere supplier of Britain's own flourishing industrial
base. The policies were concerned mainly with the fortification and advancement for
their own country.
The industrial policy pursued by the British colonial administration has the following
shortfalls:

1. Neglect of Indian Handicraft Industries : The British followed a

discriminatory tariff policy under which they imposed heavy tariffs (export duties)
on India's export of handicraft products while allowed free export of India's raw
material to Britain and free import of British products to India. This made Indian
exports costlier and its international demand fell drastically leading to the collapse
of handicrafts industries. Also, Indian handicrafts faced a stiff competition from
machine made textiles of Britain. The emergence of a new section of people who
liked the British goods more in comparison to the domestic goods encouraged
British industries at the cost of Indian industries. This led to the declining demand
for Indian products and encouraged foreign products.

2. Lack of Investment in Indian Industries : The modern industries in India

demanded investments in capital goods that were beyond the means of Indian
investors. On the other hand, British government was least interested in investing
in Indian industries. Thus, due to the lack of sufficient investment, the growth of
Indian industries was acutely constrained.
Q9 :What do you understand by the drain of Indian wealth during the colonial
period?
Answer: Dadabhai-Naroji advocated the theory of 'Drain of Wealth' in the 19th
century. The colonial period was marked by the exploitation of Indian resources. The
sole motive of Britain to conquer India was to own a perennial source of cheap raw
materials to feed its own industrial base in Britain. Further, British government used
India's manpower to spread its colonial base outside India. Also, the administrative
expenses that were incurred by the British government to manage the colonial rule in
India were borne by Indian Exchequer. Thus, the British rule drained out Indian
wealth for the fulfillment of its own interests.
 Q10 :Which is regarded as the defining year to mark the demographic
transition from its first to the second decisive stage?
Answer : The year 1921 is regarded as the defining year or the 'Year of Great Divide'
because prior to 1921, population growth in India was never consistent. India was in
the first phase of demographic transition till 1921 that was characterised by high birth
rate and high death rate. It implies low survival rate (or low life expectancy), which
was nearly 8 per thousand per annum. Therefore, the period before 1921 witnessed
stagnant population growth rate. After 1921, India's population growth never declined
and showed a consistent upward trend.

Q11 :Give a quantitative appraisal of India's demographic profile during the

colonial period.
Answer : India's Demographic conditions during the British rule depict our economy
as stagnant and backward.
1.Both the birth rate and death rate were as high as 48 and 40 per thousand. Due to
high birth rate and high death rate the population growth was stagnant.
2.The Infant Mortality Rate was also very high of about 218 per thousand.
3.The Life Expectancy Rate was as low as 32 years while presently it is 63.5 years.
4.The literacy rate was less than 16 percent which denotes social backwardness and
gender bias in the economy.
We can infer from the above figures that India was featured with massive poverty, low
standard and quality of living and low survival rate in the country. The lack of health
care facilities and lack of health awareness were the main causes behind such
demographic conditions of India.

Q12 :Highlight the salient features of India's pre-independence occupational

structure.
Answer: The occupational structure that refers to the distribution of population
engaged in different occupations, showed no variation throughout the British rule. The
following are the salient features of India's pre-independence occupational structure:
1. Agriculture- The Prime Occupation : Under the colonial rule, India was
basically an agrarian economy, employing nearly 85% of its population. As India
had a massive poverty during the colonial rule, so a large proportion of the
population was engaged in agricultural sector to earn their subsistence. But due to
the prevalence of Zamindari system, agricultural sector lacked investment and,
thereby, its growth was highly constrained. Thus, in other words, despite employing
a significant proportion of the population, the growth of agriculture sector was
meager.

2. Industry- The Bleak Occupation: Apart from agriculture, a small

proportion of population was employed in manufacturing sector. Nearly 10% of the
total workforce was engaged in manufacturing and industrial sector. This was due to
the stiff competition that the Indian industries faced from the machine made cheap
goods from Britain. Further, the lack of investment, initiatives and the unfavourable
tariff structure constrained industrial sector. Thus, the Indian industrial sector
 failed to contribute significantly to India's GDP.

3. Unbalanced Growth: The three sectors of Indian economy, i.e.

agricultural, industrial and tertiary sector were unequally developed. While the
agricultural sector was relatively developed, whereas, the other two sectors were at
their infant stage. In addition, there was regional variation in the occupational
structure of India. While on the one hand, states like Tamil Nadu, Andhra Pradesh
and Bombay experienced a fall in the agricultural work force on the other hand
states like Orissa, Rajasthan and Punjab experienced a rise in the agricultural
workforce.
Q13 :Underscore some of the India's most crucial economic challenges at the
time of independence.
Answer :The exploitative colonial rule of the British hampered almost every spheres of
Indian economy badly. As an end-result, India faced acute economic challenges at the
time of independence. The following are some of the economic challenges faced by the
Indian economy:
1. Low Level of Agricultural Productivity : During the colonial rule Indian
agricultural sector was used by the British to suit to their own interest.
Consequently, Indian agricultural sector experienced stagnancy, low level of
productivity, lack of investment, poor condition of landless farmers and peasants.
Thus, the immediate concern for India was to develop its agricultural sector and its
productivity. Some of the immediate reforms needed at the time of independence
were abolition of Zamindari system, need of land reforms, reducing inequality of
land ownership and upliftment of the peasants.

2. Infant Industrial Sector: India failed to develop a sound industrial base

during the colonial rule. In order to develop the industrial sector, India needed huge
capital, investments, infrastructure, human skills, technical knowhow and modern
technology. Further, due to stiff competition from the British industries, India's
domestic industries failed to sustain. Thus, developing small scale and large scale
industries simultaneously was the main concern for India to develop its industrial
sector. Moreover, the need to increase the share of industrial sector to India's GDP
was one of the important economic challenges for India.

3. Lack in Infrastructure: Although there was a significant change in the

infrastructural development in the country but this was not sufficient to improve the
performance of agricultural and industrial sector. Also, there was a need to upgrade
the existing infrastructure and to modernise the infrastructure to enhance its
efficiency and effectiveness.

4. Poverty and Inequalities: India was trapped in the vicious circle of

poverty and inequality. The colonial rule drained out a significant portion of
India's wealth to Britain. Consequently, majority of India's population was
 poverty trodden. This further exaggerated economic inequalities across the
country.

CHAPTER: 2 INDIAN ECONOMY 1950–1990

INDIAN ECONOMY (1950-1990)
 After two hundred years of British rule India finally got freedom on 15 August, 1947.
 It was necessary to rebuild the backward and stagnant Indian economy into a developed
economy.
 the most important task before the Government of independent India was to decide the
type of ‘Economic System’, which would be most suitable for India.
TYPES OF ECONOMIC SYSTEMS
1. Capitalist Economy: A capitalist economy is the one in which the means of
production are owned, controlled and operated by the private sector. Production is
done mainly for earning profits.
2. Socialist Economy: A social economy is the one in which the means of production
are owned, controlled and operated by the government.
3. Mixed Economy: A mixed economic system refers to a system in which he public
sector and the private sector are allotted their respective roles for solving the central
problems of the economy

Solution of Central problems are solved in the following manner

Economy What to produce How to produce For whom to

produce

Capitalistic goods are produced that Using cheaper Basis of their

economy can be sold profitably techniques of consumer income or
production purchasing power.

Socialistic The government Government decides Based on what

economy decides what to produce how the goods are people need and not
in accordance with needs to be produced on what they can
of the society. afford to purchase.

India adopted the Mixed Economy

After the freedom, leaders of independent India (like Jawaharlal Nehru) were confused with
regard to economic system, to be followed in India.
 Some leaders were in favor of Socialist Economy. However, in a democratic country
like India, complete dilution of private ownership was not possible
 Capitalist Economic System did not appeal to Jawaharlal Nehru, our first Prime
Minister, as under this system, there would be less chances for improvement in
quality of life of majority of people.
 As a result, Mixed Economy (with best features of both Socialist and Capitalist
Economy) was adopted by the Indian Economy. In this view, India would be a
socialist society, with a strong public sector, but also with private property and
democracy.
PLAN:-Meaning
 How the resources of a nation should be put to use.
 It should have some general goals as well as specific objectives which are to be
achieved within a specified period of time.
PLAN Duration:- Five years- known as “Five Year Plans (Borrowed from former Soviet
Union).
Economic Planning: Defined as making major economic decisions on the basis of a
comprehensive survey of the economy as a whole.
Implementation:-Government of India set up Planning Commission in 1950, with the Prime
Minister as the Chairman.

TOPIC: 1 THE GOALS OF FIVE YEAR PLANS A plan should have some clearly
specified goals. The goals of the five year plans are: growth, modernisation, self-
reliance and equity. This does not mean that all the plans have given equal importance
to all these goals. Due to limited resources, a choice has to be made in each plan about
which of the goals is to be given primary importance.

Growth: It refers to increase in the country’s capacity to produce the output of goods
and services within the country.

