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NOTES
Indian
Economy
Class 9-12 (Old+New)
Authors
Rakesh Kumar Roshan
Nihit Kishore
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CONTENTS
INDIAN ECONOMY
Chapter 1. Economy: An Introduction 1-6
Chapter 2. National Income and Accounting 7-9
Chapter 3. Economic Planning 10-15
Chapter 4. Poverty and Unemployment 16-22
Chapter 5. Rural and Urban Development (Basic Infrastructure) 23-30
Chapter 6. Agriculture 31-40
Chapter 7. Industry and Industrial Policies 41-51
Chapter 8. Money and Banking 52-64
Chapter 9. Public Finance, Fiscal Policy and Budget 65-73
Chapter 10. Foreign Trade and Balance of Payment 74-80
Chapter 11. Liberalisation, Privatisation and Globalisation 81-83
Chapter 12. International Organisations 84-88
Appendix 89-92
INDIAN ECONOMY
NCERT Notes
CHAPTER 01 01
Economy : An Introduction
Sources Class-IX New NCERT Chap 1 (The Story of Village Palampur), Chap 2 (People as a Resource), Class-IX & X Old NCERT
Chap 1 (An Overview of the Indian Economy), Class X New NCERT Chap 1 (Development), Chap 2 (Sectors of the
Indian Economy), Class-XI New NCERT Chap 1 (Indian Economy on the Eve of Independence), Chap 2 (Indian
Economy (1950-1990), Chap 5 (Human Capital Formation in India), Chap 9 (Environment and Sustainable
Development), Class-XII New NCERT Chap 1 (Introduction)
Capitalist Economy In this type of economy, the

Economy : An Introduction private enterprises are the main spheres of
A framework in which all the economic activities are production. They control the operation of the price
carried out in the form of investment, production and mechanism by which buyers and sellers determine
consumption, is termed as economy. what goods and services will be bought and sold in the
market, in what quantities and at what prices.
Types of Economy The means of production in the capitalist economy are
Depending on the basis of classification, economies controlled by private owners of capital, who operate for
can be of various types as follows : their private profit or gain. United States of America and
United Kingdom are examples of capitalist economy.
Types of Economy
Socialist Economy In this type of economy, there is
existence of public enterprise or state ownership of
On the Basis of Ownership and On the Basis of On the Basis
capital in all the important spheres of productive
Management of Resources Development of Trade activity. In the place of free operation of market
forces, the socialist economies depend on state
planning of production and distribution. China and
Russia are examples of a socialist economy.
Capitalist Socialist Mixed Open Closed Mixed Economy In this type of economy, some of the
Economy Economy Economy Economy Economy important enterprises engaged in production are owned
by the government but other enterprises have private
owners. India is the example of a mixed economy.
Developed Developing Less Developed
Economy Economy Economy India’s Mixed Economy Model
n In India, all three sectors coexist in harmony, i.e.
private sector, public sector and joint sector. The joint
On the Basis of Ownership and sector is jointly run by the government and private
Management of Resources companies, with at least 51% ownership belonging to
the state.
On the basis of ownership and management of n The government can regulate and direct the working of
resources, economies can be classified into Capitalist private enterprise in India to safeguard public interest
Economy, Socialist Economy and Mixed Economy. through different provisions of the law.
NCERT Notes INDIAN ECONOMY
02
On the Basis of Development Size of Indian Economy

On the basis of economic development, economies can be As per 2021, on the basis of economic indicators,
classified into Developed Economies, Developing India is 5th largest economy of the world. On the
Economies and Less Developed Economies. basis of Purchasing Power Parity (PPP), India is
Developed Economy It is also called an industrialised 3rd largest economy of the world after USA and
economy. This economy has advanced technological China.
infrastructure and diverse industrial and service sectors. According to UNCTAD’s (United Nations
Countries which had been industrialised since long time Conference on Trade and Development) world
like USA, UK, France, Japan, Korea and other newly investment report 2021, India is world’s 5th
industrialised countries of Asia are the examples of largest hub for foreign investment.
developed economy. Comparing the foreign investment of India, in
Developing Economies In this type of economy, the 2020 India received $ 64 billions from foreign
modern industrial sector, keeps increasing in size and investments that is 27% more than 2019. India’s
the traditional agricultural or rural sector keeps GDP at constant price in the year 2020-21 is
shrinking. It has a low socio-economic indicators and estimated at ` 135.13 lakh crores.
moderate Human Development Index as compared to
other developed countries. China and India are the Economics
examples of developing economy.
Economics is the study of labour, land and
Less Developed Economy According to the United
investments of money, income, production, taxes
Nations, this type of economy include developing
and government expenditures. Adam Smith is
economies that exhibit the lowest indicators of
known as ‘Father of Economics’.
socio-economic development, with the lowest Human
Development Index ratings of all countries in the world.
The poorer countries are generally described as
Activities in Economics
Less/Least Developed Countries (LDCs). In order to fulfill desires of day-to-day life, people
They have relatively very small industrial sectors. They keep themselves engaged in different types of
also have very little access to modern technology activities, which are as follows :
whether in industry or agriculture. Economic Activities The activities which create
Bangladesh, Niger, Central African Republic, South economic or financial gain by producing goods
Sudan, Chad, Burundi, Sierra Leone, Burkina Faso, Mali, or services are known as economic activities.
etc. are the examples of less developed economy. e.g., doctor, teacher, businessmen, etc.
Non-Economic Activities The activities done not
On the Basis of Trade for earning money or any consideration of
On the basis of trade, economies can be divided into Open economic gain are known as non-economic
Economy and Closed Economy. activities. e.g., social services, political services,
religious services, etc.
Open Economy It refers to a market economy, which is
generally free from trade barriers and where exports
and imports form a large percentage of the Gross
Branches of Economics
Domestic Product (GDP). Economic analysis is usually divided into two main
The degree of openness of an economy determines a branches of economics i.e., Macroeconomics and
government’s freedom to pursue economic policies of its Microeconomics.
choice and the susceptibility of the country to Macroeconomics It is concerned with problems
international economic cycles. of an economy as a whole rather than individual
India after 1991 economic reforms, Chile and Argentina facts and problems. e.g., National Income,
are the examples of open economy. employment, poverty, Balance of Payments,
inflation, etc.
Closed Economy It refers to an economy in which no
activity is conducted with other economies. It is Microeconomics It studies economic activities at
self-sufficient, where no imports are brought in and no micro level. It examines the economic behaviour
exports are sent out. The goal is to provide consumers of individual units such as consumers,
with everything that they need from within the economy. businessmen, etc to understand how decisions
are made in the situation of scarcity and effects
India before 1991 economic reforms, is the example of
of these decisions on the economy.
closed economy.
03
Sectors of Economy Features of Indian Economy

An economy is divided into three parts or sectors on The features of Indian economy can be categorised as
the basis of economic activities. These activities traditional and modern features.
are broadly grouped into Primary, Secondary and
Traditional Features of Indian Economy
Tertiary sectors.
The traditional features of Indian economy are as follows:
Primary Sector Primacy of Agriculture 58% of the working population
It is directly related to the extraction or of the country is engaged in agriculture and agriculture
utilisation of natural resources. It comprises share in the Gross Domestic Product (GDP) is 18%. This
economic activities like agriculture, mining, share is one of the highest in India’s Gross Domestic
fishing, dairy, quarrying, etc. Product. In India, other sectors are also developing
Products of primary sector does not undergo for quiet fast, but agriculture still remains most employable
major processing of change and are used or sector of the country. Agriculture has 13.3% share in
traded as natural products itself. India’s export.
This sector is also known as the Agriculture and Low Per Capita Income Low level of Per Capita Income
Allied Sector. is one of a major dilemma in the development of the
country, due to the increasing population of the
The Agriculture sector is at the third place with
country. Due to lower levels of Per Capita Income, it
the contribution of 20.19% in GDP.
gave rise to poverty in India.
Secondary Sector Rural Economy According to Census 2011, 67% of
It utilises the end product of the primary sector, India’s population lives in rural areas which shows the
to manufacture finished goods, through the rural population is quiet high. In developed economies,
the percentage of rural population is quite low.
refinement and processing of the primary
products. High Population Continuous and fast rising population
makes the Indian economy weak. Between 2010 to 2011,
It comprises construction, manufacturing,
the population rise in India was 17.64%. Due to rise in
electricity, gas and water supply, etc related population, stress in the available resources is created.
works. If a country has limited or less population, then there is
This sector is also known as the Industrial Sector. a greater chances of decrease in social inequality that
The Industry sector lags behind Service Sector benefits larger masses.
with the contribution of 25.92% in GDP. Unemployment In India, there is a huge amount of
workforce, but employment opportunities are few. In
Tertiary Sector such a situation, it becomes very difficult to provide
It provides services, instead of goods to other employment to everyone. Due to more population
sectors. Thus, this sector is sometimes referred engaged in agriculture sector that is needed, it affects
to as the Service Sector. the productiveness of the country. In India, more
Business, transport, telecommunication, banking, human resource is engaged in agriculture than any
insurance, etc are associated with the sector. other sectors.
In India, the Service Sector accounts for almost Inequality in Income Distribution There is a huge
54% of India’s GDP contribution. inequality in distribution of income and property in
India, that gives rise to problem of poverty and
unemployment. Due to progressive taxation system in
Other Sectors of Economy developed countries, there is low income inequalities.
Quaternary Sector The quaternary sector consists of Equal opportunities of social security, education,
those industries providing information services,
training and employment decreases the scope of income
such as computing, ICT (Information and
inequality in an economy.
Communication Technologies), consultancy
(offering advice to businesses) and Research and Modern Features of Indian Economy
Development, particularly in scientific fields.
Quinary Sector Economists further narrow the The modern features of Indian economy are as follows :
quaternary sector into the quinary sector, which Planned Economy In India, the phase of planned
includes the highest levels of decision-making in a economy started from establishment of Planning
society or economy. This sector includes top Commission and preparing of Five Years Plan.
executives or officials in such fields as government,
In between 1951 and 2017, 12 Five Years Plan have been
science, universities, healthcare, culture and media.
prepared so far.
04
NITI Aayog was established on 1st January, 2015. At Literacy Rate (ALR) is two-third while for
present, this organisation is responsible for Combined Enrolment Ratio (CER) is one-third.
preparing both short-term and long-term — Standard of Living Index (SLI) It is represented here
development plans. by the concept of Purchasing Power Parity (PPP).
Industrial Development In many Five Years Plans, Per Capita Income is converted into Purchasing
establishment of industrial plans gave rise to the Power Parity in terms of US dollar. It is also known
industrial development in India. as GDP Index. The value of HDI is scaled on 1 to 0,
In the year 1991, the process of liberalisation, where 1 represents the best and 0 (zero) represents
privatisation and globalisation also began for the worst.
development along with the initiation of ‘New
Economic Policies’. This gave rise to the industrial 1
HDI = (LEI + EAI + SLI)
development in India. 3
Economic Development 2. Multi-dimensional Poverty Index (MPI)

