Indian economy

Unit-1
Nature of Indian Economy

The Need for Economic Development

(1) Weak, Private Sector:

In an underdeveloped country, private enterprise is weak and may fail to take the necessary
risks of pioneering those industries which are necessary for rapid economic development of
the country.

Therefore, the State must come to the forefront action. The underdeveloped countries have
remained almost stationary.

This task of their development is a big task. These countries need a big push. It is only
possible through a comprehensive planning. Thus the Government should follow
comprehensive planning for the development of underdeveloped countries.

(2) Inequalities of Income:

Inequalities of income and wealth exist in underdeveloped economies. Private enterprise

system does not secure an equal distribution of the benefits of economic development among
different classes of the community. The developing social conscience of the people cannot
tolerate the existence of such grave inequalities. This would secure a better distribution of
national income among all classes of people in the country.

(3) Problem of Unemployment:

Another reason why the underdeveloped countries need a plan is that the working of pricing
system has failed to solve the problem of mass unemployment. The mass unemployment
which existed during 1930’s was horrible. No country wanted to experience such as mass
unemployment again. There is also the acute problem of disguised unemployment in under-
developed countries. The mass unemployment, particularly disguised unemployment, which
exists in underdeveloped countries cannot be dealt with unless a comprehensive economic
plan for development is formulated.

(4) Change in Attitude:

All underdeveloped countries have become development-minded. Now they want to pack the
development of centuries into a few years. They like to raise the standard of living of their
people. Therefore, these countries require quick economic development.

(5) Need of More Capital:

Higher rate of growth of development requires huge capital investment. It involves a

considerable degree of central planning and control. Among the underdeveloped countries,
higher rates of growth have been registered in those countries where there is a planned
development. In the last 15-20 years, the rate of growth of income in poor countries has been
on the whole, higher than it was before they adopted planned development.

(6) Foreign Aid:

In modern economic activities the progress of one nation is related directly or indirectly to
the progress of other nations. Thus, the detailed plan, mentioning specific output projects and
investment projects, is very useful in creating favourable atmosphere for bilateral and multi-
lateral agreements of foreign aid. Thus, carefully designed plan outlay is essential for
increasing foreign trade and thereby improving development prospects.

(7) Structural Changes:

In an un-developed or under- developed country, the main economic sector is predominantly

agriculture. The secondary and tertiary sector are substantially less developed. This results
into structural dis-equilibrium. Thus, for increasing the overall productivity, it is very
essential that optimum labour force be diverted and employed on secondary and tertiary
sectors of the economy. This is possible only by proper planning in different sectors of the
economy.

(8) Economies of Scale:

The structured changes encourages and facilitate the setting up of new industrial units, which
invariably created external economies. But these newly create economies are not usually
taken into account by the private entrepreneurs under the market system. In case of external
economies, role of public sector along with planning is essential.

Thus, the overall gains are maximized by making proper plan adjustments. Thus a specified
investment can be best utilized taking a macro-economic view to have appropriate social as
well as private gains. This strongly favours a planned development specially in case of less
developed countries.

(9) Future Requirements:

In an attempt to maximize the current profit, the producers exploit the natural resources
without considering the future requirement. Therefore, it is evident that if exhaustible natural
resources are not properly utilized, less will be available for future generations. To conserve
the natural resources carefully it is important to make and execute proper plans.

Causes of under Development

(i) Capital Deficiency:

Capital is of crucial importance for economic growth, but this is what the under-developed
countries lack.

With the low level of national output much saving is not possible but whatever there is, it is
frittered away in conspicuous consumption and extravagance in social ceremonies or is
invested in real estate or jewellery.

Lack of sufficient capital handicaps all productive enterprise and inhibits economic growth.
Such countries are caught up in a vicious circle of poverty explained below.

(ii) Lack of Entrepreneurial and Managerial Talent:

It is the bold and prudent entrepreneur and a wise manager who makes success of a business
enterprise. Lack of this talent is responsible for missing available opportunities of profitable
investment. Hence such countries remain economically backward.

(iii) Lack of Skilled Personnel and Technical Know-how:

Another very important bottleneck in the way of economic growth is the scarcity of technical
know-how and skilled personnel. These elements of productive power take long in building
up and foreign technicians are very costly. Hence, the underdeveloped countries remain
under-developed.

(iv) Limited Size of the Market:

The purchasing power of the people is very low on account of their proverbial poverty.
Hence the productive enterprises are handicapped in the sale of goods. Only an expanding
market can provide a fruitful field for profitable investment and result in economic
development of the country.

(v) Weak Infrastructure:

The backward countries lack an adequate and efficient means of transport and
communications, a well-organised and developed banking system and adequate facilities for
technical education. Without these no country can develop economically. Lack of adequate
infrastructure is a big abstracted to economic growth.

(vi) Social and Institutional Set-up:

Social customs and attitudes of the people of backward countries are a great bar to economic
progress. Conservatism, superstition, lack of ambition, undue regard for custom and status
are a drag on economic progress. Economic backwardness in India is in no small measure
due to joint family system, caste system, peculiar laws of inheritance and the other-worldly
attitude of the people.

(vii) Alien Rule:

Most of these countries have been under foreign rule which has kept them down. The foreign
rulers could not be expected to take any genuine interest in the economic regeneration of the
people. Economic backwardness of India may be largely attributed to the policies followed
by its British rulers.

(viii) Growing Population:

The explosive rate of population growth in the backward countries undoubtedly retards their
economic growth. Whatever development fakes place is swallowed up by the rising tide of
population. The fruits of development are hardly sufficient-to feed the torrent of babies.

(ix) Preponderance of Agriculture:

The bulk of the population is engaged in agriculture which is carried on in a primitive

manner. Naturally the national income remains at a low level. Economic development cannot
be brought about in the absence of rapid industrialization.

Major Problems of Economic Planning in Underdeveloped Countries

In the underdeveloped countries the adoption of economic is not being done in the spirit
because there are many impediments and problems in its way.

1. Planning is the Urgent Need:

Nobody can deny that planning is perhaps more necessary but more difficult to implement in
underdeveloped economies.
The reason is that planning requires a very strong, efficient and honest administration.

But such a strong, efficient and honest administration does not exist in underdeveloped
countries. In these economies the task of planning should be undertaken by the creation of a
highly trained and disciplined class.

2. Objectives before Planners:

The first objective of planners in UDCs should be to create an administrative machinery. The
planners should see that the quantity and form of planning should be strictly in accordance
with the administrative machinery. Moreover, the Government has to break much ground in
doing normal expected functions before it can indulge in controversial subject which
planning may involve.

3. Backward Agriculture:

It has been noticed that in an underdeveloped country, depressed agriculture is the crux of the
problem. As agriculturists are illiterate and backward, rapid economic progress may not be
possible. But once the farmers are filled up with the desire to make progress, perhaps many
difficulties may be overcome.

4. Traditional agriculture vs. Modern Agriculture:

Another problem faced by agricultural economies is the small size of holdings. Agricultural
progress is not possible unless the country goes through an agrarian revolution which
contains work on large holdings with machinery. The success depends on how popular
Government can awaken sufficient enthusiasm among masses to carry through such a
revolution by consent. Unfortunately, intensive and large-scale farming requires fewer
people per acre than the small holdings.

5. Investment and Borrowing or Deficit Financing:

Unemployment is an other problem which an developed country faces. The problem cannot
be solved by the creation of money alone, but large-scale Government activity is required.
But the control of foreign exchange in itself may not solve the problem because the new
money that is created will force the prices up.

In an industrial country, an increase in quantity of money is likely to increase employment

and output which may not be the case in an underdeveloped or agricultural country, even
where there is unemployment. An increase in the quantity of money as experienced in an
underdeveloped country is generally likely to reduce output.
 Determinants of Development
The enduring issue of why some countries are rich while others remain poor has long been
the subject of great interest among scholars. New research on the determinants of
development, though, appears to better identify the driving force behind development by
taking an incisive look at the three traditional economic explanations for these cross-country
disparities – economic policy, political institutions and geography.

Based on the findings, the researchers conclude that the primary determinant of
developmental success may be the strength of institutions.

Economic Policy, Political Institutions and Geography

The research first laid out the traditional arguments for the importance of policy, institutions
and geography as determinants of development.

All three are pretty straightforward: economic policy, such as a nation’s savings rate and the
strength of its currency, clearly dictate, to some extent, the economic vitality of a country;
geographic factors can also matter, for instance, a landlocked country like Chad – without
access to the ocean or major rivers – is at a natural disadvantage because trade becomes a
logistical nuisance; institutions — like the rule of law to maintain public safety, ensure
property rights, and mitigate corruption — still were found to have a greater impact.

However, the researchers’ revelation was not just that policy and geography took a back seat
in importance to the role of institutions in development, but that they were, independently,
hardly influential at all. Research sampling 72 countries found that while poor policies may
hurt growth rates temporarily, they did not have the sort of impact on long-term income
levels that many had previously suspected.

Promotion of Stable Institutions

The relationship between geography and development was a bit more complicated. Although
nations with poor geography and stable institutions still do well, the authors acknowledge the
role geography often plays in promoting stable institutions historically.

Specifically, nations colonized by Europe in unfavorable regions (in regard to disease and

other conditions) were typically turned into rentier states and dealt poorer institutions.
Conversely, regions which could be settled were afforded European-mainland style
institutions: democracy, property rights and the rule of law.

Determinants of Development
So, Europe’s unique colonial history shows that geography did affect the type of institutions
implemented in various countries, and it is these institutions that explain differences in
development.

In a sense, the revelation that among the determinants of development, growth is primarily a
function of institutions should be somewhat heartening, as institutions can be reformed.
Therefore, instead of nations across Sub-Saharan Africa and parts of Central America being
condemned to second-class status economically, focus can shift to the ways their poor
institutions can be altered to better catalyze development.

Although researchers failed to explain the means of doing so directly, recognizing that
building robust institutions is the best path toward progress is an important insight.

– Brendan Wade

The following are various factors which determine economic growth and development:

(i) Supply of Natural Resources: The quantity and quality of natural resources play a vital
role in the economic development of a country. Important natural resources are land,
minerals and oil resources, water, forests, climate, etc. The quality of natural resources
available in a country puts a limit on the level of output of goods which can be attained.

Without a minimum of natural resources there is not much hope for economic development.
It should, however, be noted that resource availability is not a necessary condition for
economic growth. For instance, India, though rich in natural resources, has remained poor
and under-developed.

This is because resources have not been fully utilised for productive purposes.

(ii) Capital Formation: Labour is combined with capital to produce goods and services.
Workers need machines, tools and factories to work. In fact the use of capital makes workers
more productive. Setting up of more factories equipped with machines and tools which raise
the productive capacity of the economy.

Therefore, in the opinion of many economists, capital formation is the very core of economic
development. Whatever the type of economic system, without capital accumulation the
process of economic growth cannot be accelerated.

(iii) Technological Progress and Economic Growth: Another important factor in economic

growth is progress in technology, Use of advanced techniques in production or progress in
technology brings about a significant increase in per capita output. Technological advance
refers to the discovery of new and better ways of doing things or an improvement in the old
ways.

(iv) The Growth of Population: The growth of population is another factor which

determines the rate of economic growth. The growing population increases the level of
output by increasing the number of working population or labour force provided all are
absorbed in productive employment.

So, development is measured in terms of these factors:

1. Per capita income: national income/ total population (including children) of

the country. It shows the per head availability of goods and services, or the
average income earned by a person.
2. Life expectancy: the average life period a normal person is expected to live.
It mainly indicates the level of medical facilities available to the people and
the general health level.
3. Literacy rate: the proportion of the population aged above a particular age
(in India it is 7 year +) that can read and write with understanding.
4. Skilled population: how much of the available work force includes skilled
workers, and unskilled workers.
5. Employment rate: the percentage of the working population (able and
willing to do work) who are actually employed.
6. Infant mortality rate (IMR): the mortality within 1 year of age per 1000
live births in a year.

These are the main indications of economic development, but there can be many more
indicating the quality of life enjoyed by the people of a country

As a country develops economically, the income increases, per capita income should also
increase and people generally are able to live with better living standards. However, these
factors too have their own limitations.

National Income of India-estimates

National income of India constitutes total amount of income earned by the whole nation of
our country and originated both within and outside its territory during a particular year. The
National Income Committee in its first report wrote, “A national income estimate measures
the volume of commodities and services turned out during a given period, without
duplication.”
The estimates of national income depict a clear picture about the standard of living of the
community. The national income statistics diagnose the economic ills of the country and at
the same time suggest remedies. The rate of savings and investment in an economy also
depend on the national income of the country.

Moreover, the national income measures the flow of all commodities and services produced
in an economy. Thus, the national income is not a stock but a flow. It measures the total
productive power of the community during given period.

Further, the National Income Committee has rightly observed, “National income statistics
enable an overall view to be taken of the whole economy and of the relative positions and
inter-relations among its various parts”. Thus, the computation of national income and its
analysis has been considered an important exercise on economic literature.

Estimates of National Income During Pre-Independence Period:

During the British period, several estimates of national income were made by Dadabhai
Naoroji (1868), William Digby (1899), Findlay Shirras (1911, 1922 and 1934), Shah and
Khambatta (1921), V.K.R.V. Rao (1925-29) and R.C. Desai (1931-40): Among all these pre-
independence estimates of national income in India, the estimates of Naoroji, Findlay Shirras
and Shaw and Khambatta have computed the value of the output raised by the agricultural
sector and then added some portion of the income earned by the non-agricultural sector. But
these estimates were having no scientific basis of its own.

After that Dr. V.K.R.V. Rao applied a combination of census of output and census of income
methods.

The following table 2.1 reveals various estimates of national income and per capita
income of India as prepared by different dignitaries before independence:

All these estimates of national income were conducted out of individual effort and were
subjected to serious limitations due to some of its arbitrary assumptions.
All these estimates of national income were conducted out of individual effort and were
subjected to serious limitation due to some of its arbitrary assumptions. Although pre-
independence estimates of national income in India suffered from various difficulties and
limitations but it provided considerable light and insight about the economic conditions of
the country prevailing during those period.

Estimates of National Income During the Post-Independence Period: National Income Committee’s
Estimates:
After independence, the Government of India appointed the National Income Committee in
August, 1949 with Prof. PC. Mahalnobis as its Chairman and Prof. D.R. Gadgil and Dr.
V.K.R.V. Rao as its two members so as to compile a national income estimates rationally on
a scientific basis. The first report of this committee was prepared in 1951.

In its first report, the total national income of the year 1948-49 was estimated at Rs. 8,830
crore and the per capita income of the year was calculated at Rs. 265 per annum. The
committee continued its estimation works for another three years and the final report was
published in 1954.

National Income Committee and C.S.O. Estimates:

During the post-independence period, the estimate of national income was primarily
conducted by the National Income Committee. Later on, it was carried over by the Central
Statistical Organisation. For the estimation of national income in India the National Income
Committee applied a mixture of both ‘Product Method’ and the ‘Income Method’. This
Committee divided the entire economy into 13 sectors.
Income from the six sectors, viz., agriculture, animal husbandry, forestry, Fishery, mining
and factory establishments is estimated by the output method. But the income from the
remaining seven sectors consisting of small enterprises, commerce, transport and
communications, banking and insurance, professions, liberal arts, domestic services, house
property, public authorities and rest of the world is estimated by the income methods.

The National Income Unit of the Central Statistical Organisation (C.S.O.) is now-a-days
entrusted with the measurement of national income. Here this unit of C.S.O. estimated the
major part of national income from the various sectors like agriculture, forestry, animal
husbandry, fishing, mining and factory establishments with the help of product method.

The unit of C.S.O. is also applying the income method for the estimation of the remaining
part of national income raised from the other sectors.

Till now we have three different series in the national income estimates of India. These
include Conventional Series, Revised Series and New Series.

Again the C.S.O. has prepared another new series on national income with 1993-94 as base
year as against the existing series with 1980-81 as base year.

Methodology of National Income Estimation in India:

In India, the estimation of national income is being done by two methods, i.e., product
method and income method.

Net Product Method:

While estimating the -gross domestic product of the country, the contribution to GDP from
various sectors like agriculture, livestock, fishery, forestry and logging, mining and
quarrying is estimated with the adoption of product method. In this method, it is important to
estimate the gross value of product, bi-products and ancillary activities and then steps are
taken to deduct the value of inputs, raw materials and services from such gross value.

In respect of other sub-sectors like animal husbandry, fishery, forestry, mining and factory
establishments, the gross value of their output is obtained by multiplying the estimated
output with their market price. From such gross value of output, deductions are made for cost
of materials used and depreciation charges so as to obtain net value added in each sector.

In respect of secondary activities, the computations of gross domestic product are done by
the production approach only for the manufacturing industrial units (both registered and
unregistered). In respect of constructions activity, the estimates of the value of pucca
construction are made by the commodity How approach and that of the kachcha construction
is made by the expenditure method.

Net Income Method:

In India, the income from rest of the sectors, i.e., small enterprises, commerce, transport and
communications, banking and insurance professions, liberal arts, domestic activities, house
property, public authorities and rest of the world is estimated by the income method.

Here, the income approach is adopted to estimate the value added from these aforesaid
remaining sectors. Here, the process involves the measurement of aggregate factor incomes
in the shape of compensation of employees (wages and salaries) and operating surpluses in
the form of rent, interest, profits and dividends.

Finally, by adding up the contribution of all different sectors to national income of the
country, it is necessary to obtain net domestic product at factor cost. In order to derive the net
national income at current prices, it is necessary to add the net income from abroad and net
indirect taxes with the net domestic product at factor cost. This same estimate is then
deflated at the prices of the base year selected to derive a series of national income at
constant prices.

Interregional Variations of National Income

For computing aggregate income of respective states in India, State Domestic Products
(SDP) of various states are estimated regularly for every year by its government agencies.

The data related to SDP estimates are widely in use by various agencies like Planning
Commission, Finance Commission and other research organisations for assessing the degree
of regional disparities and also for formulating necessary policies in connection with transfer
of resources from the Centre to states.

The estimates of SDP can be successfully utilised for measuring the degree of development
attained by a state. Accordingly the level of development attained by a state can also be
measured by its per capita income which can again be compared with the all India average of
per capita income.

The SDP estimates also work as useful indicators to show structural transformation, if any,
among the constituent sectors of these states. Let us now look at the CSO estimates of per
capita income of 15 major states of India to have a look at the dynamics of growth and the
ratio of disparity between various states.
Table 3.7 reveals that during the 14-year period, i.e. from 1980-81 to 1993-94, the per capita
income figures of most of the states, excepting a few rich states like, Punjab, Haryana and
Maharashtra have gone for a little change.

Moreover, the relative ranking of the most of the states by per capita income has not shown
any significant change excepting Himachal Pradesh, Karnataka, Kerala, Madhya Pradesh,
Rajasthan, Assam and Orissa whose relative ranking has shown a change to some extent.

During this period, the five top ranking states in respect of per capita income were Punjab,
Haryana, Maharashtra, Gujarat and Himachal Pradesh.

But the five poorest states in respect of per capita income during the same period were Bihar,
Orissa, Madhya Pradesh, Uttar Pradesh and Rajasthan. In 1993-94, Karanataka, Assam and
Rajasthan have improved its relative position. The per capita income figure of Bihar was
lowest among all the 16 states.

The table further reveals that the inter-state disparity in respect of per capita income has been
widened during the 14 year period as a result of the strategy followed in planning for
economic development in India. As a result of this, the disparity ratio between the richest
state—Punjab and the poorest state—Bihar which was 2.91: 1 in 1980-81 gradually
increased to 3.44: 1 in 1993-94.

Thus the planning process followed in India has totally failed in fulfilling one of its basic
objectives of removing regional imbalances and maintaining balanced regional development
throughout the country. The following table shows the disparity ratio in respect of per capita
income of different states at constant prices during the recent years.

Table 3.7(a) reveals that the per capita NSDP of nine advanced states has been increasing at
moderate rates (annual average) between 6.0 per cent to 2.6 per cent during 1990-91 to 2000-
01. But the per capita NSDP of the backward states recorded a slow growth between 1.9 per
cent to 1.0 per cent and Bihar recorded a negative growth rate of (-) 2.8 per cent during the
same period.

Again, the ratio between the maximum per capita income of Punjab and the minimum per
capita income of Bihar has increased from 2.74 in 1990-91 to 4.60 in 2000-01.

Table 3.8 depicts a clear picture about the per capita net state domestic product (NDP) at
current prices for 17 major states along with their relative ranking. In 1980-81, the per capita
state NDP of only six states, viz., Punjab, Haryana, Maharashtra, Gujarat.

Himachal Pradesh and Jammu & Kashmir were lying above the national average NDP
whereas in 1991-92 only the first four above mentioned states were above the national
average.

The disparity ratio between the richest state—Punjab and the poorest state—-Bihar which
was 1 : 3.04 in 1980-81 gradually increased slightly to 1 : 4.90 in 2000-01. Thus it proves
again that the planning process in India has failed to reduce regional disparities to a
considerable extent.

Moreover, the table shows that the relative ranking of Andhra Pradesh, Madhya Pradesh,
Rajasthan, Tamil Nadu, Kerala and Assam has improved considerably.

But the same ranking remained low for Uttar Pradesh, Jammu & Kashmir, Bihar. Further, the
relative ranking of Uttar Pradesh, Orissa, West Bengal and J &K have even deteriorated
considerably in 1995-96.

Thus the regional disparity is very much acute among the various states of India. This has
been reflected by the per capita income gap between the very rich states (viz., Punjab,
Haryana, Maharashtra and Gujarat) and the very poor states (viz., Bihar, Madhya Pradesh,
Assam, Uttar Pradesh and Orissa).

The per capita income gap at 1980-81 prices between the richest state (Punjab) and the
poorest state (Bihar) has increased from Rs 1755 in 1980-81 to Rs 2473 in 1993-94. Again
the same gap at current prices has increased from Rs 1797 in 1980-81 to Rs 19940 in 2000-
01 and then to Rs 30,957 in 2005-06.

Again the per capita income figure of different states in 2013-14 at current prices reveals a
wide disparity among the states. The per capita income gap at current prices between the
richest state Haryana (Rs 1, 32,089) and the poorest state Bihar (Rs 31,229) reached the level
of Rs 1, 00, 86 in 2013-14 which can be considered as very high.
It would be better to look into this regional disparity from a different angle, i.e., through
comparative rates of growth.

The growth rates of NSDP during the current period also show the trend of growing regional
disparity among different states of the country. Table 3.9 reveals that the annual average
growth rate of NSDP of advanced states during the pre-reform period, i.e., during 1980-81 to
1990-91 was 5.2 per cent.

But the same rate for the advanced states increased to 6.3 per cent during the post-reform
period, i.e., during 1990-91 to 1997-98.

As compared to that, the annual average growth rate of NSDP of backward states in general
has declined from 4.9 per cent during the pre-reform period (1980-81 to 1990-91) to 3.0 per
cent during the post- reform period (1990-91 to 1997-98).

It is further observed that the annual average growth rates of NSDP of three major states
Uttar Pradesh, Madhya Pradesh and Bihar declined to 2.6 per cent, 4.1 per cent and 0.6 per
cent respectively during the post-reform period as compared to that of all India growth rates
of 5.5 per cent during the same period.

Table 3.9 thus clarifies the position:

Overall growth rate of SDP of these above mentioned states has improved fairly due to their
steady growth in either agriculture or industry or both. But the states like Kerala and Orissa
had all along maintained a very poor overall growth rate of SDP during the 1970s and the
first half of 1980s due to their attainment of very low growth rate in agricultural production.

Again during the first half of 1980s only six states, viz., Punjab, Haryana, West Bengal,
Tamil Nadu, Rajasthan and Madhya Pradesh had been able to maintain their overall growth
rate of SDP above the 5 per cent all India average growth rate of NDP.

Whereas, the other states had attained a very poor overall growth rate of SDP even to the
extent of 1.1 per cent only, which were far below the all India average growth rate of NDP.

Thus it has been revealed that in most of the states excepting a few industrially developed
states, agriculture is still playing the role of major determinants of their overall growth rates
in SDP. Further, it is found that much disparity still prevails in the overall growth rates of
SDP of the various states leading to aggressive regional imbalance or inequalities creating
serious discontent and chaos in social fabric of our country.

Although historical experience shows that regional inequalities tend to increase in the early
part of development and it tend to get narrowed down after attaining some level of
development but the high degree of poverty and backwardness prevailing in some of the
backward states of India is aggravating the situation to the worst level.

Thus unlike the developed countries of the world, India should try to reduce this degree of
regional disparity or imbalances as early as possible for the interest of integrity of the
country even if it is considered too early from the angle of economic development.

NITI Aayog
NITI Aayog or National Institution for Transforming India Aayog is basically a policy think
tank of Government of India and State Governments that replaces 65-year old Planning
Commission. Union Government of India had announced formation of NITI Aayog on 1st
January, 2015.

The NITI Aayog will have a governing council comprising all State Chief Ministers and Lt.
Governors of Union Territories and will work towards fostering a ‘Co-operative federalism’
for providing a “national agenda” to the Centre and States.

The body is comprised of a CEO and a Vice Chairperson, to be appointed by the Prime
Minister, in addition to some full-time members and two part-time members, while four
Union Ministers would serve as ex-officio members. Besides, there would be specific
regional councils, while experts and specialists from various fields would be called as special
invitees nominated by the Prime Ministers.
NITI Aayog will serve as a “think tank” of the government as a “directional and policy
dynamo” and would provide both to the governments at the centre and in the states with
strategic and technical advice on key policy matters including economic issues of national
and international importance.

Thus NITI Aayog will never plan, rather it will formulate policy. By following these
policies, various Ministries of the Central Government will prepare developmental projects
considering the need of long term development. NITI is in favour of cooperative federal
structure where both the Centre and States jointly prepare developmental policies.

But NITI, at the same time, wants to promote healthy competition among the developing
states.

Thus, the propulsive concept behind the new body would be “co-operative federalism”
entailing that the states to have their say in framing plans and policies for development. The
NITI Aayog has been envisaged as a kind of inclusive think-tank embracing the Centre and
States to give strategic and technical advice on economic matters of national and global
importance.

NITI Aayog will have regional councils to focus on developmental activities on specific
areas and is patterned on the National Reforms Development Commission of China.

While the Planning Commission had the power to allocate funds to states for attaining
regional development, the NITI Aayog will not have such powers. Rather, the task of
allocating funds to states now being vested with the Finance Ministry’s Department of
Expenditure.

Its primary job would be to undertake long term policy and design frameworks and take
necessary initiatives for attaining faster development and finally to monitor these activities
sincerely.

Thus, NITI Aayog will actively monitor and evaluate implementation of the Government
programmes and initiatives. The Planning Ministry of present NDA Government is of the
view that “with central plan expenditure of the order of Rs 5.75 lakh crore was being
channelized per year for development, it was absolutely necessary that there is concurrent,
comprehensive, credible and reliable evaluation”.