 It implies either a larger stock of productive capital, or a larger size of supporting

services like transport and banking, or an increase in the efficiency of productive
capital and services.
 A good indicator of economic growth, in the language of economics, is steady
increase in the Gross Domestic Product (GDP). The GDP is the market value of all
the goods and services produced in the country during a year
 It is necessary to produce more goods and services if the people of India are to
enjoy (in the words of the First Five Year Plan) a more rich and varied life. The GDP
of a country is derived from the different sectors of the economy, namely the
agricultural sector, the industrial sector and the service sector.
 The contribution made by each of these sectors makes up the structural
composition of the economy. In some countries, growth in agriculture contributes
more to the GDP growth, while in some countries the growth in the service sector
contributes more to GDP growth

Modernisation: To increase the production of goods and services the producers have
to adopt new technology. For example, a farmer can increase the output on the farm by
using new seed varieties instead of using the old ones. Similarly, a factory can increase
output by using a new type of machine. Adoption of new technology is called
modernisation.

 modernisation does not refer only to the use of new technology but also to
changes in social outlook such as the recognition that women should have the
same rights as men. In a traditional society, women are supposed to remain at
home while men work. A modern society makes use of the talents of women in
 the work place — in banks, factories, schools etc. — and such a society in most
occassions is also prosperous.

Self-reliance: A nation can promote economic growth and modernisation by using

its own resources or by using resources imported from other nations.

 The first seven five year plans gave importance to self-reliance which means
avoiding imports of those goods which could be produced in India itself. This
policy was considered a necessity in order to reduce our dependence on foreign
countries, especially for food.
 It is understandable that people who were recently freed from foreign
domination should give importance to self-reliance. Further, it was feared that
dependence on imported food supplies, foreign technology and foreign capital
may make India’s sovereignty vulnerable to foreign interference in our policies.

Equity: Now growth, modernisation and self-reliance, by themselves, may not

improve the kind of life which people are living. A country can have high growth, the most
modern technology developed in the country itself, and also have most of its people living
in poverty.

 It is important to ensure that the benefits of economic prosperity reach the poor
sections as well instead of being enjoyed only by the rich. So, in addition to
growth, modernisation and self-reliance, equity is also important.
 Every Indian should be able to meet his or her basic needs such as food, a decent
house, education and health care and inequality in the distribution of wealth
should be reduced.

TOPIC:2
AGRICULTURE sector showed that during the colonial rule there was neither
growth nor equity in the agricultural sector. The policy makers of independent India had
to address these issues which they did through land reforms and promoting the use of
‘High Yielding Variety’ (HYV) seeds which ushered in a revolution in Indian agriculture.

1) Land Reforms: Just a year after independence, steps were taken to abolish
intermediaries and to make the tillers the owners of land. At the time of independence,
the land tenure system was characterised by intermediaries (variously called zamindars,
jagirdars etc.) who merely collected rent from the actual tillers of the soil without
contributing towards improvements on the farm.

 The abolition of intermediaries meant that some 200 lakh tenants came into
direct contact with the government — they were thus freed from being exploited
by the zamindars.
  Equity in agriculture called for land reforms which primarily refer to change in the
ownership of landholdings..
 The idea behind this move was that ownership of land would give incentives to
the tillers to invest in making improvements provided sufficient capital was made
available to them.
 In some areas the former zamindars continued to own large areas of land by
making use of some loopholes in the legislation; there were cases where tenants
were evicted and the landowners claimed to be self-cultivators (the actual tillers),
claiming ownership of the land; and even when the tillers got ownership of land,
the poorest of the agricultural labourers (such as sharecroppers and landless
labourers) did not benefit from land reforms

2) Land ceiling was another policy to promote equity in the agricultural sector. This
means fixing the maximum size of land which could be owned by an individual.

 The purpose of land ceiling was to reduce the concentration of land ownership in
a few hands.
 The land ceiling legislation also faced hurdles. The big landlords challenged the
legislation in the courts, delaying its implementation. They used this delay to
register their lands in the name of close relatives, thereby escaping from the
legislation.
 The legislation also had a lot of loopholes which were exploited by the big
landholders to retain their land.
CONCLUSION: Land reforms were successful in Kerala and West Bengal because these
states had governments committed to the policy of land to the tiller. Unfortunately other
states did not have the same level of commitment and vast inequality in landholding
continues to this day.

TOPIC: 3 The Green Revolution

 Green revolution refers to the use of high yielding variety (HYV) seeds especially
for wheat and rice.
 The use of these seeds required the use of fertiliser and pesticide in the correct
quantities as well as regular supply of water; the application of these inputs in
correct proportions is vital.
 india’s agriculture vitally depends on the monsoon and if the monsoon fell short
the farmers were in trouble unless they had access to irrigation facilities which
very few had.
 As a result, in the first phase of the green revolution (approximately mid 1960s
upto mid 1970s), the use of HYV seeds was restricted to the more affluent states
such as Punjab, Andhra Pradesh and Tamil Nadu. Further, the use of HYV seeds
primarily benefited the wheat growing regions only.
  In the second phase of the green revolution (mid-1970s to mid-1980s), the HYV
technology spread to a larger number of states and benefited more variety of
crops.

ADVANTAGES OF GREEN REVOLUTION:

 SELF SUFFICIENCY: The spread of green revolution technology enabled India to
achieve self-sufficiency in food grains; we no longer had to be at the mercy of
America, or any other nation, for meeting our nation’s food requirements.
 MARKETED SURPLUS: a substantial amount of agricultural produce is sold in the
market by the farmers, the higher output can make a difference to the economy.
The portion of agricultural produce which is sold in the market by the farmers is
called marketed surplus.
 DECINE IN RELATIVE PRICES: A good proportion of the rice and wheat produced
during the green revolution period (available as marketed surplus) was sold by the
farmers in the market. As a result, the price of food grains declined relative to
other items of consumption. The low income groups, who spend a large
percentage of their income on food, benefited from this decline in relative
prices.
 INCREASE IN BUFFER STOCK : The green revolution enabled the government to
procure sufficient amount of food grains to build a stock which could be used in
times of food shortage.
 INCREASE IN OUTPUT OF SMALL FARMERS: The government provided loans at a
low interest rate to small farmers and subsidised fertilisers so that small
farmers could also have access to the needed inputs. Since the small farmers
could obtain the required inputs, the output on small farms equalled the output on
large farms in the course of time.
 FACILITIES PROVIDED BY REEARCH INSTUTIES: The risk of the small farmers being
ruined when pests attack their crops was considerably reduced by the services
rendered by research institutes established by the government.
SHORTCOMINGS OF GREEN REVOLUTION: While the nation had immensely
benefited from the green revolution, the technology involved was not free from risks.

 INCREASE IN DISPARITIES: One such risk was the possibility that it would increase
the disparities between small and big farmers—since only the big farmers
could afford the required inputs, thereby reaping most of the benefits of the green
revolution.
 PRONE TO PEST ATTACKS: Moreover, the HYV crops were also more prone to
attack by pests and the small farmers who adopted this technology could
lose everything in a pest attack. Fortunately, these fears did not come true because
of the steps taken by the government.
TOPIC:4 The Debate Over Subsidies:
ARGUMENTS IN FAVOUR OF SUBSIDIES:

 It is generally agreed that it was necessary to use subsidies to provide an incentive

for adoption of the new HYV technology by farmers in general and small farmers in
particular. Any new technology will be looked upon as being risky by farmers.
Subsidies were, therefore, needed to encourage farmers to test the new
technology.
 Some economists believe that once the technology is found profitable and is
widely adopted, subsidies should be phased out since their purpose has been
served.
 some believe that the government should continue with agricultural subsidies
because farming in India continues to be a risky business. Most farmers are very
poor and they will not be able to afford the required inputs without subsidies.
Eliminating subsidies will increase the inequality between rich and poor farmers
and violate the goal of equity.
 These experts argue that if subsidies are largely benefiting the fertiliser industry
and big farmers, the correct policy is not to abolish subsidies but to take steps to
ensure that only the poor farmers enjoy the benefits.
ARGUMENTS AGAINST SUBSIDIES:

 subsidies are meant to benefit the farmers but a substantial amount of fertiliser
subsidy also benefits the fertiliser industry; and among farmers, the subsidy largely
benefits the farmers in the more prosperous regions. Therefore, it is argued that
there is no case for continuing with fertiliser subsidies; it does not benefit the
target group and it is a huge burden on the government’s finances.
IMPACT OF SUBSIDIES:

 Indian agricultural productivity had increased sufficiently to enable the country to

be self-sufficient in food grains. This is an achievement to be proud of.
 On the negative side, some 65 per cent of the country’s population continued to be
employed in agriculture even as late as 1990.
 Economists have found that as a nation becomes more prosperous, the proportion
of GDP contributed by agriculture as well as the proportion of population working
in the sector declines considerably.
 In India, between 1950 and 1990, the proportion of GDP contributed by agriculture
declined significantly but not the population depending on it (67.5 per cent in 1950
to 64.9 per cent by 1990).
 Why was such a large proportion of the population engaged in agriculture although
agricultural output could have grown with much less people working in the sector?
The answer is that the industrial sector and the service sector did not absorb the
people working in the agricultural sector. Many economists call this an important
failure of our policies followed during 1950-1990.
TOPIC:5 INDUSTRY AND TRADE Economists have found that poor nations can
progress only if they have a good industrial sector. Industry provides employment which is
more stable than the employment in agriculture; it promotes modernisation and overall
prosperity. It is for this reason that the five year plans place a lot of emphasis on industrial
development.
Industry at the time of independence:

 the variety of industries was very narrow — largely confined to cotton textiles and
jute. There were two well managed iron and steel firms — one in Jamshedpur and
the other in Kolkata — but, obviously, we needed to expand the industrial base
with a variety of industries if the economy was to grow.
 Public and Private Sectors in Indian Industrial Development: Indian industrialists
did not have the capital to undertake investment in industrial ventures required
for the development of our economy; nor was the market big enough to encourage
industrialists to undertake major projects even if they had the capital to do so. It is
principally for these reasons that the state had to play an extensive role in
promoting the industrial sector.
 the decision to develop the Indian economy on socialist lines led to the policy of
the state controlling the commanding heights of the economy, as the Second Five
Year plan put it. This meant that the state would have complete control of those
industries that were vital for the economy.
 The policies of the private sector would have to be complimentary to those of the
public sector, with the public sector leading the way.