In economic growth, the concept of social justice The Multi-dimensional Poverty Index was launched
and fair distribution is termed as Economic by the United Nations Development Programme
Development. It is a qualitative concept. (UNDP) and the Oxford Poverty and Human
Development Initiative (OPHI) in 2010.
Indicators of Economic Development MPI is based on the idea that poverty is not
unidimensional (not just depends on income and one
Alternative indicators have been developed by
individual may lack several basic needs like
different national and international organisations to
education, health etc.), rather it is multi-dimensional.
provide better measures of a nation’s quality of life.
The index shows the proportion of poor people and
These include :
the average number of deprivations each poor person
The Human Development Index (HDI)
experiences at the same time.
Multi-dimensional Poverty Index (MPI)
MPI uses three dimensions and ten indicators are as
World Happiness Report (WHR)
follows :
Gender Inequality Index (GII)
— Education Years of schooling and child enrollment.
Global Hunger Index (GHI)
— Health Child mortality rate and nutrition.
Each of these indexes is a composite measure — Standard of living Electricity, flooring, drinking
weighing both income and non-income variables such water, sanitation, cooking fuel and assets.
as life expectancy, literacy rates, environmental
A person is multi-dimensionally poor if she/he is
indicators, measures of inequality and so on. By
deprived in one third or more (means 33% or more) of
including these variables, they provide a measure of
the weighted indicators (out of the ten indicators). Those
life quality that goes beyond the narrowness of a
who are deprived in one half or more of the weighted
nation’s GDP value.
indicators are considered as living in extreme
1. Human Development Index (HDI) multi-dimensional poverty.
The United Nations Development Programme 3. World Happiness Report (WHR)
(UNDP) introduced the HDI in its first Human The phrase ‘Gross National Happiness’ was first
Development Report (HDR), prepared under the coined by the fourth King of Bhutan, King Jigme
stewardship of Mahbub-ul-Haq in 1990. Singye Wangchuck, in 1972.
HDR, 1990 defined human development as the The concept implies that sustainable development
process of widening people’s choices as well as should take a holistic approach towards notions of
raising the level of well-being achieved. progress and give equal importance to non-economic
Three main indicators of HDI are as follows : aspects of wellbeing.
— Life Expectancy Index (LEI) Infant mortality is The World Happiness Report ranks 149 countries by
not considered as a separate indicator in this how happy their citizens perceive themselves to be.
index. Thus, life expectancy refers to life The rankings are based on polling (Gallup World
expectancy at birth, not at age one. Poll), which looks at six variables:
— Educational Attainment Index (EAI) It is a (i) Gross Domestic Product Per Capita (Purchasing
combination of adult literacy rate and combined Power Parity)
enrolment ratio. The weight assigned to Adult (ii) Social Support
05
(iii) Healthy life expectancy at birth Human capital considers education and health as a
(iv) Freedom to make life choices means to increase labour productivity.
(v) Generosity In fact, human capital is the stock of skill and
(vi) Perceptions of corruption productive knowledge embodied in them.
‘People as Resource’ is a way of referring to a
4. Gender Inequality Index (GII) country’s working people in terms of their existing
It measures gender inequalities in following three productive skills and abilities.
important aspects of Human Development : When the existing ‘human resource’ is further
(i) Reproductive health, measured by maternal developed by becoming more educated and healthy,
mortality ratio and adolescent birth rates; we call it ‘human capital formation’ that adds to the
(ii) Empowerment, measured by proportion of productive power of the country just like ‘physical
parliamentary seats occupied by females and capital formation’.
proportion of adult females and males aged 25
years and older with at least some secondary Sources of Human Capital
education; Investment in education is considered as one of the
(iii) Economic status, expressed as labour market main sources of human capital.
participation and measured by labour force There are also several other sources such as
participation rate of female and male populations
investments in health, on-the job training,
aged 15 years and older.
migration and information are the other sources of
5. Global Hunger Index (GHI) human capital formation.
This index is jointly published annually by Concern Difference between Human Capital and Physical Capital
Worldwide and Welthungerhilfe. Physical Capital Human Capital
It was first prepared in 2006 and is published in Physical capital is tangible Human capital is intangible,
every year in October. The 2021 edition marks the and can be easily sold in the it is endogenously built in the
16th edition of the GHI. market like any other body and mind of its owner.
commodity.
It is calculated on the basis of four indicators :
The physical capital is Human capital is inseparable
(i) Under nourishment Share of the population with separable from its owner. from its owner.
insufficient caloric intake. Physical capital is completely Human capital is not
(ii) Child Wasting Share of children under the age of mobile between countries perfectly mobile between
five who have low weight for their height, except for some artificial trade countries as movement is
reflecting acute undernutrition. restrictions. restricted by nationality and
culture.
(iii) Child Stunting Share of children under the age of
five who have low height for their age, reflecting
chronic undernutrition.
Human Capital and Economic Growth
(iv) Child Mortality The mortality rate of children Human capital allows an economy to grow. When
under the age of five. human capital increases in areas such as science,
education and management it leads to increase in
Based on the values of the four indicators, the GHI
innovation, social well-being, equality, increased
determines hunger on a 100-point scale, where zero
productivity, improved rates of participation, etc.
is the best possible score (no hunger) and 100 is the
All of these contribute to economic growth.
worst.
The causality between human capital and economic
Each country’s GHI score is classified by severity,
growth flows in either direction. That is, higher
from low to extremely alarming.
income causes the building of a higher level of
human capital and vice versa, that is, high level of
Human Capital and Human human capital causes growth of income.
Development India recognised the importance of human capital
in economic growth long ago. The Seventh Five
The two terms sound similar but there is a clear
Year Plan says, “Human resources development has
distinction between them.
necessarily to be assigned a key role in any
Human Capital development strategy, particularly in a country
with a large population.”
Population becomes human capital, when there is
investment made in the form of education, training
and medical care.
06
Human Development 6. Ensure availability and sustainable management of

water and sanitation for all.
Human development is based on the idea that
7. Ensure access to affordable, reliable, sustainable and
education and health are integral to human
modern energy for all.
well-being. Only when people have the ability to
read and write alongwith the ability to lead a long 8. Promote sustained inclusive and sustainable
and healthy life, then they will be able to make economic growth, full and productive employment
other choices, which they value. and decent work for all.
9. Build resilient infrastructure, promote inclusive and
Economic Growth sustainable industrialisation and foster innovation.
10. Reduce inequality within and among countries.
It is an increase in the production of goods and
services in an economy. 11. Make cities and human settlements inclusive, safe,
resilient and sustainable.
It is a quantitative concept. It means an increase
12. Ensure sustainable consumption and production
in real national income/national output.
patterns.
Increases in capital goods, labour force,
13. Take urgent action to combat climate change and its
technology, and human capital can all contribute
impacts.
to economic growth.
14. Conserve and sustainably use the oceans, seas and
Gross Domestic Product, Gross Value Added, marine resources for sustainable development.
Gross National Product, etc. are the measures of
15. Protect, restore and promote sustainable use of
Economic Growth.
terrestrial ecosystems, sustainably manage forests,
combat desertification and halt or reverse land
Sustainable Development degradation and halt biodiversity loss.
The term sustainable development is defined as 16. Promote peaceful and inclusive societies for
“the development to achieve the needs of present sustainable development, provide access to justice for
generation without compromising future all and build effective, accountable and inclusive
generation’s needs.” institutions at all.
When the World Commission on Environment 17. Strengthen the means of implementation and
and Development (Brundtland Commission) revitalise the global partnership for sustainable
published its report in 1987, it presented development.
‘sustainable development’ as a new concept.
Sustainable development ensures the well-being Comparative Analysis of Development of
of individuals by integrating social development, India and Its Neighbouring Countries
economic development, environmental n India, Pakistan and China developed same
conservation and protection. developmental Policies.
Sustainable Development Goals (SDGs) or Global n India announced its First Five Year Plan in 1951-56,
Goals are a collection of 17 interlinked global Pakistan in 1956 and China in 1953.
goals designed to be a ‘blueprint to achieve a better
n Important sectors, industries and land in China were
brought under the control of the government.
and more sustainable future for all’.
n In 1958, China started Great Leap Forward programme
The SDGs were set up in 2015 by the United which aimed at industrialisation at large scale.
Nations General Assembly and are intended to be n In rural areas, ‘Commune’ were started under this
achieved by the year 2030. system, people practiced group farming. In 1996, Mao
These 17 goals are as follows : Zedong started ‘Cultural Revolution’ in China.
1. End poverty in all its forms everywhere. n In Pakistan, mixed economic model is practiced where
2. End hunger, achieve food security and improved both capitalist and socialist models coexist.
nutrition and promote sustainable agriculture. n In 1970s and 1980, Pakistan changed its policies but
didn’t gave emphasis on nationalisation. In 1970s, only
3. Ensure healthy lives and promote well-being for
industries of capital products were nationalised.
all at all ages. n At present time, most of the countries are promoting
4. Ensure inclusive and equitable quality education private sector.
and promote lifelong learning opportunities at
all.
5. Achieve gender equality and empower all
women and girls.
INDIAN ECONOMY
NCERT Notes
CHAPTER 02 07
National Income
and Accounting
Sources Class-X New NCERT Chap 1 (Development), Class-XI New NCERT Chap 1 (Indian Economy on the Eve of Independence),
Class-XI Old NCERT Chap 2 (Accounting of National Income), Class XII New NCERT Chap 2 (Composition of
Macroeconomy and Accounting of National Income), Class XII Old NCERT Chap 3 (Accounting of National Income :
Concepts and Measurement)
National Income Intermediate Goods Such goods are used by other

producers as material inputs. These are mostly used
National Income refers to the complete value of the as raw material or inputs for production of other
final goods and services produced by any country commodities.
during its financial year. Depreciation It represents how much of an assets
Thus, it is the consequence of all economic activities value has been used. It is an annual allowance for
that are running in any country during the period of wear and tear of capital goods. In other words, it is
one year. It is valued in terms of money. the cost of the goods divided by the number of years
of its useful life.
Historical Timeline of India’s National Income Market Price It refers to the actual transacted price
The first attempt to calculate the National Income and it includes indirect taxes such as excise duty,
was made in 1868 by Dadabhai Naoroji in his book Value Added Tax (VAT), service tax, customs duty, etc
‘Poverty and Un-British Rule in India’, who and government subsidies.
estimated the Per Capita Income at ` 20. Factor Cost It means the total cost of all factors of
Another effort was made by Dr. Vijayendra Kasturi production consumed or used in producing a good or
Ranga Varadraja Rao, who was the first to use service. It includes government grants and subsidies,
scientific approach to calculate National Income. In but it excludes indirect taxes.
1925 to 1929, he estimated Per Capita Income at ` 76. Purchasing Power Parity (PPP) It is an analysis
The Government of India appointed a National metric to compare economic productivity and
Income Committee under the Chairmanship of standards of living between two different countries.
Dr. PC Mahalanobis. This committee gave its first The PPP exchange rates are constructed to ensure
report in 1951 and final report in 1954. The that the same quantity of goods and services are
committee estimated National Income of ` 8650 priced equivalently across countries.
crore and Per Capita Income of ` 246.50. Base Year It is the year against which the
performance of an index is measured. It is also called
Basic Terms used in National Income the reference year.
and Accounting Hindu Growth Rate Professor Rajkrishna, an Indian
Final Goods Such goods that are meant for final use economist, coined the term ‘Hindu Growth Rate’. The
and will not pass through any more stages of Hindu rate of growth is a term referring to the low
production or transformations. annual growth rate of the planned economy of India
before the liberalisation of 1991.
NCERT Notes INDIAN
NCERT Notes ECONOMY
INDIAN ECONOMY
08
Calculation of National Income Calculation of GDP in India

National Income (NI) measures the net value of GDP in a country is usually calculated by the National
goods and services produced in a country during Statistical Agency, which compiles the information
a year and it also includes Net Factor Income from a large number of sources.
from Abroad (NFIA). In the case of India, it is the National Statistics Office
National Income measures the productive power (NSO), which estimates GDP.
of an economy in a given period to turn out goods The international standards for measuring GDP are
and services for final consumption. In India, obtained from the System of National Accounts, 1993,
National Income estimates are related to the compiled by the International Monetary Fund (IMF),
financial year (1st April to 31st March). the European Commission (EC), the Organisation for
Economic Cooperation and Development (OECD), the
According to the National Income Committee
United Nations (UN) and the World Bank.
(1949), National Income estimate measures the
volume of commodities and services turned out 2. Gross Value Added (GVA)
during a given period without duplication. In 2015, India opted to make major changes to its
National Income = C + I + G + (X − M) compilation of national accounts and decided to bring
the whole process into conformity with the United
Where, C = Total Consumption Expenditure Nation’s System of National Accounts (SNA) of 2008.
I = Total Investment Expenditure As per the SNA, GVA is defined as the value of output
G = Total Government Expenditure minus the value of intermediate consumption and is a
X = Export, M = Import measure of the contribution to growth made by an
individual producer, industry or sector.
Various Measures of National Income It provides the rupee value for the number of goods and
services produced in an economy after deducting the cost of
Economists use many methods to study National inputs and raw materials that have gone into the production.
Income. Few of them are as follows :
Gross Value Added = GDP + Subsidies on Products
1. Gross Domestic Product (GDP) − Taxes on Products
It measures the monetary value of all the final goods
and services taking place within the domestic territory Earlier, India had been measuring GVA at ‘factor cost’
(within the borders of a country) during a year. till the new methodology was adopted, in which GVA at
‘basic prices’ became the primary measure of economic
GDP = C + I + G output.
Where, C = Total Consumption Expenditure GVA at basic prices will include production taxes and
I = Total Investment Expenditure exclude production subsidies. GVA at factor cost
G = Total Government Expenditure included no taxes and excluded no subsidies.
The base year from 2004-05 has also been shifted to
GDP at Market Price (GDP MP ) 2011-12.
It refers to the total value of all the goods and
services at market price produced during a year 3. Gross National Product (GNP)
within the geographical boundaries of the country. It counts all the output of the residents/nationals of a
country. So, if an Indian owned company has a factory
Market price refers to the actual transacted price in the United Kingdom, the output of that factory
and it includes indirect taxes such as excise duty, would be included in UK GDP, not in Indian GDP.
VAT, service tax, customs duty, etc and
However, while measuring GNP, the output of the
government subsidies. That’s why the GDP MP (in
Indian owned factory in the UK would be included in
`) has steadily increased in the last decades.
India’s GNP.
GDPMP = GDPFC + (Indirect Taxes − Subsidies)
Thus, while calculating GNP, the Net Factor Income
GDP at Factor Cost (GDP FC ) from Abroad will be included.
GDP at factor cost is the total value of goods and GNP (FC/ MP) = GDP (FC/ MP) + X − I
commodities produced in a year in a country by
Where,
its all production units (factory level). It includes
X = Income Earned and Received by Indians
government grants and subsidies, but it excludes
Working Abroad
indirect taxes.
I = Income Earned and Received by Non-Indians in
GDPf FC = GDP MP − Indirect Tax + Subsidy India
09
4. Net Domestic Product (NDP) The Gross Domestic Product (GDP) of an economy is
If the depletion of the capital stock (Depreciation), is arrived at by measuring the aggregate value of
subtracted from GDP, Net Domestic Product (NDP) is goods and services produced in a year.
obtained. The difference between Gross and Net Further deducting the aggregate amount of
Domestic Product occurs because of depreciation. depreciation, across all firms in an economy, gives
In terms of value addition, the summation of Net us the Net Domestic Product (NDP).
Value Added (NVA) of all firms is called Net 2. Income Method
Domestic Product (NDP).
In this method, a sum of net income earned by
NDP (FC/ MP) = Gross Domestic Product (FC/ MP) − working people in different sectors and commercial
Depreciation enterprises is obtained. Incomes of both categories
of people, tax-paying and non-tax-paying, are added
5. Net National Product (NNP) to obtain National Income.
If we deduct depreciation from GNP, the measure of It is calculated by measuring the aggregate level of
aggregate income will give NNP. income, rent, interest and profits by the respective
factors of production of an economy.
NNP (FC/ MP) = Gross National Product (FC/ MP) −
Depreciation National Income (NI) = (Total rent − Income from land)
+ (Total wages − Income from labour) + (Total
Note NNP at factor cost gives us the Real National Income of India. interest
− Income from capital) + (Total profit − Income from
6. Per Capita Income (PCI)
entrepreneur).
Per Capita Income (PCI) measures the average
income earned per person in a given area (city,
region, country, etc.) in a specified year.
3. Consumption Method
In this method, income is either spent on
It is calculated by dividing the area’s total income
consumption or saved.
by its total population. Per Capita Income is
national income divided by population size. Hence, National Income is the addition of total
consumption and total savings. It is also called the
Per Capita Income (PCI) = National Income/Total Expenditure Method.
Population
NI = Total Consumption Expenditure + Total Savings
7. Green Gross Domestic Product (GGDP)
Organisations Associated with National
It is an index of economic growth with the
Income Calculation in India
environmental consequences of that growth factored
into a country’s conventional GDP. Green GDP Organisation Description
monetises the loss of biodiversity and accounts for Central It is a governmental agency in India under the
costs caused by climate change. Statistical Ministry of Statistics and Programme
Calculation of Green GDP requires net natural Organisation Implementation responsible for coordination
(CSO) of statistical activities in India, and evolving
capital consumption including resource depletion,
and maintaining statistical standards.
environmental degradation and protective and
restorative environmental initiatives, be subtracted National It was set-up in 1950 on the recommendation
from traditional GDP. Sample of Dr. PC Mahalanobis, for conducting
Survey Office large-scale sample surveys to meet the data
(NSSO) needs of the country, for the estimation of
Various Methods of Measuring National Income and other aggregates.
National Income National The government has merged the Central
Statistical Statistical Organisation and National Sample
According to Simon Kuznets, National Income
Office (NSO) Survey Organisation under the Ministry of
Accounting of a country is calculated by the following Statistics and Programme Implementation
three methods : (MOSPI) into a single entity on 23rd May,
2019.
1. Product Method
National It was established on 1st June, 2005 based on
This method of National Income Accounting Statistical the recommendations of Rangarajan
calculates the aggregate value of final goods and Commission Committee (2000) to reduce the problems
services produced in a year. (NSC) faced by statistical agencies in the country in
relation to collection of data.
GDP = Value of Output – Intermediate Consumption
CHAPTER
10 03
Economic Planning
Sources Class-IX New NCERT Chap 2 (People As a Resource), Class-IX & X Old NCERT Chap 5 (The State and
Economic Development), Class-XI New NCERT Chap 2 (Indian Economy)
Planning in Indian Economy History of Planning in India