This step mainly focuses on strategies to spread awareness about and use of evaluation as a
tool for enhancing result from policies and programmes of good governance. So it was time
to consider developing a National Evaluation Policy that would provide direction to
Monitoring and Evaluation (M & E) activities in the country, laying stress upon quality
standards and sound ethical procedures and provide for appropriate institutional mechanisms.
NITI Aayog would therefore mean:

(a) A group of people with authority entrusted by the government to formulate/regulate

policies concerning transforming India.

(b) It is a commission to assist government in both social and economic issues.

(c) It is an institute of think tank with experts in it.

(d) It is an body to actively monitor and evaluate implementation of government programmes

and initiatives.

The NITI Aayog comprises the following members and bodies:

1. Prime Minister of India as the chairperson.

2. Governing Council comprising the Chief Ministers of all States and Union
Territories with legislatures and Lieutenant Governors of other Union
Territories.
3. Regional Councils will be formed to address specific issues and
contingencies impacting more than one state or a region. The aim of the
Regional Councils is to amicably settle disputes between two or more states
facing a common set of problems that usually delay the progress of
developmental projects.

These councils will be formed for a specified tenure. The Regional Councils will be
convened by the Prime Minister and will comprise of the Chief Ministers of States and Lt.
Governors of Union Territories in the region for addressing specific issues. These Regional
Councils will be chaired by the chairperson of the NITI Aayog or his nominee.

4. Experts, specialists and practitioners with relevant domain knowledge will

be called as special invitees, to be nominated by the Prime Minister.

Full-time organizational framework (in addition to Prime Minister as the Chairperson)

includes the following positions:

(i) Vice-Chairperson.

(ii) Members: Two (2) Full-time.:

(iii) Part-time Members: Maximum of two from leading universities, research organizations
and other relevant institutions in an ex-officio capacity. Part-time members will be on a
rotational basis.

(iv) Ex-officio Members: Maximum of four members of the Union Council of Ministers to
be nominated by the Prime Minister.

(v) Chief Executive Officer (CEO). To be appointed by the Prime Minister for a fixed tenure,
in the rank of Secretary to the Government of India.

(vi) Special Invitees.

(vii) Secretariat as deemed necessary for its functioning.

Presently, following members are included in the NITI Aayog in different

capacities: (SEACH INTERNET FOR LATEST MEMBERS)

1. Chairperson: Prime Minister Narendra Modi.

2. CEO: Sindhushree Khullar.
3. Vice Chairperson: Arvind Panagariya (Well known India born economist
and Columbia University Professor)
4. Ex-officio Members: Rajnath Singh, Arun Jaitley, Suresh Prabhu and Radha
Mohan Singh.
5. Special Invitees: Nitin Gadkari, Smriti Zubin Irani and Thawar Chand
Gehlot.
6. Full-time Members: Bibek Debroy and V.K. Saraswat.
7. Governing Council: All Chief Ministers and Lieutenant Governor of Union
Territories.

The following are some of the important aims and objectives of NITI Aayog:

1. NITI Aayog sets its aims to provide a critical directional and strategic input
into the development process of the country.
2. NITI Aayog aims to serve as a “think tank” of the government both at
central and state levels with relevant strategic and technical advice on key
policy matters including economic issues of national and international
importance.
3. NITI Aayog now seeks to replace the centre-to-state one way flow of policy
framed by the Planning Commission by an amicable settled policy framed
by a genuine and continuing partnership of states.
 4. The NITI Aayog will also seek to put an end to slow and tardy
implementation of policy by fostering better Inter-Ministry co-ordination
and better centre-state co-ordination. It will help evolve a shared vision of
national development priorities, and foster co-operative federalism, in order
to focus on the view that strong states make a strong nation.
5. The NITI Aayog has set it objectives to develop mechanisms to formulate
credible plans to the village level and aggregate these progressively at higher
levels of government. This Aayog will ensure special attention to the
sections of society that may be at risk of not benefitting adequately from
economic progress.
6. The NITI Aayog, will create a knowledge, innovation and entrepreneurial
support system through a collaborative community of national and
international experts, practitioners and partners. The Aayog will offer a
platform for resolution of inter-sectoral and inter-departmental issues in
order to accelerate the implementation of the development agenda.
7. The NITI Aayog will monitor and evaluate the implementation of
programmes, and focus on technology upgradation and capacity building.

Undertaking the above activities, the NITI Aayog will aim to accomplish the following
objectives and opportunities:

(i) An effective administration paradigm in which the Government is an “enabler” rather than
a “provider of first and last resort”.

(ii) Attaining progress from “food security” to focus on a mix of agricultural production as
well as attain actual returns that farmers get from their produce.

(iii) To ensure that India is an active player in the debates and deliberations on the global
commons.

(iv) To ensure that the economically vibrant middle-class remains actively engaged, and its
potential is fully utilized.

(v) Leverage India’s pool of entrepreneurial, scientific and intellectual human capital.

(vi) Incorporate the geo-economic and geo-political strength of the non-resident Indian
Community.

(vii) Use urbanization as an opportunity to create a wholesome and secure habitat through
the use of modern technology.
(viii) Use technology to reduce opacity and potential for misadventures in governance.

Moreover, the NITI Aayog aims to enable India to face complex challenges in a better
way through the following measures:

(i) Leveraging of India’s demographic dividend and realization of the potential of youth, men
and women through imparting education, skill development, elimination of gender bias and
also by providing employment.

(ii) Elimination of poverty, and the enhance the chance for every Indian to live a life of
dignity and self- respect.

(iii) Redressal of inequalities based on gender bias, caste and economic disparities.

(iv) To integrate villages institutionally into the development process of the country.

(v) To provide policy support to more than 50 million small business which are considered as
a major source of employment generation.

(vi) To safeguard our environmental and ecological assets.

Thus the NITI Aayog will try to frame a proper development policy for the country and will
also seek to put an end to slow and tardy implementation of policy, by fostering better inter-
ministry coordination and improve Centre-State coordination. It will also evolve a shared
vision of national development priorities, and foster co-operative federalism, recognizing the
motto that strong states make a strong nations.

Critics of this new set up criticised it and some termed it as an old wine in a new bottle.
However, some critics have also argued positively in its favour.

Arun Maira, former Planning Commission member, observed that “The idea to create an
institution where states’ leaders will be part and parcel of the collective thinking with the
Centre and the other stakeholders in formulating a vision for the development of the country
is right one as compared with previous structure, where a handful of people formulated the
vision and then presented it to the National Development Council (NDC). This was not
entirely absorbed and adopted by the latter”.

However, it is too early to comment on the efficacy of the new institution related to planned
development, something possible when it shifts gears and moves into operation seriously.
However, the present move to decentralize planning and allowing inputs from states to guide
it, appears to be a positive and effective steps.
Another positive side of these institutions is to establish a dynamic institutional mechanism
where eminent individuals outside the government system could contribute towards policy
making. Moreover, one of the major tasks of the NITI Aayog is to actively monitor and
evaluate implementation of programmes and initiatives which is something new under the
present setup.

Unit -2
Human Resources and Economic Development

Demographic features of Economic Population

By demographic features we mean the characteristics of population like, size, composition,

diversity, growth and quality of population etc.

To have basic understanding of the population problem of a specific country, one should
have a complete knowledge regarding the basic features of population of that country.

The following are features of India’s population:

1. Large Size and Fast Growth:

The first main feature of Indian population is its large size and rapid growth. According to
2001 census, the population of India is 102.87 crore. In terms of size, it is the second largest
population in the world, next only to China whose population was 127 crore in 2001. India’s
population was 23.6 crore in 1901 and it increased to 102.7 crore in 2001.

In addition to its size, the rate of growth of population has been alarming since 1951. At
present, India’s population is growing at a rate of 1.9 percent per annum; 21 million people
are added every year which is more than the population of Australia. This situation is called
population explosion and this is the result of high birth rate and declining death rate.
 2. Second Stage of Demographic Transition:

According to the theory of demographic transition, the population growth of a country passes
through three different stages as development proceeds. The first stage is characterised by
high birth rate and high death rate. So in this stage the net growth of population is zero. Till
1921, India was in the 1st stage of demographic transition.

The second stage is featured by high birth rate and declining death rate leading to the rapid
growth of population. India entered the second stage of demographic transition after 1921. In
1921-30 India entered the 2nd stage, the birth rate was 464 per thousand and death rate was
363 per thousand.

In 2000-01, birth rate was 25.8 and death rate declined to 85. This led to rapid growth of
population. India is now passing through the second stage of demographic transition. While
developed countries are in 3rd stage.

3. Rapidly Rising Density:

Another feature of India’s population is its rapidly rising density. Density of population
means to the average number of people living per square kilometer. The density of
population in India was 117 per square km. in 1951 which increased to 324 in 2001. This
makes India one of the most densely populated countries of the world. This adversely affects
the land-man ratio.

India occupies 2.4 per-cent of the total land area of the world but supports 16.7 per-cent of
the total world population. Moreover, there is no causal relationship between density of
population and economic development of a country. For example, Japan & England having
higher density can be rich and Afghanistan & Myanmar having lower density can be poor.
However in an underdeveloped country like India with its low capital and technology, the
rapidly rising density is too heavy a burden for the country to bear.

4. Sex Ratio Composition Unfavourable to Female:

Sex ratio refers to the number of females per thousand males. India’s position is quite
different than other countries. For example the number of female per thousand males was
1170 in Russia, 1060 in U.K., 1050 in U.S.A. whereas it is 927 in India according to 1991
census.

The sex ratio in India as 972 per thousand in 1901 which declined to 953 in 1921 and to 950
in 1931. Again, in 1951, sex ratio further declined to 946. In 1981, sex ratio reduced to 934
against 930 per thousand in 1971. During 1991, sex ratio was recorded 927 per thousand.
The sex ratio is 933 per thousand in 2001. State wise Kerala has more females than males.
There are 1040 females per thousand males. The lowest female ratio was recorded in Sikkim
being 832. Among the union territories Andaman and Nicobar Islands has the lowest sex
ratio i.e. 760. Therefore, we can conclude that sex ratio composition is totally unfavourable
to female.

5. Bottom heavy Age Structure:

The age composition of Indian population is bottom heavy. It implies that ratio of persons in
age group 0-14 is relatively high. According to 2001 census, children below 14 years were
35.6%. This figure is lower than the figures of previous year. High birth rate is mainly
responsible for large number of dependent children per adult. In developed countries the
population of 0-14 age group is between 20 to 25%. To reduce the percentage of this age
group, it is essential to slow down the birth rate.

6. Predominance of Rural Population:

Another feature of Indian population is the dominance of rural population. In 1951, rural
population was 82.7% and urban population was 17.3%. In 1991 rural population was 74.3%
and urban population was 257. In 2001, the rural population was 72.2% and urban population
was 27.8. The ratio of rural urban population of a country is an index of the level of
industrialisation of that country. So process of urbanisation slow and India continues to be
land of villages.

7. Low Quality Population:

The quality of population can be judged from life expectancy, the level of literacy and level
of training of people. Keeping these parameters in mind, quality of population in India is
low.

(a) Low Literacy Level:

Literacy Level in India is low. Literacy level in 1991 was 52.2% while male-female literacy
ratio was 64.1 and 39.3 percent. In 2001, the literacy rate improved to 65.4 percent out of
which made literacy was 75.8 and female literacy was 52.1 percent. There are 35 crore
people in our country who are still illiterate.

(b) Low level of Education and Training:

The level of education and training is very low in India. So quality of population is poor. The
number of persons enrolled for higher education as percentage of population in age group
20-25 was a percent in 1982. It is only one fourth of the developed countries. The number of
doctors and engineers per million of population are 13 and 16 respectively. It is quite less as
compared to advanced countries.

(c) Low Life Expectancy:

By life expectancy we mean the average number of years a person is expected to live. Life
expectancy in India was 33 years. It was increased to 59 in 1991 and in 2001, life expectancy
increased to 63.9. Decline in death rate, decline in infant mortality rate and general
improvement in medical facilities etc. have improved the life expectancy. However life
expectancy is lower in India as compared to life expectancy of the developed nations. Life
expectancy is 80 year in Japan and 78 years in Norway.

8. Low Work Participation Rate:

Low proportion of labour force in total population is a striking feature of India’s population.
In India, Labour force means that portion of population which belongs to the age group of
15-59. In other words, the ratio of working population to the total is referred to as work
participation rate.

This rate is very low in India in comparison to the developed countries of the world. Total
working population was 43% in 1961 which declined to 37.6% in 1991. This position
improved slightly to 39.2% in 2001. That means total non-working population was 623
million (60.8 percent) and working population was 402 million (39.2%). Similarly low rate
of female employment and bottom-heavy age structure are mainly responsible for low work
participation in India.

9. Symptoms of Over-population:

The concept of over-population is essentially a quantitative concept. When the population

size of the country exceeds the ideal size, we call it over-population. According to T.R.
Malthus, the father of demography, when the population of a country exceeds the means of
substance available, the country faces the problem of over-population.

No doubt, food production has increased substantially to 212 million tonnes but problems
like poverty, hunger, malnutrition are still acute. Agriculture is overcrowded in rural areas of
the country which is characterised by diminishing returns. This fact leads to the conclusion
that India has symptoms of over-population. Indian low per capita income, low standard of
living, wide spread unemployment and under-employment etc. indicate that our population
size has crossed the optimum limit.
 Size and Growth of Population and Economic Development

1. Population Growth and Rate of Saving and Investment:

Economic growth requires increasing supplies of capital goods. A higher rate of economic
growth can be achieved by accelerating the rate of capital formation. Increasing supplies of
capital goods become possible only with higher rate of investment and a higher role of
investment, of turn, is possible if the rate of savings is high.

Now, increase in population by adding to the number people whose requirements of “feeding
and clothing” have to be met which tends to raise consumption and, therefore, lowers both
saving and investment. Coale and Hoover, in their famous work explained that saving rate
was reduced by population growth because of increase in burden of dependency.

He argued that with high fertility rate among the younger persons and declining mortality
(death) rate among the old-age people, in the growing population the proportion of non-
working age groups which depend on the working or earning members of their families
increases.

Since all must consume, in the absence of increase to productivity, saving per person must
fall. Thus rapid growth of population by causing lower rate of savings and investment tends
to hold down the rate of capital formation and therefore the rate of economic growth in
developing countries like India. Under conditions like those in India population growth
therefore actually impedes economic development rather than facilitate it.

2. Investible Resources and Raising Per Capita Income:

While on the one land rapid growth in population reduces investible resources for
accelerating capital formation, it raises the requirements for investment to achieve a given
target increase in per capital income. Suppose population of a country A is increasing at 1
per cent per annum and that of a country B at 3 per cent per annum.

Given that capital-output ratio is 4: 1, then country A would have to invest 4 per cent of its
current income to maintain its per capita income, while country B would have to invest 12
per cent of its current income even to maintain its per capita output.

Thus, when the population is increasing at a rapid rate, comparatively larger investments are
needed to maintain the current level of income. Thus, given the scarcity of investible
resources adequate resource are not left to raise per capita income significantly.

3. Lowers Growth of Per Capita Income:

Like a thief in the night, population growth robs us of most of the gains in national income
made from higher investment. Rapid population growth nullifies our investment efforts to
raise the living standards of our people. In other words, a high rate of increase in population
swallows up a large part of the increase in national income so that per capita income or living
standards of the people do not rise much.

This is precisely what has happened during the planning era in India. Thus, while the
aggregate national income of India went up by 3.6% per annum in the First Plan period and
4.1% per annum in the Second Plan period, per capita income rose by only 1.8 per cent and 2
per cent per annum respectively.

Average annual growth in national income and per capita income in various Five Year Plan
Periods in given in Table 41.2. It will be seen from this table that the annual growth in per
capita income has been much less than the annual growth rate in that national income. It is
the population growing at 2 per cent per annum or more during the planning period that has
caused per capita income to rise much less than the increase achieved in national income.

However, since 1991 population growth rate has been less than 2 per cent, it was 1.93 per
cent between 1991 to 2001 and 1.6 per cent between 2001-2011, on the one hand and growth
rate of national income was much higher on the other (see Table 41.2).

Therefore, the growth rate of per capita income has been relatively higher. Per capita income
(at 2004-05 prices) grew at the rate of 4.6 per cent in the Eighth Plan period (1992-97), 3.5
per cent in the 9th plan period (1997-2002), 5.9 per cent in the 10th plan period and 6.3 per
cent in the 11th plan period. This higher per capita income growth rate since 1991 has tended
to raise the standard of living of the people higher than before.

That the population growth prevents the rapid rise in per capita Income and therefore rise in
living standards of the people can be expressed by the following growth formula

g = Iα – r
where g stands for the rate of growth of per capita income, I represents rate of investment, a
stands for output-capital ratio (or productivity of capital) and r represents rate of population
growth.

Since rate of growth in national income is given by the rate of investment multiplied by the
output-capital ratio, la will signify the rate of growth of national income. Now, it will be seen
that rate of population growth r appears as a negative factor and will therefore lower the rate
of growth of per capita income g. It therefore follows that if rate of growth of per capita
income g, and the rate of rise in living standards with a given rate of investment is to be
raised, the rate of growth of population should be lowered.

4. Population Growth and Marketed Surplus of Food-grains:

Another way in which growth in population is impeding economic development is its effect
on marketed surplus of food-grains. The marketed surplus of food-grains is a pre-requisite
for expansion in non-agricultural employment and output.

When a country grows and accelerates its pace of industrialization, it requires food-grains to
feed the workers who are employed in industries. If enough surpluses of food-grains are not
forthcoming this acts as an important constraint on the industrial development.

This prevents the living standards of the people to rise rapidly. Now, marketed surplus of
food-grains is the difference between the output of food-grains by the agricultural population
and their consumption of them. Thus,

Marketed surplus of food-grains = (0 – Cs).

Where 0 stands for output of food-grains, and C. for consumption of food-grains by the
fanners themselves. As about 65% of the population is engaged in agriculture, the most of
the increase in population also takes place there.

This increase in population in the agriculture raises the consumption of food-grains, i.e., C sin
the above equation and therefore reduces the marketable surplus, if output remains the same.
Even if output is rising, the extra consumption by the increase in population tends to lower
the growth in marketed surplus for food-grains.

We thus see that the growth in population has an adverse effect on the marketed surplus of
food-grains and these acts as a drag on the growth of output and employment in industries. In
India, in several years, increase in agricultural output has not been enough and further that
the rapid growth in population has tended to reduce the growth of marketable surplus. This
had an adverse effect on industrial development in India.
Rapid growth in population in an already over-populated country also raises the problem of
food security in the country. The cause of food problem in India is the rapid growth in
population since 1951. In order to overcome the shortage of food-grains and to prevent the
occurrence of famines in the country, India was forced to import food-grains and spend a
good amount of valuable foreign exchange on them. This worsened the balance of payments
problem of the country.

As a result sufficient amount of foreign exchange to import materials, machines and

equipment for our industries could not be made and this obstructed the growth of industrial
output. This also shows how rapid growth in population by causing food shortage inhibits the
rate of industrial development.

5. Population Growth and Unproductive Investment:

In his study of population growth and economic development in India Coale and Hoover
focussed on the adverse effect of population growth on the resources a variable for
productive investment. According to them, rapid population growth forces the country to
make non-productive investment, that is, to invest in duplicating certain social welfare
facilities such as the construction of parks, houses, social buildings, sanitation works.

To the extent the Government has to increase its expenses on duplicating these social welfare
facilities, investment resources for productive type of capital such as machines for industries,
irrigation and fertilisers for agriculture, crucial basic goods such as steal, coal, electricity
generation etc would be reduced. Thus, rapid population growth obstructs economic
development by reducing the growth of productive capital.

6. Population Growth and Unemployment:

Economic development requires that employment should increase adequately so that

unemployment should decrease. Explosive growth in population has caused serious
unemployment and under-employment problem in India. Due to explosive growth in
population in India labour force has been increasing rapidly since 1951.

In recent years labour force which was2estimated at 309 million in 1983, went up to 333
million in 1988, to 382 million in 1994 and to 406 million in 1999-2000. As a result of this
explosive increase in labour force demographic pressure on the economy has increased
resulting in increase in backlog of unemployment and under- unemployment at the beginning
of each successive Five Year Plan. In view of this much of our investment efforts are
directed at ‘absorbing the growing labour force in productive employment, our ability to
raise productivity of labour is severely constrained.

Since production processes in modem organised industrial sector is highly capital intensive,
much of the growing labour force cannot be employed there. As a result, demographic
pressure on land and agriculture increases resulting in the severe drop in the net sown area
per capita.

In agriculture, self-employment is predominant and the joint family system prevails under
which both household’s income and work are shared among the family members. Therefore,
in the absence of employment opportunities outside agriculture, much of the additional
labour force is forced to remain in agriculture and allied activities.

Agriculture performs the role of residual absorber. They share work in agriculture with other
family members no matter how low the productivity per person becomes. Thus, with the fall
in net sown area per person and increased Population pressure, disguised unemployment
emerges in agriculture.

Disguised unemployment means more workers seem to be employed in it but quite a large
number of additional workers do not add to agricultural output, that is, marginal productivity
of workers in agriculture is zero or nearly zero.

Since population growth reduces savings and investable resources, it is very difficult to
withdraw any significant number of workers from agriculture so as to equal, them with the
required capital to provide them productive employment outside agriculture. To a certain
extent lack of capital may be made up by harder work by workers in a country like India.

But such a method of adjustment is not easy to achieve in India. This is because in the
modern times man can produce little with bare hands. To provide them productive
employment workers need to be equipped with enough capital goods.

Even employment generation in agriculture apart from high yielding inputs such as
fertilisers, HYV seeds, and pesticides as requires irrigation works, an important capital
needed for extension of double cropping which is highly employment generating way in
agriculture. Due to lack of investible resources caused partly by population growth, it has not
been possible to extend irrigation facilities to the currently known irrigation potential.

It follows from above that labour force consequences of population growth are to a good
extent responsible for huge unemployment and underemployment prevailing in India.

7. Population Growth and Poverty:

Last but not the least the important consequence of rapid population growth is that it has
made very difficult to make a significant dent into the problem of mass poverty prevailing in’
the country. This is clear from the fact that as large as about 18 million people over and
above one billion populations estimated on March 1, 20.01 are being added to our population
every year as per 2001 census. This gives rise to a huge problem of properly feeding and
clothing them.

Further, as has been explained in detail in the above sections such large increase in
population and consequently huge increment in labour force lowers our capacity to make
productive investment and thereby to increase productivity of labour to ensure eradication of
poverty Prof. K. Sundaram rightly writes, “the size of increments to population is itself of
some consequence. Thus is because the resource requirements of feeding and clothing even
at the current low levels are such that the incremental population itself constraints the ability
of the economy to raise the living standards of the existing population.”

A vicious circle of poverty operates in this regard. Rapid population growth leads to lower
productivity which causes poverty, poverty causes high infant mortality rate which in turn
causes high population growth. There is no wonder then, even after over 50 years of planned
economic development, 317 million people lived below the poverty line in 1993-94. The
decline in number of poor people to 260 million in 1999-2000 is doubtful’ because of the
change methodology made in NSS of 1999-2000.

Persons are means as well as ends of economic development. They are an asset if in adequate
strength and prove to be a liability if excess in strength.

Population has crossed the optimum limit in India and has become a liability.

So problem of population explosion in India has proved to be a big hindrance in the success
of economic planning and development.

Following are the main effects of population explosion:

1. Problem of Investment Requirement:

Indian population is growing at a rate of 1.8 percent per annum. In order to achieve a given
rate of increase in per capita income, larger investment is needed. This adversely affects the
growth rate of the economy. In India, annual growth rate of population is 1.8 percent and
capital output ratio is 4:1. It means that in order to stabilize the existing economic growth
rate (4 X 1.8) = 7.2 percent of national income must be invested.

2. Problem of Capital Formation:

Composition of population in India hampers the increase in capital formation. High birth rate
and low expectancy of life means large number of dependents in the total population. In
India 35 percent of population is composed of persons less than 14 years of age. Most of
these people depend on others for subsistence. They are unproductive consumers. The burden
of dependents reduces the capacity of the people to save. So the rate of capital formation
falls.

3. Effect on per Capita Income:

Large size of population in India and its rapid rate of growth results into low per capita
availability of capital. From 1950-51 to 1980-81. India’s national income grew at an average
annual rate of 3.6 percent per annum. But per capita income had risen around one percent. It
is due the fact that population growth has increased by 2.5 percent.

4. Effect on Food Problem:

Rapid rate of growth of population has been the root cause of food problem.

Shortage of food grains hampers economic development in two ways:

(a) People do not get sufficient quantity of food due low availability of food which affects
their health and productivity. Low productivity causes low per capita income and thus
poverty.

(b) Shortage of food-grains obliges the under-developed countries to import food grains from
abroad. So a large part of foreign exchange is spent on it. So development work suffers. So
rise in population causes food problem.

5. Problem of Unemployment:

Large size of population results in large army of labour force. But due to shortage of capital
resources it becomes difficult to provide gainful employment to the entire working
population. Disguised unemployment in rural areas and open unemployment in urban areas
are the normal features of an under developed country like India.

6. Low Standard of Living:

Rapid growth of population accounts for low standard of living in India. Even the bare
necessities of life are not available adequately. According to Dr. Chander Shekhar population
in India increases by about 1.60 crore. It requires 121 lakh tonnes of food grains, 1.9 lakh
metres of cloth and 2.6 lakh houses and 52 lakh additional jobs.

7. Poverty:

Rising population increases poverty in India. People have to spend a large portion of their
resources for bringing up of their wards. It results into less saving and low rate of capital
formation. Hence improvement in production technique becomes impossible. It means low
productivity of labour.

8. Burden of Unproductive Consumers:

In India, a large number of children are dependent. Old persons above the age of 60 and
many more in the age group of 15-59 do not find employment. In 2001, working population
was 39.2 percent while 60.8 percent are unproductive workers. This high degree of
dependency is due to high rate of dependent children. This dependency adversely affects
effective saving.

9. Population and Social Problems:

Population explosion gives rise to a number of social problems. It leads to migration of

people from rural areas to the urban areas causing the growth of slum areas. People live in
most unhygienic and insanitary conditions.

Unemployment and poverty lead to frustration and anger among the educated youth. This
leads to robbery, beggary, prostitution and murder etc. The terrorist activities that we find
today in various parts of the country are the reflection of frustration among educated
unemployed youth. Overcrowding, traffic congestions, frequent accidents and pollution in
big cities are the direct result of over-population.

10. More Pressure on Land:

Rising rate of population growth exerts pressure on land. On the one hand, per capita
availability of land goes on diminishing and on the other, the problem of sub-division and
fragmentation of holdings goes on increasing. It adversely affects the economic development
of the country.

11. Impact on Maternity Welfare:

In India, population explosion is the result of high birth rate. High birth rate reduces health
and welfare of women. Frequent pregnancy without having a gap is hazardous to the health
of the mother and the child. This leads to high death rate among women in the reproductive
age due to early marriage. Hence to improve the welfare and status of women in our society,
we have to reduce the birth rate.