TOPIC:6 Industrial Policy Resolution 1956 (IPR 1956): In accordance

with the goal of the state controlling the commanding heights of the economy, the
Industrial Policy Resolution of 1956 was adopted. This resolution formed the basis of the
Second Five Year Plan, the plan which tried to build the economy on the basis of a socialist
pattern of society.
CLASSIFICATION OF INDUSTRY:

 This resolution classified industries into three categories.

 The first category comprised most important industries which would be exclusively
owned by the state e.g Iron and steel, railways, air transport, atomic energy etc.
 the second category consisted of industries in which the private sector could
supplement the efforts of the state sector, with the state taking the sole responsibility
for starting new units; e.g drugs, fertiliser, road transport and shipping.
 the third category consisted of the remaining industries which were to be in the
private sector e.g cosmetic, soap , detergent, and cold drinks etc.

TOPIC:7 INDUSTRIAL LICENSING:

 Under the industrial licensing, license was granted to open a new industry reserved for
a private sector under category III. Although this category of industries left to the
private sector, the sector was kept under state control through a system of licenses.
 No new industry was allowed unless a license was obtained from the government.
 Even an existing industry had to obtain a license for expanding output or for
diversifying production (producing a new variety of goods).
 License to expand production was given only if the government was convinced that
the economy required a larger quantity of goods. This was meant to ensure that the
quantity of goods produced was not more than what the economy required.
 This policy was used for promoting industry in backward regions; it was easier to
obtain a license if the industrial unit was established in an economically backward
area.
 Such units were given certain concessions such as tax benefits and electricity at a
lower tariff. The purpose of this policy was to promote regional equality.

TOPIC:8 Small-Scale Industry:

 In 1955, the Village and Small-Scale Industries Committee, also called the Karve
Committee, noted the possibility of using small-scale industries for promoting rural
development.
 A ‘small-scale industry’ is defined with reference to the maximum investment
allowed on the assets of a unit which was 5lakh at that point of time but this limit
has changed over a period of time; at present the maximum investment allowed is
rupees one crore.
 It is believed that small-scale industries are more ‘labour intensive’ i.e., they use
more labour than the large-scale industries and, therefore, generate more
employment.
 These industries cannot compete with the big industrial firms; it is obvious that
development of small-scale industry requires them to be shielded from the large
firms. For this purpose, the production of a number of products was reserved for
the small-scale industry; the criterion of reservation being the ability of these units
to manufacture the goods.
 They were also given concessions such as lower excise duty and bank loans at
lower interest rates.

TOPIC:9 TRADE POLICY(IMPORT SUBSTITUTION)

 The industrial policy that we adopted was closely related to the trade policy. In
the first seven plans, trade was characterised by what is commonly called an
inward looking trade strategy. Technically, this strategy is called import
substitution.
 This policy aimed at replacing or substituting imports with domestic production.
For example, instead of importing vehicles made in a foreign country, industries
would be encouraged to produce them in India itself.
  In this policy the government protected the domestic industries from foreign
competition. Protection from imports took two forms: tariffs and quotas.
 Tariffs are a tax on imported goods; they make imported goods more expensive
and discourage their use. Quotas specify the quantity of goods which can be
imported.
 EFFECT OF TARIFS AND QUOTAS/ OBJECTIVE OF IMPORT SUBSTITUTION:
The effect of tariffs and quotas is that they restrict imports and, therefore, protect
the domestic firms from foreign competition.
 The policy of protection is based on the notion that industries of developing
countries are not in a position to compete against the goods produced by more
developed economies. It is assumed that if the domestic industries are protected
they will learn to compete in the course of time. Our planners also feared the
possibility of foreign exchange being spent on import of luxury goods if no
restrictions were placed on imports. Nor was any serious thought given to
promote exports until the mid-1980s.

Effect of Policies on Industrial Development: The achievements of India’s

industrial sector during the first seven plans are impressive indeed.
 The proportion of GDP contributed by the industrial sector increased in the period
from 11.8 per cent in 1950-51 to 24.6 per cent in 1990-91. The rise in the industry’s
share of GDP is an important indicator of development. The six per cent annual
growth rate of the industrial sector during the period is commendable.
 No longer was Indian industry restricted largely to cotton textiles and jute; in fact,
the industrial sector became well diversified by 1990, largely due to the public
sector.
 The promotion of small-scale industries gave opportunities to those people who
did not have the capital to start large firms to get into business.
 Protection from foreign competition enabled the development of indigenous
industries in the areas of electronics and automobile sectors which otherwise
could not have developed.
 In spite of the contribution made by the public sector to the growth of the Indian
economy, some economists are critical of the performance of many public sector
enterprises. It is now widely held that state enterprises continued to produce
certain goods and services (often monopolising them) although this was no longer
required. An example is the provision of telecommunication service.

TOPIC:10 SHORT NOTE ON P.C MAHANALOBIS:

Mahalanobis: the Architect of Indian Planning Many distinguished thinkers contributed to
the formulation of India’s five year plans. Among them, the name of the statistician,
Prasanta Chandra Mahalanobis, stands out. Planning, in the real sense of the term, began
with the Second Five Year Plan.

 The Second Plan, a landmark contribution to development planning in general, laid

down the basic ideas regarding goals of Indian planning; this plan was based on the
 ideas of Mahalanobis. In that sense, he can be regarded as the architect of Indian
planning.
 Mahalanobis was born in 1893 in Calcutta. He was educated at the Presidency
College in Calcutta and at Cambridge University in England. His contributions to the
subject of statistics brought him international fame.
 In 1945 he was made a Fellow (member) of Britain’s Royal Society, one of the
most prestigious organisations of scientists; only the most outstanding scientists
are made members of this Society. Mahalanobis established the Indian Statistical
Institute (ISI) in Calcutta and started a journal, Sankhya, which still serves as a
respected forum for statisticians to discuss their ideas.
 Both, the ISI and Sankhya, are highly regarded by statisticians and economists all
over the world to this day. During the second plan period, Mahalanobis invited
many distinguished economists from India and abroad to advise him on India’s
economic development.
 EXTRA QUESTIONS
Q1 :Define a plan.
Answer : A plan is a proposed list of goals that an economy wants to achieve within a
specific period of time. It suggests the optimum ways to utilise the scarce available
resources to achieve the enlisted goals. In India, planning is done for a period of five
years, which is called five year plan. Plans have both specific and general goals. Some
of the common goals are economic growth, modernisation, self-reliance and equity.
Plans lay down the basic framework over which the policies are designed. Often
various goals are conflicting to each other, for example, modernisation reduces labour
employment. So there is a need to maintain a balance among different goals.

Q2 :Why did India opt for planning?

Answer : Soon after independence, India faced an important choice to opt either for
capitalism or socialism. Finally, India, inspired by the extraordinary success of
planning in Soviet Union, opted for socialism. Although, Indian political and economic
conditions were not as favourable as it was for Soviet Unions to opt for socialism, yet
India adopted socialism but with a difference. India hinged upon the socialist idea with
a strong emphasis on public sector and active participation of the private sector in a
democratic framework. The Planning Commission (1950) was established with the
motive that the government would undertake comprehensive planning for the nation
as a whole, where public sector would lay down the basic economic framework and
would encourage private sector for their active contribution to the economic growth.

Q3 :Why should plans have goals?

Answer :Every plan should have specified goals. Plan without goal is like life without
soul. While a plan specifies the means and ways to allocate scarce resources to achieve
proposed targets, goals are the ultimate targets, the achievement of which ensures the
success of plans. Thus, plans must include the goals.

Q4 :What are miracle seeds?

Answer : High Yielding Variety of seeds was developed by the Nobel Laureate Dr.
Narman Barlauf in Mexico. These seeds are more productive and need regular and
adequate irrigation facilities along with greater use of fertilisers and pesticides. In
1966,consequent to the use of HYV seeds, Indian agricultural sector experienced
Green Revolution, especially in the crops of rice and wheat. HYV seeds grow faster
than the normal seeds and, consequently, crops can be harvested in a much shorter
time period. Initially, HYV seeds were used in states like Punjab, Andhra Pradesh and
Tamil Nadu (as these states had more suitable irrigation facilities) and later on to
other states. Consequent to the use of HYV seeds, the production of food grains in
1967-68 increased by 25% (approx).