Economic planning refers to the path of actions in For planned development, many plans, proposal,
terms of policy measures to be followed in future, reforms, etc were passed in India. Some of these are
for pursuing pre-determined objectives. It is a discussed as follows:
consciously and judiciously carried out process for
optimum utilisation of existing resources in order to
Visvesvaraya Plan
fulfil some well-defined objectives. First systematic work on planning came into
The Planning Commission defined economic existence in the year 1934 when renowned engineer
planning as “the utilisation of a country’s resources and statesmen M. Visvesvaraya formulated a 10 year
for developmental activities in accordance with plan for economic development.
national priorities.” He amalgamated his plan in his book ‘Planned
Under the Indian Constitution, economic planning Economy for India’.
is headed in the 7th Schedule and under Concurrent He emphasised on increasing the industrial
list. The economic planning in India is based on mix production and coordinated development of small
of capitalist and socialist economy model. and large enterprises.
Objectives of Planning in India FICCI’s Proposal

The fundamental objective of planning in India is to In 1934, Federation of India Chambers of Commerce
achieve an increase in National Income and Per and Industry (FICCI) emphasised on economic
Capita Income. planning in India.
Another objective of planning is to improve It was the first formal organisation by Indian
agricultural production for : industrialists, under the Chairmanship of NR
Sarkar.
— Achieving self-sufficiency in foodgrains
He recommended that country like India should
production.
have a comprehensive economic planning.
— Meeting the needs of industry and export.
— Achieve industrialisation with special reference to National Planning Committee
basic and heavy industries. In 1938, Congress President and Indian National
— Provide more employment opportunities. Army supreme leader Netaji Subhash Chandra Bose
initiated planning in India under the Chairmanship
— Reduce inequalities in income and wealth
of Jawaharlal Nehru.
distribution.
This was followed by formation of a 15 member
— Achieve self-reliance and eradicate poverty to
National Planning Committee.
achieve economic growth.
11
The Committee emphasised that the national It’s objective is to foster involvement and
independence is a primary condition for taking all participation in the economic policy-making process
the steps that might be found necessary for by the state government of India.
carrying out planning.
The National Planning Committee appointed Types of Planning
several sub-committees to study different aspects
of the national economy. Planning can be classified as follows :
Types of Planning
Gandhian Strategy
It was proposed by Acharya Shriman Narayan
Agarwal. On the Basis of State On the Basis of Process On the Basis of Area
and market inter-relation Centralised Planning National Planning
It emphasised on the economic decentralisation Decentralised Planning Regional Planning
Imperative Planning
with primary to rural development by developing
Indicative Planning
cottage industries.
Bombay Plan
In early 1944, industrialists and economists of On the Basis of Result On the Basis of Duration
Bombay, Sir Purshottamdas Thakurdas, Mr. JRD Structural Planning Perspective Planning
Tata and six others attempted and published a Functional Planning Rolling Planning
development plan. Short-term Planning
Its main objective was doubling the per capita

income in the country over a period of 15 years. On the Basis of State and Market Inter-relation
It proposed an increase of about 130% and 500% in On the basis of state and market inter-relation, types of
agriculture and industry. The total outlay of planning are as follows :
` 10,000 crores was recommended. Imperative Planning A socialist planning is called
imperative planning as the central planning authority
People’s Plan performs all economic activities in the best interests
It was a 10 year plan prepared by MN Roy in 1945. of the society.
Its emphasis was on agriculture and consumer Indicative Planning In this type of planning, all
goods industries through collectivisation and policies of the country operate under the direction of
setting up of state owned industrialisation. government. Role of state is only a motivating and
It advocated nationalisation of land with the total promoting factor in policies.
outlay of ` 15000 crores.
On the Basis of Result
Sarvodaya Plan On the basis of result, types of planning are as follows :
It was drafted by Jaiprakash Narayan in 1950. It Structural Planning In this type of planning the
was inspired by Gandhian plan and Sarvodaya present social and economic structure is changed and
idea of Vinoba Bhave. a new structure emerges.
It suggested the freedom foreign technology and Functional Planning The functional plans could be
stressed upon land reforms and decentralised considered an overall strategy or plan describing how,
participatory planning. when and where the objectives and goals will be
LPG Reforms accomplished for each function as well as for the
entire plan.
The government announced a New Economic
Policy on 24th July, 1991. It is commonly known On the Basis of Process
as Liberalisation, Privatisation and Globalisation
model. On the basis of process, types of planning are as follows :
The plan’s objective was to put India’s economy Centralised Planning In this type of planning, all the
into the area of globalisation. It ended the economic decisions are taken by the Central
licence/permit raj for maximum industries. Government. It is also known as Top-to-bottom
planning.
NITI Aayog’s Plan Decentralised Planning It is a kind of percolation of
The National Institution for Transforming India planning activities or processes from the Centre to the
(NITI) Aayog was established in 2015. It replaced sub-state levels, i.e., district, sub-division, block and
the Planning Commission of India. village level.
12
On the Basis of Duration NITI Aayog

On the basis of duration, types of planning are as The Planning Commission was replaced by a new
follows : institution called NITI Aayog on 1st January, 2015
Perspective Planning It refers to long-term with emphasis on ‘Bottom –Up’ approach to envisage
planning, in which a long range of targets are set in the vision of Maximum Governance, Minimum
advance for a period of 15, 20 or 25 years. e.g., Government, echoing the spirit of ‘Cooperative
Vision 2020, National Population Policy (NPP) Federalism’.
2000, etc. Administrative structure of NITI Aayog
Rolling Planning This type of planning has no fixed — Chairperson Prime Minister
time period, means it moves forward without fixed — Vice-Chairperson To be appointed by Prime Minister
duration. Its goals are analysed on yearly basis.
— Governing Council Chief Ministers of all states and
Short-Term Planning In this type of planning, goals Lt. Governors of Union Territories
are decided on yearly basis. It can be of three or
— Regional Council To address specific regional
four years.
issues, comprising Chief Ministers and Lt. Governors
On the Basis of Area Chaired by the Prime Minister or his nominee
On the basis of area, types of planning are as follows : — Adhoc Membership Two members in ex-officio
National Planning In this type of planning, Central capacity from leading Research institutions on
Government plays a vital role as objectives of the rotational basis
planning are decided by it. — Ex-Officio Membership Maximum four members
Regional Planning The plan that aims to target a from the Union Council of Ministers to be
specific region for inclusive development and to nominated by the Prime Minister
reduce the regional imbalance is called regional — Chief Executive Officer Appointed by Prime
planning. The Eighth Five-Year Plan specified the Minister for a fixed tenure, in rank of Secretary to
programme of the special area such as Hilly areas Government of India
North-Eastern state development, tribal areas and
— Special Invitees Experts, Specialists with domain
backward areas development.
knowledge nominated by the Prime Minister
Planning Commission Objectives and Functions of NITI Aayog