12. Pressure on Environment:

Population explosion leads to environmental degradation. Higher birth rate brings more
pollution, more toxic wastes and damage to biosphere. Briefly speaking, population
explosion hinders the economic development. It should be controlled effectively.
 Problem of Economic Development
On one hand, India is receiving accolades for a sustained growth rate and on the other, it is
still a low-income developing economy. Even today, nearly 25 percent of India’s population
lives below the poverty line. Also, there are many human and natural resources which are
under-utilized. In this article, we will explore the economic issues in India.

The Economic Issues in India

Being a low purchasing power country and one of the fastest growing economies in the
world, there are some unique economic issues in India as explained below:

Low per capita income

Usually, developing economies have a low per-capita income. The per capita income in India
in 2014 was $1,560. In the same year, the per-capita Gross National Income (GNI) of USA
was 35 times that of India and that of China was 5 times higher than India.

Further, apart from the low per-capita income, India also has a problem of unequal
distribution of income. This makes the problem of poverty a critical one and a big obstacle in
the economic progress of the country. Therefore, low per-capita income is one of the primary
economic issues in India.

Huge dependence of population on agriculture

Another aspect that reflects the backwardness of the Indian economy is the distribution of
occupations in the country. The Indian agriculture sector has managed to live up to the
demands of the fast-increasing population of the country.

According to the World Bank, in 2014, nearly 47 percent of the working population in India
was engaged in agriculture. Unfortunately, it contributed merely 17 percent to the national
income implying a low productivity per person in the sector. The expansion of industries
failed to attract enough manpower either.

Heavy population pressure

Another factor which contributes to the economic issues in India is population. Today, India
is the second most-populated country in the world, the first being China.

We have a high-level of birth rates and a falling level of death rates. In order to maintain a
growing population, the administration needs to take care of the basic requirements of food,
clothing, shelter, medicine, schooling, etc. Hence, there is an increased economic burden on
the country.

The existence of chronic unemployment and under-employment

The huge unemployed working population is another aspect which contributes to the
economic issues in India. There is an abundance of labor in our country which makes it
difficult to provide gainful employment to the entire population.

Also, the deficiency of capital has led to the inadequate growth of the secondary and tertiary
occupations. This has further contributed to chronic unemployment and under-employment
in India.

With nearly half of the working population engaged in agriculture, the marginal product of
an agricultural laborer has become negligible. The problem of the increasing number of
educated-unemployed has added to the woes of the country too.

Slow improvement in Rate of Capital Formation

India always had a deficiency of capital. However, in recent years, India has experienced a
slow but steady improvement in capital formation. We experienced a population growth of
1.6 percent during 2000-05 and needed to invest around 6.4 percent to offset the additional
burden due to the increased population.

Therefore, India requires a gross capital formation of around 14 percent to offset depreciation
and maintain the same level of living. The only way to improve the standard of living is to
increase the rate of gross capital formation.

Inequality in wealth distribution

According to Oxfam’s ‘An economy for the 99 percent’ report, 2017, the gap between the
rich and the poor in the world is huge. In the world, eight men own the same wealth as the
3.6 billion people who form the poorest half of humanity.

In India, merely 1 percent of the population has 58 percent of the total Indian wealth. Also,
57 billionaires have the same amount of wealth as the bottom 70 percent of India. Inequal
distribution of wealth is certainly one of the major economic issues in India.

Poor Quality of Human Capital

In the broader sense of the term, capital formation includes the use of any resource that
enhances the capacity of production.
Therefore, the knowledge and training of the population is a form of capital. Hence, the
expenditure on education, skill-training, research, and improvement in health are a part of
human capital.

To give you a perspective, the United Nations Development Program (UNDP), ranks
countries based on the Human Development Index (HDI). This is based on the life
expectancy, education, and per-capita income. In this index, India ranked 130 out of 188
countries in 2014.

Low level of technology

New technologies are being developed every day. However, they are expensive and require
people with a considerable amount of skill to apply them in production.

Any new technology requires capital and trained and skilled personnel. Therefore, the
deficiency of human capital and the absence of skilled labor are major hurdles in spreading
technology in the economy.

Another aspect that adds to the economic issues in India is that poor farmers cannot even buy
essential things like improved seeds, fertilizers, and machines like tractors, investors, etc.
Further, most enterprises in India are micro or small. Hence, they cannot afford modern and
more productive technologies.

Lack of access to basic amenities

In 2011, according to the Census of India, nearly 7 percent of India’s population lives in
rural and slum areas. Also, only 46.6 percent of households in India have access to drinking
water within their premises. Also, only 46.9 percent of households have toilet facilities
within the household premises.

This leads to the low efficiency of Indian workers. Also, dedicated and skilled healthcare
personnel are required for the efficient and effective delivery of health services. However,
ensuring that such professionals are available in a country like India is a huge challenge.

Demographic characteristics

According to the 2011 Census, India had a population density of 382 per square kilometer as
against the world population density of 41 per square kilometer.

Further, 29.5 percent was in the age group of 0-14 years, 62.5 percent in the working age
group of 15-59 years, and around 8 percent in the age group of 60 years and above. This
proves that the dependency burden of our population is very high.
Under-utilisation of natural resources

India is rich in natural resources like land, water, minerals, and power resources. However,
due to problems like inaccessible regions, primitive technologies, and a shortage of capital,
these resources are largely under-utilized. This contributes to the economic issues in India.

Lack of infrastructure

The lack of infrastructural facilities is a serious problem affecting the Indian economy. These
include transportation, communication, electricity generation, and distribution, banking and
credit facilities, health and educational institutions, etc. Therefore, the potential of different
regions of the country remains under-utilized.

Human Development Index

Although it is not possible to have a flawless quantitative measure of human development,
the United Nations Development Programme (UNDP) has developed a composite index,
now known as the Human Development Index (HDI).

It includes (i) longevity of life, (ii) knowledge base, and (iii) a decent material standard of
living. To keep the index simple, only a limited number of variables are included. Initially,
life expectancy was chosen as an index of longevity, adult literacy as an index of knowledge
and per capita Gross National Product adjusted for Purchasing Power Parity (PPP) as an
index of decent life. These variables are expressed in different units. Therefore, a
methodology was evolved to construct a composite index rather than several indices.

In India, three sets of indicators have been selected for preparing the Human Development
Report. Among them, a core set of composite indices presents the state of human
development for the society as a whole. Besides, Gender Equality Index has been estimated
to reflect the relative attainments of women, and the Human Poverty Index to evaluate the
state of deprivation in the society.

Several other variables have gradually been added to the above sets of indicators. Among
them, health indicators related to longevity are birth rate, death rate with special reference to
infant mortality, nutrition, and life expectancy at birth.

Social indicators include literacy particularly female literacy, enrolment of school-going

children, drop out ratio, and pupil-teacher ratio. Economic indicators are related to wages,
income, and employment. Per Capita Gross Domestic Product, incidences of poverty and
employment opportunity is also favoured indicators in this group. They are converted into a
composite index to present the holistic picture of the Human Development.
Computing the HDI:

To construct the Index, fixed minimum and maximum values have been established for each
of the indicators:

1. Life expectancy at birth: 25 years and 85 years;

2. General literacy rate: 0 per cent and 100 per cent;
3. Real GDP per capita (PPP$); PPP$ 100 and PPP$ 40,000.

Individual Indices are computed first on the basis of a given formula. HDI is a simple
average of these three indices and is derived by dividing the sum of these three indices by 3.

With normalization of the values of the variables that make up the HDI, its value ranges from
0 to 1. The HDI value for a country or a region shows the distance that it has to travel to
reach the maximum possible value of 1 and also allows inter-country comparisons.

HDI of India:

As compared to the pre-independence days India has done well in development in general.
As per Human Development Reports (HDRs) published annually by the UNDP, India has
consistently improved on human development front and is grouped among the countries with
‘medium human development’.

According to Human Development Report 2005, India ranked 127 (same rank as in the
previous two years) out of 177 countries (Table 15.1). Even though India did not improve her
rank, the report applauds its state policies for promoting political, social and religious
aspects.

Among South Asian countries, India ranks third after Maldives (84) and Sri Lanka (93).
Pakistan Nepal and Bangladesh are worse than India. Their ranks are 135,136 and 139
respectively (Table 15.1). Globally, Norway, Iceland and Australia are the top three
performers when it comes to giving their citizens good quality of life. Burkima Faso and
Sierra Leone Niger have worst human development indices.

In spite of all these developments, India still lags behind developed and evens the developing
countries so far as human development is concerned. Not only developed countries but some
of the developing countries such as Sri Lanka and Indonesia are much better than India with
respect to HDI. India’s gender development index (GDI) is also lower than that of Sri Lanka,
China and Indonesia.

Some of the principal indicators used for calculating Human Development Index (HDI) are
briefly discussed below:
Health Indicators:

Health in a major component of human development. It is measured in terms of birth rate,

death rate (with special reference to infant mortality rate), nutrition, and life expectancy at
birth.

Crude death rate is defined as the number of deaths per thousand populations in a particular
year. It declined rapidly from 25.1 per thousand in 1951 to 12.5 per thousand in 1981 and to
8.1 per thousand in 2002. Decline in infant mortality rate (number of deaths of children
under one year of age per thousand live births) was less than half in 2002 of what it was in
1951. Child (0-4 years) mortality rate declined from 57.3 per thousand in 1972 to 19.3 in
2001. It means risk of death has declined at each stage of life. Certainly it is a definite
improvement in health.

The Crude birth rate (defined as the number of births per thousand populations in a particular
year) has also declined from 40.8 per thousand in 1951 to 33.9 per thousand in 1981 and 25
per thousand in 2002. But the decline in birth rate has been much slower than that of the
death rate.

For example, death rate declined by 17 points between 1951 and 2002 while birth rate
declined by 14.2 points only during the same period. It is worth mentioning that birth rate
has always been higher than the death rate which results in rapid increase in population.
Similarly, total fertility rate (number of children born to a woman during child-bearing age)
also reduced from 6 children in 1951 to 3.1 children in 2001.

Life Expectancy:

Life expectancy has gone up with the decline in vital rates such as birth, death and fertility
rates. In the year 1951, it was only 37.2 years for males and 36.2 years for females. The
corresponding figures increased to 63.9 and 66.9 years respectively in 2001 – 06. The
increase in life expectancy has been more conspicuous in females than in males. It was lower
than males in 1951 which became higher in 1981 and still continues to be higher.

Although considerable progress has been made in socio-demographic parameters over the
last two decades, the country continues to lag behind several other countries in the region .
The Tenth Five Year Plan targeted a reduction in Infant Mortality Rate (IMR) to 45 per 1000
by 2007 and 28 per 1,000 by 2012; reduction in Maternal Mortality Rate (MMR) to 2 per
1000 live births by 2007 and 1 per 1000 live birth by 2012 and reduction of decadal growth
rate of population between 2001- 2011 to 16.2 per cent.

The National Population Policy, 2000 aims at achieving net replacement levels of total
fertility rate by 2010 through vigorous implementation of inter-sectoral operational
strategies. The long term objective is to achieve population stabilization by 2025.
 New Economic Policy: Privatization, Liberalization, Globalization
LPG stands for Liberalization, Privatization, and Globalization. India under its New
Economic Policy approached International Banks for development of the country. These
agencies asked Indian Government to open its restrictions on trade done by the private sector
and between India and other countries.

Indian Government agreed to the conditions of lending agencies and announced New
Economic Policy (NEP) which consisted wide range of reforms. Broadly we can classify the
measures in two groups:

1. Structural Reforms

With long-term perspective and eyeing for improvement of the economy and enhancing the
international competitiveness, reforms were made to remove rigidity in various segments of
Indian economy.

2. Stabilization Measures (LPG)

These measures were undertaken to correct the inherent weakness that has developed in
Balance of Payments and control the inflation. These measures were short-term in nature.
Various Long-Term Structural Reforms were categorized as:

 Liberalization
 Privatization and
 Globalization

Collectively they are known by their acronym LPG. The balance of Payment is the system of
recording the economic transactions of a country with the rest of the world over a period of
one year. When the general prices of goods and services are increasing in an economy over a
period of time, the same situation is called Inflation. Let’s understand each terminology in
detail

Liberalization

The basic aim of liberalization was to put an end to those restrictions which became
hindrances in the development and growth of the nation. The loosening of government
control in a country and when private sector companies’ start working without or with fewer
restrictions and government allow private players to expand for the growth of the country
depicts liberalization in a country.

Objectives of Liberalization Policy

  To increase competition amongst domestic industries.
 To encourage foreign trade with other countries with regulated imports and
exports.
 Enhancement of foreign capital and technology.
 To expand global market frontiers of the country.
 To diminish the debt burden of the country.

Privatization

This is the second of the three policies of LPG. It is the increment of the dominating role of
private sector companies and the reduced role of public sector companies. In other words, it
is the reduction of ownership of the management of a government-owned enterprise.
Government companies can be converted into private companies in two ways:

 By disinvestment
 By withdrawal of governmental ownership and management of public sector
companies.

Forms of Privatization

 Denationalization or Strategic Sale: When 100% government ownership

of productive assets is transferred to the private sector players, the act is
called denationalization.
 Partial Privatization or Partial Sale: When private sector owns more than
50% but less than 100% ownership in a previously construed public sector
company by transfer of shares, it is called partial privatization. Here the
private sector owns the majority of shares. Consequently, the private sector
possesses substantial control in the functioning and autonomy of the
company.
 Deficit Privatization or Token Privatization:When the government
disinvests its share capital to an extent of 5-10% to meet the deficit in the
budget is termed as deficit privatization.

Objectives of Privatization

 Improve the financial situation of the government.

 Reduce the workload of public sector companies.
 Raise funds from disinvestment.
 Increase the efficiency of government organizations.
 Provide better and improved goods and services to the consumer.
 Create healthy competition in the society.
  Encouraging foreign direct investments (FDI) in India.

Globalization

It means to integrate the economy of one country with the global economy. During
Globalization the main focus is on foreign trade & private and institutional foreign
investment. It is the last policy of LPG to be implemented.

Globalization as a term has a very complex phenomenon. The main aim is to transform the
world towards independence and integration of the world as a whole by setting various
strategic policies. Globalization is attempting to create a borderless world, wherein the need
of one country can be driven from across the globe and turning into one large economy.

Outsourcing as an Outcome of Globalization

The most important outcome of the globalization process is Outsourcing. During the
outsourcing model, a company of a country hires a professional from some other country to
get their work done, which was earlier conducted by their internal resource of their own
country.

The best part of outsourcing is that the work can be done at a lower rate and from the
superior source available anywhere in the world. Services like legal advice, marketing,
technical support, etc. As Information Technology has grown in the past few years, the
outsourcing of contractual work from one country to another has grown tremendously. As a
mode of communication has widened their reach, all economic activities have expanded
globally.

Various Business Process Outsourcing companies or call centres, which have their model of
a voice-based business process have developed in India. Activities like accounting and book-
keeping services, clinical advice, banking services or even education are been outsourced
from developed countries to India.

The most important advantage of outsourcing is that big multi-national corporate or even
small enterprises can avail good services at a cheaper rate as compared to their country’s
standards. The skill set in India is considered most dynamic and effective across the world.
Indian professionals are best at their work. The low wage rate and specialized personnel with
high skills have made India the most favourable destination for global outsourcing in the
later stage of reformation.

Unemployment Problem in India

The following are the main causes of unemployment:
(i) Caste System:
In India caste system is prevalent. The work is prohibited for specific castes in some areas.

In many cases, the work is not given to the deserving candidates but given to the person
belonging to a particular community. So this gives rise to unemployment.

(ii) Slow Economic Growth:

Indian economy is underdeveloped and role of economic growth is very slow. This slow
growth fails to provide enough unemployment opportunities to the increasing population.

(iii) Increase in Population:

Constant increase in population has been a big problem in India. It is one of the main causes
of unemployment. The rate of unemployment is 11.1% in 10th Plan.

(iv) Agriculture is a Seasonal Occupation:

Agriculture is underdeveloped in India. It provides seasonal employment. Large part of
population is dependent on agriculture. But agriculture being seasonal provides work for a
few months. So this gives rise to unemployment.

(v) Joint Family System:

In big families having big business, many such persons will be available who do not do any
work and depend on the joint income of the family.

Many of them seem to be working but they do not add anything to production. So they
encourage disguised unemployment.

(vi) Fall of Cottage and Small industries:

The industrial development had adverse effect on cottage and small industries. The
production of cottage industries began to fall and many artisans became unemployed.

(vii) Slow Growth of Industrialisation:

The rate of industrial growth is slow. Though emphasis is laid on industrialisation yet the
avenues of employment created by industrialisation are very few.

(viii) Less Savings and Investment:

There is inadequate capital in India. Above all, this capital has been judiciously invested.
Investment depends on savings. Savings are inadequate. Due to shortage of savings and
investment, opportunities of employment have not been created.
(ix) Causes of Under Employment:
Inadequate availability of means of production is the main cause of under employment.
People do not get employment for the whole year due to shortage of electricity, coal and raw
materials.

(x) Defective Planning:

Defective planning is the one of the cause of unemployment. There is wide gap between
supply and demand for labour. No Plan had formulated any long term scheme for removal of
unemployment.

(xi) Expansion of Universities:

The number of universities has increased manifold. There are 385 universities. As a result of
this educated unemployment or white collar unemployment has increased.

(xii) Inadequate Irrigation Facilities:

Even after the completion of 9th five plans, 39% of total cultivable area could get irrigation
facilities.

Due to lack of irrigation, large area of land can grow only one crop in a year. Farmers remain
unemployed for most time of the year.

(xiii) Immobility of labour:
Mobility of labour in India is low. Due to attachment to the family, people do not go to far
off areas for jobs. Factors like language, religion, and climate are also responsible for low
mobility. Immobility of labour adds to unemployment.

Problem of Poverty
(i) Heavy pressure of population:

Population has been rising in India at a rapid speed. This rise is mainly due to fall in death
rate and more birth rate.

India’s population was 84.63 crores in 1991 and became 102.87 crores in 2001. This pressure
of population proves hindrance in the way of economic development.

(ii) Unemployment and under employment:

Due to continuous rise in population, there is chronic unemployment and under employment
in India. There is educated unemployment and disguised unemployment. Poverty is just the
reflection of unemployment.
(iii) Capital Deficiency:

Capital is needed for setting up industry, transport and other projects. Shortage of capital
creates hurdles in development.

(iv) Under-developed economy:

The Indian economy is under developed due to low rate of growth. It is the main cause of
poverty.

(v) Increase in Price:

The steep rise in prices has affected the poor badly. They have become more poor.

(vi) Net National Income:

The net national income is quite low as compared to size of population. Low per capita
income proves its poverty. The per capita income in 2003-04 was Rs. 20989 which proves
India is one of the poorest nations.

(vii) Rural Economy:

Indian economy is rural economy. Indian agriculture is backward. It has great pressure of
population. Income in agriculture is low and disguised unemployment is more in agriculture.

(viii) Lack of Skilled Labour:

In India, unskilled labour is in abundant supply but skilled labour is less due to insufficient
industrial education and training.

(ix) Deficiency of efficient Entrepreneurs:

For industrial development, able and efficient entrepreneurs are needed. In India, there is
shortage of efficient entrepreneurs. Less industrial development is a major cause of poverty.

(x) Lack of proper Industrialisation:

Industrially, India is a backward state. 3% of total working population is engaged in industry.

So industrial backwardness is major cause of poverty.

(xi) Low rate of growth:

The growth rate of the economy has been 3.7% and growth rate of population has been 1.8%.
So compared to population, per capita growth rate of economy has been very low. It is the
main cause of poverty.

(xii) Outdated Social institutions:

The social structure of our country is full of outdated traditions and customs like caste
system, laws of inheritance and succession. These hamper the growth of economy.

(xiii) Improper use of Natural Resources:

India has large natural resources like iron, coal, manganese, mica etc. It has perennial
flowing rivers that can generate hydro electricity. Man power is abundant. But these sources
are not put in proper use.

(xiv) Lack of Infrastructure:

The means of transport and communication have not been properly developed. The road
transport is inadequate and railway is quite less. Due to lack of proper development of road
and rail transport, agricultural marketing is defective. Industries do not get power supply and
raw materials in time and finished goods are not properly marketed.

Suggestions for Removal of Poverty from India

(i) Population Control:

Population in India has been increasing rapidly. Growth rate of population is 1.8%. For
removal of poverty the growth rate of population should be lowered.

(ii) Increase in Employment:

Special measures should be taken to solve the problems of unemployment and disguised
unemployment. Agriculture should be developed. Small scale and cottage industries should
be developed in rural areas to generate employment.

(iii) Equal distribution of Income:

Mere increase in production and control on population growth will not remove poverty in
India. It is necessary that inequality in the distribution of income should be reduced.

(iv) Regional poverty:
In States like Orissa, Nagaland, U.P and Bihar etc. the percentage of the poor to the total
population is high. Govt. should give special concession for investment in these regions.
More PSU’s should be established in these states.

(v) Problem of Distribution:

The public distribution system (PDS) should be strengthened to remove poverty. Poor
section should get food grains at subsidized rates and in ample quantity.

(vi) Fulfillment of minimum needs of the Poor:

Govt. should take suitable steps to meet minimum needs of the poor e.g., supply of drinking
water and provision of primary health centres and primary education.

(vii) Increase in the productivity of the Poor:

To remove poverty, it is necessary to increase productivity of the poor. The poor should be
given more employment. More investment should be made in pubic and private sectors to
generate employment.

(viii) Changes in techniques of Production:

India should adopt labour intensive techniques of production. We should have technical
development in our economy in such a way that labour resources could be fully employed.

(ix) Stability in Price Level:

Stability in prices helps to remove poverty. If prices continue to rise, the poor will become
more poor. So Govt. should do it best to keep the prices under control.

(x) Development of Agriculture:

The agriculture should be developed to remove poverty. Rapid rate of growth of agriculture
production will help to remove urban as well as rural poverty. Agriculture should be
mechanized and modernized. Marginal farmers should be given financial assistance.

(xi) Increase in the rate of growth:

Slow rate of growth is the main cause of poverty. So growth rate must be accelerated. In
2003-04 the growth rate has been 6.5% despite that 26% of population remains below
poverty line.
 UNIT 3
Industrialization
Growth and Problems of Major Industries: Iron and Steel
Progress of Iron and Steel Industry in India
We live essentially in an age of iron and steel. “Because of its hardness, strength and
durability, because of the ease with which it can be cast and worked into any desired shape
and because of its remarkable cheapness under modem methods of production, iron is the
most important and widely used metal in the service of man”.

Iron and steel were the harbinger of industrial revolution in late 18th and early 19th century.
Today this industry has proved to be the harbinger of globalisation. It is one of the very few
industries that have assumed a global character with developments in one region affecting
the industry almost everywhere else; and India is no exception.

The proud machine civilization of modem age would not have existed without iron. The
sturdy structure of modem industrial world i made of steel. Iron and steel is the basic or key
industry and lays the foundation of a vibrant industrial economy.

Most of the subsidiary industries such as automobiles, locomotives, rail tracks, shipbuilding,
machine building, bridges, dams and a host of other industrial and commercial activities
depend upon iron and steel industry. No wonder, per capita consumption of iron and steel is
one of the most significant measures of the level of industrialisation and economic growth of
a country.

Although Indians are known for their technique of smelting iron since early time, the first
iron an steel unit on modem lines was established in 1830 at Porto Nova in Tamil Nadu.
However it could not succeed and was closed down in 1866. The other efforts made during
the second half of the 19th century also met with the same fate.

The real beginning of modem iron and steel industry was made in 1907 only when Tata Iron
and Steel Company (TISCO) were set up at Jamshedpur (Sakchi at that time). The Indian
Iron and Steel Company (IISCO) were set up in 1919 at Bumpur followed by the setting up
of Mysore Steel Works at Bhadravati (now Visveswaraya Iron and Steel Works) in 1923.

Iron and steel Industry witnessed rapid growth after Independence. India produced 16.9 lakh
tonnes of pig iron in. 1950-51. The development of iron and steel industry was envisaged
during the first Five-Year Plan, but it was during the Second Five-Year Plan that the three
integrated steel projects were started at Bhilai, Rourkela and Durgapur.
India is now the eighth largest producer of steel in the world. Recent developments have
amply demonstrated the mettle of Indian steel industry to rise even further and become a
major player in the world. However steel is known to be an industry witnessing periodic
business cycles of upswings an downswings.

Steel Authority of India (SAIL) Established in 1973, SAIL is a government undertaking and
is responsible for the management of steel plants at Bhilai, Durgapur, Rourkela, Bokaro and
Bumpur and also the Alloy Steel Plant at Durgapur and Salem Steel Plant. The management
of Indian Iron and Steel was taken over by Government on 14th July, 1976. SAIL also took
over Maharashtra Elektrosmelt Limited, a mini steel plant, in January 1986. Visweswaraya
Iron and Steel Limited were also taken over by SAIL in August 1989.

Locational Factors:

Iron and steel industry uses large quantities of heavy and weight losing raw materials and its
localisation is primarily controlled by the availability of raw materials. Coal and iron ore are
the two basic raw materials used by iron and steel industry and on the basis of minimum
transportation cost most of the steel plants are located at three distinct places viz. (i) near
coal fields, (ii) near iron ore mining centres and (iii) at places between areas of coal and iron
ore production.

Most of the iron and steel plants of India such as Jamshedpur, Bumpur, Durgapur, Rourkela,
Bhilai and Bokaro are located in Jharkhand, West Bengal, Orissa and Chhattisgarh. These
states are very rich in coal and iron ore deposits and are important producers of these
materials.

Visveswaraya Iron and Steel Works at Bhadravati is a major exception which is located far
away from the main coal producing areas of the country. Earlier, this centre was depending
upon charcoal which was available locally. Now it uses hydroelectricity from the Sharavati
Power Project.

The other raw materials used in this industry are manganese, limestone, dolomite, chromite,
silica, etc. These raw materials are used in small quantities and can be transported without
much difficulty. Hence, they do not materially affect the localisation of this industry.

Another important factor influencing the localisation of iron and steel industry is the
availability of market. Steel products of an integrated steel plant are quite bulky and it has
been estimated that the transport cost per tonne-kilometre of steel product is about three
times more than that of coal or iron ore.

Thus, following the theory of minimum transportation cost many centres of iron and steel
production tend to be attracted by market. Moreover, recent technological developments in
transport, the use of scrap as raw material and the agglomeration economics have made
market oriented location more advantageous than ever before. With the increasing popularity
of open hearth process, scrap has become a very important raw material in this industry.

About half of the metal now melted ‘in world’s iron and steel furnaces is scrap.
Industrialized areas, specially with steel consuming industries, are the major sources of scrap
iron. Thus, the market has double attraction, as the consumer of steel and as a source of raw
materials. However, the use of scrap as raw material on a large scale is yet to pick up in
India.

From the above discussion, it is clear that in the present day localization of iron and steel
industry, each of the three factors viz., coal, iron ore and market has almost equal
significance. The geographical coincidence of any two of the three factors would easily
determine the site of the steel plant.