Q5 :Explain the need and type of land reforms implemented in the agriculture
sector.
Answer :The need for land reforms in India was very necessary due to the following
reasons:
1)Land Tenure System: There were three types of land tenure systems namely,
the Zamindari System, the Mahalwari System and the Ryotwari System prevalent in the
Indian agricultural sector at the time of independence. The common feature of these
 three systems was that the land was mostly cultivated by the tenants and the land
revenues were paid by them to their landlords. This led to the exploitation of tenants
in the form of exorbitantrents.
2)Size of Land Holdings: The size of land holdings owned by the farmers was
very small. In addition, the land holdings were fragmented. This obstructed the use of
modern techniques.
3)Lack of Initiative: As most of the land was owned by the landlords, so the
farmers lacked initiative and neither had enough means to undertake mechanised
methods of cultivation.
4)Traditional Approach and Low Productivity : Indian farmers used to rely
on the conventional and the traditional inputs and methods and climatic conditions
that hampered the productivity of agricultural sector.
5)Absence of Marketing System: Due to the absence of well developed marketing
system, the farmers used to rely on the intermediaries to sell their product in the
market. These intermediaries used to purchase the farm products at a very low price
and sell them at higher price at market. Consequently, the correct profit share did not
accrue to the farmer and, hence, this led to the lack of finance and investment on farm.
6)Nature of Farming: The basic motive for farming was for subsistence. That is,
farming was done basically to earn survival and not for sale and to earn profit.

TYPES: Due to the above problems in the Indian agriculture, it was very
necessary to undertake land reforms. Land reforms comprise of the following
steps:-
1)Abolishing Intermediaries: The prime focus of land reforms was to abolish
intermediaries like Zamindars, Jagirdars, etc. There were many steps undertaken to
make the tillers, the owners of the land.
2)Regulation of Rent: The cultivators were exploited in the form of exorbitant
rents. In the first five year plan, the maximum rent fixed was one-fourth or one-fifth of
the total farm produce (except in Punjab and Haryana, where it was rd). The
regulations of rent not only reduced the burden from the tenants but also enabled
them with greater portion of finance to invest on farm.
2)Consolidation of Holdings: As the land holdings were small and also
fragmented, so it was very necessary to consolidate the land holdings for the use of
modern and advanced technology. The farmers were given consolidated holdings
equal to the total of the land in their various fragmented plots. This enabled them the
benefits associated with the large scale production.
3)Land Ceilings: It means legislated fixed amount of land that an individual may hold.
The basic motive behind this step was to promote equality of ownership of land
holdings. This eradicated the concentration of land holdings in few hands.
Government used to confiscate the excess land over the fixed amount of land and
distribute it among the landless farmers.
4)Co-operative Farming: This step was taken to counter the problems due to sub-
division of holdings. Small scale farming by an individual land holder is neither
profitable nor productive, so, these steps encouraged different farmers to pool their
farms and perform farming jointly. This enhanced the productivity and greater profits
were shared by the individual farmers.

Q6 :Explain 'growth with equity' as a planning objective.

 Answer : Both growth and equity are the two important aspects of India's five year
plans. While growth refers to the increase in GDP over a long period of time equity
refers to an equitable distribution of GDP so that the benefits due to higher economic
growth are shared by all sections of population. Equity implies social justice. Growth
itself is desirable but growth in itself does not guarantee the welfare of people. Growth
is assessed by the market value of goods and services (GDP) and it may be possible
that the goods and services that are produced may not benefit the majority of
population. In other words, only a few with high level of living and money income may
get the share of GDP. Hence, growth with equity is a rational and desirable objective
of planning. This objective ensures that the benefits of high growth are shared by all
the people equally and, hence, this not only leads to reduction of inequality of income,
poverty promotion of egalitarian society but also enables everyone to be self-reliant.
Therefore, to conclude, it can be said that growth with equity is the most important
objective of an economic planning.

Q7:Does modernisation as a planning objective create contradiction in the

light of employment generation? Explain.
Answer:No, modernisation as a planning objective does not contradict employment
generation. In fact both modernisation and employment generation are positively
correlated. While modernisation refers to the use of new and modern technology in
production process that may make some people lose their jobs in the initial stages. But
gradually, the use of modern technology and input will raise the productivity and,
consequently, the income of the people that will further raise the demand for goods
and services. In order to fulfill this increased demand, there will be more job
opportunities that will lead more people to be hired and, hence, more employment
opportunities will be generated. Hence, both modernisation and employment
generation are not contradictory but are complementary to each other.

Q8 :Why was it necessary for a developing country like India to follow self-
reliance as a planning objective?
Answer :Self-reliance implies discouraging the imports of those goods that could be
produced domestically. Achieving self-reliance is of prime importance for a developing
country like, India as otherwise, it would increase the country's dependence on foreign
products. Dependence on foreign goods and services can promote economic growth of
India but this would not contribute to the development of domestic productive
resources. Dependence on foreign goods and services provides impetus to foreign
country's industries at the cost of domestic infant industries. Further, imports drain
away the scarce foreign reserves that are of prime importance to any developing and
underdeveloped economy. Therefore, achieving self-reliance is an important objective
for developing countries in order to avoid themselves from being acquiescent to the
developed nations.

Q9:What is sectoral composition of an economy? Is it necessary that the

service sector should contribute maximum to GDP of an economy? Comment.
Answer :The sectoral composition of an economy is the contribution of different
sectors to total GDP of an economy during a year. That is, the share of agricultural
sector, industrial sector and service sector in GDP.
Yes, it is necessary that at the later stages of development, service sector should
contribute the maximum to the total GDP. This phenomenon is called Structural
Transformation. This implies that gradually the country's dependence on the
agricultural sector will shift from the maximum to minimum and, at the same time,
 the share of industrial and service sector in the total GDP will increase. This structural
transformation together with the economic growth is termed as economic
development.

Q10 :Why was public sector given a leading role in industrial development
during the planning period?
Answer :At the time of independence, Indian economic conditions were very poor and
weak. There were neither sufficient foreign reserve nor did India have international
investment credibility. In the facet of such poor economic condition it was only the
public sectors that need to take the initiative. The following are the reason that explains
the driving role of the public sector in the industrial development:
Need of Heavy Investment: There was a need of heavy investment for
industrial development. It was very difficult for the private sector to invest such a big
amount. Further, the risks involved in these projects were also very high and also
these projects had long gestation period. Thus, the government played the leading role
to provide the basic framework of heavy industries.

Low Level of Demand: At the time of independence, the majority of

population was poor and had low level of income. Consequently, there was low level of
demand and so there was no impetus for any private sector to undertake investment in
order to fulfill these demands. Thus, India was trapped into a vicious circle of low
demand. The only way to encourage demand was by public sector investments.

Q11 :While subsidies encourage farmers to use new technology, they are a
huge burden on government finances. Discuss the usefulness of subsidies in the
light of this fact.
Answer :Subsidy means availing some important inputs to farmers at a concessional
rate that is much lower than its market rate. During 1960s, in order to adopt new
technology HYV seeds and use of modern fertilisers and insecticides, farmers were
provided inputs at a subsidised rate. Thus, the public sector role was needed to invest
heavily, so as to raise the income of people that will in turn raise the demand and so on.
The following arguments are given in favour of subsidy:
 Subsidy is very important for marginal land holders and poor farmers who
cannot avail the essential farm inputs at the ongoing market rate.
 Subsidy in 1960s was basically an incentive for the farmers to adopt modern
techniques and vital inputs like fertilisers, HYV seeds, etc. The subsidy was
mainly of convincing and lucrative nature so that the farmers do not hesitate to
use these modern techniques.
 Subsidy is generally provided to the poor farmers with the motive of reducing
inequality of income between rich and poor farmers and to promote an
egalitarian distribution ofincome.
 It is argued that the adoption of new technology and techniques are not risk
free and only daring farmers are only willing to adopt them.
The following arguments are given against subsidy.

 It is generally argued that subsidy favours and benefits fertiliser industries

than the farmers. Subsidies provide a protective shield against the market
conditions and, consequently, these industries need not to bother about their
market share and competition.
 Subsidies are also enjoyed by the potential farmers who do not need them. This
 often leads to the misallocation and wastage of the scarce resources.
 Subsidies, if provided at a much lower rate than the market rate may lead to
the wastage of resources. For example, subsidised electricity leads to the
wastage of energy.
 There is a general consensus that in order to assess the benefit and feasibility of
a particular technique, subsidy should be provided but once the performance
has been
judged subsidies should be stopped.

CONCLUSION: Hence, based on the above pros and cons, we can conclude that
although subsidies are very useful and necessary for poor farmers and to overcome
uncertainties associated with farming, it put an excessive burden on the scarce
government finances. Thus, a proper planning, suitable reforms and allocation of
subsidies only to the needy farmers is required.