The Planning Commission of India was set up by The following are the objectives and functions of NITI
a Resolution of the Government of India in Aayog :
March, 1950. To foster cooperative federalism through structured
Institutionally, it was a part of the Cabinet support initiatives and mechanisms with the States
organisation and the ‘demands for grants’ for the on a continuous basis, recognising that strong States
planning commission were included in the budget make a strong nation.
for the Cabinet Secretariat. To develop mechanisms to formulate credible plans
It was a non-constitutional body and its first at the village level and aggregate these progressively
deputy Ex-officio chairman was Gulzarilal Nanda. at higher levels of government.
To ensure, on areas that are specifically referred to it,
National Development Council (NDC) that the interests of National Security are
incorporated in economic strategy and policy.
It was set up on 6th August, 1952. It is a
non-constitutional and non-statutory body and also To pay special attention to the sections of our society
known as Rashtriya Vikas Parishad. that may be at risk of not benefitting adequately from
NDC’s objective is to strengthen and mobilise economic progress.
the effort and resources of the nation in support of To provide advice and encourage partnerships
the plan. between key stakeholders and national and
It was presided over by the Prime Minister of India international like-minded Think Tanks, as well as
and included all Union Ministers, Chief Ministers of educational and policy research institutions.
all the States, Administrators of Union Territories To create a knowledge, innovation and
and Members of the Planning Commission. entrepreneurial support system through a
Ministers of State with independent charge collaborative community of national and
were also invited for the deliberations of the international experts, practitioners and other
council. partners.
13
To offer a platform for resolution of inter-sectoral This plan lags behind its target growth rate of 4.5%
and inter-departmental issues in order to and achieved a growth rate of 4.27%.
accelerate the implementation of the development
agenda. Mahalanobis Model
To maintain a State-of-the-art Resource Centre, be This strategy was based on the two sector
a repository of research on good governance and model-consumer goods sector and capital goods sector.
best practices in sustainable and equitable The strategy emphasised investment in heavy industry to
development as well as help their dissemination to achieve industrialisation for rapid economic
development. It was based on the Russian experience.
stake-holders.
This strategy was adopted in the 2nd Five Year Plan and
with minor modifications, upto the 5th Plan. It was a
Five Year Plans in India long-term strategy.
After independence, India launched a programme
of Five Year Plans which were borrowed from the 3. Third Five Year Plan (1961-1966)
former Soviet Union (now Russia) to make the
This plan is also called ‘Gadgil Yojana’, after the
optimum use of the country’s available resources
name of Deputy Chairman of Planning Commission Dr.
and to achieve rapid economic development.
Gadgil.
In India, development plans were formulated and
The main target of this plan was to make the
carried out within the framework of the mixed
economy independent. The stress was laid on
economy.
agriculture and the improvement in the production
Our plan documents upto the year 2017 not only of wheat.
specify the objectives to be attained in the five
During the execution of this plan, India was engaged
years of a plan but also, what is to be achieved over
in two wars:
a period of twenty years.
— The Sino-India war of 1962
The five year plans were supposed to provide the
basis for the prospective plan. — The Indo-Pakistani war of 1965
The following gives us a description about the Five These wars exposed the weakness in our economy
Year Plans (FYPs) in India: and shifted the focus to the defence industry, the
Indian Army and the stabilisation of the price (India
1. First Five Year Plan (1951-1956) witnessed inflation).
It was based on the Harrod-Domar Model with a The plan was a flop due to wars and drought. The
few modifications. Its main focus was on the target growth was 5.6% while the achieved growth
agricultural development of the country. was 2.4%.
This plan was successful and achieved a growth
Plan Holidays (1966-1969)
rate of 3.6% (more than its target of 2.1%). n Due to the failure of the previous plan, the government
At the end of this plan, five IITs were set up in the announced three annual plans called Plan Holidays
country. from 1966-1969.
n The main reason behind the failure of the third Five
Year Plan was the Indo-Pakistani war and the
Harrod-Domar Model Sino-India war, leading to the plan Holidays.
This strategy emphasised the role of capital n During this plan, annual plans were made and equal
accumulation’s dual character, which on the one hand, priority was given to agriculture, its allied sectors and
increases the national income and on the other hand, the industry sector.
increases the production capacity. n In a bid to increase the exports in the country, the
According to this growth model, the rate of economic government declared devaluation of the rupee.
growth in an economy is dependent on the level of
savings and capital output ratio.
4. Fourth Five Year Plan (1969-1974)
Rate of growth (Y) = Savings (S)/Capital output ratio (K)
There were two main objectives of this plan
i.e. growth with stability and progressive
2. Second Five Year Plan (1956-1961) achievement of self-reliance.
It was based on the PC Mahalanobis Model. During this time, 14 major Indian banks were
Its main focus was on the industrial development of nationalised and the Green Revolution was started.
the country.
14
The Indo-Pakistani War of 1971 and the Bangladesh The Plan aimed at accelerating food grain
Liberation War also took place. production, increasing employment opportunities
Implementation of Family Planning Programmes was and raising productivity with a focus on ‘food,
amongst major targets of the Plan. work and productivity’.
This plan failed and could achieve a growth rate of For the first time, the private sector got priority
3.3% only against the target of 5.7%. over the public sector.
Its growth target was 5.0% and it achieved 6.01%.
5. Fifth Five Year Plan (1974-1978)
Annual Plans
This plan focussed on Garibi Hatao, employment, n The Eighth Five Year Plan could not take place due
justice, agricultural production and defence. to the volatile political situation at the centre.
In 1975, The Electricity Supply Act was amended, a n Two annual programmes were formed for the year
Twenty-Point Programme (TPP) was launched, the 1990-1991 and 1991-1992.
Minimum Needs Programme (MNP) and the Indian
National Highway System was also introduced at the 8. Eighth Five Year Plan (1992-1997)
same time. In this plan, the top priority was given to the
Overall this plan was successful, which achieved a development of human resources i.e. employment,
growth of 4.8% against the target of 4.4%. education and public health.
This plan was terminated in 1978 by the newly During this plan, Narasimha Rao Government
elected Morarji Desai government. launched the New Economic Policy of India.
Some of the main economic outcomes during the
Rolling Plan (1978-1980) Eighth Five Year plan period were rapid economic
n After the termination of the Fifth Five Year Plan, the growth (highest annual growth rate so far – 6.8 %),
Rolling Plan came into effect from 1978 to 1980. high growth of agriculture and allied sector,
n In 1980, Congress rejected the Rolling Plan and a new manufacturing sector, growth in exports and
sixth Five Year Plan was introduced. imports, improvement in trade and current
n Three plans were introduced under the Rolling plan account deficit.
— For the budget of the present year. A high growth rate was achieved even though the
— This plan was for a fixed number of years - 3, 4 or share of the public sector in total investment had
5 years. declined considerably to about 34%.
— Perspective plan for long terms - 10, 15 or 20 years.
n The plan has several advantages as the targets could 9. Ninth Five Year Plan (1997-2002)
be mended and projects, allocations, etc were variable The main focus of this plan was ‘Growth with
to the country’s economy. Social Justice and Equality’.
n This means that, if the targets can be amended each
It was launched in the 50th year of independence
year, it would be difficult to achieve the targets and
will result in destabilisation in the Indian economy.
of India.
This plan failed to achieve the growth target of
6.5% and achieved a growth rate of 5.6%.
6. Sixth Five Year Plan (1980-1985)
10. Tenth Five Year Plan (2002-2007)
The basic objective of this plan was economic
liberalisation by eradicating poverty and achieving This plan aimed to double the Per Capita Income
technological self-reliance. of India in the next 10 years.
It was based on investment yojana, infrastructural It also aimed to reduce the poverty ratio to 15%
changing and trend to the growth model. by 2012.
Its growth target was 5.2% and it achieved 5.7% Its growth target was 8.0% but it achieved only
growth. 7.6%.
7. Seventh Five Year Plan (1985-1990) 11. Eleventh Five Year Plan (2007-2012)
The objectives of this plan include the establishment It was prepared by the C. Rangarajan.
of a self-sufficient economy, opportunities for Its main theme was ‘Rapid and Inclusive growth’.
productive employment and upgradation of It achieved a growth rate of 8% against a target of
technology. 9% growth.
15
12. Twelfth Five Year Plan (2012-2017)

Its main theme is ‘Faster, More Inclusive and Sustainable Growth’ achievement.
Its growth rate target was 8% but it achieved only 7.1% approx.
Five Year’s Plan : At a Glance

Plan Growth Rate Achieved Growth Rate Special Preferences/Programmes
First Five Year Plan 2.1 3.6 l
Agriculture and related community development programme
(Harrod Domar
Model)
Second Five Year Plan 4.5 4.21 l
Heavy industries, Health and Medical
(Mahalanobis Model) l
Rourkela, Bhilai and Durgapur steel plants established
Third Five Year Plan 5.6 2.72 l
Food and Agriculture
(Gadgil Yojana)
Fourth Five Year Plan 5.7 3.3 l
Agriculture and Irrigation
(DP Dhar Model) l
Development with the aim of achieving stability and
self-sufficiency
Fifth Five Year Plan 4.4 4.83 l
Public health and Social Welfare
l
Slogan of poverty eradication and self-reliance
Sixth Five Year Plan 5.2 5.4 l
Agriculture, Industry, Power
l
Relentless Plan
l
Poverty eradication
Seventh Five Year 5.0 6.0 l
Power, Food
Plan
Eighth Five Year Plan 5.6 6.68 l
Human Resource (Education, health employment) development
Ninth Five Year Plan 6.5 5.4 l
Social justice, Rural development, Job creation
l
Growth with equitable distribution or equality
Tenth Five Year Plan 8.0 7.8 l
Development of social infrastructure, employment and energy
Eleventh Five Year 8.1 7.9 l
Rapid economic growth
Plan l
Job creation
l
Availability of basic physical and educational services
Twelfth Five Year Plan 8.0 7.1 (Approx) l
Accelerated sustainable and inclusive growth rate
Abolition of Five Year Plans

As India is a diverse and big centralised planning could not work beyond a point due to its one-size-fits-all
approach. Therefore, the Planning Commission was formed, which was replaced by the NITI Aayog.
Thus, there was no Thirteen Five Year Plan, however, the five-year defense plan was made. The NITI Aayog have
no financial role as they are only policy guide maps for the government.
15 Years Vision Document in Place of Five Year Plan

The Five Years Plans were discontinued and were replaced with 15 Years Vision Document. The first 15 Year
Vision Document came into effect from 2017-18 after the end of the Twelfth Five Year Plan.
It was formulated with central objective of eradication of poverty. It came alongwith a 7 year National
Development Agenda which lay down the programmes, schemes and strategies to achieve a long term vision.
The long vision document (Perspective plan) comprise three year mass economic framework :
— 2017-18 to 2032-33 Vision Document
— 2017-18 to 2024-25 National Development Agenda
— 2017-18 to 2019-20 Three Year Action Agenda (to be repeated after every three year).
CHAPTER
16 04
Poverty and Unemployment
Sources Class-IX New NCERT Chap 2 (People as a Resource), Class-IX New NCERT Chap 3 (Poverty as a Challenge),
Class-IX & X Old NCERT Chap 2 (An Overview of the Indian Economy), Class-X New NCERT Chap 2 (Sectors of
Indian Economy), Chap 1 (Development), Class XI New NCERT Chap 1 (Indian Economy on the Eve of Independence
Poverty), Class XI New NCERT Chap 7 (Employment : Growth, Information and Other Issues), Chap 10 (Comparative
Analysis of India and Its Neighbouring Countries)
People can help themselves even with a small

Poverty assistance, as the poverty comes because of unfortunate
Poverty is a state or condition in which a person events. (e.g. small farmers and seasonal workers).
or community lacks the financial resources and — Transient Poor Such poor are generally not poor.
essentials for a minimum standard of living. They fall in trap of poverty due to unfortunate event.
Poverty means that the income level from e.g., gambler.
employment is so low that basic human needs Never Poor In this type, non-poor people are
can’t be met. categorised whose income is higher than poverty line.
Famous economist Amartya Sen had given the e.g., businessmen, people employed in quaternary and
concept of poverty. According to him, monetary quinary sector.
income plays an important role in eliminating Rural Poor They are found in non-metro areas with a
poverty. As per him, poverty is the lack of capabilities. population of fewer than 50,000 inhabitants. Due to the
According to the World Bank, Poverty is lesser population, the area lacks basic services and
pronounced deprivation in well-being and amenities which is the cause of their financial struggle.
comprises many dimensions. It includes low Urban Poor They are found in areas with a population
incomes and the inability to acquire the basic goods of more than 50,000 inhabitants. These families live in
and services necessary for survival with dignity. much-stressed conditions due to overcrowding. They
lack basic necessities like affordable housing.
Categories of Poor in India
There are various categories of poor in India
Types of Poverty
depending on the incidence of poverty. There are two types of poverty i.e. Absolute Poverty and
Relative Poverty.
These are as follows : Types of Poverty
Generational or Chronic Poor This type of poverty
is handed over to individuals and families from Absolute Poverty Relative Poverty
one generation to the next. Generally, people in
Absolute Poverty It is a condition where household
this category are Below Poverty Line (BPL). e.g.
income is below a necessary level to maintain basic
landless farmers, casual labours, etc.
living standards i.e. food, shelter, housing etc. It was
Churning Poor They are the one who regularly first introduced in 1990, the ‘dollar a day’ poverty line
move in and out of poverty. These are of two types measured absolute poverty by the standards of the
— Situational or Occasionally Poor It is a world’s poorest countries. In October, 2015, the World
temporary type of poverty based on occurrence Bank reset it to $1.90 a day.
of an adverse event like environmental disaster, Relative Poverty It refers to poverty on the basis of
job loss and severe health problem. comparison of Per Capita Income of different
countries.
17
Poverty Line On the basis of consumption, there are two

methods of poverty estimation :
The incidence of poverty is measured by the poverty
— Uniform Recall Period (URP) Here, consumption
ratio, which is the ratio of the number of poor to the
total population expressed as a percentage. It is also data is asked for a 30-day recall period for all items.
known as head-count ratio. — Mixed Recall Period (MRP) Here, consumption
Poverty line estimation in India is based on the expenditure is asked for five infrequently used
consumption expenditure and not on the income levels. items i.e. clothing, footwear, durable goods,
education and institutional medical expenses for
The World Bank defines a person as extremely poor
if she/he is living on less than 1.90 international a 365 day recall period and other items are asked
dollars a day, which are adjusted for inflation as well for a 30-day recall period.
as price differences between countries. Before independence, first time Dadabhai Naoroji
Asian Development Bank (ADB) has its own poverty estimated poverty in his book ‘Poverty and
line; which is currently at $ 1.51 per person per day. Un-British Rule in India’. In the year 1867-68, it
was ` 16 to ` 35.
Inter-state Disparities of Poverty in India Planning Commission Expert Group (1962) is a
n The distribution of poverty is not same throughout the
working group constituted by the Planning
country. Few states experience worse poverty conditions Commission formulated the separate poverty lines
and few states have slightly less as compared to other for rural and urban areas (` 20 and ` 25 per capita
states. However, from first half of 1970s, there is per year respectively).
reasonable amount of decrease in state level poverty. Assessment VM Dandekar and N Rath (1971) is
n The Multi-dimensional Poverty Index (MPI) 2021 known as the first systematic assessment of poverty
report identifies 25.01% of India’s population as in India, based on National Sample Survey (NSS)
multi-dimensionally poor. data. VM Dandekar and N Rath had the view that
n Among Indian states, Bihar records the highest poverty line must be derived from the expenditure
headcount poverty ratio with 51.91% of the population that was adequate to provide 2,250 calories per day
who are multi-dimensionally poor. This is followed by in both rural and urban areas.
Jharkhand (42.16%), Uttar Pradesh (37.79%), Madhya YK Alagh Committee (1979) determined a poverty
Pradesh (36.65%), Meghalaya (32.67%). line based on a minimum daily requirement of
n The lowest headcount poverty ratio recorded in 2,400 and 2,100 calories for an adult in Rural and
Kerala at 0.71%. It is followed by Goa (3.76%), Sikkim Urban areas respectively.
(3.82%), Tamil Nadu (4.89%), Punjab (5.59%), Himachal
Pradesh (7.62%), where less population is International Standard of
multi-dimensionally poor. Poverty Estimation
n Bihar has the highest number of malnourished people,
At world level, United Nation Development
while Uttar Pradesh topped the list of state and Union
territories in child and adolescent mortality.
Programme (UNDP) sets parameters to measure
poverty, whereas, in India, NITI Aayog on the
n States like Kerala, Maharashtra, Andhra Pradesh,
recommendations of committees, sets the parameters
Tamil Nadu, Gujarat and West Bengal recorded
to measure poverty.
significant reduction in poverty.
n West Bengal achieved tremendous success in reducing Earlier, UNDP had set Human Poverty Index (HPI) as a
poverty through land reforms, whereas states like parameter to measure poverty in its Human
Andhra Pradesh and Tamil Nadu decreased level of Development Reports, but 2010 onwards it switched
poverty through Public Distribution System (PDS). over to a new parameter, namely, Multi-dimensional
Poverty Index (MPI). Lorenz Curve and Gini Coefficient
are the two international methods of poverty estimation.
Poverty Estimation in India
1. Lorenz Curve
Poverty is measured based on consumer expenditure It measures the income disparity between
surveys of the National Sample Survey Organisation. countries. It is developed by Max O Lorenz in the
A poor household is defined as one with an year 1905.
expenditure level below a specific poverty line.
A point on this curve shows those individuals who
Poverty estimation in India is carried out by NITI are below a certain percentage of income Lorenz
Aayog’s task force through the calculation of poverty Curve displays inequalities. Therefore, the absolute
line based on the data captured by the National parity line remains as far as from the Lorenz
Sample Survey Office (NSSO) under the Ministry of Curve, greater will be the disparity in income and
Statistics and Programme Implementation (MOSPI). vice-versa.
18
Lorenz Curve of Income Distribution is given as Committees Associated with