In another situation, when some ingredients are to be imported or finished steel is to be

exported, sea port locations are preferred. This is exemplified by the establishment of the
Vishakhapatnam Steel Plant at a sea port. A few more plants in the offing such as Mangalore
and Ratnagiri also favour seaboard location.

Centres of Production:

At present there are 10 primary integrated plants and a large number of decentralised
scondary units known as mini steel plants. Besides, there are several rolling and re-rolling
mills and foundries which manufacture different items of steel using pig iron and ingot steel.
There are about 10,000 foundries, 95 per cent of which are concentrated in the western states
of Maharashtra and Gujarat and in the southern state of Tamil Nadu.

Some of the major problems faced by Indian iron and steel industry are as follows:

1. Capital:

Iron and steel industry requires large capital investment which a developing country like
India cannot afford.

Many of the public sector integrated steel plants have been established with the help of
foreign aid.

2. Lack of Technology:

Throughout the 1960s and upto the oil crisis in mid-1970s, Indian steel industry was
characterised by a high degree of technological efficiency. This technology was mainly from
abroad. But during the following two decades after the oil crisis, steep hike in energy costs
and escalation of costs of other inputs, reduced the margin of profit of the steel plants.

This resulted in lower levels of investment in technological developments. Consequently, the

industry lost its technology edge and is now way behind the advanced countries in this
regard. Material value productivity in India is still very low.

In Japan and Korea, less than 1.1 tonnes (and in several developed countries 1.05 tonnes) of
crude steel is required to produce a tonne of saleable steel. In India, the average is still high
at 1.2 tonnes. Improvement in the yield at each stage of production, particularly for value
added products will be more important in the coming years.

3. Low Productivity:

The per capita labour productivity in India is at 90-100 tonnes which is one of the lowest in
the world. The labour productivity in Japan, Korea and some other major steel producing
countries is about 600-700 tonnes per man per year.

At Gallatin Steel a mini mill in the U.S. there are less than 300 employees to produce 1.2
million tonnes of hot rolled coils. A comparable facility in India employs 5,000 workers.
Therefore, there is an urgent need to increase the productivity which requires retraining and
redevelopment of the labour force.

4. Inefficiency of public sector units:

Most of the public sector units are plagued by inefficiency caused by heavy investment on
social overheads, poor labour relations, inefficient management, underutilisation of capacity,
etc. This hinders proper functioning of the steel plants and results in heavy losses.

5. Low potential utilisation:

The potential utilisation in iron and steel is very low. Rarely the potential utilisation exceeds
80 per cent. For example, Durgapur steel plant utilises only 50 per cent of its potential. This
is caused by several factors, like strikes, lockouts, scarcity of raw materials, energy crisis,
inefficient administration, etc.

6. Heavy demand:
Even at low per capita consumption rate, demand for iron and steel is
increasing with each passing day and large quantities of iron and steel are to be imported for
meeting the demands. Production has to be increased to save precious foreign exchange.

7. Shortage of metallurgical coal:

Although India has huge deposits of high grade iron ore, her coal reserves, especially high
grade cooking coal for smelting iron are limited. Many steel plants are forced to import
metallurgical coal. For example, steel plant at Vishakhapatnam has to import coal from
Australia. Serious thought is now being given to replace imported coal by natural gas from
Krishna-Godavari basin.

8. Inferior quality of products:

Lack of modern technological and capital inputs and weak infrastructural facilities leads to a
process of steel making which is more time consuming, expensive and yields inferior variety
of goods. Such a situation forces us to import better quality steel from abroad. Thus there is
urgent need to improve the situation and take the country out of desperate position.

Growth and Problems of Major Industries: Cotton Textiles

Growth and Development:

India held world monopoly in the manufacturing of cotton textiles for about 3,000 years from
about B.C. 1500 to A.D. 1500. In the middle ages, Indian cotton textile products were in
great demand in the Eastern and European markets.

The muslins of Dhaka, chintzes of Masulipatnam, calicos of Calicut, baftas of Cambay and
gold-wrought cotton piece goods of Burhanpur, Surat and Vadodara acquired a worldwide
celebrity by virtue of their quality and design.

This industry could not survive in the face of strong competition from the modern mill
industry of Britain which provided cheap and better goods as a result of Industrial
Revolution in that country. Moreover, the British textile industry enjoyed political advantage
at that time.

The first modem cotton textile mill was set up in 1818 at Fort Glaster near Kolkata. But this
mill could not survive and had to be closed down. The firat successful modem cotton textile
mill was established in Mumbai in 1854 by a local Parsi entrepreneur C.N. Dewar. Shahpur
mill in 1861 and Calico mill in 1863 at Ahmedabad were other landmarks in the
development of Indian cotton textile industry.

The real expansion of cotton textile industry took place in 1870’s. By 1875-76 the number of
mills rose to 47 of which over 60 per cent were located in Mumbai city alone. The industry
continued to progress till the outbreak of the First World War in 1914. The total number of
mills reached 271 providing employment to about 2.6 lakh persons.

The First World War, the Swadeshi Movement and the grant of fiscal protection favoured the
growth of this industry at a rapid pace. Demand for cloth during the Second World War led
to further progress of the industry. Consequently, the number of mills increased from 334 in
1926 to 389 in 1939 and 417 in 1945. Production of cloth also increased from 4,012 million
yards in 1939-40 to 4,726 million yards in 1945-46.

The industry suffered a serious setback in 1947 when most of the long staple cotton growing
areas went to Pakistan as a result of partition. However, most of the cotton mills remained in
India. Under such circumstances, India faced a severe crisis of obtaining raw cotton.

The country had, therefore, to resort to large-scale imports of long staple cotton which was
an extremely difficult task in view of the limited foreign exchange reserves. The only
solution to this problem was to increase hectare-age and production of long staple cotton
within the country. This goal was achieved to a great extent in the post partition era.

Present Position:

At present, cotton textile industry is largest organised modem industry of India. There has
been a phenomenal growth of this industry during the last four decades. About 16 per cent of
the industrial capital and over 20 per cent of the industrial labour of the country is engaged in
this industry. The total employment in this industry is well over 15 million workers.

There are at present 1,719 textile mills in the country, out of which 188 mills are in public
sector, 147 in cooperative sector and 1,384 in private sector. About three-fourths were
spinning mills and the remaining one-fourth composite mills. Apart from the mill sector,
there are several thousand small factories comprising 5 to 10 looms.

Some of them have just one loom. These are based on conventional handloom in the form of
cottage industry and comprise decentralised sector of this industry. Table 27.4 shows that the
constitution of decentralised sector is much more than the organised sector.

It has increased rapidly from a mere 19.31 per cent in 1950-51 to 58.96 per cent in 1980-81
and made a sudden jump to 87.95 per cent in 1990-91. It gradually improved during the first
half of 1990s and stood at 94.63 per cent in 2003-04. (see Table 27.4)

Table 27.4 Production of Cotton Cloth (Mill Cloth) in India, 2002-03

Table 27.4 Production of Cotton Cloth (Mill Cloth) in India, 2002-03:

State/Union Percentage of all India

Production in Sq Mtr
Territory production

1. Maharashtra 3,82,257 39.38

 2. Gujarat 3,21,775 33.14

3. Tamil Nadu 64544 6.69

4. Punjab 55,784 5.75

5. Madhya
47305 4.87
Pradesh

6. Uttar Pradesh 32386 334

7. Rajasthan 28384 2.92

8. Pondicherry 24357 2.51

9. Karnataka 7,222 0.74

10. Kerala 6342 0.66

Total 9,70,756 100.00

Problems of Cotton Textile Industry:

Although cotton textile is one of the most important industries of India, it suffers from many
problems. Some of the burning problems are briefly described as under:

1. Scarcity of Raw Cotton:

Indian cotton textile industry suffered a lot as a result of partition because most of the long
staple cotton growing areas went to Pakistan. Although much headway has been made to
improve the production of raw cotton, its supply has always fallen short of the demand.
Consequently, much of the long staple cotton requirements are met by resorting to imports.

2. Obsolete Machinery:
Most of the textile mills are old with obsolete machinery. This results in low productivity
and inferior quality. In the developed countries, the textile machinery installed even 10-15
years ago has become outdated and obsolete, whereas in India about 60-75 per cent
machinery is 25-30 years old.

Only 18-20 per cent of the looms in India are automatic whereas percentage of such looms
ranges from cent per cent in Hong Kong and the USA., 99 per cent in Canada, 92 per cent in
Sweden, 83 per cent in Norway, 76 per cent in Denmark, 70 per cent in Australia, 60 per cent
in Pakistan and 45 per cent in China.

3. Erratic Power Supply:

Power supply to most cotton textile mills is erratic and inadequate which adversely affects
the production.

4. Low Productivity of Labour:

Labour productivity in India is extremely low as compared to some of the advanced
countries. On an average a worker in India handles about 2 looms as compared to 30 looms
in Japan and 60 looms in the USA. If the productivity of an American worker is taken as
100, the corresponding figure is 51 for U.K. 33 for Japan and only 13 for India.

5. Strikes:
Labour strikes are common in the industrial sector but cotton textile industry suffers a lot due
to frequent strikes by a labour force. The long drawn strike in 1980 dealt a severe below to
the organised sector. It took almost 23 years for the Government to realise this and introduce
legislation for encouraging the organised sector.

6. Stiff Competition:
Indian cotton mill industry has to face stiff competition from powerloom and handloom
sector, synthetic fibres and from products of other countries.

7. Sick Mills:
The above factors acting singly or in association with one another have resulted in many sick
mills. As many as 177 mills have been declared as sick mills. The National Textile
Corporation set up in 1975 has been striving to avoid sick mills and has taken over the
administration of 125 sick mills. What is alarming is 483 mills have already been closed.

Exports:
India is a major exporter of cotton textiles. Cotton yarn, cloth and readymade garments form
important items of Indian exports. Indian garments are well known throughout the world for
their quality and design and are readily accepted in the world of fashion.

Growth and Problems of Major Industries: Cement

Cement Company plays a major role in the growth of the nation. Cement is a key infra -
structure industry. Cement industry in India was under full control and supervision of the
government. However, it got relief at a large extent after the economic reform. It has been
decontrolled from price and distribution on 1st March, 1989 and delicensed on 25th July,
1991. But government interference, especially in the pricing, is still evident in India.

In spite of being the second largest cement producer in the world, India falls in the list of
lowest per capita consumption of cement with 125 kg. The reason behind this is the poor
rural people who mostly live in mud huts and cannot afford to have the commodity. Despite
the fact, the demand and supply of cement in India has grown up. In a fast developing
economy like India, there is always large possibility of expansion of cement industry.

The cement industry is the building block of the nation’s construction industry. Few
construction projects can take place without utilizing cement somewhere in the design.
Annual cement industry shipments are currently estimated at $10.0 billion for 2008; down
from $15.0 billion in 2006. U.S. cement production is widely dispersed with the operation of
113 cement plants in 36 states. The top five companies collectively operate 54.4% of U.S.
clinker capacity with the largest company representing 15.9% of all domestic clinker
capacity. An estimated 80.0% of U.S. clinker capacity is owned by companies headquartered
outside of the U.S.

Historical Perspective:
The history of the cement industry in India dates back to the 1889 when a Kolkata-based
company started manufacturing cement from Argillaceous. But the industry started getting
the organized shape in the early 1900s. In 1914, India Cement Company Ltd. was established
in Porbandar with a capacity of 10,000 tons and production of 1000 tons installed.

The World War I gave the first initial thrust to the cement industry in India and the industry
started growing at a fast rate in terms of production, manufacturing units, and installed
capacity. This stage was referred to as the Nascent Stage of Indian Cement Company. In
1927, Concrete Association of India was set up to create public awareness on the utility of
cement as well as to propagate cement consumption.

The cement industry in India saw the price and distribution control system in the year 1956,
established to ensure fair price model for consumers as well as manufacturers. Later in 1977,
government authorized new manufacturing units (as well as existing units going for capacity
enhancement) to put a higher price tag for their products. A couple of years later, gov-
ernment introduced a three-tier pricing system with different pricing on cement produced in
high, medium and low cost plants.

Growth Profile of Cement Industry:

India is the second largest cement producing country after China with 137 large and 365 mini
cement plants. The large plants employ 1,20,000 people. For the year ended March 31, 2011,
the Indian cement industry is the second largest in the world. In 2010-11, total cement
consumption in India stood at 300 million tonnes while exports of cement and clinker
amounted to around 3 million tonnes.

The Indian cement industry is not only meeting the requirements arisen within the domestic
territory but also fulfilling the burgeoning demands of the international arena. India is also
exporting good amount of cement clinker and by products of cement. Due to the superlative
quality, the Indian cement has occupied the high position on the global map.

The cement industry holds a significant place in the national economy because of its strong
linkages to various sectors such as construction, transportation, coal and power. The cement
industry in India is also one of the major contributors to the exchequer by way of indirect
taxes.

Even during the global economic slowdown in 2008-09, growth in cement demand remained
robust at 8.4 per cent. In 2009-10 cement consumption has short up, reporting, on an
average, 12.5 per cent growth in consumption during the first eight months with the growth
being fuelled by strong infrastructure spending, especially from the Government Sector.

India produces variety of cement based on different compositions such as Ordinary Portland
cement, Portland Pozzolana, Portland Blast Furnace Slag cement, white cement and
specialized cement. Cement in India produced as per the Bureau of Indian standards
comparable with the best in the world.

Expanding Market Size:

The Indian cement industry can be divided into five geographical zones-North, South, East,
West and Central-based on localized differentiation in the consumer profile and supply-
demand scenario. Demand in the cement industry has been wonderful growth on the back of
infrastructure, residential and commercial projects. Cement production in India is anticipated
to increase to 315-320 million tonne (MT) by end of 2011-12 from the current 300 MT.
According to Cement Manufactures Association, the country is expected to reach a capacity
of 550 million tonnes by 2020.

This industry has seen constant modernization and implementation of latest technologies
during past few years. About 93 per cent of the total capacity is based on eco-friendly dry
process technology. Progressive liberalization and easing of foreign direct investments (FDI)
norms in various sectors paved the way for growth in FDI, which led to growing demand for
office space from multinational companies (MNCs) and other foreign investors.

Total FDI in the cement sector between April 2000 and August 2010 stood at US $1.9
billion. The cement industry in India is known for its linkages with other sectors. The
Government of India has taken various steps to provide the required impetus to the industry.
At present 100 per cent FDI is allowed in this industry. Both the state and export policies
promote cement production.

Exporters can claim duty drawbacks on imports of coal and furnace oil up to 20 per cent of
the total value of imports. Most state governments offer fiscal incentives in the form of sales
tax exemptions/deferrals in order to attract investment. A contract worth Rs.1,200 crore (US
$228.59 million) has been awarded to the Perth based India Resources by Prism Cement
towards development of a captive coal mine, emphasizing the growing trend of Indian
companies outsourcing their mining operations to foreign entities.

India Cement has acquired a coal mine in Indonesia for US$ 20 million. It is expected to be
operational by January 2012. Germen cement giant Heidelberg and domestic cements have
shown interest to be the joint venture partner in state-run Rashtriya Ispat Nigam’s proposed
Rs.1,000 crore (US$ 190.45 million), 3 mt pa cement plant at Vizag.

Cement Production and Growth:

India, being the second largest cement producer in the world after China with a total capacity
of 151.2 Million Tones (MT), has got a big No. Cement Companies. With the government of
India giving boost to various infrastructure projects, housing facilities and road networks, the
cement industry in India is currently growing at an enviable pace. More growth in the Indian
cement industry is expected in the coming years.

It is also predicted that the cement production in India would rise to 236.16 MT in FY 11.
It’s also expected to rise to 262.61 MT in FY 12. The cement industry in India is dominated
by around 20 companies, which account for almost 70% of the total cement production in
India. In the present year, the Indian cement companies have produced a total cement
production in FY 09-10 to 231 MT.

Domestic demand plays a major role in the fast growth of cement industry in India. In fact
the domestic demand of cement has surpassed the economic growth rate of India. The
cement consumption is expected to rise more than 22% by 2009-10 from 2007-08. In cement
consumption, the state of Maharashtra leads the table with 12.18% consumption, followed by
Uttar Pradesh. In terms of cement production, Andhra Pradesh leads the list with 14.72% of
production, while Rajasthan remains at second position.

Cement Dispatches:
Cement industry in India has successfully maintained almost total capacity utilization levels,
which resulted in maintaining a 10% growth rate. In 2006-07, the total despatch was 155
MT, which rose up to 170 MT in 2007-08. The month of October 2009 saw a cement
dispatch of 12.22 MT, which was almost 9% higher than the total cement dispatch of 11.21
MT in the same month in the 2008.

Exhibit 9.2 shows that there was an improvement in capacity utilization from 85% to 93% in
2007-08 and 2008-09 respectively. Similar trend is also reported in production and export of
cement during the same period.

Technology Up-gradation Programme:

Cement industry in India is currently going through a technological change as a lot of up-
gradation and assimilation is taking place. Currently, almost 93% of the total capacity is
based entirely on the modern dry process, which is considered as more environment-
friendly. Only the rest 7% uses old wet and semi-dry process technology.

There is also a huge scope of waste heat recovery in the cement plants, which lead to
reduction in the emission level and hence improves the environment. Cement industry has
made tremendous strides in technological up-gradation and assimilation of latest technology.

At present ninety three per cent of the total capacity in the industry is based on modern and
environment-friendly dry process technology and only seven per cent of the capacity is based
on old wet and semi-dry process technology. There is tremendous scope for waste heat
recovery in cement plants and thereby reduction in emission level.

One project for co-generation of power utilizing waste heat in an Indian cement plant is
being implemented with Japanese assistance under Green Aid Plan. The induction of
advanced technology has helped the industry immensely to conserve energy and fuel and to
save materials substantially.

India is also producing different varieties of cement like Ordinary Portland Cement (OPC),
Portland Pozzolana Cement (PPC), Portland Blast Furnace Slag Cement (PBFS), Oil Well
Cement, Rapid Hardening Portland Cement, Sulphate Resisting Portland Cement, White
Cement etc. Production of these varieties of cement conform to the BIS Specifications. It is
worth mentioning that some cement plants have set up dedicated jetties for promoting bulk
transportation and export.

Problems of Cement Industry:

Major problems of cement industry are as follows:

1. Poor Government Infrastructure Spending:

Before 2010-11, there was a stimulated growth in the spending of government on

infrastructure projects. But due to resource crunch government has reduced its spending on
infrastructure has resulted in lower demand of cement. Private sector especially real estate
sector due to financial market condition has also lowered down its demand for cement.

2. High Lending Rates:

Banks’ lending rates are now hovering near the peak level so cement industry is unable to
meet out its working capital requirements as well as capital expenditure programme.
Actually it has affected the modernization and expansion programme of the cement industry.

3. High Tariffs:

Frequent upward revision of various tariffs – high excise duty, sales tax, royalty on lime
stone and coal etc. has adversely affected the demand as it has increased the cost of products
to the customers. The excise duty on cement has been steadily rising.

4. Poor Availability of Coal:

Coal is an important input in the cement industry. The availability of coal has remained the
contentious issue for the industry as Coal India one of the largest domestic suppliers,
priorities supply to the power sector as per the government direction. Coal availability in the
auction conducted by the Coal India has shrunk during 2011-12 leading to sharp spike in
prices. Import has also turned costlier after the rupee depreciation.

5. The Power Shortage:

Power cuts, unsteady and inadequate power supply have created serious problems for cement
units. Continuous process requires uninterrupted power supply to operate efficiently. Various
cement plants have installed their captive power plants but their cost increases the cost of
production and adversely affects the margins of the industry.

6. Transportation Problem:
Indian Railways is the base for the transportation of cement in the country. But due to
shortage of wagons, cement dispatches by rail have declined over the years. Besides,
Railways hiked fright charges by six percent. It increases the cost of supplies. However,
Road transport is offering all help in logistic management of cement industry.

Prospects:

Cement industry has affected a gradual shift from wet to modern, fuel efficient dry process
plants. Most of these new plants have adopted state-of-the-art technology. Existing plants are
also implementing modernization programmes to improve their performance. This has
resulted in better capacity utilization, higher productivity; reduce energy consumption and
better quality of cement.

Available study suggests that the cement industry in India witnessed massive growth on the
back of various industrial development and pro-economic policies of the Union Government.
This has helped attracting the attention of various global cement giants, thereby sparking off
a wave of mergers and acquisitions in several states. The report has estimated India’s cement
consumption to grow at a compound annual growth rate (CAGR) of 11 percent, between
2011-12 and 2013-14.

The study, which focused on the demand-supply outlook and the cement pricing in various
regions of the country revealed that the Andhra Pradesh topped the chart in terms of large
plants and its installed capacity in India. Fast growing economy and the regulatory support is
expected to further encourage the industry players to embark on expansion plans.
Furthermore, it is infrastructure projects, road networks and housing facilities will boost the
growth in cement consumption in the near future.

Continuous technological upgrading and assimilation of latest technology has been going on
in the cement industry. Presently 93 per cent of the total capacity in the industry is based on
modern and environment-friendly dry process technology and only 7 per cent of the capacity
is based on old wet and semidry process technology. There is tremendous scope for waste
heat recovery kiln cement plants and thereby reduction in emission level.

One project for co-generation of power utilizing waste heat in an Indian cement plant is
being implemented with Japanese assistance under Green Aid Plan. The induction of
advanced technology has helped the industry immensely to conserve energy and fuel and to
save materials substantially.

Growth and Problems of Major Industries: Sugar

Sugar is the second largest agro-based industry in India. The industry provides employment
to about two million skilled and semi-skilled workers besides those who are employed in
ancillary activities, mostly from rural areas. Though the industry contributes a lot to the
socio-economic development of the nation, it is plagued with a number of problems such as
cyclical fluctuations, high support prices payable to farmers, lack of adequate working
capital, partial decontrol and the uncertain export outlook.

Despite the problems, the industry has good growth potential due to steady increase in sugar
consumption, retail boom and diversification into areas such as power generation and
production of ethanol. In addition to this, strong possibilities exist for counter trade, if the
Government designs and develops sugar industry-oriented policies. With this background, an
attempt has been made to examine the problems and prospects of sugar industry in India.

Sugar Industry in India is well developed with a consumer base of more than billions of
people. It is also the second largest producer of sugar in the world. There are around 45
million of sugarcane growers in India and a larger portion of rural labourers in the country
largely rely upon this industry. Sugar Industry is one of the agricultural based industries. In
India it is the second largest agricultural industry after.

Trade Policy:
Forced by the severe domestic shortages and abnormally high sugar prices since beginning of
2009, the Government of India (GOI) took several measures to relax import restrictions to
augment domestic supplies. On February 17, 2009 the government relaxed the norms for
duty free imports of raw sugar under the advance licensing scheme (ALS) exempting future
export commitments from actual user conditions for raw sugar imports during February 17,
2009, the government allowed mills to import raw sugar at zero duty under the open general
license (no future export commitments).

The government also allowed select State Trading Enterprises (STEs) to import white sugar
at zero duty. Subsequently, on July 31, 2009, the government allowed duty free imports of
white sugar by traders and processors until November 31, 2009. Through a series of notifica-
tions the GOI has extended the duty free imports of raw sugar and white sugar up to
December 31, 2010.

The GOI has also exempted imported sugar, both raw sugar and white sugar, from the levy
sugar obligation and the market quota release system, applicable to domestic sugar. With the
sugar prices easing, there is an increasing pressure from the local industry to re-impose the
import duties on white and raw sugar, and reverting back to the old import policy regime.
Currently, the GOI does not allow exports of sugar and or provide any export incentive
(transport subsidy) for sugar.

Sugarcane Production and Pricing Policy:

The Government of India (GOI) supports research, development, training of farmers and
transfer of new varieties and improved production technologies (seed, implements, pest
management) to growers in its endeavour to raise cane yields and sugar recovery rates. The
Indian Council of Agricultural Research (ICAR) conducts sugarcane research and
development at the national level.

State agricultural universities, regional research institutions, and state agricultural extension
agencies support these efforts at the regional and state levels. The central and state
governments also support sugarcane growers by ensuring finance and input supplies at
affordable prices.

The GOI establishes a Minimum Support Price (MSP) for sugarcane on the basis of rec-
ommendation by the Commission for Agricultural Costs and Prices (CACP) and after
consulting State Governments and associations of the sugar industry and cane growers.

Last year the GOI announced a new system of Fair and Remunerative Price (FRP) that would
links the cane price with sugar price realization by the sugar mills. Several state governments
further augment the MSP/FRP, typically by 20-25 per cent, due to political compulsions
rather than market pricing.

Sugar Production and Marketing Policy:

The GOI levies a fee of Rs.240 ($5.33) per ton of sugar produced by mills to raise a
Sugarcane Development Fund (SDF), which is used to support research, extension, and
technological improvement in the sugar sector. The SDF is also often used to support sugar
buffer-stocks operations, provide a transport subsidy for sugar exports, and provide an
interest subsidy on loans for the installation of power generation and ethanol production
plants. In March 2008, the GOI enacted the Sugar Development Fund (Amendment) Bill,
2008 that enables the government to include the use of the funds for debt restructuring and
soft loans to the sugar mills.

The Government of India follows a policy of partial market control and dual pricing for
sugar. The local sugar mills are required to supply 20 per cent of their production to the
government as ‘levy sugar’ at below-market prices, which the government distributes
through the Public Distribution System (PDS) to its below-poverty line population at
subsidized rates.
Mills are allowed to sell the balance of their production as ‘free sugar’ at market prices.
However, the sale of free-sale sugar and levy sugar is administered by the government
through periodic quotas, designed to maintain price stability in the market.

On March 12, 2009 the central government advised the state government to impose stock and
turnover limits on traders to prevent hoarding of sugar. Khandsari sugar has also been
brought under the ambit of stockholding and turnover limit from July 17, 2009. Most state
governments imposed stock and turnover control orders in their respective states.

On August 22, 2009, the government imposed stock holding limits on large consumers (food
and beverage companies) who consume more than 1.0 ton of sugar per month. Initially these
consumers were asked to maintain stock necessary to meet not more than 20 days
requirements; which were further lowered to 10 days requirements in February 2010.

These limits are effective up to Sept 30, 2010. With the improvement in domestic sugar
supplies, there is growing pressure from the domestic sugar mills and traders to remove these
stock limits.

In May 2011, the government allowed futures trading in sugar, and three national exchanges
have been given permission to engage in sugar futures trading. However, in May 2009, the
government suspended futures trading in sugar until December 2009, which has been
subsequently extended till September end 2010.

Sugar Decontrol in India:

The Government of India has launched economic reforms in 1991 and process of
liberalisation, privatization and globalization was started to give a new thrust towards
different segments of Indian economy. Naturally, Sugar industry is also crying for sugar
decontrol since long in the changed scenario.

Sugar Industry is seeking freedom at least from the mandatory supply of the Sugar by the
industry at below cost for state-run welfare programmes – also known as the levy obligation
– and the monthly sale quota. These apart, the government also decides the minimum price
the mills have to pay for sugarcane purchases periodical limits on stocks large buyers can
hold to thwart hoarding. The sector has been under the government control since 1940s.