Q12 :Why, despite the implementation of green revolution, 65 per cent of our
population continued to be engaged in the agriculture sector till 1990?
Answer : Although Indian agricultural production increased substantially that
enabled India to attain the status of self-sufficiency in food grains but this increase is
substantial only in comparison to food grain production in the past. Further, India
failed to achieve structural transformation associated with the agricultural revolution
and development. That is, in other words, industrial and service sector failed to
generate significant employment opportunities in order to attract and absorb excess
agricultural labour. The agricultural contribution to GDP has fallen from 51% in
1960-61 to 44% in 1970-71, on the other hand, the share of industry and service sector
in India's GDP increased merely from 19% to 23% and from 30% to 33% during the
same period. Meantime, the percentage of population dependent on agriculture
decreased merely from 67.50% (in 1950) to 64.9% (in 1990). Hence, the industrial and
service sector growth was not very significant and, hence, failed to employ and attract
surplus labour from agricultural sector. This may be because of the flaws in the
economic policies that became the bottleneck for the growth of secondary and tertiary
sector.

Q13 :Though public sector is very essential for industries, many public sector
undertakings incur huge losses and are a drain on the economy's resources.
Discuss the usefulness of public sector undertakings in the light of this fact.
Answer : Although, the mismanagement and wrong planning in PSUs may lead to
misallocation and, consequently, to wastage of the scarce resources and finance but
PSUs do have some positive and useful advantages.
 Enhancing Nation's Welfare: The main motive of the PSU was to provide
goods and services that add to the welfare of the country as a whole. For
example, schools, hospitals, electricity, etc. These services not only enhance
welfare of country's population but also enhance the future prospects of
economic growth and development.
 Long Gestation Projects: It was not feasible and economically viable for the
private sectors to invest in the big and wide projects like basic industries and
electricity, railways, roads, etc. This is because these projects need a very huge
initial investment and have long gestation period. Hence, PSU is the most
appropriate to invest in these projects.
 Basic Framework: An important ideology that was inherited in the initial
 five year plans was that the public sector should lay down the basic framework
for industrialisation that would encourage the private sector at the latter stage
of industrialisation.
 Socialist Track: In the initial years after independence, Indian planners and
thinkers were more inclined towards socialist pattern. It was justified on the
rational ground that if the government controls the productive resources and
production, then it won't mislead the country's economic growth. This was the
basic rationale to set up PSUs. These PSUs produce goods not according to the
price signals but according to the social needs and economic welfare growth of
the country.
 Reduce Inequality of Income and Generate Employment Opportunities :
It was assumed that in order to reduce inequalities of income, eradicate poverty
and to raise the standard of living, government sector should invest in the
economy via PSUs.

Q14 :Explain how import substitution can protect domestic industry.

Answer :In the initial seven five year plans, India opted for import substitution
strategy, which implies discouraging the imports of those goods that could be
produced domestically. Import Substitution Strategy not only reduces an economy's
dependence on the foreign goods but also provides impetus to the domestic firms.
Government provides various financial encouragements, incentives, licenses to the
domestic producers to produce domestically the import substituted goods. This would
not only allow the domestic producers to sustain but also enables them to grow as they
enjoy the protective environment. They need not to fear from any competition and also
not to worry about their market share as license gives them the monopoly status in the
domestic market. Being monopolist, they earn more profits and invest continuously in
R&D and always look for new and innovative techniques. This gradually improves
their competitiveness and when they are exposed to the international market they can
survive and compete with their foreign counterparts.

CHAPTER-3
LIBERALISATION, PRIVATISATION AND GLOBALISATION: AN APPRAISAL

TOPIC: 1 REASONS WHICH LED TO ADOPTION OF NEW ECONOMIC POLICY IN INDIA:

 TILL 1990, india was following social model for development i.e state was having a major
role in development process. But in 1990-91 the economic crisis in india emerged and the
need for economic reforms were as follows:

 Prices of many essential goods rose sharply. Imports grew at a very high rate
without matching growth of exports.
 A high trade defecit and balance of payment crisis.
 A continuous and increasing fiscal defecit.
 Gulf crisis leading to high external debt.
 Poor performance of public sector undertaking.
 foreign exchange reserves declined to a level that was not adequate to finance
imports for more than two weeks. There was also not sufficient foreign exchange
to pay the interest that needs to be paid to international lenders.
 No country or international funder was willing to lend to India.
In order to overcome the crisis India approached the International Bank for
Reconstruction and Development (IBRD), popularly known as World Bank and the
International Monetary Fund (IMF), and received $7 billion as loan to manage the
crisis. For availing the loan, these international agencies expected India to liberalise
and open up the economy by removing restrictions on the private sector, reduce the
role of the government in many areas and remove trade restrictions between India
and other countries. India agreed to the conditionalities of World Bank and IMF and
announced the New Economic Policy (NEP).

TOPIC:2 NEW ECONOMIC POLICY:

The NEP was started in july 1991 which consisted of wide ranging economic reforms. The
thrust of the policies was towards creating a more competitive environment in the
economy and removing the barriers to entry and growth of firms. This set of policies can
broadly be classified into two groups:

 the stabilisation measures: Stabilisation measures are short term measures,

intended to correct some of the weaknesses that have developed in the balance of
payments and to bring inflation under control. In simple words, this means that
there was a need to maintain sufficient foreign exchange reserves and keep the
rising prices under control.
 structural reform policies are long-term measures, aimed at improving the
efficiency of the economy and increasing its international competitiveness by
removing the rigidities in various segments of the Indian economy. The
government initiated a variety of policies which fall under three heads viz.,
liberalisation, privatisation and globalisation.
OBJECTIVES OF NEW ECONOMIC POLICY:
1) To reduce the rate of inflation in the domestic territory.
2) TO reduce the fiscal defecit.
3) To improve the balance of payment situation.
4) To encourage foreign capital investment.
5) To improve the efficiency and productivity of the economy.

TOPIC: LIBERALISATION
liberalisation refers to the relaxtion given to enterprenure to enable them to make their
decisions and give freedoms to undertake activities at all level is termed as liberalising the
economy.

 Liberalisation was introduced to put an end to the restrictions and open various
sectors of the economy.
 Though a few liberalisation measures were introduced in 1980s in areas of
industrial licensing, export-import policy, technology upgradation, fiscal policy and
foreign investment, reform policies initiated in 1991 were more comprehensive.
OBJECTIVES OF LIBERALISATION:
1) To remove needles and unnecessary restrictions on the working of industries and other
sectors.
2) To upgrade technology.
3) To develop international competitiveness and integrate the indian economy with world
economy.

REFORM 1: Industrial policy reform:

In India, regulatory mechanisms were enforced in various ways:
(i) industrial licensing under which every entrepreneur had to get permission from
government officials to start a firm, close a firm or decide the amount of goods that could
be produced
(ii) private sector was not allowed in many industries
(iii) some goods could be produced only in small-scale industries, and
(iv) controls on price fixation and distribution of selected industrial products.
Due to complex system, the government of india announced New industrial policy 1991, the main
industrial reforms were as under:

i) reduction in industrial licensing:

Industrial licensing was abolished for almost for all but items except a short list of
industries related to security, strategic and environmental concerns. These includes —
alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics aerospace and
drugs and pharmaceuticals and defence equipments.
ii) Dereservation of industries for public sector: are reserved for the public sector were
narrowed down from seventeen to eight and greater participation by private sector was
permited.
iii) reform in small scale sector: Many goods produced by small-scale industries have now
been dereserved. In many industries, the market has been allowed to determine the
prices. And, the investment ceiling has also enhanced.
REFORM 2: Financial Sector Reforms:
 Financial sector includes reforms for the financial sector such as commercial banks,
investment banks, stock exchange operations and foreign exchange market. The
financial sector in India is regulated by the Reserve Bank of India (RBI).
 The RBI decides the amount of money that the banks can keep with themselves,
fixes interest rates, nature of lending to various sectors, etc.
 One of the major aims of financial sector reforms is to reduce the role of RBI from
regulator to facilitator of financial sector. This means that the financial sector may
be allowed to take decisions on many matters without consulting the RBI.
The main financial sector reform were as follows:
a) The reform policies led to the establishment of private sector banks, Indian as well as
foreign.
b) Foreign investment limit in banks was raised to around 50 per cent.
c) Those banks which fulfil certain conditions have been given freedom to set up new
branches without the approval of the RBI and rationalise their existing branch networks.
d) banks have been given permission to generate resources from India and abroad, certain
managerial aspects have been retained with the RBI to safeguard the interests of the
account-holders and the nation.
e) capital market development i.e promotion of stock exchange.
f) Foreign Institutional Investors (FII), such as merchant bankers, mutual funds and
pension funds, are now allowed to invest in Indian financial markets.
REFORM:3 Tax Reforms:

 Tax reforms are concerned with the reforms in the government’s taxation and
public expenditure policies, which are collectively known as its fiscal policy.
Main tax reforms were as under:
a) there has been a continuous reduction in the taxes on individual incomes as it was
felt that high rates of income tax were an important reason for tax evasion
b) Efforts have also been made to reform the indirect taxes, taxes levied on
commodities, in order to facilitate the establishment of a common national market for
goods and commodities.
c) Another component of reforms in this area is simplification. In order to encourage
better compliance on the part of taxpayers many procedures have been simplified and the
rates also substantially lowered. Recently, the Parliament passed a law, Goods and
Services Tax Act 2016, to simplify and introduce a unified indirect tax system in India. This
law came into effect from July 2017. This is expected to generate additional revenue for
the government, reduce tax evasion and create ‘one nation, one tax and one market’.