follows:
Poverty Estimation in India
Cumulative income share (%)
100
90 There are various committees which were formed to
80 estimate the poverty level in India. These are discussed
70
60 as follows :
50 A
40 Lakdawala Committee
30 B It was constituted in 1989 by the Planning
20
Commission to consider methodological and
10
0 computational aspects of estimation of proportion
10 20 30 40 50 60 70 80 90100 and number of poor in India.
Cumulative population share (%)
The report of this committee was submitted in
2. Gini Coefficient July, 1993.
It suggested that the consumption expenditure
It was developed by Italian statistician Carrado Gini
should be calculated based on caloric consumption
in 1912. It is a measure of inequality of income
as earlier.
distribution. It is defined as a ratio with values
between 0 and 1. It also suggested that state specific poverty lines
should be constructed and these should be updated
Gini coefficient of 1 (100 on percentile scale)
using Consumer Price Index (CPI) – Industrial
expresses maximum inequality and zero shows
workers in urban areas and Agricultural labour in
minimum inequality. According to UNDP, Global
rural areas.
Gini Coefficient Rate is 0.66. India’s Gini Coefficient
is around 0.37-0.42. Tendulkar Committee Report
A Gini coefficient of one (100 on the percentile Tendulkar Committee headed by Prime Minister’s
scale) expresses maximal inequality among values Economic Advisor, Mr Suresh Tendulkar was set-up
(e.g. where only one person has all the income). in March, 2009 to look into the methodology of
The Gini coefficient is usually defined mathematically estimating poverty in India. Tendulkar Committee
based on the Lorenz Curve, which plots the submitted its report in December, 2009 to the
proportion of the total income of the population (y Planning Commission.
axis) that is cumulatively earned by the bottom x% of Using this approach, new poverty line for the year
the population. The line at 45 degrees Gini, thus, 2004-05, has been raised from ` 356 per capita per
represents perfect equality of incomes. month to ` 447 per capita per month in rural areas
Gini coefficient =
A and from ` 539 per capita per month to ` 579
A+ B per capita per month in urban areas.
In daily terms, poverty line has been raised from ` 12
Where, A = Area above Lorenz Curve to `15 per capita per day in rural areas and from `
B = Area below Lorenz Curve 18 per capita per day to ` 19 per capita per day in
urban areas.
Inequality Adjustment The new, updated data released by the commission
n Amartya Sen through his capability approach, based on the price indices computed from the 66th
credited to the creation of the Human Development Round NSS 2009-10 data on Household Consumer
Index (HDI), a composite measure of life expectancy Expenditure Survey, say anyone who has ` 28 to
and per-capita income. The capability approach is spend daily is out of poverty.
an economic theory conceived as welfare economics. It has estimated the poverty lines at all India level
n According to him, human development only can as MPCE (Monthly Per-Capita Consumption
progress, if per capita income of all people gets Expenditure) of ` 1000 for rural areas and ` 860 for
increase simultaneously. Once there is increase in per urban areas in 2009-10.
capita income and visible decrease in income
inequality, then there shall be increment in human
SR Hashim Committee
development. The Planning Commission has constituted an expert
W = µ (1-G) group ‘Measurement of Poverty’ UNDP under the
Where W = Welfare Chairmanship of SR Hashim on 13th May, 2010, to
µ = Per Capita Income recommend detailed methodology for identification
of BPL families in urban areas in the context of the
G = Age of Inequality
12th Five Year Plan.
19
The panel has suggested that the government should Price Rise It has been steady in the country and this
use a three-stage approach—automatic exclusion, has added to the burden, the poor carry. Although, a
automatic inclusion and scoring index to identify few people have benefitted from this, the lower
urban poor. income groups have suffered because of it as they are
not even able to satisfy their basic minimum needs.
Rangrajan Committee Unemployment It is another factor causing poverty
The Expert Group under the Chairmanship of in India. The ever-increasing population has led to
Dr C Rangarajan to Review the Methodology for a higher number of job-seekers. However, there is
Measurement of Poverty in the country constituted
not enough expansion in opportunities to match
by the Planning Commission in June, 2012 has
submitted its report on 30th June, 2014. this demand for jobs.
The report retained consumption expenditure Lack of Capital and Entrepreneurship The shortage
estimates of NSSO as the basis for determining of capital and entrepreneurship results in low level
poverty. On the basis of this, it pegged the total of investment and job creation in the economy.
number of poor in India at 363 million or 29.6% of Social Factors Apart from economic factors, there
the population. This is higher than 269.8 million poor are also social factors hindering the eradication of
people or 21.9% pegged by the Suresh Tendulkar poverty in India. Some of the hindrances in this
Committee.
regard are the laws of inheritance, caste system,
certain traditions, etc.
Status of Poverty in India Colonial Exploitation The British colonisation and
n There is substantial decline in poverty ratios in India
rule over India for about two centuries,
from about 45% in 1993-94 to about 21.9% in 2011-12.
de-industrialised India by ruining its traditional
India lifted 271 million people out of poverty between
2006 and 2016. If the trend continues, people below handicrafts and textile industries. Colonial policies
poverty line may come down to less than 20% in the transformed India to a mere raw-material producer
next few years. for European industries.
n In a given year in India, official poverty lines finds Climatic Factors Most of India’s poor belong to the
higher in some states than in others because price states of Bihar, Uttar Pradesh, Madhya Pradesh,
levels vary from state to state. Chhattisgarh, Odisha, Jharkhand, etc. Natural
calamities such as frequent floods, disasters,
earthquakes and cyclones cause heavy damage to
Causes of Poverty in India agriculture in these states.
The following are the major causes of poverty in India: Poverty Trap It is a spiraling mechanism, which
Population Explosion India’s population has steadily forces people to remain poor. It is so binding in
increased through the years. During the past 45 itself that it doesn’t allow the poor people to escape
years, it has risen at a rate of 2.2% per year, which it. Poverty trap generally happens in developing
means, on average, about 17 million people are and under-developing countries, and is caused by a
added to the country’s population each year. This lack of capital and credit to people.
also increases the demand for consumption goods
tremendously. Measures to Eradicate Poverty
Low Agricultural Productivity A major reason for The suggestive measures to eradicate poverty are as
poverty is the low productivity in the agriculture
follows :
sector. The reason for low productivity is manifold.
Mainly, it is because of fragmented and subdivided Population Control Population in India has been
land holdings, lack of capital, illiteracy about new increasing rapidly. Growth rate of the population is
technologies in farming, the use of traditional very alarming. For removal of poverty, the growth
methods of cultivation, wastage during storage, etc. rate of the population should be controlled.
Inefficient Resource Utilisation There is Increase in Employment Special measures should be
underemployment and disguised unemployment in taken to solve the problems of unemployment and
the country, particularly in the farming sector. This disguised unemployment. Agriculture should be
has resulted in low agricultural output and also led developed. Small scale and cottage industries should
to a dip in the standard of living. be developed in rural areas to generate employment.
Low Rate of Economic Development Economic Problem of Distribution The Public Distribution
development has been low in India especially in the System (PDS) should be strengthened to remove
first 40 years of independence before the LPG poverty. Poor section should get food grains at
reforms in 1991. subsidised rates and in ample quantities.
20
Fulfillment of Minimum needs of the Poor Government The following features of disguised
should take suitable steps to meet minimum needs of the unemployment are as follows:
poor e.g., supply of drinking water and provision of — Marginal productivity of labour is zero.
primary health centres and primary education. However, Professor Sen does not agree with
Increase in the Productivity of the Poor To remove this view.
poverty, it is necessary to increase productivity of the — It is not possible to identify the persons who
poor. The poor should be given more employment. More are actually unemployed.
investment should be made in public and private sectors — Excess of population and lack of capital is
to generate employment. the principal cause.
Stability in Price Level Stability in prices helps to remove Generally it is associated with agricultural
poverty. If prices continue to rise, the poor will become families.
more poor.
Seasonal Unemployment
Development of Agriculture Agriculture should be
developed as rapid rate of growth of agriculture production It is an unemployment that occurs during
will help to remove urban as well as rural poverty. certain seasons of the year. Agricultural
Agriculture should be mechanised/ modernised and labourers in India rarely have work
marginal farmers should be given financial assistance. throughout the year.
Increase in the Rate of Growth Slow rate of growth is the Urban Unemployment
main cause of poverty. So, the growth rate must be
Urban Unemployment of India, is divided into
accelerated by taking needful measures.
two categories
— Educated Unemployment
Unemployment — Industrial and Technological
Unemployment occurs when a person, who is actively Unemployment
searching for employment is unable to find work. Educated Unemployment
Unemployment is often used as a measure of the health of the
It refers to unemployment of those who are
economy.
normally educated.
The most frequent measure of unemployment is the
This type of unemployment can be of open
unemployment rate, which is the number of unemployed
unemployment and under employment type,
people divided by the number of people in the labour force.
i.e. those who can’t find work and those who
National Sample Survey Organisation (NSSO) defines work in a job that is not in keeping with their
employment and unemployment on the following activity skills, education or capacity.
status of an individual:
Industrial and Technological Unemployment
— Working (engaged in an economic activity) i.e.
It is the loss of jobs due to changes in technology
‘Employed’.
in industries. In 2016, World Bank data
— Seeking or available for work i.e. ‘Unemployed’.
predicted that the proportion of jobs threatened
— Neither seeking nor available for work. by automation in India is 69% year-on-year.
The first two constitute the labour force and the Technology has always displaced some work
unemployment rate is the percentage of the labour force that and jobs. In 1930, the economist John
is without work. Maynard Keynes warned of a new disease that
Unemployment rate = (Unemployed Workers/Total labour force) × 100
he termed as Technological Unemployment.
Technological Unemployment is associated
with technical changes. Modern industries are
Types of Unemployment capital intensive and workers are being replaced
Various types of unemployment are categorised as: by machines. Adoption of labour saving
technologies renders some workers unemployed.
Rural Unemployment
In rural areas of India, disguised unemployment and seasonal Unemployment in Both Rural and
unemployment prevail. There description is given below. Urban Areas
Disguised Unemployment Voluntary Unemployment It occurs when a
person is not willing to work at the prevailing
It is a situation, in which more persons are employed to do rate of wage or does not desire to work. It is
a job which can be done with equal efficiency by a less not taken into consideration while measuring
number of workers. unemployment in an economy.
21
Involuntary Unemployment It is the situation, in generally avoid migrating to far-off areas of work.
which the worker is willing and able to work, but Factors like diversity of language, religion and
he does not get work. It is also called open customs also contribute to low mobility. Lower
unemployment. mobility causes greater unemployment.
Underemployment It is situation, in which a person Education Although literacy rates have risen in the
is engaged in economic activity but fails to provide last few decades, there still remains a fundamental
him fully in accordance with his qualification and flaw in the education system in India. The
efforts. Thus, a person is employed but not in the curriculum is mostly theory-oriented and fails to
desired capacity whether in terms of compensation provide vocational training required to match up
hours, or level of skill and experience. with the current economic environment.
Structural Unemployment It is a category of The degree-oriented system fails when, it comes to
unemployment arising from the mismatch between producing human resources skilled enough to
the jobs available in the market and the skills of the specific job profiles in the economy.
available workers in the market. Agriculture The problem of disguised
Many people in India do not get jobs due to lack of unemployment is the biggest contributor behind this
requisite skills and due to poor education level, it deficit. Also, the seasonal nature of employment in
becomes difficult to train them. the sector leads to recurring cycles of unemployment
for the rural population.
Cyclical Unemployment It is the result of the
business cycle, where unemployment rises during Lack of Skills There has been a push towards
recessions and declines with economic growth. providing employment opportunities to the people
Cyclical unemployment figures in India are by the government by skilling them. But skill deficit
negligible. It is a phenomenon that is mostly found still is a big issue.
in capitalist economies. Poor Industrialisation The industrial sector in India
still lag behind. Agriculture still remains as the
Frictional Unemployment It refers to the time lag
biggest employer in the country.
between the jobs when an individual is searching
for a new job or is switching between the jobs. Lack of Investment Inadequacy of capital
investment has been a key contributor in not
In other words, an employee requires time for
generating enough industry that in turn provides
searching a new job or shifting from the existing to a
employment to the labour force.
new job, this inevitable time delay causes frictional
unemployment.
Measurement of Unemployment in India
It is also called as Search Unemployment. It is often
considered as voluntary unemployment because it is National Sample Survey Office (NSSO), an organisation
not caused due to the shortage of jobs, but in fact, the under Ministry of Statistics and Programme
workers themselves quit their jobs in search of better Implementation (MoSPI) measures unemployment in
opportunities. India on following approaches:
Usual Status Approach This approach estimates only
Vulnerable Employment This means, people
those persons as unemployed who had no gainful
working informally, without proper job contracts
work for a major time during the 365 days preceding
and thus without any legal protection. These the date of survey.
persons are deemed ‘unemployed’ since records of
Weekly Status Approach This approach records only
their work are never maintained. It is one of the
those persons as unemployed who did not have
main types of unemployment in India. gainful work even for an hour on any day of the
week preceding the date of survey.
Causes of Unemployment Daily Status Approach Under this approach,
The following are the main causes for unemployment unemployment status of a person is measured for
in India: each day in a reference week. A person having no
Population Growth Rapid growth of population is gainful work even for 1 hour in a day is described as
the major reason for increasing unemployment in unemployed for that day.
the country. In the last decade (2006-2016), India’s
population increased by 136 million and Impact of Unemployment in India
unemployment is at a 5 year high in the financial The following are the impacts of unemployment in
year of 2015-2016. India:
Mobility of Labour Labour mobility is very low in The problem of unemployment gives rise to the
India as because of their family loyalty, people problem of poverty.
22
Young people after a long time of unemployment PM Svanidhi Yojana