The Sugar Industry is facing problem between high cane prices-often used by state gov-
ernments as a tool to get the political support of the farming community-and low sugar sales
realisation. The cash-strapped sugar industry has also renewed its calls this year again (2011-
12) for lifting the government control over the sector. Surplus sugar stocks for a second
straight year have kept domestic prices subdued for more than six months now despite a 17%
hike in cane prices in the largest producing state of Uttar Pradesh and to a large extent in
other states.
Present Regulatory Framework for Sugar:
The Sugar mills are mandated to sell 10% of their output to the government for its public
distribution system around 60% of their cost of sugar at current prices. The government’s
control over how much sugar mills will sell in the open market each month compounds their
worries as a failure to complete sales with in the month could result in a conversion of the
unsold quantity into the levy quota. The levy obligation alone cost $2,500 crore to $3,000
crore a year to the sugar mills.

Composition of the Committee:

The Government of India has constituted in January, 2012 six-member committee under the
chairman-ship of Dr. C. Rangarajan, chairman. Economic Advisory Committee to the Prime
Minister to look into all issues relating to de-regulation of the sugar sector. It has been
assigned to give its recommendations to the Prime Minister at the earliest.

Other members on the panel include the Chief Economic Advisor, Dr. Kaushik Basu; the
Chairman of Commission for Agricultural Costs and Prices, Dr. Ashok Gulati; Secretaries of
Agriculture, and Food and Public Distribution, Secretary EAC, Dr. K.P. Krishan; and the
former secretary of Food and Public Distribution, Mr. Nanda Kumar, currently a member of
National Disaster Management Authority.

The Committee has been empowered to involve such experts, academics as required as
special invitees. The food ministry would provide the necessary support to the committee in
discharging its functions.

Actually in late 2010, the Prime Minister had set up a four- member committee under Dr. C.
Rangarajan to look into the issue of linking cane prices to the sugar rates. “In a sense, the
present committee is an extension of the earlier committee, and may look into all issues
relating to the sugar sector.”

“The industry welcomes the constitution of such a committee consisting of several expe-
rienced senior economists and government officials. It expects for some positive outcome
quickly, which will be in the interests of both the farmers as well as the industry.” Various
controls and dwindling returns on sugar sales bled their viability and that is why Sugar
industry is demanding for decontrol.

Rationale of Sugar Control:

(i) Present L. P. G. environment has created conducive environment for sugar decontrol.

(ii) It is in accordance with the policy of the government to reduce subsidy in public
distribution mechanism.
(iii) Levy quota pricing is irrelevant because cost of sugar production is increasing on
continuous basis.

(iv) Most of the sugar units are non-viable due to levy quota burden and restrictions on open
market sale quota etc.

(v) Sugar mills are facing resource crunch and they also need funds for their expansion and
modernization programmes. Survival of sugar units will be at stake in case decontrol is not
there.

Prospects of Sugar Decontrol under Present Scenario:

The timing of demand for decontrol of sugar sector is quite appropriate. Sugar output during
this season is expected at 25-26 million tonnes (mt). This, along with opening stocks of 6.1
mt, can more than take care of domestic demand of 22-23 mt. With no major festivals,
November to March is usually a lean period for local consumption. But for farmers sugar
realizations during this period matter, as they determine the cane price mills can realistically
afford to pay.

This is also a time when supplies from Brazil dry up, with the new crop there due for
crushing only from early April. All this provides a window of opportunity to free the
industry – from levy obligations, controls on how much sugar any mill can sell in the open
market in a month, and stocking limits – and also open up exports. Sugar prices are firming
up now in the sugar market.

Problems of Sugar Industry:

(i) It is characterized by instability in recurring imbalance between the demand for and
supply of sugar in the country.

(ii) It is a totally agro-based industry. The manufacturing plant is merely an extrac tion unit.
Sugarcane forms about 2/3rd of the total manufacturing cost of sugar.

(iii) Sugar mills are facing tough competition from gur and khandsari producers who try to
corner major chunk of sugarcane from the farmers.

(iv) Poor yields of cane per hectare, low recovery of sugarcane; uneconomic size of sugar
units increase the cost of production and force them to become uncompetitive in the
international market.

(v) Organized cane suppliers and manufacturing units generally exploit the small cane
growers as they do not have sufficient bargaining power.
(vi) Growing obsolescence and old machineries have forced the large number of sugar mills
to become sick.

(vii) The Sugar industry has been delicensed since August 1998 but government still regulate
the free sale quota and export volume of the sugar to regulate the domestic price scenario.

Suggestions:
(i) Government should formulate the policy of area demarcation for cane supplies. It will
prevent unhealthy competition among sugar factories in enticing growers to supply their cane
at bargaining prices.

(ii) Sugar factories should be allowed to develop their own cane areas for improving their
internal cane supplies.

(iii) Sugar factories should formulate their own cane drawl programme based on registration
of cane on an area basis.

(iv) Sugar Factories should be required to pay more incentives for early maturing cane
varieties to encourage more production in early months of crushing.

(v) Optimum utilization of the by-products should be ensured to improve viability of the
mills.

(vi) Import of raw sugar should be allowed on systematic basis to avoid shortage of sugar.

Growth and Problems of Major Industries: Petroleum

The development of the Indian petroleum industry began on a very slow note. It started
mainly in the northeastern part of India especially in the place called Digboi in the state of
Assam. Until the 1970’s, the production of petroleum and the exploration of new locations
for extraction of petroleum were mainly restricted to the northeastern state in India.

However, an important advancement in the Indian petroleum industry came with the passing
of Industrial Policy Resolution in 1956, which emphasized focus on the growth and
promotion of industries in India. Another major incident was the discovery of Bombay High,
which changed the scenario of the Indian petroleum industry drastically. The Indian
petroleum industry was sponsored completely by the government, and the management
control of the petroleum industry and all its related activity was entirely with the
government. The petroleum industry has the most significant role to play in changing the
Indian economy from an agrarian economy to an industrial economy.
The adoption of liberalization and privatization in July 1991 changed the situation again. The
government started allowing the Indian petroleum industry to go into private hands and also
entered into government and private joint ventures. The government also eased the stringent
regulation process on the petroleum industry. This gave a tremendous boost to the petroleum
industry in India. The industry began to grow at a tremendous pace. The production of
petroleum and petroleum products also showed a significant rise.

Along with liberalization and privatization, the overall economy of India grew. Also, the
demand for petroleum products increased at an annual rate of about 5.5%. The demand for
petroleum and petroleum products still continues to grow, and there is great potential for
investors to invest in the sector and gain valuable returns while meeting the increasing
demands for the petroleum products.

The petroleum industry in India is particularly favorable for foreign investment because the
industry is one of the fastest growing segments, and it has shown a staggering growth rate of
around 13% in the recent past. Apart from the tremendous growth rate in the Indian
petroleum industry today, it also boasts technology of international standards, easy
availability of infrastructure at very cheap rates, high demands for petroleum products, and
increased spending habits of the middle-class people. All these factors make investments in
the Indian petroleum industry an attractive proposition for foreign investors.

The foreign trade in petroleum and petroleum products in the recent past have registered
significant growth. It has thus attracted new foreign investments. Some of the main
petroleum products that are manufactured for trade with foreign countries are petroleum
gases, gas oil, propane, distilled crude oil, naphtha, ethane, and kerosene.

The petroleum industry has contributed heavily to the manufacturing industry in the country
through foreign trade in petroleum products.  
Rapid globalization, fast-changing technology, and the changing methods in the way
business is conducted have brought significant changes and enormous opportunities for
petroleum companies in India to flourish and expand their operation to global markets.

Another very important reason why the Indian petroleum industry is a good option for
investment is that the future of the petroleum industry in India promises great potential for
development. The fast economic growth of India and the various developmental activities
taking place presents India with opportunities in the future to be a dominant player globally
in the export of petroleum products. 

Problem # 1. Shortage of Petroleum Crude:

Petroleum industry in India has been suffering from the problem of shortage of raw
materials, i.e., petroleum crude. Total refining capacity in the country has reached the level
of 148.97 million tonnes in 2006-07 as against the total indigenous production of only 34.0
million tonnes.

Thus, the petroleum industry has to depend too much on the imported crude. Due to the
increasing volume of demand-supply gap, the petroleum refineries in India have failed to
utilise their production capacity fully.

Problem # 2. Dependence on Foreign Countries:

Petroleum industry in India has been depending too much on foreign countries for the supply
of petroleum crude and machineries. Total consumption of petroleum crude has increased to
146.5 million tonnes in 2006-07 as against the total production of petroleum crude of 34.0
million tonnes. This has resulted in the import of 105.5 million tonnes of petroleum crude in
2006-07.

Moreover, the petroleum industry of the country depends too much on some foreign
countries for meeting its requirement of various drilling and refining machineries.

Problem # 3. Price Hike:

The international prices of petroleum goods have been maintaining a constant hike since
1973-74. This has led to the excessive rise in our import bill on petroleum goods. In 2011-12,
total import bill on petroleum oil and lubricants was to the tune of Rs 7, 43,075 crore as
against Rs 5,587 crore in 1980-81.

Problem # 4. Shortage of Oil Refining Capacity:

In India there is a shortage of oil refining capacity as compared to total demand for
petroleum products. Total refining capacity of the country stands at 214.1 million tonnes as
compared to the total consumption of 220.5 million tonnes of petroleum products in 2011-12.
This has necessitated the expansion of existing refineries and also setting up of new
refineries under the joint sector.

Problem # 5. Exploration of New Reserves:

In India, the production of petroleum crude of existing old reserves has been shrinking due to
normal technical reasons. The proved oil reserves in India constitute only 0.5 per cent of the
world oil reserves (proved). At this present level of consumption, the proved reserves will be
depleted within next 15 to 20 years.

The country has now increasingly facing the growing demand-supply gap of petroleum
crude. The country has also been facing the problem of mounting import bill of POL items.
Under the present circumstances, it is quite urgent to intensify the exploration activities of
the oil sector sincerely.

Problem # 6. Technical Problems:

The petroleum industry of the country is also suffering from numerous technical problems in
respect of production of middle distillates, activating its fire fighting systems etc. which need
to be corrected and updated at the earliest possible time. The RD facilities in the industry
should be expanded with the maximum possible limit to face these technical problems.

Problem # 7. Pollution:

The growing pollution near the refineries and oil fields is a big problem for the industry. The
Government is trying to control such pollution by adopting certain effective measures.

Problem # 8. Lack of Market-Determined Pricing System:

The lack of a well functioning market determined pricing system, partly because of the lack
of vibrant competition among the companies with diversified ownership, continues to
constrain the performance of petroleum industry.

Despite the surge of international prices of petroleum touching record level, the petroleum
companies are not allowed to revise their market price of petrol and HSD accordingly and
allowed only a limited freedom to revise the prices as per revised methodology. This has
resulted a serious drain of the financial resources of the petroleum companies.

Industrial Policy
At the time of Independence, Indian economy was facing severe problems of illiteracy,
poverty, low per capita income, industrial backwardness and unemployment. After India
attained its Independence in 1947, a sincere effort was made to begin an era of industrial
development. The government adopted rules and regulations for the various industries. This
industrial policy introduction proved to be the turning point in the Indian Industrial history.

Industrial Policy

Industrial policy is a document that sets the tone in implementing, promoting the regulatory
roles of the government. It was an effort to expand the industrialization and uplift the
economy to its deserved heights. It signified the involvement of Indian government in the
development of industrial sector.
With the introduction of new economic policies, the main aim of the government was to free
the Indian industry from the chains of licensing. The regulatory roles of the Indian
government refer to the policies towards industries, their establishments, their functioning,
their expansion, their growth as well as their management.

Industrial growth of a country is guided and regulated through its industrial policies.

I. Industrial Policy of 1948

The first industrial policy after independence was announced on 6th April 1948. It was
presented by Dr Shyama Prasad Mukherjee then Industry Minister. The main goal of this
policy was to accelerate the industrial development by introducing a mixed economy where
the private and public sector was accepted as important in the development of the economy.
It saw Indian economy in socialistic patterns. The large industries were classified into four
categories:

 Industries with exclusive State Monopoly/Strategic industries:  It

included industries engaged in the activity of atomic energy, railways and
arms and ammunition.
 Industries with Government control: This category included industries of
national importance. 18 such categories were mentioned in this category
such as fertilizers, heavy machinery, defence equipment, heavy chemicals,
etc.
 Industries with Mixed sector: This category included industries that were
allowed to operate independently in private or public sector. The
government was allowed to review the situation to acquire any existing
private undertaking.
 Industry in the Private sector: Industries which were not mentioned in the
above categories fall into this category. High importance was granted to
small businesses and small industries, leading to the utilization of local
resources and creating employment.

II. Industrial Policy Resolution, 1956

This second industrial policy was announced on April 20, 1956, which replaced the policy of
1948. The features of this policy were:

 A new classification of Industries.

 Non-discriminatory and fair treatment for the private sector.
Promotion of village and small-scale industries.
 To achieve development by removing regional disparity.
  Labour welfare.

The IRDA divided industries into three categories:

 Schedule A industries: The industries that were under the monopoly of the

state or government. It included 7 industries. The private sector was also
introduced in this industries if national interest required.
 Schedule B industries: In this category of industries, the state was allowed
to establish new units but the private sector was not denied to set up or
expand existing units e.g. chemical industries, fertilizer, synthetic, rubber,
aluminium etc.
 Schedule C industries: So the industries that were not a part of the above-
mentioned industries then it formed a part of Schedule C industries.

To summarize, the policy of 1956 in which the state was given a primary role for industrial
development as capital was scarce and business was not strong.

III. Indian Policy Statement, 1973

Indian Policy Statement of 1973 identified high priority industries with investment from
large industrial houses and foreign companies were permitted. Large industries were
permitted to start operations in rural and backward areas with a view to developing those
areas and enabling the growth of small industries around. And so the basic features of Indian
Policy Statement were:

 The policy was directed towards removing the distortions, it provided for
closer interaction between agriculture and industrial sector.
 Priority was given towards generation and transmission of power.
 The list of industries reserved for the small-scale sector was expanded.
 Special legislation was made to protect cottage and household industries
were introduced.

IV. Indian Policy Statement 1977

Indian Policy Statement was announced by George Fernandes then union industry minister
of the parliament. The highlights of this policy are:

A] Target on the development of small-scale and cottage industries.

 Household and cottage industries for self-employment.

 Tiny sector investment up to 1 lakhs.
  Smallscale industries for investment up to 1-15 lakhs.

B] Large-scale sector

 Basic industries: infrastructure and development of small-scale and village

industries.
 Capital goods industries: meeting the requirement of cottage industries.
 High technological industries:development of agriculture and smallscale
industries such as petrochemicals, fertilizers and pesticides.

C] Restrict the control of big business houses.

D] Role of the public sector:

 Development of ancillary industries.

 To make available expertise in technology and management in small and
cottage industries.

E] Revival and rehabilitation of sick units.

V. Industrial Policy, 1980

The Congress government announced this policy on July 23rd, 1980. The features of this
policy are:

 Promotion of balanced growth.

 Extension and simplification of automatic expansion.
 Taking over industrial sick units.
 Regulation and control of unauthorized excess production capabilities
installed for industrial houses.
 Redefining the role of small-scale units.
 Improving the performance of the public sector.

VI. New Industrial Policy, 1991

The features of NIP, 1991 are as follows:

 Public sector de-reservation and privatization of public sector through

disinvestment.
 Industrial licensing.
  Amendments to Monopolies and Restrictive Trade Practices (MRTP) Act,
1969.
 Liberalised Foreign Investment Policy.
 Foreign Technology Agreements (FTA).
 Dilution of protection to SSI and emphasis on competitiveness enhancement.

The all-around changes introduced in the industrial policy framework have given a new
direction to the future industrialization of the country. There are encouraging trends on
diverse fronts. Industrial growth was 1.7 percent in 1991-92 that has increased to 9.2 percent
in 2007-08.The industrial structure is much more balanced. The impact of industrial reforms
is reflected in multiple increases in investment envisaged, both domestic and foreign.

Small Scale Industries- Problems and Policy

Some of the Government Policies for development and promotion of Small-Scale Industries
in India are: 1. Industrial Policy Resolution (IPR) 1948, 2. Industrial Policy Resolution (IPR)
1956, 3. Industrial Policy Resolution (IPR) 1977, 4. Industrial Policy Resolution (IPR) 1980
and 5. Industrial Policy Resolution (IPR) 1990.

Since Independence, India has several Industrial Policies to her credit. So much so that
Lawrence A. Veit tempted to say that “if India has as much industry as it has industrial
policy, it would be a far well-to-do nation.” With this background in view, in what follows is
a review of India’s Industrial Policies for the development and promotion of small-scale
enterprises in the country.

1. Industrial Policy Resolution (IPR) 1948:

The IPR, 1948 for the first time, accepted the importance of small-scale industries in the
overall industrial development of the country. It was well realized that small-scale industries
are particularly suited for the utilization of local resources and for creation of employment
opportunities.

However, they have to face acute problems of raw materials, capital, skilled labour,
marketing, etc. since a long period of time. Therefore, emphasis was laid in the IPR, 1948
that these problems of small-scale enterprises should be solved by the Central Government
with the cooperation of the State Governments. In nutshell, the main thrust of IPR 1948, as
far as small-scale enterprises were concerned, was ‘protection.’

2. Industrial Policy Resolution (IPR) 1956:

The main contribution of the IPR 1948 was that it set in the nature and pattern of industrial
development in the country. The post-IPR 1948 period was marked by significant
developments taken place in the country. For example, planning has proceeded on an
organised manner and the First Five Year Plan 1951-56 had been completed. Industries
(Development and Regulation) Act, 1951 was also introduced to regulate and control
industries in the country.

The parliament had also accepted ‘the socialist pattern of society’ as the basic aim of social
and economic policy during this period. It was this background that the declaration of a new
industrial policy resolution seemed essential. This came in the form of IPR 1956.

The IPR 1956 provided that along with continuing policy support to the small sector, it also
aimed at to ensure that decentralised sector acquires sufficient vitality to self-supporting and
its development is integrated with that of large- scale industry in the country. To mention,
some 128 items were reserved for exclusive production in the small-scale sector.

Besides, the Small-Scale Industries Board (SSIB) constituted a working group in 1959 to
examine and formulate a development plan for small-scale industries during the, Third Five
Year Plan, 1961-66. In the Third Five Year Plan period, specific developmental projects like
‘Rural Industries Projects’ and ‘Industrial Estates Projects’ were started to strengthen the
small-scale sector in the country. Thus, to the earlier emphasis of ‘protection’ was added
‘development.’ The IPR 1956 for small-scale industries aimed at “Protection plus
Development.” In a way, the IPR 1956 initiated the modem SSI in India.

3. Industrial Policy Resolution (IPR) 1977:

During the two decades after the IPR 1956, the economy witnessed lopsided industrial
development skewed in favour of large and medium sector, on the one hand, and increase in
unemployment, on the other. This situation led to a renewed emphasis on industrial policy.
This gave emergence to IPR 1977.

The Policy Statement categorically mentioned:

“The emphasis on industrial policy so far has been mainly on large industries, neglecting
cottage industries completely, relegating small industries to a minor role. The main thrust of
the new industrial policy will be on effective promotion of cottage and small-scale industries
widely dispersed in rural areas and small towns. It is the policy of the Government that
whatever can be produced by small and cottage industries must only be so produced.”

The IPR 1977 accordingly classified small sector into three broad categories:

1. Cottage and Household Industries which provide self-employment on a large

scale.
 2. Tiny sector incorporating investment in industrial units in plant and
machinery up to Rs. 1 lakh and situated in towns with a population of less
than 50,000 according to 1971 Census.
3. Small-scale industries comprising of industrial units with an investment of
upto Rs. 10 lakhs and in case of ancillary units with an investment up to Rs.
15 lakhs.

The measures suggested for the promotion of small-scale and cottage industries
included:

(i) Reservation of 504 items for exclusive production in small-scale sector.

(ii) Proposal to set up in each district an agency called ‘District Industry Centre’ (DIC) to
serve as a focal point of development for small-scale and cottage industries. The scheme of
DIC was introduced in May 1978. The main objective of setting up DICs was to promote
under a single roof all the services and support required by small and village entrepreneurs.

What follows from above is that to the earlier thrust of protection (IPR 1948) and
development (IPR 1956), the IPR 1977 added ‘promotion’. As per this resolution, the small
sector was, thus, to be ‘protected, developed, and promoted.’

4. Industrial Policy Resolution (IPR) 1980:

The Government of India adopted a new Industrial Policy Resolution (IPR) on July 23, 1980.
The main objective of IPR 1980 was defined as facilitating an increase in industrial
production through optimum utilization of installed capacity and expansion of industries.

As to the small sector, the resolution envisaged:

(i) Increase in investment ceilings from Rs. 1 lakh to Rs. 2 lakhs in case of tiny units, from
Rs. 10 lakhs to Rs. 20 lakhs in case of small-scale units and from Rs. 15 lakhs to Rs. 25 lakhs
in case of ancillaries.

(ii) Introduction of the concept of nucleus plants to replace the earlier scheme of the District
Industry Centres in each industrially backward district to promote the maximum small-scale
industries there.

(iii) Promotion of village and rural industries to generate economic viability in the villages
well compatible with the environment.
Thus, the IPR 1980 reimphasised the spirit of the IPR 1956. The small-scale sector still
remained the best sector for generating wage and self-employment based opportunities in the
country.

5. Industrial Policy Resolution (IPR) 1990:

The IPR 1990 was announced during June 1990. As to the small-scale sector, the resolution
continued to give increasing importance to small-scale enterprises to serve the objective of
employment generation.

The important elements included in the resolution to boost the development of small-
scale sector were as follows:

(i) The investment ceiling in plant and machinery for small-scale industries (fixed in 1985)
was raised from Rs. 35 lakhs to Rs. 60 lakhs and correspondingly, for ancillary units from
Rs. 45 lakhs to Rs. 75 lakhs.

(ii) Investment ceiling for tiny units had been increased from Rs. 2 lakhs to Rs. 5 lakhs
provided the unit is located in an area having a population of 50,000 as per 1981 Census.

(iii) As many as 836 items were reserved for exclusive manufacture in small- scale sector.

(iv) A new scheme of Central Investment Subsidy exclusively for small-scale sector in rural
and backward areas capable of generating more employment at lower cost of capital had
been mooted and implemented.

(iv) With a view, to improve the competitiveness of the products manufactured in the small-
scale sector; programmes of technology up gradation will be implemented under the
umbrella of an apex Technology Development Centre in Small Industries Development
Organisation (SIDO).

(v) To ensure both adequate and timely flow of credit facilities for the small- scale industries,
a new apex bank known as ‘Small Industries Development Bank of India (SIDBI)’ was
established in 1990.

(vi) Greater emphasis on training of women and youth under Entrepreneurship Development
Programme (EDP) and to establish a special cell in SIDO for this purpose.

(vii) Implementation of delicencing of all new units with investment of Rs. 25 crores in fixed
assets in non-backward areas and Rs. 75 crores in centrally notified backward areas.
Similarly, delicensing shall be implemented in the case of 100% Export Oriented Units
(EOU) set up in Export Processing Zones (EPZ) up to an investment ceiling of Rs. 75 lakhs.
This sector can stimulate economic activity and is entrusted with the responsibility of
realising various objectives generation of more employment opportunities with less
investment, reducing regional imbalances etc. Small scale industries are not in a position to
play their role effectively due to various constraints.

The various constraints, the various problems faced by small scale industries are as under:
(1) Finance:

Finance is one of the most important problem confronting small scale industries Finance is
the life blood of an organisation and no organisation can function proper у in the absence of
adequate funds. The scarcity of capital and inadequate availability of credit facilities are the
major causes of this problem.

Firstly, adequate funds are not available and secondly, entrepreneurs due to weak economic
base, have lower credit worthiness. Neither they are having their own resources nov are
others prepared to lend them. Entrepreneurs are forced to borrow money from money lenders
at exorbitant rate of interest and this upsets all their calculations.

After nationalisation, banks have started financing this sector. These enterprises are still
struggling with the problem of inadequate availability of high cost funds. These enterprises
are promoting various social objectives and in order to facilitate then working adequate
credit on easier terms and conditions must be provided to them.

(2) Raw Material:

Small scale industries normally tap local sources for meeting raw material requirements.
These units have to face numerous problems like availability of inadequate quantity, poor
quality and even supply of raw material is not on regular basis. All these factors adversely
affect t e functioning of these units.

Large scale units, because of more resources, normally corner whatever raw material that is
available in the open market. Small scale units are thus forced to purchase the same raw
material from the open market at very high prices. It will lead to increase in the cost of
production thereby making their functioning unviable.

(3) Idle Capacity:

There is under utilisation of installed capacity to the extent of 40 to 50 percent in case of

small scale industries. Various causes of this under-utilisation are shortage of raw material
problem associated with funds and even availability of power. Small scale units are not fully
equipped to overcome all these problems as is the case with the rivals in the large scale
sector.
(4) Technology:

Small scale entrepreneurs are not fully exposed to the latest technology. Moreover, they lack
requisite resources to update or modernise their plant and machinery Due to obsolete
methods of production, they are confronted with the problems of less production in inferior
quality and that too at higher cost. They are in no position to compete with their better
equipped rivals operating modem large scale units.

(5) Marketing:

These small scale units are also exposed to marketing problems. They are not in a position to
get first hand information about the market i.e. about the competition, taste, liking, disliking
of the consumers and prevalent fashion.

With the result they are not in a position to upgrade their products keeping in mind market
requirements. They are producing less of inferior quality and that too at higher costs.
Therefore, in competition with better equipped large scale units they are placed in a
relatively disadvantageous position.

In order to safeguard the interests of small scale enterprises the Government of India has
reserved certain items for exclusive production in the small scale sector. Various government
agencies like Trade Fair Authority of India, State Trading Corporation and the National
Small Industries Corporation are extending helping hand to small scale sector in selling its
products both in the domestic and export markets.

(6) Infrastructure:

Infrastructure aspects adversely affect the functioning of small scale units. There is
inadequate availability of transportation, communication, power and other facilities in the
backward areas. Entrepreneurs are faced with the problem of getting power connections and
even when they are lucky enough to get these they are exposed to unscheduled long power
cuts.

Inadequate and inappropriate transportation and communication network will make the
working of various units all the more difficult. All these factors are going to adversely affect
the quantity, quality and production schedule of the enterprises operating in these areas. Thus
their operations will become uneconomical and unviable.

(7) Under Utilisation of Capacity:

Most of the small-scale units are working below full potentials or there is gross
underutilization of capacities. Large scale units are working for 24 hours a day i.e. in three
shifts of 8 hours each and are thus making best possible use of their machinery and
equipments.

On the other hand small scale units are making only 40 to 50 percent use of their installed
capacities. Various reasons attributed to this gross under- utilisation of capacities are
problems of finance, raw material, power and underdeveloped markets for their products.