REFORM:4 Foreign Exchange Reforms:

 The first important immediate measure to resolve the balance of payments crisis,
the rupee was devalued against foreign currencies. This led to an increase in the
inflow of foreign exchange. It also set the tone to free the determination of rupee
value in the foreign exchange market from government control. From that period
markets determine exchange rates based on the demand and supply of foreign
exchange.

REFORM: 5 Trade and Investment Policy Reforms:

The main aim of new trade policy was to create a free environment for trade to
improve the efficiency, to increase foreign investment into the economy and
strengthen india’s position in the world market. The following measures were
adopted:
a) abolition of import licensing system except in case of hazardous and
environmental sensitive industries.
b) Reduction in tariff rates.
c) Removal of quantitative restriction on imports.
d) Export promotion structure by removing export duties.
e) Withdrawl of restrictions on foreign investment, import of capital goods to
upgrade technology and import of foreign technology in to the domestic territory
TOPIC: PRIVITISATION
 Privatsation means transfer of ownership, management and control of public sector
enterprises to the entrepreneurs to the private sector.
 Privatisation implies greater role of the private sector in the economic activities of
the country. Over the years, Indian Government has diluted its stake in several
public enterprises, including IPCL, IBP, Maruti Udyog, etc.

Privatisation can be done in two ways;

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

DISINVESTMENT:
Disinvestment refers to sale of some of the shares of public sector undertaking to the
private and public at large is known as disinvestment. The government has adopted two
methods of disinvestment:
i) selling of shares in psu’s (public sector undertakings)
ii) stratergic sale of psu’s to private sector company.
OBJECTIVES OF DISINVESTMENT:
i) To release the public resources for the use of high priority areas.
ii) To reduce public debt.
iii) To reduce the losses of PSU’S.
iv) Modernisation and upgradation to increase efficiency and competitiveness of PSU’S.

TOPIC: GLOBALISATION
 Globalisation means integrating the national economy with the world economy
through removal of barriers on international trade and capital movements.
 Globalisation offers opportunity for an organization to expand globally, i.e., in
worldwide market. Improving technologies, better transportation and
communication have enabled companies to expand into global or worldwide
markets.
 It began after the second world war through the establishment of GATT (GENERAL
AGREEMENT ON TRADE AND TARRIFS)

OBJECTIVES OF GLOBALISATION:
1) Reduction of trade barriers to permit free flow of goods across national frontier.
2) Free flow of capital among nations i.e no restrictions on foreign investment.
3) Free flow of technology.
4) Free movement of labours among different countries of the world.

TOPIC: OUTSORCING:
• Outsourcing implies hiring regular business service from external sources, mostly
from other countries, which was previously provided internally or from within the
country
• These services include service like legal advice, computer service, advertisement,
security, information technology, voice based business process(known as BPO or
call centre) record keeping, teaching, bank transcription etc. each provided by
respective departments of the company).
• Companies of developed countries find it more profitable to hire services from
developing countries as the cost of these services are less than in the developed
countries.
• India has become an important destination for global outsourcing because of the
following reasons:
a) India has a large pool of skilled and young man power available at relatively low
wage rate.
b) growth of indian IT industry which has proved its competitive strength in the
world.
• Outsourcing not only helps in generating employment opportunities in the country
but also contributes to the GDP and foreign exchange reserve of our country.
TOPIC: WORLD TRADE ORGANISATION (WTO)
• The WTO was founded in 1st January 1995 as the successor organisation to the
General Agreement on Trade and Tariff (GATT).
 • GATT was established in 1948 with 23 countries as the global trade organisation to
administer all multilateral trade agreements by providing equal opportunities to all
countries in the international market for trading purposes.
• WTO is expected to establish a rule-based trading regime in which nations cannot
place arbitrary restrictions on trade.
• India was the founder member of both WTO and GATT.
FUNCTIONS OF WTO:
• To facilitate to resolve trade disputes.
• To facilitate international trade by bilateral and multilateral trade agreements.
• To reduce tariff as well as non-tariff barriers and providing greater market access
to all member countries.
• Provide technical assistance and training for developing countries.
• Cooperating with other international institution of economic policy making.

TOPIC: INDIAN ECONOMY DURING REFORMS: AN ASSESSMENT

POSITIVE IMPACT OF LPG:

1:ECONOMIC GROWTH: the growth of an economy is measured by the Gross

Domestic Product. The post–1991 India witnessed a rapid growth in GDP on a continual
basis for two decades. The growth of GDP increased from 5.6 per cent during 1980–91 to
8.2 per cent during 2007–12.
2:PRODUCTIVITY: While the industrial sector reported fluctuation, the growth of the
service sector has gone up. This indicates that this growth is mainly driven by growth in
the service sector. During 2012-15, there has been a setback in the growth rates of
different sectors witnessed post–1991. While agriculture recorded a high growth rate
during 2013–14, this sector witnessed negative growth in the subsequent year.
3:CONTRIBUTION OF SERVICE SECTOR: While the service sector continued to witness a
high level of growth — higher than the overall GDP growth in 2014– 15, this sector
witnessed the highest ever growth rate of 10.3 per cent. The industrial sector witnessed a
steep decline during 2012–13, it began to show a continuous positive growth.
4:FDI AND FII: The opening of the economy has led to a rapid increase in foreign direct
investment and foreign exchange reserves. The foreign investment, which includes foreign
direct investment (FDI) and foreign institutional investment (FII), The foreign investment,
which includes foreign direct investment (FDI) and foreign institutional investment (FII), has
increased from about US $100 million in 1990-91 to US $ 30 billion in 2017-18. There has been an
increase in the foreign exchange reserves from about US $ 6 billion in 1990-91 to about US $ 413
billion in 2018-19.

5:INCREASE IN EXPORTS: India is seen as a successful exporter of auto parts, engineering

goods, IT software and textiles in the reform period. Rising prices have also been kept
under control.
NEGATIVE IMPACT OF LPG: On the other hand, the reform process has been
widely criticised for not being able to address some of the basic problems facing our
economy especially in areas of employment, agriculture, industry, infrastructure
development and fiscal management.
1: Growth and Employment: Though the GDP growth rate has increased in the reform
period, scholars point out that the reform-led growth has not generated sufficient
employment opportunities in the country.
2: Reforms in Agriculture: Reforms have not been able to benefit agriculture, where the
growth rate has been decelerating. Public investment in agriculture sector especially in
infrastructure, which includes irrigation, power, roads, market linkages and research and
extension (which played a crucial role in the Green Revolution), has fallen in the reform
period.
3: The removal of fertiliser subsidy has led to increase in the cost of production, which has
severely affected the small and marginal farmers. This sector has been experiencing a
number of policy changes such as reduction in import duties on agricultural products,
removal of minimum support price and lifting of quantitative restrictions on agricultural
products; these have adversely affected Indian farmers as they now have to face
increased international competition.
4: FOCUS ON CASH CROPS: Moreover, because of export oriented policy strategies in
agriculture, there has been a shift from production for the domestic market towards
production for the export market focusing on cash crops in lieu of production of food
grains. This puts pressure on prices of food grains.
5: Reforms in Industry: Industrial growth has also recorded a slowdown. This is because of
decreasing demand of industrial products due to various reasons such as cheaper imports,
inadequate investment in infrastructure etc. In a globalised world, developing countries
are compelled to open up their economies to greater flow of goods and capital from
developed countries and rendering their industries vulnerable to imported goods.
Cheaper imports have, thus, replaced the demand for domestic goods. Domestic
manufacturers are facing competition from imports.

6:Disinvestment: Every year, the government fixes a target for disinvestment of PSEs.
For instance, in 1991-92, it was targeted to mobilise Rs 2500 crore through disinvestment.
The government was able to mobilise Rs 3,040 crore more than the target revenues rather
than using it for the development of PSEs and building social infrastructure in the country.
In 2017–18, the target was about ` 1,00,000 crore, whereas, the achievement was about `
1,00,057 crore. Critics point out that the assets of PSEs have been undervalued and sold to
the private sector. This means that there has been a substantial loss to the government.

7:Reforms and Fiscal Policies: Economic reforms have placed limits on the growth of
public expenditure, especially in social sectors. The tax reductions in the reform period,
aimed at yielding larger revenue and curb tax evasion, have not resulted in increase in tax
revenue for the government. Also, the reform policies, involving tariff reduction, have
curtailed the scope for raising revenue through custom duties. In order to attract foreign
investment, tax incentives were provided to foreign investors which further reduced the
scope for raising tax revenues. This has a negative impact on developmental and welfare
expenditures.
9. infrastructure facilities: including power supply, have remained inadequate due to lack
of investment. Globalisation is, thus, often seen as creating conditions for the free
movement of goods and services from foreign countries that adversely affect the local
industries and employment opportunities in developing countries.