indulge in illegal activities for earning money The Prime Minister Street Vendor’s Atmanirbhar
which ultimately leads to an increase in crime. Nidhi (PM Svanidhi) was launched by the Ministry of
Unemployed persons can easily be persuaded by Housing and Urban Affairs on 1st June, 2020 as a
anti-social elements. This makes them lose faith in Central Sector Scheme with the following objectives:
democratic values of the country. — To facilitate working capital loan upto ` 10,000,
It is often seen that unemployed people end up
— To incentivise regular repayment, to reward digital
getting addicted to drugs and alcohol or attempt
transactions.
suicide, leading losses to the human resources of
the country. The scheme will help formalise the street vendors
across India who were severely hit by the COVID-19
It also affects the economy of the country as the
pandemic as well as it will open up new
workforce that could have been gainfully employed
opportunities to this sector to move up the economic
to generate resources actually gets dependent on
ladder.
the remaining working population, thus escalating
socio-economic costs for the State. For instance, 1% Atal Pension Yojana (APY)
increase in unemployment reduces the GDP by 2%. It was launched in the year 2015 to create a
universal social security system for all Indians,
Government Programmes and especially the poor, the under-privileged and the
workers in the unorganised sector. It is administered
Schemes Related to Poverty by Pension Fund Regulatory and Development
and Unemployment Authority (PFRDA).
The following are the few steps taken by the The main objectives of the Atal Pension Yojana to
Government to tackle the menace of poverty and provide security and protection to citizens in the
scenarios like illness, accidents, diseases etc. This
unemployment in India:
scheme is mainly aimed at the unorganised sector in
Atmanirbhar Bharat the country.
Prime Minister, Shri Narendra Modi on 12th May, Pradhan Mantri Kaushal Vikas
2020 announced an economic stimulus package for Yojana (PMKVY)
` 20-lakh crore (estimated at 10% of the GDP),
towards building an Atmanirbhar Bharat or a It was launched in 2015 and has an objective of
self-reliant, resilient India. enabling a large number of Indian youth to take up
industry-relevant skill training that will help them in
The Package is to cater to various sections
securing a better livelihood.
including cottage industry, MSMEs, labourers,
middle class and various indigenous industries. Ministry of Skill Development and Entrepreneurship
(MSDE) has launched the updated Pradhan Mantri
The aim is to make the country and its citizens
Kaushal Vikas Yojana (PMKVY) 3.0, in a bid to
independent and self-reliant in all senses.
empower India’s youth. It will be implemented in a
Five pillars of Atmanirbhar Bharat were outlined – more decentralised structure with greater
Economy, Infrastructure, System, Vibrant responsibilities and support from States/UTs and
Demography and Demand. Districts.
Pradhan Mantri Garib Kalyan Ann Yojana Pradhan Mantri Jan Dhan Yojana (PMJDY)
(PMGKAY) It is aimed at direct benefit transfer of subsidy,
It is a part of Pradhan Mantri Garib Kalyan pension, insurance etc and attained the target of
Package (PMGKP) launched on 26th March, 2020 to opening 1.5 crore bank accounts. The scheme
help the poor fight the battle against COVID-19. Its particularly targets the unbanked poor.
nodal Ministry is the Ministry of Finance. It was launched on 28th August, 2014. It is a national
The scheme is aimed at providing each person, who mission with an aim to provide access to various
is covered under the National Food Security Act, financial services including Remittance, Credit,
2013 with an additional 5 kg grains (wheat or rice) Insurance, Pension and Banking Savings in an
for free, in addition to the 5 kg of subsidised affordable manner. The Accident Insurance Cover
foodgrain already provided through the Public under Jan-Dhan Yojana of ` 1 lakh enhanced to
Distribution System (PDS). ` 2 lakh to new PMJDY accounts opened after 28th
August, 2018.
INDIAN ECONOMY
CHAPTER
NCERT Notes
05 23
Rural and Urban

Development
(Basic Infrastructure)
Sources Class-IX & X Old NCERT Chap 3 (Infrastructure of Indian Economy), Class-XI New NCERT Chap 1 (Indian Economy
on the Eve of Independence), Chap 6 (Rural Development), Chap 8 (Infrastructure)
The Ministry of Rural Development is a branch of

Concept of Rural Development the Government of India entrusted with the task of
Rural development is the process of improving the accelerating the socio-economic development of
quality of life and economic well-being of people living rural India. Its focus is on health, education, piped
in rural areas, often relatively isolated and sparsely drinking water, public housing and roads.
populated areas. Rural development has traditionally
centered on the exploitation of land-intensive natural Issues in Rural Development
resources such as agriculture and forestry.
The development of rural areas can be done only by
Rural development still remains the core of the
solving the basic problems prevailing in these areas.
overall development of the country. More than
two-third of the country’s people are dependent on These problems can be classified as follows:
agriculture for their livelihood and one-third of rural
India is still Below the Poverty Line (BPL). 1. Rural Credit
The objectives composed by the government for Growth of rural economy depends primarily on
rural development are as follows: infusion of capital, from time to time, to realise
higher productivity in agriculture and
— To improve productivity and wages of rural people.
non-agriculture sectors.
— To guarantee increased and quick employment
As the time gestation between crop sowing and
possibilities.
realisation of income after production is quite long,
— To demolish unemployment and bring a notable farmers borrow credit from various sources to meet
decline in underemployment. their initial investment on seeds, fertilisers,
— To guarantee an increase in the standard of living implements etc.
of the underprivileged population.
Types of Rural Credit
— To provide the basic needs: elementary education,
healthcare, clean drinking water, rural roads, etc. Rural credit can be classified into the following
categories :
Ministry of Rural Development Short-term credit The Indian farmers require credit
In 1974, Department of Rural Development was to meet their short-term needs viz., purchasing
established under Agricultural and Food Ministry. seeds, fertilisers, paying wages to hired workers etc,
This department was formed as a Ministry of Rural for a period of less than 15 months. Such loans are
Development on 20th January, 1980. generally repaid after harvest.
24
Medium-term credit This type of credit includes 3. Regional Rural Banks (RRBs)
credit requirements of farmers for a medium RRBs are financial institutions that ensure adequate
period ranging between 15 months and 5 years credit for agriculture and other rural sectors. Regional
and it is required for purchasing cattle, pumping Rural Banks were set up on the basis of the
sets, other agricultural implements etc. recommendations of the Narasimham Working Group
Medium-term credits are normally larger in size (1975) and after the legislation of the Regional Rural
than short-term credit. Banks Act, 1976.
Long-term credit Farmers also require finance for The equity of a Regional Rural Bank is held by the
a long period of more than 5 years just for the Central Government, concerned State Government
purpose of buying additional land or for making and the Sponsor Bank in the proportion of 50:15:35.
any permanent improvement on land like the
sinking of wells, reclamation of land, horticulture
etc. Thus, the long-term credit requires sufficient National Bank for Agriculture and Rural
time for the repayment of such loan. Development (NABARD)
n NABARD is a development bank focussing primarily on
Sources of Rural Credit the rural sector of the country. It is the apex banking
The sources of rural credit can be classified into two institution to provide finance for Agriculture and rural
categories - Institutional and Non-Institutional development.
sources. n Its headquarter is located in Mumbai, the country’s
financial capital. It is a statutory body established in
Non-Institutional Sources 1982, under the Parliamentary Act- National Bank for
Non-Institutional sources of rural credit include Agriculture and Rural Development Act, 1981.
credit from moneylenders, traders and n It was set up based on the Shri B Sivaraman Committee
commission agents, relatives etc. recommendation.
n It provides refinance support for building rural
Institutional Sources infrastructure. It prepares district-level credit plans to
Credit sources working under the formal system guide and motivate the banking industry in achieving
forms the Institutional sources. These are: these targets.
n It supervises Cooperative Banks and Regional Rural
1. Rural Cooperative Institutions Banks (RRBs) and helps them develop sound banking
Rural Cooperative Institutions are mandated to practices and integrate them into the CBS (Core
address the ‘last mile problem’ associated with Banking Solution) platform.
the delivery of affordable credit to farmers.
It can be broadly classified into short-term and 4. Self-Help Groups
long-term institutions, each with distinct
Self-Help Groups (SHGs) have emerged to fill the gap
mandates. The focus of short-term cooperatives,
in the formal credit system because the formal credit
viz. State Cooperative Banks (SCBs), District
delivery mechanism has not only proven inadequate.
Central Cooperative Banks (DCCBs), and Primary
The SHGs promote good management in small
Agricultural Credit Societies (PACS) have been
proportions by a minimum contribution from each
primarily providing crop loans and working
member.
capital loans to farmers and rural artisans.
They pool money and credit is given to the needy
2. Commercial Banks members to be repayable in small installments at
In the initial period, the commercial banks of our reasonable interest rates.
country have played a marginal role in advancing By 2020, nearly 6 crore women in India have become
rural credit. In 1950-51, only 1% of the member in 54 lakh women SHGs.
agricultural credit was advanced by the
commercial banks. About ` 10,000 - 15,000 per SHG and another ` 2.5
lakhs per SHG as a Community Investment Support
But after the nationalisation of commercial banks Fund (CISF) are provided as part of renovating fund to
in 1969, the commercial banks started to extend take up self employement for income generation. Such
financial support both directly and indirectly and credit provisions are generally referred to as
also for both short and medium periods. With the micro-credit programmes. SHGs have helped in the
help of ‘Village Adoption Scheme’ and Service empowerment of women.
Area approach, the commercial banks started to
meet the credit and other requirements of the
farmers.
25
2. Rural Marketing Shift of Workforce from Agriculture to

Other Allied Activities
Rural marketing comprises all operations
involved in the movement of farm produce from Expansion into other sectors is essential to provide
the producer to the ultimate consumer. supplementary gainful employment and in realising
higher levels of income for rural people to overcome
Issues (Problem faced) related with Rural
poverty and other tribulations.
marketing in India are as follows :
There is a need to focus on allied activities, non-farm
— Too many middlemen.
employment and other emerging alternatives of
— Lack of storage facilities in markets.
livelihood, though there are many other options available
— Inadequate transportation facilities. for providing sustainable livelihoods in rural areas.
— Lack of institutional financing.
— Absence of grading and standardisation. 5. Sustainability and Organic Farming
— Absence of market information. Traditional Indian agriculture was entirely based on
— Unregulated local markets. the use of chemical fertilisers and pesticides. These
— Adulteration of commercial crops. chemicals enter in our food chain and create toxic
effects on living beings.
3. Role of Cooperatives Soil quality also degrades due to use of chemicals in
To work for similar objectives and profits is agricultural practices. Due to all these drawbacks,
referred as cooperative. concept of sustainability and organic farming is given
importance.
Cooperative societies under cooperative system
are of two types : Organic farming is a system which lays emphasis on
ecological balance, conservation and protection.
— Credit Cooperative Society It is a credit society
that is a member-owned financial cooperative It is based on cheap inputs rather than costlier ones.
and controlled by its members. It provides loan Due to this, cost of investment in agriculture is less and
at village level. profit is more.
— Non-credit Cooperative Society It is a society
In world market, products of organic farming are in
high demand. That’s why, their export is a profitable
that works in the field of sugar production,
business.
wheat purchase, etc. These are formed in urban
areas and provide loans to people living in In comparison to the food products produced from
urban or semi-urban areas. chemical fertilisers, food products of organic farming
are more nutritious.
4. Agricultural Diversification into
Productive Activities Rural Development and Panchayati Raj
n Panchayati Raj institutions play an important role in
Agricultural diversification includes two aspects : rural development and that is why they have been given
One relates to change in cropping pattern. a constitutional status by the 73rd Amendment Act of
Other relates to a shift of workforce from 1992.
agriculture to other allied activities (livestock, n Panchayati Raj Institutions are involved in rural
poultry, fisheries etc.) and non-agriculture development through their participation in planning
sector. and execution at the village level.
n Gram Sabha, which is an integral part of the Panchayat
Change in Cropping Pattern system is being empowered to involve all the people in
Diversification towards new areas is necessary the decentralised planning.
not only to reduce the risk from agriculture n There have been 33% seats reserved for women in all the
sector but also to provide productive sustainable three tiers of Panchayati Raj Institutions.
livelihood options to rural people.
e-Panchayat
Much of the agricultural employment activities n The main objective of e-Panchayat is to bring overall
are concentrated in the Kharif season. But during reform in the Panchayati Raj Institutions so as to make it
the Rabi season, in areas where there are more transparent, effective and accountable.
inadequate irrigation facilities, it becomes n In the Twelfth Five Year Plan, it was proposed to include
difficult to find gainful employment. e-Panchayat multimedia programmes in the Rajiv
Gandhi Panchayat Empowerment initiative.
26
Rural Development Schemes Its beneficiaries include people belonging to SCs/STs,