(8) Project Planning:

Another important problem faced by small scale entrepreneurs is poor project planning.
These entrepreneurs do not attach much significance to viability studies i.e. both technical
and economical and plunge into entrepreneurial activity out of mere enthusiasm and
excitement.

They do not bother to study the demand aspect, marketing problems, and sources of raw
materials and even availability of proper infrastructure before starting their enterprises.
Project feasibility analysis covering all these aspects in addition to technical and financial
viability of the projects, is not at all given due weight-age.

Inexperienced and incomplete documents which invariably results in delays in completing

promotional formalities. Small entrepreneurs often submit unrealistic feasibility reports and
incompetent entrepreneurs do not fully understand project details.

Moreover, due to limited financial resources they cannot afford to avail services of project
consultants. This result is poor project planning and execution. There is both time interests of
these small scale enterprises.

(9) Skilled Manpower:

A small scale unit located in a remote backward area may not have problem with respect to
unskilled workers, but skilled workers are not available there. The reason is Firstly, skilled
workers may be reluctant to work in these areas and secondly, the enterprise may not afford
to pay the wages and other facilities demanded by these workers.

Besides non-availability entrepreneurs are confronted with various other problems like
absenteeism, high labour turnover indiscipline, strike etc. These labour related problems
result in lower productivity, deterioration of quality, increase in wastages, and rise in other
overhead costs and finally adverse impact on the profitability of these small scale units.

(10) Managerial:
Managerial inadequacies pose another serious problem for small scale units. Modern
business demands vision, knowledge, skill, aptitude and whole hearted devotion.
Competence of the entrepreneur is vital for the success of any venture. An entrepreneur is a
pivot around whom the entire enterprise revolves.

Many small scale units have turned sick due to lack of managerial competence on the part of
entrepreneurs. An entrepreneur who is required to undergo training and counseling for
developing his managerial skills will add to the problems of entrepreneurs.

The small scale entrepreneurs have to encounter numerous problems relating to

overdependence on institutional agencies for funds and consultancy services, lack of credit-
worthiness, education, training, lower profitability and host of marketing and other problems.
The Government of India has initiated various schemes aimed at improving the overall
functioning of these units.

Regional imbalances
Regional Imbalances: Cause # 1

Historical Factor:

Historically, regional imbalances in India started from its British regime. The British rulers
as well as industrialists started to develop only those earmarked regions of the country which
as per their own interest were possessing rich potential for prosperous manufacturing and
trading activities.

British industrialists mostly preferred to concentrate their activities in two states like West
Bengal and Maharashtra and more particularly to three metropolitan cities like Kolkata,
Mumbai and Chennai. They concentrated all their industries in and around these cities
neglecting the rest of the country to remain backward.

The land policy followed by the British frustrated the farmers to the maximum extent and
also led to the growth of privileged class like zamindars and money lenders for the
exploitation of the poor farmers. In the absence of proper land reform measures and proper
industrial policy, the country could not attain economic growth to a satisfactory level.

The uneven pattern of investment in industry as well as in economic overheads like transport
and communication facilities, irrigation and power made by the British had resulted uneven
growth of some areas, keeping the other areas totally neglected.

Regional Imbalances: Cause # 2

Geographical Factors:

Geographical factors play an important role in the developmental activities of a developing

economy. The difficult terrain surrounded by hills, rivers and dense forests leads to increase
in the cost of administration, cost of developmental projects, besides making mobilisation of
resources particularly difficult.

Most of the Himalayan states of India, i.e., Himachal Pradesh, Northern Kashmir, the hill
districts of Uttar Pradesh and Bihar, Arunachal Pradesh and other North-Eastern states,
remained mostly backward due to its inaccessibility and other inherent difficulties.

Adverse climate and proneness to flood are also responsible factors for poor rate of
economic development of different regions of the country as reflected by low agricultural
productivity and lack of industrialisation. Thus these natural factors have resulted uneven
growth of different regions of India.

Regional Imbalances: Cause # 3

Locational Advantages:

Locational advantages are playing an important role in determining the development strategy
of a region. Due to some locational advantages, some regions are getting special favour in
respect of site selections of various developmental projects.

While determining the location of iron and steel projects or refineries or any heavy industrial
project, some technical factors included in the locational advantage are getting special
considerations. Thus regional imbalances arise due to such locational advantages attached to
some regions and the locational disadvantages attached to some other backward regions.

Regional Imbalances: Cause # 4

Inadequacy of Economic Overheads:

Economic overheads like transport and communication facilities, power, technology,

banking and insurance etc. are considered very important for the development of a particular
region.

Due to adequacy of such economic overheads, some regions are getting a special favour in
respect of settlement of some developmental projects whereas due to inadequacy of such
economic overheads, some regions of the country, viz., North-Eastern Region, Himachal
Pradesh, Bihar etc. remained much backward as compared to other developed regions of the
country.
Moreover, new investment in the private sector has a general tendency to concentrate much
on those regions having basic infrastructural facilities.

Regional Imbalances: Cause # 5

Failure of Planning Mechanism:

Although balanced growth has been accepted as one of the major objectives of economic
planning in India, since the Second Plan onwards but it did not make much headway in
achieving this object. Rather, in real sense, planning mechanisms has enlarged the disparity
between the developed states and less developed states of the country.

In respect of allocating plan outlay relatively developed states get much favour than less
developed states.

From First Plan to the Seventh Plan, Punjab and Haryana have received the highest per
capita plan outlay, all along. The other three states like Gujarat, Maharashtra and Madhya
Pradesh have also received larger allocation of plan outlays in almost all the five year plans.

On the other hand, the backward states like Bihar, Assam, Orissa, Uttar Pradesh and
Rajasthan have been receiving the smallest allocation of per capita plan outlay in almost all
the plans.

Due to such divergent trend, imbalance between the different states in India has been
continuously widening, inspite of framing achievement of regional balance as one of the
important objectives of economic planning in the country.

Regional Imbalances: Cause # 6

Marginalisation of the Impact of Green Revolution to Certain Regions:

In India, the green revolution has improved the agricultural sector to a considerable extent
through the adoption of new agricultural strategy. But unfortunately the benefit of such new
agricultural strategy has been marginalised to certain definite regions keeping the other
regions totally untouched.

The Government has concentrated this new strategy to the heavily irrigated areas with the
idea to use the scarce resources in the most productive manner and to maximise the
production of foodgrains so as to solve the problem of food crisis.
Thus the benefit of green revolution is very much restricted to the states like Punjab,
Haryana and plain districts of Uttar Pradesh leaving the other states totally in the dark about
the adoption of new agricultural strategy.

This has made the well-off farmers much better off, whereas the dry land farmers and non-
farming rural population remained totally untouched. Thus in this way new agricultural
strategy has aggravated regional imbalances due to its lack of all-embracing approach.

Regional Imbalances: Cause # 7

Lack of Growth of Ancillary Industries in Backward States:

The Government of India has been following a decentralised approach for the development
of backward regions through its investment programmes on public sector industrial
enterprises located in backward areas like Rourkela, Barauni, Bhilai, Bongaigaon etc. But
due to lack of growth of ancillary industries in these areas, all these areas remained backward
in spite of huge investment made by the Centre.

Regional Imbalances: Cause # 8

Lack of Motivation on the part of Backward States:

Growing regional imbalance in India has also been resulted from lack of motivation on the
part of the backward states for industrial development. While the developed states like
Maharashtra, Punjab, Haryana, Gujarat, Tamil Nadu etc. are trying to attain further industrial
development, but the backward states have been showing their interest on political intrigues
and manipulations instead of industrial development.

Regional Imbalances: Cause # 9

Political Instability:

Another important factor responsible for regional imbalance is the political instability
prevailing in the backward regions of the country. Political instability in the form of unstable
government, extremist violence, law and order problem etc. have been obstructing the flow
of investments into these backward regions besides making flight of capital from these
backward states.

Thus this political instability prevailing in same backward regions of the country are standing
as a hurdle in the path of economic development of these regions
 Parallel Economy
Parallel economy, based on the black money or unaccounted money, is a big menace to the
Indian economy. It is also a cause of big loss in the tax-revenues for the government. As
such, it needs to be curbed. Its elimination will benefit the economy in more than one way.

In a general way, we can define black economy as the money that is generated by activities
that are kept secret, in the sense that these are not reported to the authorities. As such, this
money is also not accounted to (he fiscal authorities i.e., taxes are not paid on this money.

An estimate by Suraj B. Gupta had put the size of black money at over 50 per cent of GDP
(at factor cost) in 1987-88. It is also stated that annual rate of growth of black economy is
higher than the annual growth rate of GDP.

According to Global Financial Integrity Study of 2009, $ 1.4 trillion belongs to Indians were
parked in safe havens abroad. $ 1.4 trillion is equivalent to Rs. 70 lakh crore, more than
India’s national income of around Rs. 50 lakh crore.

A statement from the Swiss Central Bank declared that Indians have $2.5 billion deposits in
various Swiss Banks. It is suspected that the deposits of Indians in tax havens are mostly
being withdrawn and shifted to a third country; making it difficult for the government to
gather any further details once the accounts are closed.

Harmful Effects of Parallel Economy:

The circulation of black money has adversely affected the economy in several ways. First, is
the misdirection of precious national resources? A part of black money is kept in a form that
contributes nothing/little to productive activities. Again, much around half to two third is
squandered away on ostentatious consumption of goods and services.

Second, it has enormously worsened the income distribution, and has thereby undermined
the fabric of the society.

Third, the existence of a big-sized unreported segment of the economy is a big handicap in
making a correct analysis and formulation of right policies for it. Nor. it is possible to
monitor the development in the economy with precision.

Fourth, the black money has eroded the social values of the society. The undeclared income
is ‘earned’ by illegitimate ways. This is spent in undesirable and vulgar manner.

What are the Measures Taken by the Government to Control Parallel Economy?
Since black money is a big evil, it is of utmost urgency that we get rid of it, and make the
economy function in a healthy manner. In this regard, certain measures have already been
adopted by the government.

1. Special Schemes:

The government at various times adopted special schemes to eliminate black money. The
schemes have been of various types. One such scheme was the Voluntary Disclosure
Scheme, This was adopted long back in 1951, and then twice in 1965 and again in 1975.
Under these schemes, those declaring their income were not to be punished. Some success
was achieved.

A scheme introduced in 1991-92 Budget envisaged that the people with unaccounted money,
if deposit the same with the National Housing Bank, will be given complete immunity from
enquiry and investigation. The government would deduct 40 per cent of such deposits with
the rest belonging to the depositors.

Another scheme, the latest one, is like the earlier ones (of 1951, 1965 and 1975) of voluntary
disclosure of income introduced in 1997. Such people were to pay the tax and keep the
declared income with them. The government realized over Rs. 10,000 crore as taxes.

2. Tax Efforts:

The second set of measures relates to tax efforts. One bears upon the tax rates. The
underlying approach is that, a reduction in tax rates will dampen the urge for concealing
income to evade taxes. Second, concerns the efforts at raising tax revenues through
administrative measures.

These consist of simplification of tax laws and tax procedures and more importantly the
procedure of tax raids. These measures too have yielded some results. The government has
also sought to curb growth of black money through measures like making it mandatory for
property registrars, banks, RBI, mutual funds, companies issuing shares and debenture to
report high-value transactions.

Cash withdrawal tax introduced in 2005-06 is also another measure to curb black money.
Integration of state level VAT into a country wide goods and services tax would also
facilitate the process of bringing all economic activities within tax information network’s
reach.

Controlling Parallel Economy in India

1. Checking Tax Evasion:
As evasion of taxes has been considered as the major root of the generation of black income.
Thus, the government has undertaken various administrative and legal measures to check
evasion of both direct and indirect taxes. These measures were undertaken as per the
recommendations of various commissions and committees such as Taxation Enquiry
Commission (1953), Kaldor’s recommendation for Indian Tax Reform (1956), Direct Taxes
Administrative Enquiry Committee (1958) and Direct Tax Enquiry Committee (1991). The
Commissions and Committees pointed out various loopholes and weaknesses in tax laws and
suggested various measures to check evasion of taxes.

2. Demonetization:
Demonetization of high denomination currency has also been suggested from different
levels. In India demonetization was done for the first time in 1946 and the value of
demonetized notes was about Rs. 144 crore. Demonetization of high denomination currency
worth Rs. 1,000 and Rs. 5,000 and Rs. 10,000 was again attempted in 1978. Till August
1981, notes worth Rs. 125 crore was demonetized. Thus demonetization as a measure of
checking black money is not at all successful and it is also very much unpopular.

3. Voluntary Disclosure Scheme:

The government introduced voluntary discloser schemes in different times to unearth black
money. This scheme was first introduced in 1951 which resulted disclosures amounting to
Rs. 71 crore and tax collection of Rs. 11 crore. Again the scheme (VDS) was introduced in
1965 with a provision of 60 per cent tax on disclosed income which resulted disclosures
worth Rs. 146 crore and tax collection of Rs. 68 crore.

Again as per the recommendation of the Direct Tax Enquiry Committee, the Government
again utilized this scheme (VDS) for both income and wealth. Accordingly, this scheme
disclosed Rs. 1,578 crore and tax collection of Rs. 248.7 crore as income tax and wealth tax.
The 1997-98 Budget again introduced the Voluntary Disclosure Scheme to unearth black
money.

4. Special Bearer Bond Scheme:

Government introduced special bearer bond scheme in 1981 in order to canalize unreported
money. Accordingly, the Special Bearer Bonds, 1981 of the face value of Rs. 10,000 each
were issued for a period of 10 years at 2 per cent rate of interest per annum. As per 1982-83
budget, a total to Rs. 875 crore was subscribed under the Special Bearer Bond Scheme.

5. Reduction of Tax Rates:

In order to make the taxes more productive, the government has been reducing the peak rate
of personal income tax from 61.9 per cent to 54 per cent in 1990-91 and then to 40 per cent
in 1992-93 budget and then finally to 30 per cent in 1997-98 Budget. Thus reduction of
personal income and corporation tax are expected to increase tax revenue by more than 25
per cent in 1994-95. The share of direct taxes in GDP has also increased from 2.1 per cent in
1990-91 to 2.8 per cent in 1994-95 as a result of reduction in tax rates.

6. Economic Liberalization:
Introduction of economic liberalization has removed the regime of controls and regulations
and thereby the extent of black economy would be reduced gradually.

7. Other Measures:
The Government has also introduced some other measures to contain the growth of black
income in the country which includes—Deposit in the National Housing Bank in 1991. NRI-
foreign exchanges remittance, issuing National Development Bonds in US dollars,
controlling the election expenses incurred by the candidates, conducting searches, seizures,
raids and other steps to plug loopholes in the tax-administration etc.

The 1995-96 Budget has also introduced a new scheme where undisclosed income detected
as a result of search shall be assessed separately at a flat rate of 60 per cent. But
unfortunately, all these measures are introduced in India half-heartedly, and thus the grip of
parallel economy is gradually being strengthened.

Had there been a sincere attempt to control the generation of black income in the
country by the government, bureaucrats, tax administrators etc., the network of parallel
economy might have been checked and the country might have experienced a better
economic situation characterized by better level of living for the common people, moderate
inflation and rational economic decisions.

India’s foreign trade

India’s Foreign Trade Policy: Origin, Meaning, importance

Foreign Trade is the important factor in economic development in any nation. Foreign trade
in India comprises of all imports and exports to and from India. The Ministry of Commerce
and Industry at the level of Central Government has responsibility to manage such
operations. The domestic production reveals on exports and imports of the country. The
production consecutively depends on endowment of factor availability. This leads to relative
advantage of the financial system. Currently, International trade is a crucial part of
development strategy and it can be an effective mechanism of financial growth, job
opportunities and poverty reduction in an economy. According to Traditional Pattern of
development, resources are transferred form the agricultural to the manufacturing sector and
then into services.

Historical review: Foreign trade in India began in the period of the latter half of the 19th
century. The period 1900-1914 saw development in India’s foreign trade. The augment in the
production of crops as oilseeds, cotton, jute and tea was mainly due to a thriving export
trade. In the First World War, India’s foreign trade decelerated. After post-war period,
India’s exports increased because demand for raw materials was increased in all over world
and there were elimination of war time restrictions. The imports also increased to satisfy the
restricted demand. Records indicated that India’s foreign trade was rigorously affected by the
great depression of 1930s because of decrement in commodity prices, decline in consumer’s
purchasing power and unfair trade policies adopted by the colonial government. During the
Second World War, India accomplished huge export surplus and accumulated substantial
amount of real balances. There was a huge pressure of restricted demand in India during the
Second World War. The import requirements were outsized and export surpluses were lesser
at the end of the war. Before independence, India’s foreign trade was associated with a
colonial and agricultural economy. Exports consisted primarily of raw materials and
plantation crops, while imports composed of light consumer merchandise and other
manufactures. The structure of India’s foreign trade reflected the organized utilization of the
country by the foreign leaders. The raw materials were exported from India and finished
products imported from the U.K. The production of final products were discouraged. For
instance, cotton textiles, which were India’s exports, accounted for the largest share of its
imports during the British period. This resulted in the decline of Indian industries. Since last
six decades, India’s foreign trade has changed in terms of composition of commodities. The
exports included array of conventional and non-traditional products while imports mostly
consist of capital goods, petroleum products, raw materials, intermediates and chemicals to
meet the ever increasing industrial demands. The export trade during 1950-1960 was
noticeable by two main trends. First, among commodities which were directly based on
agricultural production such as tea, cotton textiles, jute manufactures, hides and skins, spices
and tobacco exports did not increase on the whole, and secondly, there was a significant
boost in the exports of raw manufactures such as iron ore. In the period of 1950 to 1951,
main products dominated the Indian export sector. These included cashew kernels, black
pepper, tea, coal, mica, manganese ore, raw and tanned hides and skins, vegetable oils, raw
cotton, and raw wool. These products comprised of 34 per cent of the total exports. In the
period of 1950s there were balance of payments crunch. The export proceeds were not
enough to fulfil the emerging import demand. The turn down in agriculture production and
growing pace of development activity added pressure. The external factors such as the
closure of Suez Canal created tension on the domestic financial system. The critical problem
at that moment was that of foreign exchange scarcity. The Second Five Year Plan with its
emphasis on the development of industry, mining and transport had a large foreign exchange
factor. This tension on the balance of payments required the stiffening of import strategy at a
later stage.

Table: Measures initiated in India to Influence Foreign Trade during 1949-1950

to 1979-1980
Source: Inputs from various issues of Economic Survey, Ministry of Finance,
Government of India, New Delhi.

In the age of globalisation, India is new entrant to expand international trend. In 1991, the
government initiated some changes in its strategy on trade, foreign Investment, Tariffs and
Taxes under the name of “New Economic Reforms”. Indian government mainly concentrated
on reforms on Liberalization, openness and export sponsorship activity. It is witnessed that
foreign Trade of India has considerably revolutionized export in the Post reforms period.
Trade Volume increased and the composition of exports has undergone several noteworthy
changes. In Post – reform Period, the major provider to export’s growth has been the
manufacturing sector.

Though India has steadily opened up its wealth, its tariffs are high as compared with other
countries, and its conjecture norms are still restricted. Foreign trade in India in legal term is
the Foreign Trade (Development and Regulation) Act, 1992. The Act provide with the
development and regulation of foreign trade by assisting imports into, and supplementing
exports from India. To fulfil the requirements of the Act, the government may make
necessities for assisting and controlling foreign trade, may forbid, confine and regulate
exports and imports, in all or particular cases as well as subject them to exclusion.
Government is endorsed to devise and declare an export and import policy and also amend
the same from time to time, by notification in the Official Gazette, and is also authoritative to
appoint a ‘Director General of Foreign Trade’ for the purpose of the Act, including
formulation and accomplishment of the export-import policy.
The 15X15 Matrix Strategies was introduced in 1995 and major aim of this policy was to
recognize market diversification and commodity diversification. When reviewed the success
of this, it represented that the share of the total top 15 product groups exported to the top 15
market destinations declined from 71% in 1996-97 to 66% in 2000-01 in respect of the total
export of these 15 product groups for all destinations taken together. It clearly showed the
market diversification for these product groups. The major items of India’s exports
controlled in the Matrix continue to remain the same during 2000 – 01 such as Gems and
Jewellery, RMG Cotton including accessories and Cotton Yarn, Fabrics and Made Ups. The
top three destinations changed from US, UK and Japan to US, Hong Kong and UAE.
Another strategy was Focus LAC which was introduced in 1997 in order to enhance exports
of chosen products such as Textiles including RMG, Engineering goods and Chemical
products to Latin American Region. The highest growth rate of exports to this region was
accomplished during period of 2000-01 when the value of exports was high of US$ 982
million. Though the current trade between LAC and India is still low, there is possibility to
increase two-way trade between India and the LAC region. It is observed from the export
strategies of previous time is that the composition, competitiveness and complexion of world
products trade are changing rapidly and there is a need to review the market constantly for
any medium term export strategy to achieve a higher share of global exports on a sustainable
basis. The main concentration of previous foreign trade strategies was on the existing export
products of India.

Nonetheless, presently, the government has made policy on trade and investment policy that
has established an obvious change from protecting ‘producers’ to benefiting ‘consumers’. It
is reflected in its foreign trade strategy of India for 2004/09 which indicated that “for India to
become a major player in world trade we have also to make possible those imports which are
required to stimulate our economy”. With numerous economic alterations, globalisation of
the Indian economy has been the foremost factor to formulate the trade policies. The
announcement of a new Foreign Trade Policy of India for a five year period of 2004-09,
substituting until now taxonomy of EXIM Policy by Foreign Trade Policy is major step in
the development of foreign trade policy. This policy made the overall development of India’s
foreign trade and offers guidelines for the development of this sector. Main purpose of the
Exim Policy is to hasten the economy from low level of economic activities to high level of
economic activities by making it a globally oriented energetic economy and to derive
maximum benefits from expanding global market opportunities, to encourage continued
economic growth by providing access to essential raw materials, intermediates, components,
consumables and capital goods required for augmenting production, to boost the techno local
strength and efficiency of Indian agriculture, industry and services, thereby, improving their
competitiveness, to generate new employment and opportunities and encourage the
attainment of internationally accepted standards of quality. Finally, this policy provides
quality consumer products at reasonable prices. A vibrant export-led growth strategy of
doubling India’s share in global commodities trade with an attention on the sectors having
prospects for export development and potential for employment generation, represent the
main factor of the policy. These activities augment India’s international competitiveness and
assist in increasing the suitability of Indian exports. The trade policy recognizes major
strategies, outlines export incentives, and also focus on issues relating to institutional support
including simplification of procedures relating to export activities. India is now violently
pushing for a more moderate global trade management, especially in services. It has
understood a leadership role among developing nations in global trade debates, and played a
decisive part in the Doha negotiations. With economic reforms, globalisation of the Indian
economy has been the major factor in devising the foreign trade policy of India.
Source: Inputs from various issues of Economic Survey, Ministry of Finance,
Government of India, New Delhi.

The objective of the Foreign Trade Policy is to twofold India percentage share of global
merchandise trade and to act as an effectual instrument of economic growth by giving a
thrust to employment generation, especially in semi-urban and rural areas. The growth
performance of exports has been a result of watchful effort of the Government to lessen
transaction costs and assist trade. The guidelines of the Foreign Trade Policy (2004-09) for a
five year period clearly articulate objectives, strategies and policy initiatives that has been
involved in putting exports on a higher growth line.

Reviewing data of exports by Principal Commodities for the period April – October 20016-
17, the export growth was largely driven by petroleum products, engineering. Export of other
products like Agriculture and Allied Products, Ores and Minerals, Leather and Leather
Manufactures, Gems and Jewellery, Chemicals and related Products, Engineering Goods and
other commodities are shown below:
There are numerous challenges and issues in foreign trade. These include burden of export
promotion schemes, danger of circular trading, and risk of importing outdated machinery.
Sometimes policy fails to take a holistic view of trade issues. Other issue is relative
importance of the home market, the nature or the degree of State intervention and
recessionary conditions in the global market. India’s exports have suffered due to structural
constraints operating both on the demand and supply side. On the demand side exports have
continued to undergone the problems of adverse world trading environment, protectionist
sentiments in the developed countries in the guise of technical standards, environmental and
social concerns and tariff differentials in imports by the developed countries. At the supply
end, the factors that have constrained exports from India include infrastructure constraints,
high transaction costs, inflexibilities in labour laws, quality problems, constraints in
attracting FDI in the export sector, etc

It is summarized that foreign trade has significant function in the fiscal development of any
nation. India has made strong foreign trade policies and reformed these from time to time
with the process of globalisation and liberalization. Since 1991, India’s foreign trade
considerably transformed. India’s major exports include manufacturing and engineering
goods. India has good trading relations with all developed countries in the world. More than
fifty percent of India’s total export trade is with Asia and ASEAN region and about sixty
percent of India’s total imports is with the same countries. India’s wealth previously was
agricultural economy. India’s major requirement use to be food grains and other goods in
import with fast industrialization, the composition of India’s imports goods changed and
needed chemicals, fertilizers and machinery which were required to meet the developmental
requirements of country. In the composition of export; country sells agricultural products
such as tea, spices, and other raw materials. However, with the industrialization of the
financial system, compositions of exports changed. Currently, India exports products such as
machinery chemicals and marine products. This may enhance the fiscal condition of India.

Balance of Payment
The balance of payments (henceforth BOP) is a consolidated account of the receipts and
payments from and to other countries arising out of all economic transactions during the
course of a year.

In the words of C. P. Kindleberger : “The balance of payments of a country is a

systematic record of all economic transactions between the residents of the
reporting and the residents of the foreign countries during a given period of
time.” Here by ‘residents’ we mean individuals, firms and government.
By all economic transactions we mean individuals, firms and government. By all economic
transactions we mean transactions of both visible goods (merchandise) and invisible goods
(services), assets, gifts, etc. In other words, the BOP shows how money is spent abroad (i.e.,
payments) and how money is received domestically (i.e., receipts).

Thus, a BOP account records all payments and receipts arising out of all economic
transactions. All payments are regarded as debits (i.e., outflow of money) and are recorded in
the accounts with a negative sign and all receipts are regarded as credits (i.e., inflow or
money) and are recorded-in the accounts with a positive sign. The International Monetary
Fund defines BOP as a “statistical statement that subsequently summarises, for a specific
time period, the economic transactions of an economy with the rest of the world.”

Components of BOP Accounts

(A) The Current Account

The current account of BOP includes all transaction arising from trade in currently produced
goods and services, from income accruing to capital by one country and invested in another
and from unilateral transfers— both private and official. The current account is usually
divided in three sub-divisions.

The first of these is called visible account or merchandise account or trade in goods account.
This account records imports and exports of physical goods. The balance of visible exports
and visible imports is called balance of visible trade or balance of merchandise trade [i.e.,
items 1(a), and 2(a) of Table 6.1].