EXTRA QUESTIONS
Q1 : Why were reforms introduced in India?
Answer : Economic reforms were introduced in the year 1991 in India to combat economic
crisis. Economic Crisis of 1991 was a culminated outcome of the policy failure in the
preceding years. It was in that year the Indian government was experiencing huge fiscal
deficits, large balance of payment deficits, high inflation level and an acute fall in the
foreign exchange reserves. Moreover, the gulf crisis of 1990-91 led to an acute rise in the
prices of fuel which further pushed up the inflation level. Because of the combined effect
of all these factors, economic reforms became inevitable and were the only way to move
Indian economy out of this crisis. The following are the factors that necessitated the need
for the economic reforms.
1. Huge Fiscal Deficit: Throughout 1980s, fiscal deficit was getting worse due to huge
non-development expenditures. As a result, gross fiscal deficit rose from 5.7% of GDP to
6.6% of GDP during 1980-81 to 1990-91. Subsequently, a major portion of this deficit
was financed by borrowings (both from external and domestic source). The increased
borrowings resulted in increased public debt and mounting interest payment
obligations. The domestic borrowings by government increased from 35% to 49.8% of
GDP during 1980-81 to 1990-91. Moreover, the interest payments obligations accounted
for 39.1% of total fiscal deficit. Consequently, India lost its financial worthiness in the
international market and, fell in a debt trap. Thus, economic reforms were needed
urgently.
2. Weak BOP Situation: BOP represents the excess of total amount of exports over
total amount of imports. Due to lack of competitiveness of Indian products, India was
not able to earn enough foreign exchange through exports to finance our imports. The
current account deficit rose from 1.35% to 3.69% of GDP during 1980-81 to 1990-91. In
order to finance this huge current account deficit, Indian government borrowed a huge
amount from the international market. Consequently, the external debt increased from
12% to 23% of GDP during the same period. On the other hand, Indian exports were not
potent enough to earn sufficient foreign exchange to repay these external debt
obligations. This BOP crisis compelled the need for the economic reforms.
3. High level of Inflation: The high fiscal deficits forced the central government to
monetise the fiscal deficits by borrowings from RBI. RBI printed new money that pushed
up the inflation level, thereby, making the domestic goods more expensive. The rate of
inflation rose from 6.7% p.a. to 10.3% p.a. during 1980s to 1990-91. In order to lower the
inflation rate, government in 1991 had to opt for the economic reforms.
4. Sick PSUs: Public Sector Undertakings were assigned the prime role of
industrialisation and removal of inequality of income and poverty. But the subsequent
years witnessed the failure of PSUs to perform these roles efficiently and effectively.
Instead of being a revenue generator for the central government, these became liability.
The sick PSUs added an extra financial burden on the government's budget.
Thus, because of all the above reasons existing concomitantly, the economic reforms
became inevitable.
Q2 :Why is it necessary to become a member of WTO?
Answer :It is important for any country to become a member of WTO (World Trade
Organisation) for the following reasons:
 i) WTO provides equal opportunities to all its member countries to trade in the
international market.
ii) It provides its member countries with larger scope to produce at large scale to
cater to the needs of people across the international boundaries. This provides ample
scope to utilise world resources optimally and provides greater market accessibility.
iii) It advocates for the removal of tariff and non-tariff barriers, thereby, promoting
healthier and fairer competition among different producers of different countries.
iv) The countries of similar economic conditions being members of WTO can raise
their voice to safeguards their common interests.
Q3 :Why did RBI have to change its role from controller to facilitator of financial sector in
India?
Answer :Prior to liberalisation, RBI used to regulate and control the financial sector that
includes financial institutions like commercial banks, investment banks, stock exchange
operations and foreign exchange market. With the economic liberalisation and financial
sector reforms, RBI needed to shift its role from a controller to facilitator of the financial
sector. This implies that the financial organisations were free to make their own decisions
on many matters without consulting the RBI. This opened up the gates of financial sectors
for the private players. The main objective behind the financial reforms was to encourage
private sector participation, increase competition and allowing market forces to operate
in the financial sector. Thus, it can be said that before liberalisation, RBI was controlling
the financial sector operations whereas in the post-liberalisation period, the financial
sector operations were mostly based on the market forces.
Q4 :How is RBI controlling the commercial banks?
Answer: RBI controls the commercial banks viavarious instruments like Statutory Liquidity
Ratio (SLR), Cash Reserve Ratio (CRR), Bank Rate, Prime Lending (PLR), Repo Rate, Reverse
Repo Rate and fixing the interest rates and deciding the nature of lending to various
sectors. These are those ratios and rates that are fixed by RBI and it is mandatory for all
the commercial banks to follow or maintain these rates. All these measures control the
commercials banks' operations and also control money supply in Indian economy.
Q5 :What do you understand by devaluation of rupee?
Answer :Devaluation of Rupee refers to the fall in the value of rupee in terms of foreign
currency. Specifically, it implies deliberate official lowering of the value of the country's
currency with respect to the foreign currency. Devalutaion prevails under the fixed
exchange rate regime. This implies that value of rupee has fallen and the value of foreign
currency has risen. It means that now (after devaluation) one US$ can be exchanged for
more rupees. This encourages exports and discourages imports as the former is cheaper
now for foreign countries and the latter is expensive for Indians.
Q6 :Distinguish between the following
Answer :
 (i) Strategic Sale Minority Sale
Strategic Sale refers to the sale of Minority Sale refers to the sale of less than
51% or more stake of a PSU to the 49% stake of a PSU to the private sector.
a)
private sector who bids the
highest.
b) The ownership of PSU is handed The ownership of PSU still remains with the
over to the private sector. government as it holds 51% of stakes.

(ii) Bilateral Trade Multilateral Trade

a) It is a trade agreement between two It is a trade agreement among more
countries than two countries.
This is an agreement that provides equal This is an agreement that provides
opportunities to both the countries. equal opportunities to all the member
b)
countries in the international market

(iii) Tariff Barriers Non-tariff Barriers

It refers to the tax imposed on the It refers to the restrictions other than
imports by the country to protect its taxes, imposed on imports by the
a)
domestic industries. country.
b) It includes custom duties, export- It includes quotes and licenses.
import duties
It is imposed on the physical units (like It is imposed on the quantity and
per tonne) or on value of the goods quality of the goods imported.
c)
imported.

Q7 :Why are tariffs imposed?