freed bonded labourers and non-SC/ST categories,
The following are the important rural widows or next-of-kin of defence personnel killed in
development schemes of India: action, ex-servicemen and retired members of the
SVAMITVA (Survey of Villages and Mapping Paramilitary forces, disabled persons and Minorities.
with Improvised Technology in Village Areas) Beneficiaries are chosen according to data taken from the
Socio-Economic Caste Census (SECC) of 2011.
It is a new initiative of the Ministry of
Panchayati Raj launched Nation-wide on 24th Shyama Prasad Mukherjee Rurban Mission (SPMRM)
April, 2021. It aims to provide rural people PM Narendra Modi launched this scheme as National
with the right to document their residential Rurban Mission on 21st February, 2016. This scheme was
properties so that, they can use their property merged with Providing Urban Amenities in Rural Areas
for economic purposes. (PURA) Scheme.
The scheme is for surveying the land parcels in SPMRM is focused on comprehensive development of 300
rural inhabited areas using drone technology. Rurban clusters spread across the country.
The survey shall be done across the country in a
These clusters are identified in rural regions displaying
phase wise manner over the period 2020-2025.
potential for economic growth through the presence of
The scheme is proposed as a Central Sector thematic livelihood activities, increasing population and
scheme with a projected outlay of ` 79.65 crores non-farm employment.
for the pilot phase (Financial Year 2020 -21).
The Mission is being implemented with an aim to
Jal Jeevan Mission transform these clusters by focusing on developing skills,
This mission was launched on 15th August, 2019 strengthening economic activities and provision of crucial
to provide safe and adequate drinking water basic infrastructure amenities in an equitable and
through individual household tap connection time-bound manner.
by 2024 to all households in rural India. The benefits of Rurban mission are as follows :
It will be implemented by newly created Jal — Under this scheme, the facilities of cities will be given to
Shakti Ministry. This ministry was formed in villages. Electricity, water, roads and health facilities
2019 by merger of Ministry of Water
will be provided to villages.
Resources, River Development and Ministry of
Drinking Water and Sanitation. — The villages will be developed on the line of the cluster.
— Population in a cluster will be 21,000 to 50,000.
Gram Swaraj Abhiyaan — 30% of total expenditure on Center Gap Funding will be
Gram Swaraj Abhiyaan is a campaign that is from our budget.
being organised on the occasion of Ambedkar
Jayanti between 14th April to 5th May, 2018. Saansad Adarsh Gram Yojana (SAGY)
The campaign is undertaken under the name It was launched in 2014, with the objective of creating
of ‘‘Sabka Sath, Sabka Gaon, Sabka Vikas’’. ‘Adarsh Grams’ across the country.
The objective of the campaign is to promote In its first phase 2014-19, the scheme called upon the
social harmony, spread awareness about Members of Parliament (MPs) to make one Gram
pro-poor initiatives of government, reach out Panchayat of their choice, a Model Village by 2016 and
to poor households to enroll them as also to another two by 2019.
obtain their feedback on various welfare
From 2019, under the second phase of the scheme, each
programmes.
Member of Parliament during his/her tenure may develop
Pradhan Mantri Awaas Yojana – Gramin five model villages (one per year) in his/her area till 2024.
It was launched to achieve the objective of Deen Dayal Antyodaya Yojana – National Rural
‘Housing for All’ by 2022, the erstwhile rural Livelihoods Mission (DAY-NRLM)
housing scheme Indira Awaas Yojana (IAY) was
restructured to Pradhan Mantri Awaas It is a centrally sponsored programme, launched by the
Yojana-Gramin (PMAY-G) w.e.f 1st April, 2016. Ministry of Rural Development in June 2011. Its objective
is to eliminate rural poverty through the promotion of
Its objective is to help rural people Below the multiple livelihoods and improved access to financial
Poverty Line (BPL) in construction of dwelling services for the rural poor households across the country.
units and upgradation of existing
unserviceable kutcha houses by providing It involves working with community institutions through
assistance in the form of a full grant. community professionals in the spirit of self-help, which
is a unique proposition of DAY-NRLM.
27
Deen Dayal Upadhyaya Grameen Kaushalya Yojana It is the Gram Sabha and the Gram Panchayat,
It was launched in 2011. It is a placement linked skill which approves the self of works under
Development Programme for Wage Employment. MGNREGA and fixes their priority.
Skill development through Rural Self-Employment and Social audit of MGNREGA works is mandatory,
Training Institutes (RSETIs) enables a trainee to take which leads to accountability and transparency.
bank credit and start his/her own Micro-enterprise. Pradhan Mantri Gram Sadak Yojana (PMGSY)
Some such trainees may also seek regular salaried jobs. It was launched on 25th December, 2000.
At present, RSETIs offer training in 61 vocations Its objective is to provide connectivity, by way of
classified under four major areas viz. agriculture, an all-weather road to unconnected habitations.
processing, product manufacture and general
entrepreneurship development programme. Its beneficiaries include unconnected habitations of
designated population size (500+ in plain areas and
Providing Urban Amenities in Rural Areas (PURA) 250+ in North-Eastern States, Himalayan States,
It is a strategy of rural development given by APJ Deserts and Tribal Areas as per 2001 census).
Abdul Kalam. His vision was to develop rural India National Social Assistance Programme (NSAP)
through a cluster development system where 50-100
villages with common competencies and/or mutual It was launched in 1995. It is targeted at any such
markets could be horizontally or vertically integrated person who has little or no regular means of
as PURA complexes. subsistence from his/her own source of income or
financial support from family members or other
These villages would be linked through ‘four connectivities’
sources, to be identified by States/UTs. At present,
i.e., physical, electronic, knowledge and economic.
NSAP includes five sub-schemes as its components :
The scheme was approved by Government of India in
(i) Indira Gandhi National Old Age Pension Scheme.
January 2004.
(ii) Indira Gandhi National Widow Pension Scheme.
National Rural Drinking Water Programme (NRDWP)
(iii) Indira Gandhi National Disability Pension
It was launched in 2009. It aims to provide safe and Scheme (IGNDPS).
adequate water for drinking, cooking and other domestic
(iv) National Family Benefit Scheme.
needs to every rural person on a sustainable basis.
(v) Annapurna Scheme.
It aimed to provide all rural habitations, government
schools and anganwadis access to safe drinking water.
Pradhan Mantri Adarsh Gram Yojana (PMAGY)
Urban Development
Urban development is the social, cultural, economic
It is a rural development programme launched by the
Central Government in India in the financial year and physical development of cities, and the
2009-10 for the development of villages having a higher underlying causes of these processes.
ratio (over 50%) of people belonging to the Scheduled
Castes through convergence of Central and state schemes Urban Areas
and allocating financial funding on a per village basis. Urban areas have been recognised as ‘engines of
The scheme targets to make an ‘Adarsh Gram’ (Model inclusive economic growth’. Of the 121 crore Indians,
village) that consists of sufficient physical and 83.3 crore live in rural areas while 37.7 crore stay in
institutional infrastructure, with fully meeting the urban areas, i.e approx 32% of the population.
minimum requirements of every sector of the public. The Census of India, 2011 defines urban settlement as :
Mahatma Gandhi National Rural Employment Statutory Towns All the places, which have
Guarantee Act (MGNREGA) 2005 Municipality Corporation, Cantonment Board or
notified town area committee. These towns are
The scheme was introduced as a social measure that
notified under law by respective State/UT
guarantees ‘the right to work’. The Ministry of Rural
governments and have local bodies like municipal
Development monitors the entire implementation of
corporation, municipality, etc, irrespective of
this scheme in association with state governments.
demographic characteristics. For example-
Its major objective is providing not less than one Vadodara (Municipal Corporation), Shimla
hundred days of unskilled manual work as a (Municipal Corporation).
guaranteed employment in a financial year to every
Census Town All the other places, which satisfy
household in rural areas as per demand, resulting in
following criteria :
creation of productive assets of prescribed quality and
durability. — A minimum population of 5,000 persons
28
— At least 75 % of male main working population

Urban Development Schemes
engaged in non-agricultural pursuits
The following are the important Urban
— A density of population of at least 400 persons per
development schemes of India :
square kilometre
Smart Cities Mission
Note These were identified on the basis of census 2001 data. Cities are
urban areas with more than 1,00,000 population. Urban areas It was launched on 25th June, 2015.
below 1,00,000 are called towns in India. The main objective of the Mission is to promote
cities by providing core infrastructure, clean and
Urbanisation sustainable environment and give a decent
The process of urbanisation refers to a societal quality of life to their citizens through the
transformation taking place with the increased mobility application of ‘smart solutions’.
and settling of people in urban surroundings. The Mission aims to drive economic growth and
improve quality of life through comprehensive
It is a process of geographic transformation that may be
work on social, economic, physical and
explained by the migration of people from rural to
institutional pillars of the city.
urban, sub-urban and peri-urban areas with the
perception of a better quality of life that includes better The focus is on sustainable and inclusive
development by creation of replicable models,
employment, education, healthcare, transportation,
which act as lighthouses to other aspiring cities.
communication, housing, entertainment, etc.
100 cities have been selected to be developed as
Challenges Associated with Smart Cities through a two-stage competition.
Urbanisation in India Atal Mission for Rejuvenation and Urban

Transformation (AMRUT)
The following are the issues challenges with urbanisation
in India : Jawaharlal Nehru National Urban Renewal
Mission was renamed to Atal Mission for
Excessive Population Pressure The cities suffer from the
Rejuvenation and Urban Transformation
problems of slums, crime, unemployment, urban
(AMRUT) and then relaunched in June 2015.
poverty, pollution, congestion, ill-health and several
deviant social activities due to rural-urban migration. The focus is to establish infrastructure that
could ensure adequate robust sewage networks
Overflowing Slums There are about 13.7 million slum
and water supply for urban transformation by
households in the country sheltering a population of
implementing urban revival projects.
65.49 million people across the country. As much as
65% of Indian cities have adjoining slums where people Rajasthan was the first state in the country to
live in small houses adjacent to each other. submit the State Annual Action Plan under Atal
Mission for Rejuvenation and Urban
Inadequate Housing Among the numerous social
Transformation (AMRUT).
problems of urbanisation, the problem of housing is the
most distressing. A vast majority of urban population The components of the AMRUT consist of
live under conditions of poor shelter and in highly capacity building, reform implementation, water
congested spaces. supply, sewerage and septage management,
storm water drainage, urban transport and
Unplanned Development The model of building a
development of green spaces and parks.
developed city comprises unplanned development,
which only promotes difference prevailing in urban During the process of planning, the Urban Local
cities between the rich and the poor. Bodies (ULBs) will strive to include some smart
features in the physical infrastructure components.
Pandemic-Induced Problems The COVID-19 pandemic
has exacerbated the misery of urban poor or slum HRIDAY
dwellers. The sudden implementation of complete The National Heritage City Development and
COVID lockdown severely affected the ability of slum Augmentation Yojana (HRIDAY), a central
dwellers to earn their living. sector scheme of the Government of India, was
Non-Inclusive Welfare Schemes The benefits of welfare launched on 21st January, 2015
schemes for urban poor often reach only a small part of The main aim is bringing together urban
the intended beneficiaries. Most relief funds and planning, economic growth and heritage
benefits do not reach slum dwellers, mainly because conservation in an inclusive manner and with
these settlements are not officially recognised by the the objective of preserving the heritage
government. character of the city.
29
Under the Scheme, twelve cities namely, Ajmer, It is aimed at providing shelter equipped with
Amritsar, Amaravati, Badami, Dwarka, Gaya, essential services to the urban homeless in a
Kanchipuram, Mathura, Puri, Varanasi, Velankanni, phased manner. In addition, it would also address
Warangal have been identified for development. livelihood concerns of the urban street vendors.
Pradhan Mantri Awaas Yojana-
Housing for All (Urban)
Other Schemes of Rural and Urban
The Mission is being implemented during 2015-2022
Development
and provides central assistance to Urban Local Other government schemes related to the rural and
Bodies (ULBs) and other implementing agencies urban development are as follows :
through States/UTs for
Ayushman Bharat Yojana
— In-situ Rehabilitation of existing slum dwellers
using land as a resource through private It has been launched by the government on 23rd
participation Credit Linked Subsidy, Affordable September, 2018 with an aim to move towards a
Housing in Partnership Subsidy for beneficiary-led provision of universal healthcare by providing
individual house construction/ enhancement. insurance cover of ` 5 Lakh per family per year,
— Credit linked subsidy component is being taking care of almost all secondary care and
implemented as a Central Sector Scheme while tertiary care procedures.
other three components as Centrally Sponsored There is no limitation on family size and age to
Scheme (CSS). avail the scheme. It is a centrally sponsored health
insurance scheme of Ministry of Health and Family
All statutory towns as per Census 2011 and towns
Welfare (MOHFW).
notified subsequently would be eligible for coverage
under the Mission. Ayushman Bharat adopts a two-way approach :
— Firstly, the creation of health and wellness
Swachh Bharat Mission-Urban centres to bring health care closer to homes.
The Swachh Bharat Mission - Urban (SBM-U), — Secondly, the formulation of a Pradhan Mantri
launched on 2nd October, 2014 aims at making urban Jan Aarogya Yojana (PMJAY) to protect poor and
India free from open defecation and achieving 100% vulnerable families against financial risk arising
scientific management of municipal solid waste in out of catastrophic health episodes.
4,041 statutory towns in the country.
The objectives of the mission are : Pradhan Mantri Suraksha Bima Yojana
— Elimination of open defecation. It is a government scheme launched on 9th May,
— Eradication of Manual Scavenging. 2015.
— Modern and Scientific Municipal Solid Waste It intends to provide an affordable insurance
Management. scheme for the poor and underprivileged people in
— To effect behavioural change regarding healthy the age group of 18 to 70 years with a bank account
sanitation practices. at a premium of ` 12 per annum.
— Generate awareness about sanitation and its It provides a risk coverage of ` 2 lakh for accidental
linkage with public health Capacity augmentation death and full disability and ` 1 lakh for partial
for (Urban Local Bodies, ULBs). disability.
— To create an enabling environment for private sector Mission Indradhanush
participation in Capex (capital expenditure) and It was launched on 25th December, 2014. Its aim is
Opex (operation and maintenance expenditure). to fully immunise more than 89 lakh children who
National Urban Livelihoods Mission (NULM) are either unvaccinated or partially vaccinated
It was launched by the Ministry of Housing and Urban under Universal Immunisation Programme (UIP).
Poverty Alleviation (MHUPA), Government of India It targets children under 2 years of age and
on 23rd September, 2013 by replacing the existing pregnant women for immunisation.
Swarna Jayanti Shahari Rozgar Yojana (SJSRY). It provides vaccination against 12
The NULM focuses on organising urban poor in their Vaccine-Preventable Diseases (VPD) i.e. diphtheria,
strong grassroots level institutions, creating whooping cough, tetanus, polio, tuberculosis,
opportunities for skill development leading to hepatitis B, meningitis and pneumonia, Haemophilus
market-based employment and helping them to set up influenzae type B infections, Japanese Encephalitis
self- employment ventures by ensuring easy access to (JE), rotavirus vaccine, pneumococcal conjugate
credit. vaccine (PCV) and measles-rubella (MR).
30
List of the Some Major Rural and Urban Development Programmes