The second part of the account is called the invisibles account since it records all exports and
imports of services. The balance of these transactions is called the balance of invisible trade.
As these transactions are not recorded—in the customs office—unlike merchandise trade we
call them invisible items.
 It includes freights and fares of ships and planes, insurance and banking charges,
foreign tours and education abroad, expenditures on foreign embassies, transactions out of
interest and dividends on foreigners’ investment and so on. Items 2(a) and 2(b) comprise
services balance or balance of invisible trade in table 6.1.

The difference between merchandise trade and invisible trade (i.e., items 1 and 2) is known
as the balance of trade.

There is another flow in the current account that consists of two items [3(a) and 3(b)].
Investment income consists of interest, profit and dividends on bonus and credits. Interest
earned by a US resident from the TELCO share is one kind of investment income that
represents a debit item here.

There may be a similar money inflow (i.e., credit item). Unrequited transfers include grants,
gifts, pension, etc. These items are such that no reverse flow occurs. Or these are the items
against which no quid pro quo is demanded. Residents of a country received these cost-free.
Thus, unilateral transfers are one-way transactions. In other words, these items do not
involve give and take unlike other items in the BOP account.

Thus the first three items of the BOP account are included in the current account. The current
account is said to be favourable (or unfavourable) if receipts exceed (fall short of) payments.

(B) The Capital Account

The capital account shows transactions relating to the international movement of ownership
of financial assets. It refers to cross-border movements in foreign assets like shares, property
or direct acquisitions of companies’ bank loans, government securities, etc. In other words,
capital account records export and import of capital from and to foreign countries.
The capital account is divided into two main subdivisions: short term and the long term
movements of capital. A short term capital is one which matures in one year or less, such as
bank accounts.

Long term capital is one whose maturity period is longer than a year, such as long term
bonds or physical capital. Long term capital account is, again, of two categories: direct
investment and portfolio investment. Direct investment refers to expenditure on fixed capital
formation, while portfolio investment refers to the acquisition of financial assets like bonds,
shares, etc. India’s investment (e.g., if an Indian acquires a new Coca- Cola plant in the
USA) abroad represents an outflow of money. Similarly, if a foreigner acquires a new
factory in India it will represent an inflow of funds.

Thus, through acquisition or sale and purchase of assets, capital movements take place.
Investors then acquire controlling interests over the asset. Remember that exports and
imports of equipment do not appear in the capital account. On the other hand, portfolio
investment refers to changes in the holding of shares and bonds. Such investment is portfolio
capital and the ownership of paper assets like shares does not ensure legal control over the
firms.

[In this connection, the concepts of capital exports and capital imports require little elabo -
ration. Suppose, a US company purchases a firm operating in India. This sort of foreign
investment is called capital import rather than capital export. India acquires foreign currency
after selling the firm to a US company. As a result, India acquires purchasing power abroad.
That is why this transaction is included in the credit side of India’s BOP accounts. In the
same way, if India invests in a foreign country,, it is a payment and will be recorded on the
debit side. This is called capital export. Thus, India earns foreign currency by exporting
goods and services and by importing capital. Similarly, India releases foreign currency by
importing visible and invisibles and exporting capital.]

(C) Statistical Discrepancy Errors and Omissions

The sum of A and B (Table 6.1) is called the basic balance. Since BOP always balances in
theory, all debits must be offset by all credits, and vice versa. In practice, it rarely happens—
particularly because statistics are incomplete as well as imperfect. That is why errors and
omissions are considered so that the BOP accounts are kept in balance (Item C).

(D) The Official Reserve Account

The total of A, B, C, and D comprise the overall balance. The category of official reserve
account covers the net amount of transactions by governments. This account covers
purchases and sales of reserve assets (such as gold, convertible foreign exchange and special
drawing rights) by the central monetary authority.

Now, we can summarise the BOP data

Current account balance + Capital account balance + Reserve balance = Balance of Payments

(X – M) + (CI – CO) + FOREX = BOP

X is exports,

M is imports,

CI is capital inflows,

CO is capital outflows,

FOREX is foreign exchange reserve balance.

BOP Always Balances

A nation’s BOP is a summary statement of all economic transactions between the residents
of a country and the rest of the world during a given period of time. A BOP account is
divided into current account and capital account. Former is made up of trade in goods (i.e.,
visible) and trade in services (i.e., invisibles) and unrequited transfers. Latter account is made
up of transactions in financial assets. These two accounts comprise BOP

A BOP account is prepared according to the principle of double-entry book keeping. This
accounting procedure gives rise to two entries— a debit and a corresponding credit. Any
transaction giving rise to a receipt from the rest of the world is a credit item in the BOP
account. Any transaction giving rise to a payment to the rest of the world is a debit item.

The left hand side of the BOP account shows the receipts of the country. Such receipts of
external purchasing power arise from the commodity export, from the sale of invisible
services, from the receipts of gift and grants from foreign governments, international lending
institutions and foreign individuals, from the borrowing of money from the foreigners or
from repayment of loan by the foreigners.

The right hand side shows the payments made by the country on different items to the
foreigners. It shows how the total of external purchasing power is used for acquiring imports
of foreign goods and services as well as the purchase of foreign assets. This is the accounting
procedure.

However, no country publishes BOP accounts in this format. Rather, by convention, the BOP
figures are published in a single column with positive (credit) and negative (debit) signs.
Since payments side of the account enumerates all the uses which are made up of the total
foreign purchasing power acquired by this country in a given period, and since the receipts of
the accounts enumerate all the sources from which foreign purchasing power is acquired by
the same country in the same period, the two sides must balance. The entries in the account
should, therefore, add up to zero.

In reality, why should they add up to zero? In practice, this is difficult to achieve where
receipts equal payments. In reality, total receipts may diverge from total payments because
of:

(i) The difficulty of collecting accurate trade information

(ii) The difference in the timing between the two sides of the balance

(iii) A change in the exchange rates, etc.

Because of such measurement problems, resource is made to ‘balancing item’ that intends to
eliminate errors in measurement. The purpose of incorporating this item in the BOP account
is to adjust the difference between the sums of the credit and the sums of the debit items in
the BOP accounts so that they add up to zero by construction. Hence the proposition ‘the
BOP always balances’. It is a truism. It only suggests that the two sides of the accounts must
always show the same total. It implies only an equality. In this book-keeping sense, BOP
always balances.

Thus, by construction, BOP accounts do not matter. In fact, this is not so. The accounts have
both economic and political implications. Mathematically, receipts equal payments but it
need not balance in economic sense. This means that there cannot be disequilibrium in the
BOP accounts.

A combined deficit in the current and capital accounts is the most unwanted macroeconomic
goal of ,an economy. Again, a deficit in the current account is also undesirable. All these
suggest that BOP is out of equilibrium. But can we know whether the BOP is in equilibrium
or not? Tests are usually three in number:

(i) Movements in foreign exchange reserves including gold

(ii) Increase in borrowing from abroad

(iii) Movements in foreign exchange rates of the country’s currency in question.

Firstly, if foreign exchange reserves decline, a country’s BOP is considered to be in

disequilibrium or in deficit. If foreign exchange reserves are allowed to deplete rapidly it
may shatter the confidence of people over the domestic currency. This may ultimately lead to
a run on the bank.
Secondly, to cover the deficit a country may borrow from abroad. Thus, such borrowing
occurs when imports exceed exports. This involves payment of interest on borrowed funds at
a high rate of interest.

Finally, the foreign exchange rate of a country’s currency may tumble when it suffers from
BOP disequilibrium. A fall in the exchange rate of a currency is a sign of BOP
disequilibrium.

Thus, the above (mechanical) equality between receipts and payments should not be
interpreted to mean that a country never suffers from the BOP problems and the international
economic transactions of a country are always in equilibrium.

Implications of an Unbalance in the BOP

Although a nation’s BOP always balances in the accounting sense, it need not balance in an
economic sense.

An unbalance in the BOP account has the following implications:

In the case of a deficit

(i) Foreign exchange or foreign currency reserves decline,

(ii) Volume of international debt and its servicing mount up, and

(iii) The exchange rate experiences a downward pressure. It is, therefore, necessary to correct
these imbalances.

BOP Adjustment Measures:

BOP adjustment measures are grouped into four:

(i) Protectionist measures by imposing customs duties and other restrictions, quotas on

imports, etc., aim at restricting the flow of imports,

(ii) Demand management policies—these include restrictionary monetary and fiscal policies

to control aggregate demand [C + I + G + (X – M)],

(iii) Supply-side policies—these policies aim at increasing the nation’s output through

greater productivity and other efficiency measures, and, finally,
(iv) exchange rate management policies— these policies may involve a fixed exchange rate,
or a flexible exchange rate or a managed exchange rate system.

As a method of connecting disequilibrium in a nation’s BOP account, we attach importance

here to exchange rate management policy only.

UNIT 4
Indian Finance System
Mobilization of Resources for Development
Mobilization of Resources: Mobilizing is the process of assembling and organizing things
for ready use or for a achieving a collective goal. The term mobilization of resources should
be seen in the same context. Mobilization of resources means the freeing up of locked
resources.

Every country has economic resources within its territory known as domestic resources. But
often they might not be available for collective use. The percentage of resources used when
compared to the potential is often very low. For a country to grow, identification and
mobilization of its resources is necessary. It should be available for easy use and for central
and state level planning.

Types of Resources of India

1. Natural Resources: Coal, Petroleum, Natural Gas, Water, Spectrum etc

2. Human Resources: The labor force and intellectual capacity of a nation.

The proper utilization of these resources lead to generation of economic resources –

savings, investment capital, tax etc. While mobilization of resources is considered, the
mobilization of economic resources (financial resources) should also be studied.

Mobilization of Natural Resources

India, though a country with sufficient reserves, due to policy bottlenecks, is importing coal
and iron. This is increasing our Current Account Deficit.

Mobilization of Human Resources

Organizing human potential for ready use is necessary for growth of India. In-fact, as
country of 125 crore people, India now is eyeing more on its human resource potential. The
demographic dividend is also in favour of India.

 Mobilization of human resources highlights the need to empower human

resources.
 Weaker sections like women, children, SC, ST, OBC etc should be brought
into mainstream.
 There should be right employment opportunities for human resources, and
when there is lack of skill the job demands, there should be skill
development programs.
 Utilize the demographic dividend.
 India is currently levering on its technologists – engineers, doctors and
scientists.

Mobilization of Financial Resources

If a country needs to grow, more goods and services should be produced. The production can
be done by government sector, private sector or in PPP mode. But for that, the economic
resources of a country should be mobilised.

In India, despite having good savings rate, domestic investment is less. Indians are investing
in less productive assets like gold and consumer durable.  If India needs to grow, there
should be more investments in agriculture, manufacturing or services.

 In India, tax collected is very less. The tax base has to be widened.
 Four factor of production- land, labour, capital and organization – should
come to together. There should be an atmosphere for growth and investment.
 Organizations do not “spontaneously emerge” but require the mobilization
of resources.
 In modern capitalistic society, these resources are more “free flowing” and
are easier to mobilize than in more traditional societies. Many factors impact
the development of the organization.
 Initial Resource Mix: There are various resource needs in a starting
organization (technology, labor, capital, organizational structure, societal
support, legitimacy, etc.). But the right mix of resources are not always
available.
 The most important resource of an organization is it’s people.
 More savings and more productive investment.

How does public sector mobilize domestic resources?

 1. Taxation
2. Public revenue generation for investment in social services and
infrastructure.

How does private sector mobilize domestic resources?

The private sector mobilizes the savings of households and firms through

financial intermediaries, which allocate these resources to investment in productive
activities.

Issues with mobilisation of resources

Issues with mobilisation of resources include all those issues and problems highlighted in –
mobilization of natural resources, human resources and financial resources.

Why is Domestic Resource Mobilization (DRM) particularly important?

In low-income countries confronting widespread poverty, mobilizing domestic resources

is particularly challenging, which has led developing countries to rely on foreign aid, foreign
direct investment, export earnings and other external resources. Nevertheless, there are
compelling reasons to give much more emphasis to DRM.

 Greater reliance on DRM is vital to elevating economic growth, accelerating

poverty reduction and underpinning sustained development.
 High-growth economies typically save 20-30 per cent or more of their
income in order to finance public and private investment.
 DRM is potentially more congruent with domestic ownership than external
resources.
 Foreign aid invariably carries restrictions and conditionality.
 FDI is primarily oriented to the commercial objectives of the investor, not
the principal development priorities of the host country.
 DRM is more predictable and less volatile than aid, export earnings, or FDI.

Economic Planning-Importance of Planning for Economic Development

Economic planning is often regarded as technique of managing an economy. When the

structure of an economy becomes complex and subject to rapid change and transformation
(due to population growth, discovery of resources, industrialisation, etc.) some sort of
advance thinking becomes necessary to resolve that complexity and to prepare the economy
for those changes. Such preparation is called planning.

Most often that not an economic plan is regarded as a programme of action. It may also be
taken to mean an instrument for regulating a free private enterprise economy. The regulatory
measures may vary from country to country.

They may leave either too much or too little a degree of freedom to private enterprise. This
may hamper the working out of the plan. Many plans leave their programmes incomplete
because they hesitate to exercise their regulatory functions. They are little more than a list of
public development projects.

Many other plans perform their regulatory functions with such seriousness and severity that
their programmes of action are completely jeopardised. In such planned economies any sort
of enterprise ceases to exist. The correct plan is one in which a comprehensive and consistent
programme of action is sought to be implemented by carefully harnessing enterprise for the
success of the plan.

It should be noted that a plan is just a programme of action, it is not a guarantee for action. In
short, a good plan is one which makes adequate provisions for and ensures that its targets are
properly fulfilled.

Objectives of Planning:

The objectives of planning are many and varied. These aims are not the same for all
countries, not are they same for the same country at all times.

Some major objectives of economic planning are:

(a) An improvement in the standard of living of the people through a sizable increase in
national income within a short period of time;

(b) A large expansion of employment opportunities for the removal of unemployment and for
creating jobs and incomes;

(c) A reduction in all types of social, economic and regional inequalities;

(d) An efficient utilisation of the country’s resources for faster growth;

(e) Removal of mass poverty within a definite time limit through land reform, employment
creation, and provision of educational and medical facilities;
(f) Attainment of self-reliance by reducing dependence on foreign capital and foreign aid.

Importance of Planning:

The importance of planning lies in the fact that it is an instrument through which important
socio-economic objectives, unrealisable under free private enterprise, are likely to be
effectively realised.

In an underdeveloped country like India these objectives may be broadly grouped as:

(a) A higher rate of growth than was being realised in the absence of the plan;

(b) A greater degree of economic equality than was possible under free enterprise;

(c) Fuller employment opportunities for the growing labour force of a country; and

(d) Larger provisions for capital formation as one of the principal instruments for
accelerating the rate of growth.

In the language of Gunnar Myrdal, “A main element of every national development plan
is a decision to increase the total amount of investment, aimed at raising the productive
powers of the country, and to procure the capital formation necessary for this
purpose.”

The usefulness can be gauged only by examining the extent to which it succeeds in removing
the ills of unregulated free enterprise, while simultaneously realising the above goals. In
underdeveloped countries like India an economic plan is to be looked at not as a substitute
for private enterprise.

Rather it is to be taken as the only instrument through which enterprise can spread to non-
traditional forms of economic activity.

In countries like India the most important objective of an economic plan is to bring into
being new forms of production by accelerating capital formation. This will surely raise the
overall productivity of the economy and thus raise people’s income by providing them
adequate employment opportunities, and thus remove the problems of mass poverty.

Prima facie, the over-populated underdeveloped countries often suffer from capital
starvation. In other words, there is always a shortage of all types of productive capital
equipment in such countries. So most people have to depend on land. Under-employment
and unemployment are just a reflection of this.
Economists like Nurkse and Lewis believe that the only way to provide gainful employment
opportunities and better living standards to the masses is to equip them with more capital.
The accumulation of capital must proceed at a pace which would closely correspond to the
rate of population growth and productivity change.

It is thus clear that the basic aim to economic planning in a backward country like India is to
achieve in different ways a more rapid of capital formation than what would have been
possible under private enterprise. “The success of the plan”, says Prof. D. Bhattacharya, “is
to be judged mainly by the advance it registers in respect of capital formation as
compared with the period before the plan was launched.”

In short, only planned economic development can hope to achieve a rate of growth which is
politically acceptable. The most fundamental objective of planning is to alter the pattern of
resources use and, if possible, to intensify such use in such a fashion as to achieve certain
socially desirable goals.

For an LDC like India the most important goal is the removal of mass poverty and growing
unemployment by putting resources more effectively into use. In other words, planning must
focus its attention primarily on the task of improving the pattern of resource use, for raising
incomes and improving the pattern of income distribution.

10 Objective of Economic Planning of India

1. Economic Development:
The main objective of Indian planning is to achieve the goal of economic development
economic development is necessary for under developed countries because they can solve the
problems of general poverty, unemployment and backwardness through it.

Economic development is concerned with the increase in per capita income and causes
behind this increase.

In order to calculate the economic development of a country, we should take into

consideration not only increase in its total production capacity and consumption but also
increase in its population. Economic development refers to the raising of the people from
inhuman elements like poverty unemployment and ill heath etc.

2. Increase Employment:
Another objective of the plans is better utilization of man power resource and increasing
employment opportunities. Measures have been taken to provide employment to millions of
people during plans. It is estimated that by the end of Tenth Plan (2007) 39 crore people will
be employed.
3. Self-Sufficient:
It has been the objective of the plans that the country becomes self-sufficient regarding food
grains and industrial raw material like iron and steel etc. Also, growth is to be self sustained
for which rates of saving and investment are to be raised. With the completion of Third Plan,
Indian economy has reached the take off stage of development. The main objective of the
Tenth Plan is to get rid of dependence on foreign aid by increasing export trade and
developing internal resources.

4. Economic Stability:
Stability is as important as growth. It implies absence of frequent end excessive occurrence
of inflation and deflation. If the price level rises very high or falls very low, many types of
structural imbalances are created in the economy.

Economic stability has been one of the objectives of every Five year plan in India. Some rise
in prices is inevitable as a result of economic development, but it should not be out of
proportions. However, since the beginning of second plan, the prices have been rising rather
considerably.

5. Social Welfare and Services:

The objective of the five year plans has been to promote labour welfare, economic
development of backward classes and social welfare of the poor people. Development of
social services like education, health, technical education, scientific advancement etc. has
also been the objective of the Plans.

6. Regional Development:
Different regions of India are not economically equally developed. Punjab, Haryana, Gujarat,
Maharashtra, Tamil Nadu, Andhra Pradesh etc. are relatively more developed. But U.P.,
Bihar, Orissa, Nagaland, Meghalaya and H.P. are economically backward. Rapid economic
development of backward regions is one of the priorities of five year plans to achieve
regional equality.

7. Comprehensive Development:
All round development of the economy is another objective of the five year plans.
Development of all economic activities viz. agriculture, industry, transport, power etc. is
sought to be simultaneously achieved. First Plan laid emphasis on the development of
agriculture. Second plan gave priority to the development of heavy industries. In the Eighth
Plan maximum stress was on the development of human resources.

8. To Reduce Economic Inequalities:

Every Plan has aimed at reducing economic inequalities. Economic inequalities are
indicative of exploitation and injustice in the country. It results in making the rich richer and
the poor poorer. Several measures have been taken in the plans to achieve the objectives of
economic equality specially by way of progressive taxation and reservation of jobs for the
economically backward classes. The goal of socialistic pattern of society was set in the
second plan mainly to achieve this objective.

9. Social Justice:
Another objective of every plan has been to promote social justice. It is possible in two ways,
one is to reduce the poverty of the poorest section of the society and the other is to reduce the
inequalities of wealth and income. According to Eighth Plan, a person is poor if the spends
on consumption less than Rs. 328 per month in rural area and Rs. 454 per month in urban
area at 1999-2000 prices. About 26 percent of Indian population lives below poverty line.
The tenth plan aims to reduce this to 21%.

10. Increase in Standard of Living:

The other objective of the plan is to increase the standard of living of the people. Standard of
living depends on many factors such as per capita increase in income, price stability, equal
distribution of income etc. During the period of Plans, the per capita income at current prices
has reached only up to Rs. 20988.

Salient features of India’s five years plans priorities- Target

Achievements, Failures

Salient Features of India’s Five Year Plan

1. Democratic:
The first important feature of Indian planning is that it is totally democratic. India being the
largest democratic country in the world has been maintaining such a planning set up where
every basic issue related to its Five Year Plan is determined by a democratically elected
Government. Moreover, while formulating a Five Year Plan, opinions of various tiers of
Government, various organisations, institutions, experts etc. are being given due
considerations.

2. Decentralised Planning:
Although since the inception of First Plan, the importance of decentralised planning was
emphasized so as to achieve active people’s participation in the planning process, but the real
introduction of decentralised planning was made in India for the first time during the Seventh
Plan.

Thus decentralised planning is a kind of planning at the grass root level or planning from
below. Under decentralised planning in India, emphasis has been given on the introduction of
district planning, sub-divisional planning and block-level planning so as to reach finally the
village level planning successfully.
3. Regulatory Mechanism:
Another important feature of Indian planning is that it is being directed by a central planning
authority, i.e., the Planning Commission of India which plays the role of regulatory
mechanism, so as to provide necessary direction and regulation over the planning system.

Thus under the present regulatory mechanism, every planning decision in India originates
from the Planning Commission and being finally approved by the National Development
Council. Moreover, the Planning Commission of India is also having adequate regulatory
mechanism over the successful implementation of planning.

4. Existence of Central Plan and State Plan:

Another important feature of Indian planning is that there is the co-existence of both the
Central Plan and State Plans. In every Five Year Plan of the country, separate outlay is
earmarked both for the Central Plan and also for the State Plans. Central Plan is under the
exclusive control of the Planning Commission and the Central Government, whereas the
State Plan is under the exclusive control of State Planning Board and State Government
which also requires usual approval from the Planning Commission.

5. Public Sector and Private Sector Plan:

Another notable feature of India’s Five Year Plan is that in each plan, a separate outlay is
earmarked both for public sector and the private sector. In each five year plan of the country,
public sector investment and private sector investment amount is separately fixed, which
comprises the total investment in each plan. India, being a mixed economy, it is quite natural
that a separate investment outlay for public as well as the private sector is being maintained
in each plan.

6. Periodic Plan:
One of the important features of Indian planning is that it has adopted a periodic plan of 5-
year period having five depurate Annual Plan components. This type of periodic plan
approach is quite suitable for realizing its definite targets.

7. Basic Objectives:
One of salient features of Indian Five Year Plan is that each and every plan is guided by
certain basic or fundamental objectives which are almost common in most of our plans.

The major objectives of economic planning in India mostly consist:

(a) Attainment of higher rate of economic growth

(b) Reduction of economic inequalities

(c) Achieving full employment

(d) Attaining economic self reliance

(e) Modernisation of various sectors

(f) Redressing the imbalances in the economy.

In general, Growth with social justice is the main objective of economic planning in India.

8. Unchanging Priorities:
Five year plans in India are determining its priorities considering the needs of the country. It
is being observed that Indian Five Year Plans have been giving too many priorities on the
development of industry, power and agriculture with minor modifications. Thus there is no
remarkable changes in the priority pattern of Indian planning, although in recent years
increasing priorities are also being laid on poverty eradication programmes and on
employment generating schemes.

9. Balanced Regional Development:

Another salient feature of India’s Five Year Plan is that it constantly attaches much
importance on balanced regional development. Development of backward regions is one of
the important objectives of Indian planning. India’s planning system has even isolated some
states under “special category states” so as to channelize additional resources to these
backward states for their rapid development. Special budgetary relief in the form of tax
holiday or tax relief for establishing industries into back-ward regions of the country.

10. Perspective Planning on Basic Issues or Problems:

Another important feature of Indian planning is that it has adopted the system of perspective
planning on some basic issues or problems of the country, for a period of 15 to 20 years on
the basis of necessary projections.

11. Programme Implementation and Evaluation:

Indian planning system is broadly supported by programme implementation machinery,
which used to play a very important role. Programme implementation machinery includes
various Government departments which are usually involved for the implementation of the
plan. More there is an evaluation machinery which usually conducts pre-project evaluation
and post-project evaluation of every planning project of the country.

12. Shortfalls in Target Realization:

Another notable feature of India’s Five Year Plan is its shortfalls in target realization.
Although targets are fixed for every plans in respect of rate of growth of national income,
employment, population, production of some important items etc. But in most of the cases
these targets are not fulfilled to the fullest extent, excluding certain specific cases.
Such shortfalls in target realization lead to the problems of spill over of projects into next
five year plans and cost over-runs. Thus we have seen that salient features of India’s Five
Year Plans, although numerous but some of these are quite common to that of other countries
while some are very much uncommon even.

Achievements of Planning:

1. A Higher Growth Rate:

Economic planning in India aims at bringing about a rapid economic development in all
sectors.

That is to say, it aims at a higher growth rate. India’s macroeconomic performance has been
only moderately good in terms of GDP growth rates.

The overall rate of growth stands at 4.8 per cent for the whole planning period (1950-2007)
Compared with India’s own past (1900- 1920) when she was caught in a low level
equilibrium trap, growth acceleration during the last 60 years has been impressive indeed.

2. Growth of Economic Infrastructure:

India’s performance in building up the necessary economic infrastructure is really
praiseworthy. At the inception of economic planning, road kilometer was 4 lakh kms. India
has now more than 3 million km of road network, making it one of the largest in the world.

Railway route length increased from 53,596 kms in 1951 to nearly 63,500 kms in 2005- 06.
Today, the Indian railway system is the largest in Asia and the fourth largest in the world.
Similarly, other modes of transport like shipping, civil aviation, etc., have also expanded
phenomenally.

3. Development of Basic and Capital Goods Industries:

Another major area of success of Indian planning is the growth of basic and capital goods
industries. With the adoption of the Mahalanobis Strategy of development during the Second
Plan period, some basic and capital goods industries like iron and steel witnessed spectacular
growth.

4. Higher Growth of Agriculture:

The most significant aspect of India’s Five Year Plans is that the overall rate of growth of
food production has now exceeded the rate of growth of population. Though in the early
years of planning, agricultural performance was miserable resulting in the emergence of food
crisis.

But now, due to the impact of bio-chemical revolution in Indian agriculture, food crisis
seems to be a thing of the past. She has attained self-sufficiency in food grains.
5. Savings and Investment:
The rise in the domestic savings rate from 10 p.c. of GDP at the initial stages of planning to
around 19 p.c. in 1980-81 is definitely impressive. However, this rate increased to 34.8 p.c.
by the end of March 2007. Similarly, India’s record in gross domestic capital formation rose
from 20.3 p.c. in 1980-81 to 22.8 p.c. of GDP in 2001- 02. But it rose to 36 p.c. in 2006-07.

Major Failures of Planning:

Indian planning is yet to score good marks.

The major areas of failure of planning in India are:

1. Inadequate Growth Rate:

In quantitative terms, the growth rate of the Indian economy may be good but not
satisfactory by any standards. Except the First and Sixth Five Year Plans, the actual growth
rate remained below the targeted growth rates of GNP and per capita income.