Answer :Tariffs are imposed to make imports from foreign countries relatively expensive
than domestic goods, thereby, t discouraging imports indirectly. These are imposed to
provide a safe and protective environment to the infant domestic firms from their
technologically advanced foreign counterparts. Tariffs facilitate the domestic firms to
survive and grow. Tariffs are also imposed on those goods that the government thinks to
be socially unwanted and imports of which will exert unnecessary burden on the scarce
foreign exchange reserves.
Q8 :What is the meaning of quantitative restrictions?
Answer : Quantitative Restrictions (QRs) refer to the restrictions in the form of limits or
quotas on the amount of commodities that can either be imported or exported. QRs
usually on imports (refers to non-tariff measures) are imposed to discourage imports of
foreign goods and to reduce Balance of Payment (BOP) deficits. The imposition of QRs
provides impetus to the domestic firms to survive, grow and expand in a protective and
lesser competitive environment.
Q9 :Those public sector undertakings which are making profits should be privatised. Do
you agree with this view? Why?
Answer :An efficient and profit earning PSU is a revenue generator for the government.
But if, a PSU is an inefficient and loss making one, then the same PSU exerts unnecessary
burden on the government's scarce revenues and further may lead to budget deficit. The
loss making PSUs should be privatised whereas it would not be fair to privatise a profit
making PSU. Privatising a PSU may lead to concentration of monopoly power in the
private hands. Further some of the PSUs like, water, railways, etc. enhance the welfare of
nation and is meant to serve general public at a very nominal cost. Privatisation of such
important PSUs will lead to loss of welfare of poor people. Hence, only less important
PSUs should be privatised while leaving the core and important PSUs to be owned by the
public sector. Instead of privatisation of profit-making PSUs, government can allow more
degree of autonomy and accountability in their operations, which will not only increase
their productivity and efficiency but also enhance their competitiveness with their private
counterparts.
Q10 :Do you think outsourcing is good for India? Why are developed countries opposing
it?
Answer : Yes, outsourcing is good for India. The following points suggest that outsourcing
is good for India.
1. Employment: For a developing country like India, employment generation is an
important objective and outsourcing proves to be a boon for creating more employment
opportunities. It leads to generation of newer and higher paying jobs.
2. Exchange of technical know-how: Outsourcing enables the exchange of ideas and
technical know-how of sophisticated and advanced technology from developed to
developing countries.
3. International worthiness: Outsourcing to India also enhances India's international
worthiness credibility. This increases the inflow of investment to India.
4. Encourages other sectors: Outsourcing not only benefits the service sector but also
affects other related sectors like industrial and agricultural sector through various
backward and forward linkages.
5. Contributes to human capital formation: Outsourcing helps in the development
and formation of human capital by training, imparting them with advanced skills,
thereby, increasing their future scope and their suitability for high ranked jobs.
6. Better standard of living and eradication of poverty: By creating more and higher
paying jobs, outsourcing improves the standard and quality of living of the people in the
developing countries. It also helps in reducing poverty.
7. Greater infrastructural investment: Outsourcing to India requires better quality
infrastructure. This leads to the modernisation of the economy and larger investment by
the government to develop quality infrastructure and develop quality human capital.
However, Outsourcing to India is good but developed countries oppose this because
outsourcing leads to the outflow of investments and funds from the developed countries
to the less developed countries. Also the MNCs contribute more to the development of
the host country than the home country. Further, outsourcing reduces the employment
generation in the developed countries as the same jobs can be done in the less developed
countries at relatively cheap wages. Moreover, this leads to job insecurity in the
developed countries as at a point of time jobs can be outsourced to the developing
countries.
Q11 :India has certain advantages which make it a favourite outsourcing destination.
What are these advantages?
Answer :The following points qualify India to be the favourite spot for outsourcing by
various MNCs.
1. Easy Availability of Cheap Labour: As the wage rates in India are comparatively
lower than that of in the developed countries, MNCs find it economically feasible to
outsource their business in India.
2. Reasonable Degree of Skills: Indians have fairly reasonable degree of skills and
techniques that need low training period and, thus, low cost of training.
3. International worthiness: India has a fair international worthiness and also
credibility.. This enhances the faith of the foreign investors in India.
4. Virgin Market: India has a virgin market for produced goods and services. This not
only helps the MNCs to explore the wide domestic market of India but also conquer the
international market as the cost of production in India is relatively cheaper.
5. Stable Political Environment: The democratic political environment in India
provides a stable and secured environment to the MNCs to expand and grow.
6. Favourable Government Policies: The most important point that makes India as the
most favourite spot for outsourcing is the favourable government and tax policies.
MNCs gets various types of lucrative offers from the Indian government like tax
holidays, low rate of tax, easy tax policies, etc. All these policies enable the MNCs to
 retain a major portion of their earnings in the form of savings that they can invest to
grow and expand their business.
7. Lack of Competitive Competitors: The most important for the MNCs in India is that
they don't face stiff competition from the Indian domestic industries. This almost
enables them to enjoy a monopoly status in the Indian markets.
8. Reasonable Degree of Infrastructural Investment: Indian government has invested
heavily in the past two decades in the infrastructural sector. Various steps have been
taken for connecting remote and rural areas to the metropolitan and other major cities.
This has not only reduced the cost of production of the MNCs but also helped them
operate efficiently and effectively.
9. Cheap and Abundant Availability of Raw Materials: India is well enriched in natural
resources. This ensures the MNCs cheap availability of raw material and undisturbed
and perennial supply of raw materials. This enables proper and smooth operation of
MNCs.
Q12 :Do you think the navaratna policy of the government helps in improving the performance
of public sector undertakings in India? How?
Answer : To improve efficiency, infuse professionalism and to enable PSUs to compete effectively
in the market, government awarded the status of 'navaratnas' to the following nine PSUs:
1) Indian Oil Corporation Ltd(IOCL)
2) Bharat Petroleum Corporation Ltd(BPCL)
3) Hindustan Petroleum Corporation Ltd(HPCL)
4) Oil and Natural Gas Corporation Ltd(ONGC)
5) Steel Authority of India Ltd(SAIL)
6) India Petro-chemicals Corporations Ltd(IPCL)
7) Bharat Heavy Electricals Ltd(BHEL)
8) National Thermal Power Corporation(NTPC)
9) Videsh Sanchar Nigam Ltd(VSNL)
These corporations were granted a greater degree of financial, managerial and
operational autonomy. This boosted their efficiency and effectiveness. They also became
highly competitive and some of them are becoming the giant global players. Consequent
to their better performance, government retained them under public sector and enabled
them to grow themselves not only in the domestic market but also in the international
market. These corporations are self-reliant and financially self-sufficient. Thus, the
navaratna policy has certainly improved the performance of these PSUs.
Q13 :What are the major factors responsible for the high growth of the service sector?
 Answer :The major factors that led to the growth of service sectors in India are as
follows;
1. High demand for services as final product: India was a virgin market for service
sector. So, when service sector started booming due to business outsourcing from the
developed countries to India, there was very high demand for these services especially
for banking, computer service, advertisement and communication. This high demand in
turn led to a high growth rate of service sector.
2. Liberalisation and economic reforms: The growth of Indian service sector is also
attributable to the liberalisation and various economic reforms that were initiated in
1991. Due to these reforms, various restrictions on the movement of international
finance were minimised. This led to huge inflow of foreign capital, foreign direct
investments and outsourcing to India. This encouraged the service sector growth.
3. Structural transformation: Indian economy is experiencing structural
transformation that implies shift of economic dependence from primary to tertiary
sector. Due to this transformation, there was increased demand of services by other
sectors which y boosted the service sector.
4. Advanced technology and growth of IT: The advancements and innovations in the
IT sector enabled the use of internet, telecommunication, mobile phone and electronic
transactions across different countries. All these contributed to the growth of the
service sector in India.
5. Increased volume of trade :Low tariff and non tariff barriers on imports by India
are also responsible for high growth rate of service sector. The foreign trade reforms
enabled the domestic products to interact and compete in the international markets.
6. Cheap labour and reasonable degree of skill in India: Due to the availability of
cheap labour and reasonable degree of skilled man power in India, developed countries
found outsourcing to India feasible and profitable. The business outsourcing in itself
provides substantial encouragements (like development of human capital that requires
services like good coaching centers and reputed institutions, etc.) to the growth of
service sector

Q14 :Agriculture sector appears to be adversely affected by the reform process. Why?
Answer :The economic reforms of 1991 did not benefit the agricultural sector
significantly. The following are the reasons that explain the adverse effects of the
economic reforms on India's agriculture sector:
1. Reduction of Public Investment: There has been a drastic decrease in the volume of
public investment in the agricultural sector. There has been an acute cutback from the
Indian government to provide sufficient irrigation facilities, electricity, information
 system, market linkages and roads. Moreover, investment in agricultural research and
development was not as extensive as it was during green revolution phase
2. Removal of Subsidies: Removal of subsidies on fertilisers pushed up the cost of
production of agriculture. This made farming more expensive, thereby, adversely
affecting the poor and marginal farmers.
3. Liberalisation and Reduction in Import Duties on Agricultural Products: Due to
adherence to the WTO commitments, Indian government reduced import duties on
agricultural products that forced the poor and marginal farmers to compete with their
foreign counterparts in the international markets. Stiff competition in the international
market along with traditional techniques of farming badly affected the poor farmers.
4. Shift towards Cash Crops and Lack of Food Grains: The export oriented production
strategies led to the shift of agricultural production from food grains to the production
of cash crops like cotton, jute, etc. This led to reduced availability of food grains and,
consequently, t lower nutritional values which further reduced theirproductivity.
5. Inflationary Pressures on Food Grains: The shift towards cash crops production
along with the removal of subsidies exerted inflationary pressures on the prices of food
grains. This in turn adversely affected the agricultural sector's performance by making
the cost of producing food grains moreexpensive.

Q15 :Why has the industrial sector performed poorly in the reform period?
Answer :Similar to the agricultural sector, industrial sector's performance was also poor.
The poor performance of industrial sector may be attributable to the following reasons:
1. Cheaper Imports: The demand for industrial output reduced due to the cheaper
imports. The imports from the developed countries were cheaper due to the removal of
import tariffs. These cheaper and quality foreign imports led to the fall in the demand of
domesticgoods.
2. Lack of Investment: Due to the lack of investment in infrastructure facilities
(including power supply) the domestic firms could not compete with their developed
foreign counterparts in terms of cost of production and quality of goods. The inadequate
infrastructural investment pushed up the cost of production of the domestic producers
and, consequently, led to the non-feasibility of their growth prospectus.
3. High Non-tariffs Barriers by the Developed Countries: It was very difficult to access
the developed countries market due to high non-tariff barriers maintained by the
developed countries. For instance, US did not remove quota restrictions on imports of
textiles from India andChina.
4. Vulnerable and Infant Domestic Industries : During the pre-liberalised period, the
domestic industries were provided a protective environment to grow and expand. But at
the time of liberalisation, the domestic industries were still not developed up to the
 extent it was thought and consequently, they could not compete with the multi-national
companies. The dependence of domestic industries on traditional technologies which
were neither cost effective nor quality effective was an important reason for their poor
growth. Thus, the domestic industries were adversely affected byliberalisation.

Q16 :Discuss economic reforms in India in the light of social justice and welfare.
Answer :The economic reforms have enabled India to access and compete in the
international markets. This facilitated the movement of goods and services across the
international boundaries. Further, the increased inflows of foreign capital and investment
to India have eliminated the shortage of foreign exchange to finance the imports of
sophisticated and advanced technologies to India. Moreover, the boom in the outsourcing
and the service sector led India's economic growth and GDP to increase by many folds.
Buton the other side, agriculture that employed a significant proportion of population,
failed to be benefited by these economic reforms. Also the reforms favoured the high
income group population at the cost of their poor counterparts. This resulted in wide and
still increasing economic and social inequalities among different section of population.
Further, the economic reforms developed the areas that were well connected with the
metropolitan cities leaving the remote and rural area undeveloped. Consequently, there
were wide regional disparities. The boom in the service sector, especially in the form of
quality education, superior health care facilities, IT, tourism, multiplex cinemas, etc. were
out of the reach of the poor section of the population. The population engaged in the
agricultural and allied sectors has still not been able to share the fruits of advanced
technology and modern techniques. Further, the high income group has experienced
increase in income, thereby, appreciating the quality of their consumption basket, leaving
the low and middle income group to fight hard to earn their livelihood. Thus, it can be
concluded that the economic reforms failed to provide social justice and enhance welfare
of the general public of India.