Only in recent plans (both Ninth and Tenth plan), actual growth rate has exceeded the plan
targets. In terms of per capita income, India is one of the poorest nations of the world even
after more than 58 years of democratic planning.

2. Whither India’s Socialistic Society:

Indian planning aims at building up a ‘socialistic pattern of society’, in an otherwise
capitalistic framework, through various socialistic measures. We have not yet made any
significant progress towards the goal of attaining a socialistic pattern of society even after
nearly 58 years of planning.

The concept of socialistic pattern of building a society has been altogether discarded when
we introduced new economic policy measures in mid-1991. Instead, Indian economy very
much moves on the capitalistic path.

3. Economic Inequality and Social Injustice:

The twin aspects of social justice involves on the one hand, the reduction in economic
inequalities, and, on the other, the reduction of poverty. A rise in national income with
concentration of economic power in the hands of a few people is not desirable.

In an otherwise capitalist framework, inequality in the distribution of income and wealth is

inevitable. In India’s socio-political set-up, vast inequalities exist. Indian plans aim at
reducing such inequalities, so that the benefits of economic development percolate down to
the lower group of the society.
The objective of removal of poverty got its clear-cut enunciation only in the Fifth Plan for
the first time. Due to the defective planning approach, income inequality widened and
poverty became rampant. The incidence of poverty was on the rise. It is now nearly 28 p.c.
(2004-05).

4. Unemployment:
Removal of unemployment is considered to be another important objective of India’s Five
Year Plans. But, unfortunately, it never received the priority it deserved. In the Sixth Plan
(1978-83) of the Janata Government, employment was accorded a pride of place for the first
time.

However, the Seventh Plan treated employment as a direct focal point or policy. As a result,
the employment generation programme in India has received a rude shock and the problem
of unemployment is mounting up plan after plan. The number of job-seekers increased from
363 lakh as on December 1991 to 406 lakhs as on June 2006. In the recent years, the trend is
on the rise.

In view of this, it is jokingly said that “how many plans the country needs to make the
whole country unemployed?” In view of these failures, Sukhamoy Chakraborty remarks
that Indian plans may be good on paper, but are rarely good in implementation. So, the need
of the hour is to formulate a correct economic policy as well as its implementation.

Factors affecting successful implementations of Plans

It is frustrating to spend time creating a strategic plan for your company and then see it fail.
As a business owner, you need to understand the barriers that prevent planning from being
implemented successfully. Watch for these six barriers to effective planning, so you can
address the issues that may stop your plan before you launch it.

Lack of Leadership

Being a leader is about more than a title following your name. It requires developing a
strategy and then expressing the vision in a clear way, so the entire team understands the
goal. When a vision is clearly laid out, business leaders must inspire team members to join
the program for the new vision and implement new strategies.

Even when leaders do all this well, they still need to be constant motivators, project
managers and evaluators of the strategy’s implementation. Without motivation, new
strategies fall behind as workers return to their habitual ways of doing things.

Excessive Distractions Prevent Effective Planning

Too many distractions present a significant barrier to effective planning. It could be that a
leader is trying to implement too many things at once, and the team is confused about the
priorities. Another way that a distraction prevents effective planning implementation occurs
when a leader attempts to roll out a new program during a peak business season.

Your team can’t focus on new strategies and processes if they are working overtime taking
care of clients. As the leader, understand that timing the implementation of new strategy
carefully is as important as the strategy itself.

Lack of Systems

Having the right systems in place to support a new strategy is important for success. Systems
could include hardware or software systems or could be something as simple as the
fulfillment process chain of events. Leaders need to look at the resources in place before
implementing a new strategy. For example, a new customer-retention management program
might help the team become more efficient from the sale through the delivery of goods.

However, if the computer systems haven’t been upgraded, the new program could overload
the computers and cause crashes and freezes. Team members can’t be productive while using
a system that isn’t working correctly.

Limited Manpower to Complete Tasks

Some strategies require a bigger labor force. Without it, seeing a new strategy implemented
effectively has potential problems. For example, a new lead-generation plan could do a great
job of flooding your sales team with leads. However, if the sales team doesn’t have the
capacity to follow up with all the leads, the strategy wastes money and burns prospects.

Additionally, the new influx of orders needs a fulfillment team capable of handling the new
orders. Make sure you have the right people in place to execute new strategies effectively.

Inadequate Resources and Funding

You may have a great plan but don’t have the resources to execute it properly. A lack of
resources can impact marketing, talent acquisition and new distribution programs.
Bootstrapping new changes can strain the team as it implements something that isn’t ready to
go. When you don’t have the funding, segment the strategy and roll it out in phases that meet
budget limitations.

Impractical Business Planning

Some ideas are just not practical. Don’t be stubborn about the execution of a new strategy. A
strategy is a concept that is fleshed out during implementation. Business leaders must be
flexible to see what is working and what isn’t working in the strategy and make adjustments
accordingly.

Just because something seems like a good idea on paper doesn’t mean it will translate into
practice without any glitches.

Working Knowledge of Inflation and its impact on economy with special

reference to INDIA
By inflation we mean a general rise in prices. To be more correct, inflation is a persistent rise
in the general price level rather than a once-for-all rise in it.

On the other hand, deflation represents persistently falling prices. Inflation or persistently
rising prices is a major problem in India today. When price level rises due to inflation the
value of money falls. When there is a persistent rise in price level, the people need more and
more money to buy goods and services.

To enable the people to meet their daily needs of consumption of goods and services when
their prices are rising, their incomes must rise if they have to maintain their standard of
living. For government employees, their dearness allowance is increased. Wages and salaries
employed in the organised private sector are also raised, though after some time- lag.

But people with fixed incomes and those who are self-employed are unable to raise their
prices and suffer a lot due to inflation. The poor suffer the most from persistent rise in prices,
especially of food-grains and other essential items.

Rate of inflation during the seventies and eighties was very high as compared to the rates of
inflation experienced earlier during previous periods. In India, in recent years, 2010-11,
2011-12 and 2012-13, rate of inflation as measured by consumer price index (CPI) has been
in double digit figures. Prior to Jan. 2013, even WPI inflation was quite high which
compelled Reserve Bank of India to adopt tight monetary policy.

Causes of Inflation:
Let us understand how the inflation originates or what causes it.

Depending upon the specific causes, three types of inflation have been distinguished:

(1) Demand-pull inflation,

(2) Cost-push inflation, and

(3) Structuralist inflation.

An important cause of demand-pull inflation is the excessive growth of money supply in the
economy. We will explain this cause of inflation in the Monetarist Theory of Inflation. We
will explain and discuss below these three types of inflation.

Demand-Pull Inflation:
This represents a situation where the basic factor at work is the increase in aggregate demand
for output either from the households or the entrepreneurs or government organised. The
result is that the pressure of demand is such that it cannot be met by the currently available
supply of output.

If, for example, in a situation of full employment, the government expenditure or private
investment goes up, this is bound to generate an inflationary pressure in the economy.
Keynes explained that inflation arises when there occurs an inflationary gap in the economy
which comes to exist when aggregate demand for goods and services exceeds aggregate
supply at full-employment level of output.

Basically, inflation is caused by a situation whereby the pressure of aggregate demand for
goods and services exceeds the available supply of output (both being counted at the prices
ruling at the beginning of a period). In such a situation, the rise in price level is the natural
consequence.

Now, this imbalance between aggregate demand and supply may be the result of more than
one force at work. As we know, aggregate demand is the sum of consumers’ spending on
consumer goods and services, government spending on goods and services and net
investment being contemplated by the entrepreneurs.

When aggregate demand for all purposes—consumption, investment and government,

expenditure—exceeds the supply of goods at current prices, there is arise in price level.
Since inflation is a continuous increase in the price level, not a one time rise in it, sustained
inflation requires continuous increase in aggregate demand.

In the modem macroeconomics, inflation is explained with AD-AS model. Inflation can be
explained by increase in aggregate demand (called “demand shock”) or decrease in aggregate
supply or rise in cost of production generally called “supply shock”. Demand-pull inflation
occurs when there is upward shift in aggregate demand when supply shocks are absent.

As stated above, demand-pull inflation occurs when there is increase in any component of
aggregate demand, namely, consumption demand by households, investment by business
firms, increase in government expenditure unmatched by increase in taxes (that is, deficit
spending by the government financed by either creation of new money by the central bank or
borrowing by the government from the market).

If aggregate supply of output does not increase or increases by a relatively less amount in the
short run, this will cause demand-supply imbalances which will lead to demand-pull inflation
in the economy, that is, general rise in price level.

Similarly, an inflationary process will be initiated if business firms anticipating the

opportunities of making profits decide to invest more and to finance the new investment
projects by borrowing from the banks being unable to get sufficient funds through savings
out of profits and savings invested by the public in them.

This new investment by the firms leads to the increase in aggregate demand for goods and
services. However, inflation will occur by this new investment if aggregate supply of output
does not increase adequately in the short run to match the increase in aggregate demand.

Therefore, demand-pull inflation generally occurs when the economy is already working at
full-employment level of resources or what is now generally called when there is natural rate
of unemployment. This is because if aggregate demand increases beyond the full-
employment level of output, output of goods cannot be increased adequately without much
increase in cost.

Note that in developing countries such as India, there are difficulties of measuring
employment, unemployment and full employment. Therefore in the Indian context, instead
of full-employment level of output, we use full capacity output of the economy beyond
which supply of output cannot be increased.

It is important to note that Keynes in his booklet How to Pay for the War published during
the Second World War explained inflation in terms of excess demand for goods relative to
the aggregate supply of their output. His notion of the inflationary gap which he put forward
in his booklet represented excess of aggregate demand over full-employment output.

This inflationary gap, according to him, leads to the rise in prices. Thus, Keynes explained
inflation in terms of demand-pull forces. Therefore, the theory of demand-pull inflation is
associated with the name of Keynes.

Since beyond full-employment level of aggregate supply output cannot increase in response
to increase in demand, this results in rise in prices under the pressure of excess demand.
Aggregate supply curve, according to him, is vertical at full-employment level.

Cost-Push Inflation:
We can visualize situations where even though there is no increase in aggregate demand,
prices may still rise. This may happen if there is initial increase in costs independent of any
increase in aggregate demand.

The four main autonomous increases in costs which generate cost-push inflation have
been suggested:

1. Oil Price Shock

2. Farm Price Shock
3. Import Price Shock
4. Wage-Push Inflation

Cost-Push inflation is also called supply-side inflation:

1. Oil Price Shock:

In the seventies the supply shocks causing increase in marginal cost of production became
more prominent in bringing about cost-push inflation. During the seventies, rise in prices of
energy inputs (hike in crude oil price made by OPEC resulting in rise in prices of petroleum
products). The sharp rise in world oil prices during 1973-75 and again in 1979-80 produced
significant supply shocks resulting in cost-push inflation.

The sharp rise in the price of oil leads to inflation in all oil-importing countries. The rise in
oil price also occurred in 1990, 1999-2000 and again in 2003-08 which resulted in rise in rate
of inflation in oil-importing countries such as India.

In recent years, there have been a good deal of fluctuations in oil prices; in some periods they
go up and in some others they go down. It may be noted that rise in oil prices not only gives
rise to the increase in inflation, but also adversely affects the balance of payments raising
current account deficit of the oil-importing countries such as India.

2. Farm Price Shock:

Cost-push inflation can also come about from increase in prices of other raw materials,
especially farm products, in economies such as that of India where they are of greater
importance. In India when monsoon is not adequate or come very late or when weather
conditions are quite unfavourable, they reduce the supply of agricultural products and raise
their prices.

These farm products are raw materials for various industries such as sugar industry, other
agro-processing industries, cotton textile industry, jute industry and as a result when prices of
farm products rise they lead to rise in prices of goods which use the farm products as raw
materials. This is farm price shock causing cost-push inflation.
Even rise in food prices or what is called food inflation is caused by supply-side factors such
as inadequate rainfall or untimely monsoon and other adverse weather conditions and
inadequate availability of fertilizers which lead to reduction in output of food grains is the
example of cost-push or supply-side inflation.

3. Import Price Shock:

These days currencies of most countries of the world are flexible, that is, determined by
demand for and supply of a currency and they can appreciate or depreciate every month in
terms of the US dollar. For example, when the Indian rupee depreciates, more rupees are
required to buy one US dollar and therefore in terms of rupees, imports become costlier.

The Indians who import raw materials for industries such as petroleum products, coal,
machines and other equipment, oilseeds, fertilizers, Indian consumers who imports gold, cars
and other final products have to pay higher prices in terms of rupees when Indian rupee
depreciates against US dollar.

This raises the cost of production of the producers who in turn raise the prices of final
products produced by them. This inflation is the result of import price shock. Thus
depreciation of rupee causes cost-push inflation. For example, in the month of June 2013,
there was sharp depreciation of the Indian rupee. The value of rupee fell by about 9.5 per
cent in this single month from about Rs. 56 to a US dollar in the first week of June 2013 to
around Rs. 61 to a dollar in the last week of June 2013.

4. Wage Push Inflation:

It has been suggested that the growth of powerful trade unions is responsible for the spread
of inflation, especially in the industrialized countries. When trade unions push for higher
wages which are not justifiable either on grounds of a prior rise in productivity or of cost of
living they produce a cost-push effect.

The employers in a situation of high demand and employment are more agreeable to concede
to these wage claims because they hope to pass on these rises in costs to the consumers in the
form of hike in prices. If this happens we have cost-push inflation.

It may be noted that as a result of cost-push effect of higher wages, short-run aggregate
supply curve of output shifts to the left and, given the aggregate demand curve, results in
higher price of output.

Money and Sustained Inflation:

Many economists believe in the monetarist view of inflation. Increase in money shifts the
aggregate demand curve to the right and if the economy is operating at full capacity (i.e.,
along the vertical part of the aggregate supply curve), the upward shift in aggregate demand
curve will cause price level to rise. A big drawback of this approach is that it assumes that
supply of output does not increase sufficiently to counter this effect of expansion in money
supply on aggregate demand.

In this context there is a need to distinguish between a one-time increase in the price level
and sustained inflation which occurs when the general price level continues to rise over a
long period of time. It is generally believed by most of the economists that whatever be the
initial cause of inflation (demand- pull, cost-push or inflationary expectations), for the price
level to continue rising, period after period, it must be accommodated by expansion in
money supply.

Sustained inflation is therefore considered as a purely monetary phenomenon. It is not

possible for the price level to continue rising if the money supply remains constant. The
increase in money supply continues shifting the aggregate demand curve to the right; if
aggregate supply does not increase sufficiently to match the increase in aggregate demand,
price level will continue rising.

Sustained inflation can be better understood when Government increases its expenditure
without raising taxes. This leads to the increase in aggregate demand which, aggregate
supply remaining constant, will cause a rise in price level. It is important to know what
happens when the price level rises. The higher price level raises the demand for money to
rise for transaction purposes.

With supply of money remaining constant, the greater demand for money causes interest rate
to rise. The rise in interest rate crowds out private investment. If the Central Bank of a
country wants to prevent the fall in the private investment, it will expand the money supply
to keep the interest constant. But this expansion in money supply through its effect on
aggregate demand will cause the price level to rise further if increase in more supply of
output is not possible.

This further rise in price level will again cause greater demand for money leading to higher
interest rate. And the Central Bank, if it is committed to keep the interest rate constant so that
private investment does not decline, will further expand the money supply which will cause
further inflation. This process could lead to hyperinflation which represents a rapid and
continuous rise in price level, period after period.

The historical experience shows this hyperinflation in some countries when the Central Bank
or Government of these countries kept pumping in more and more money either to finance its
persistent budget deficit of the government year after year of to prevent the interest rate to
rise. However, as mentioned above, hyperinflation disrupts the payment system and people’s
loss of credibility of the currency. This leads to a deep crisis in the economy. If
hyperinflation is to be avoided, then the process of rapid expansion in money supply must be
halted.
Structuralist Theory of Inflation:

Structuralist theory, another important theory of inflation, is also known as structural theory
of inflation and explains inflation in the developing countries in a slightly different way. The
Structuralist argue that increase in investment expenditure and the expansion of money
supply to finance it are the only proximate and not the ultimate factors responsible for
inflation in the developing countries.

According to them, one should go deeper into the question as to why aggregate output,
especially of food grains, has not been increasing sufficiently in the developing countries to
match the increase in demand brought about by the increase in investment expenditure and
money supply. Further, they argue why investment expenditure has not been fully financed
by voluntary savings and as a result excessive deficit financing has been done.

Structuralist theory of inflation has been put forward as an explanation of inflation in the
developing countries especially of Latin America. The well-known economists, Myrdal and
Streeten, who have proposed this theory have analyzed inflation in these developing
countries in terms of structural features of their economies. Recently Kirkpatrick and Nixon
have generalized this structural theory of inflation as an explanation of inflation prevailing in
all developing countries.

Myrdal and Streeten have argued that it is not correct to apply the highly aggregative
demand- supply model for explaining inflation in the developing countries. According to
them, there is a lack of balanced integrated structure in them where substitution possibilities
between consumption and production and inter-sectoral flows of resources between different
sectors of the economy are not quite smooth and quick so that inflation in them cannot be
reasonably explained in terms of aggregate demand and aggregate supply.

In this connection it is noteworthy that Prof. V.N. Pandit of Delhi School of Economics has
also felt the need for distinguishing price behaviour in the Indian agricultural sector from that
in the manufacturing sector.

Thus, it has been argued by the exponents of structuralism theory of inflation that economies
of the developing countries of Latin America and India are structurally underdeveloped as
well as highly fragmented due to the existence of market imperfections and structural
rigidities of various types.

The result of these structural imbalances and rigidities is that whereas in some sectors of
these developing countries we find shortages of supply relative to demand, in others under
utilisation of resources and excess capacity exist due to lack of demand. According to
structuralists, these structural features of the developing countries make the aggregate
demand-supply model of inflation inapplicable to them.
They therefore argue for analysing dis-aggregative and sectoral demand-supply imbalances
to explain inflation in the developing countries. They mention various sectoral constraints or
bottlenecks which generate the sectoral imbalances and lead to rise in prices.

Therefore, to explain the origin and propagation of inflation in the developing countries, the
forces which generate these bottlenecks or imbalances of various types in the process of
economic development need to be analyzed. A study of these bottlenecks is therefore
essential for explaining inflation in the developing countries.

These bottlenecks are of three types:

(1) Agricultural bottlenecks which make supply of agricultural products inelastic,

(2) Resources constraint or Government budget constraint, and

(3) Foreign exchange bottleneck. Let us explain briefly how these structural bottlenecks
cause inflation in the developing countries.

Agricultural Bottlenecks:

The first and foremost bottlenecks faced by the developing countries relate to agriculture and
they prevent supply of food grains to increase adequately. Of special mention of the
structural factors are disparities in land ownership, defective land tenure system which act as
disincentives for raising agricultural production in response to increasing demand for them
arising from increase in people’s incomes, growth in population and urbanization.

Besides, use of backward agricultural technology also hampers agricultural growth. Thus, in
order to control inflation, these bottlenecks have to be removed so that agricultural output
grows rapidly to meet the increasing demand for it in the process of economic development.

Resources Gap or Government’s Budget Constraint:

Another important bottleneck mentioned by structuralist relates to the lack of resources for
financing economic development. In the developing countries planned efforts are being made
by the Government to industrialise their economies. This requires large resources to finance
public sector investment in various industries. For example, in India, huge amount of
resources were used for investment in basic heavy industries started in the public sector.

But socio-economic and political structure of these countries is such that it is not possible for
the Government to raise enough resources through taxation, borrowing from the public,
surplus generation in the public sector enterprises for investment in the projects of economic
development. Revenue raising from taxation has been relatively very small due to low tax
base, large scale tax evasion, inefficient and corrupt tax administration.

Consequently, the government has been forced to resort to excessive deficit financing (that
is, creation of new currency) which has caused excessive growth in money supply relative to
increase in output year after year and has therefore resulted in inflation in the developing
countries. Though rapid growth of money supply is the proximate cause of inflation, it is not
the proper and adequate explanation of inflation in these economies.

For proper explanation of inflation one should go deeper and enquire into the operation of
structural forces which have caused excessive growth in money supply in these developing
economies. Besides, resources gap in the private sector due to inadequate voluntary savings
and underdevelopment of the capital market have led to their larger borrowings from the
banking system which has created excessive bank credit for it.

This has greatly contributed to the growth of money supply in the developing countries and
has caused rise in prices. Thus, Kirkpatrick and Nixon write, “The increase in the supply of
money was a permissive factor which allowed the inflationary spiral to manifest itself and
become cumulative—it was a system of the structural rigidities which give rise to the
inflationary pressures rather than the cause of inflation itself.”

Foreign Exchange Bottleneck:

The other important bottleneck which the developing countries have to encounter is the
shortage of foreign exchange for financing needed imports for development. In the
developing countries ambitious programme of industrialisation is being undertaken.
Industrialisation requires heavy imports of capital goods, essential raw materials and in some
cases, as in India, even food grains have been imported. Besides, imports of oil on a large
scale are being made.

On account of all these imports, import expenditure of the developing countries has been
rapidly increasing. On the other hand, due to lack of export surplus, restrictions imposed by
the developing countries, relatively low competitiveness of exports, the growth of exports of
the developed countries has been sluggish.

As a result of sluggish exports and mounting imports, the developing countries have been
facing balance of payment difficulties and shortage of foreign exchange which at times has
assumed crisis proportions. This has affected the price level in two ways.

First, due to foreign exchange shortage domestic availability of goods in short supply could
not be increased which led to the rise in their prices. Secondly, in Latin American countries
as well as in India and Pakistan, to solve the problem of foreign exchange shortage through
encouraging exports and reducing imports devaluation in the national currencies had to be
made. But this devaluation caused rise in prices of imported goods and materials which
further raised the prices of other goods as well due to cascading effect. This brought about
cost-push inflation in their economies.

Physical Infrastructural Bottlenecks:

Further, the structuralists point out various bottlenecks such as lack of infrastructural
facilities, i.e., lack of power, transport and fuel which stands in the way of adequate growth
in output. At present in India, there is acute shortage of these infrastructural inputs which are
hampering growth of output.

Sluggish growth of output on the one hand, and excessive growth of money supply on the
other have caused what is now called stagflation, that is inflation which exists along with
stagnation or slow economic growth.

According to the structuralist school of thought, the above bottlenecks and constraints are
rooted in the social, political and economic structure of these countries. Therefore, in its view
a broad-based strategy of development which aims to bring about social, institutional and
structural changes in these economies is needed to bring about economic growth without
inflation.

Further, many structuralists argue for giving higher priority to agriculture in the strategy of
development if price stability is to be ensured. Thus, we see that structuralist view is greatly
relevant for explaining inflation in the developing countries and for the adoption of measures
to control it. Let us further elaborate the causes of inflation in the developing countries.

The Social Costs and Effects of Inflation:

Having discussed the so called inflation fallacy we proceed to explain in detail the social cost
and effects of inflation. Apart from reducing the purchasing power of people’s incomes,
inflation inflicts some other costs on the society. To explain such costs of inflation it is
necessary to distinguish between anticipated inflation and unanticipated (i.e., unexpected)
inflation. As noted above, in case of anticipated inflation, the expected rise in price level is
taken into account while making economic transactions, for example, in negotiating wage
rate of labour etc.

Costs of Anticipated Inflation:

Suppose in an economy there has been annual inflation rate of 5 per cent for a long time in
the past and everybody expects that this 5 per cent rate of inflation will continue in the future
too. In such a case all contracts made by the people such as loan agreements with borrowers,
wage contracts with labour, property lease contracts will provide for 5 per cent annual rise in
rates of interest, wages, rent to compensate for inflation of that order.
That is, in any contract in which passage of time is involved 5 per cent rate of inflation will
be taken into account and rates will be agreed to rise per period equal to the anticipated rate
of inflation. If rates of interest, wages, rent etc. are agreed to rise at the anticipated rate of
inflation, then there will be no cost of inflation except the following two types of costs –
shoe-leather costs and menu costs which are not very high.

We explain below both these types of costs:

1. Shoe-leather Costs:

This type of cost occurs because on account of inflation cost of holding money in the form of
currency (i.e., notes and coins) rises with the increase in inflation rate. Such cost arises
because no interest is paid on holding currency, while money kept in deposits with the bank
or used for keeping bonds earns interest.

When inflation rate rises, the nominal interest rate on bank deposits rises, the interest lost by
holding currency by the people therefore increases. In order to reduce the cost of holding
currency people will tend to reduce their holdings of currency for transaction purposes.
Accordingly, at a time people will hold less currency with them and keep as long as possible
greater amount of money in bank deposits that yield interest.

Therefore, rather than withdrawing a large amount of currency from banks at a time, they
will withdraw less money which is sufficient for meeting daily expenses for a few days, say
for a week. But for doing so the people will make more trips to withdraw cash. More trips to
a bank in a month involves greater cost to the people.

These costs have to be incurred on spending on petrol if car is used for making trips, more
wear and tear of car, the time spent for making a trip. These costs of making more trips to the
bank for withdrawing currency is metaphorically called shoe-leather costs of inflation, as
walking to banks more often one’s shoes wear out more rapidly and one has to spend money
on new shoes more often.

2. Menu Costs:

The second type of anticipated inflation is menu costs, a term derived from a restaurant’s
cost of printing a new menu. Menu costs arise because high inflation requires them to change
their listed prices more often. Changing prices is somewhat more expensive because the
firms have to print new catalogues listing new prices and distribute them among their
customers. They have even to incur expenditure on advertisements to inform the public about
their new prices.

3. Macroeconomic Inefficiency in Resource Allocation:

A third cost of inflation arises because firms having menu costs change their prices quite
infrequently. Given the reluctance to change prices frequently, the higher the rate of
inflation, the greater the variability in relative prices of a firm. Suppose a firm issues a new
catalogue listing prices of its products once in a year, say in the month of January of every
year.

If during the year inflation occurs, there will be change in the relative prices of a firm to the
general price level. If inflation rate of one per cent per month takes place in a year the firm’s
relative prices to the general price level will fall by 12 per cent by the end of the year.

As a result, his sales will tend to be lower in the early part of the year (when its prices are
relatively high) and higher in the later part of the year (when its prices are relatively low).
Thus when due to inflation relative prices of a firm vary during a year as compared to the
overall price level, it causes distortion in production and therefore leads to microeconomic
inefficiencies in resource allocation.

4. Inconvenience of Living:

Lastly, another social cost of inflation is the inconvenience of living in a world with a
changing price level. Money is the yardstick with which we measure the value of
transactions. When inflation is taking place the value of money changes and as a result it
becomes difficult to correctly estimate the value of transactions in real terms every time a
transaction is made during a year.

The rising price level makes it difficult to make optimal decisions about saving and
investment and thus do the rational financial planning covering a long period of time. To
quote Mankiw, “A dollar saved today and invested at a fixed nominal interest rate will yield
a fixed dollar amount in the future. Yet the real value of that dollar amount – which will
determine the retiree’s living standard – depends on the future price level. Deciding how
much to save would be much simpler if people could count on the price level in 30 years
being similar to its level today.”