Name of the Programme Year of Beginning Objectives/Description
Gati Shakti Yojana 2021 To provide multi-modal connectivity for movement of people,
goods and services from one mode of transport to another.
Atmanirbhar Bharat Rojgar Yojana 2020 To boost employment in formal sector at COVID phase.
Five Star Villages Scheme 2020 To ensure 100% rural coverage of postal product and services.
PM Svanidhi Scheme 2020 It is a special micro credit facility scheme for providing affordable
loan to street vendor.
Pradhan Mantri Shram Yogi Maandhan 2019 To provide ` 3,000 per month to 60 year old unorganised sector
Yojana worker.
Pradhan Mantri Kisan Mandhan Yojana 2019 To provide ` 3,000 per month as pension to farmers.
Rashtriya Poshan Yojana 2018 To improve nutritional outcomes for children, pregnant women
and lactating mothers.
Pradhan Mantri Vaya Vandana Yojana 2017 Pension scheme for Senior Citizens (above 60 years of age)
Sahaj Bijli Har Ghar Yojana 2017 To provide electricity for all the household in rural and urban
areas.
Pradhan Mantri Ujjwala Yojana (PMUY) 2016 To distribute LPG connections to women of Below Poverty Line
(BPL) families.
Nirmal Bharat Abhiyan 2012 Total Sanitation Campaign (TSC) renamed to Nirmal Bharat
Abhiyan. On 2nd October, 2014, the campaign was relaunched as
Swachh Bharat Abhiyan (Clean India Mission).
Bal Bandhu Scheme 2011 Provides for protection of children in areas of civil unrest. It is
implemented by NCPCR with grant from PM’s National Relief Fund.
Rajiv Gandhi Scheme for Empowerment of 2010 It aims at empowering adolescent girls of 11 to 18 years by
Adolescent Girls (RGSEAG) ‘Sabla‘ improving their nutritional and health status. Upgradation of
home skills and vocational skills.
Pradhan Mantri Swasthya Suraksha Yojana 2010 To correct regional imbalance in tertiary healthcare and
(PMSSY) augmenting facilities for quality medical education in the country;
and setting up six AIMS like institutions in Phase-1 and in phase-2,
two more AIIMS like institutions.
Integrated Child Protection Scheme (ICPS) 2009-10 Providing a safe and secure environment for comprehensive
development of children who are in need of care and protection as
well as children in conflict with law.
Saakshar Bharat 2009 National Literacy Mission has been recasted as ‘Saakshar Bharat’.
The aim is to cover all adults, the age group of 15 and above, with
its primary focus on women.
Rashtriya Madhyamik Shiksha Abhiyan 2009 To ensure universal access by 2017 and universal retention by
(RMSA) or Scheme for Universalisation of 2020.
Access for Secondary Education (SUCCESS).
Rajiv Gandhi National Creche Scheme for the 2006 Overall development of children, childhood protection, complete
Children of Working Mothers immunisation, awareness generation among parents of
malnutrition, health and education.
Jawaharlal Nehru Urban Renewal Mission 2005 To assist cities and towns in taking up housing and infrastructural
(JNURM). It has two components : (a) Basic facilities for the urban poor in 63 cities (now 65 cities) in the
Services to Urban-Poor, and (b) Integrated country.
Housing and Slum Development Programme
Nirmal Gram Puraskar (NGP) 2003 It is an incentive scheme to encourage Panchayati Raj Institutions
(PRIs) to take up santiation promotion.
Sikkim has become the 1st Nirmal State in the country.
Swayam Siddha 2001 Organising women into Self-Helf Groups to form a strong
institutional base.
Food for Work Programme 2001 To give food through wage employment in the drought affected
areas in 8 states. Wages are paid by the State Government, Partly
in cash and partly in foodgrains.
Pradhan Mantri Gramodya Yojana (PMGY) 2000 Focus on village level development in 5 criticial areas i.e. primary
health, primary education, housing, rural roads and drinking
water and nutrition.
INDIAN ECONOMY
NCERT Notes
CHAPTER 06 31
Agriculture
Sources Class-IX New NCERT Chap 1 (The Story of Village Palampur, Chap 4 – Food Security of India),
Class-X New NCERT Chap 3 (Money and Credit), Class-IX & X Old NCERT Chap 4 (Towards Economic Development),
Class-XI New NCERT Chap 1 (Indian Economy on the Eve of Independence), Chap 2 (Indian Economy (1950-1990),
Class-XI New NCERT Chap 6 (Rural Development)
Due to low productivity and use of outdated

Introduction to Indian Agriculture technology, the farmers lacked proper
Agriculture is defined as the art, science and business infrastructure, this problem was replaced by
of producing crops and livestock for economic introduction of Green revolution in the country.
purposes.
Agriculture comes under the primary sector of the Significance of Agriculture
Indian economy. It plays an important role in the in Indian Economy
Indian economy as around 50% of the population is
still dependent on agriculture and allied activities. The following points highlight significance of
This is the reason why India is known as an agriculture sector in Indian economy :
Agriculture-based economy.
Contribution of Agriculture in
Agriculture sector includes core farming, horticulture,
animal husbandry, dairy, fishing etc. National Income
Agriculture is a dominant sector in India, contributing Agricultural sector contributes a significantly
19.9% to the total GDP (Gross Domestic Product). The large share to the national income of India. The
increasing population of India is dependent on this share of agriculture in GDP increased to 19.9% in
sector for its living. 2021-21 from 17.8% in 2019-20.
During the COVID-19 pandemic, it was the only
Reforms in Indian Agriculture sector to witness a positive growth rate. In
The credit for systematic changes in Indian 2020-21, the percentage share of Gross Value
agriculture is given to the policies of land reforms and Added (GVA) of Agriculture and Allied sector to
Green Revolution. total economy reached 20.2%
In the era of 1951, first attempt was made to bring Contribution of Agriculture in Employment
equality in agriculture with land reforms, with major
The share of agriculture has been falling in the
aim of changing the ownership of the holdings. In
country’s gross income while industrial and
addition to promote equality, importance was given to
service sectors’ shares have been on a rise
fixing the ceiling.
constantly. But from the livelihood point of view,
It was majorly done to decrease the ownership of about 52% people of India depend on agricultural
agriculture land of an individual with determining the sector.
maximum amount of ownership of agricultural land.
In 2020-21, contribution of agriculture in GDP was
At the time of independence, 75% of the country’s 19.9% which increases exports and improves
population was dependent on agriculture. India’s trade deficit.
32
Contribution in Economic Labour Intensive Cultivation Due to the increase

Growth and Capital Formation in population, the pressure on land holding
increased. Land holdings get fragmented and
Economic transformation in developing nations is subdivided and become uneconomical. Machinery
propelled by increase in agricultural incomes and and equipment cannot be used on such farms.
industrial growth. For example, China’s economic
Under Employment Due to inadequate irrigation
growth.
facilities and uncertain rainfall, the production of
Agriculture has the potential to increase India’s agriculture is less, farmers find work a few
overall Gross Domestic Product (GDP) growth. months in the year. Their capacity of work cannot
There is general agreement on the necessity of capital be properly utilised. In agriculture, there is under
formation. Since agriculture happens to be the largest employment as well as disguised unemployment.
industry in a developing country like India, it can and Small Size of Holdings Due to large scale
must play an important role in pushing up the rate of sub-division and fragmentation of holdings, land
capital formation. holding size is quite small. Average size of land
Contribution of Agriculture in Industries holding was 2.3 hectares in India while in
Australia it was 1993 hectares and in the USA it
Agriculture supplies raw materials to various was 158 hectares.
agro-based industries like sugar, jute, cotton textile
and Vanaspati industries. Food processing industries Traditional Methods of Production In India,
are similarly dependent on agriculture. Therefore, the methods of production of agriculture along with
development of these industries entirely depends on equipment are traditional. It is due to poverty and
agriculture. illiteracy of people. Traditional technology is the
main cause of low production.
Increase in rural purchasing power is very necessary
for industrial development as two-thirds of the Indian Low Agricultural Production Agricultural
population live in villages. After the green revolution, production is low in India. India produces 27 Qtls
the purchasing power of the large farmers increased wheat per hectare. France produces 71.2 Qtls per
due to their enhanced income and negligible tax burden. hectare and Britain 80 Qtls per hectare. Average
annual productivity of an agricultural labourer is
Indian agriculture plays a vital role in internal and
162 dollars in India, 973 dollars in Norway and
external trade of the country. Internal trade in
2408 dollars in USA.
food-grains and other agricultural products helps in
the expansion of the service sector. In the year Dominance of Food Crops 75% of the cultivated
1990-91, export share of Agriculture sector was 1.9% area is under food crops like wheat, rice and
which increased to 2.46% in 2020-21. This sector has bajra, while 25% of cultivated area is under
2.2% share in world’s population export. commercial crops. This pattern is the cause of
backward agriculture.
Agricultural Inputs
Land is the most important input for the agriculture.
Challenges Associated with India’s
Apart from land, following agricultural inputs are Agriculture Sector
essential for agriculture : There are various challenges associated with Indian
— Technical knowledge — Labour agriculture. Prominent among them are as follows :
— Livestock — Agro-implements
Issues Related to Subsidies
— Irrigation — Seeds
Agricultural subsidies were introduced to
— Fertilisers and insecticides — Storage
incentivise farmers to take up the green
revolution. Subsidies also intended to reduce the
Salient Features of Indian Agriculture cost of production for farmers and to check food
The following are the salient features of Indian price inflation and protect consumers.
agriculture : However, today it has become apparent that
Dependence on Monsoon Agriculture in India mainly subsidies are inflicting significant damage on
depends on monsoon. If monsoon is good, the different aspects of the economy.
production will be more and if monsoon is less Subsidised Urea has led to massive overuse of
than average then the crops fail. Sometimes floods nitrogenous fertilisers, leading to damaged soils
destroy the crops. As irrigation facilities are quite and pollution of local water bodies.
inadequate, agriculture depends on the monsoon.
33
Similarly, power subsidies have not only led to an Commodity Market It is about trading of precious
alarming overuse of groundwater, but also it has metals, energy, oil, spices and so on. There are three
severely damaged the health of power distribution commodity markets in India :
companies. — National Commodity and Derivative Exchange.
Credit subsidies like loan waivers have weakened — Multi-Commodity Exchange.
the Indian banking system (due to increased
— National Multi-Commodity Exchange of India.
NPAs), having negative spillover effects on the
economy. Future Market In future contracts, the buyer has the
obligation to purchase a specific assets and the seller
Output price supports in the form of Minimum
has to sell and deliver that asset at a specific future
Support Price (MSP) basically apply to only a
date. Agri-futures markets are considered to be one of
handful of crops, especially wheat and rice that are
the ways to ensure appropriate farm prices.
procured by the government in a handful of states.
Consumer Oriented Policies Agricultural Marketing Policies

Whenever there is a price rise in any agricultural Due to restrictions imposed by Agricultural Produce
commodity, the government imposes restrictions Market Committee (APMC) Acts passed by various
on exports to protect Indian consumers. It creates states, Indian farmers can only sell their produce at
hindrances for farmers taking advantage of high Farm gate or local market (haat) to village
prices in foreign markets. aggregators, APMC mandis and to the government at
High prices alongwith the Essential Commodities the Minimum Support Price (MSP).
Act (ECA), has declined private investment in The introduction of the Electronic National
export infrastructure such as warehouses and cold Agriculture Market (e-NAM)—an online trading
storage systems. This lack of storage infrastructure platform for agricultural commodities in India—is a
compels farmers to go for distress sale. step in the right direction. However, its effects have
been underwhelming due to three major factors :
Agriculture Marketing — Time cost of transactions
— Quality assessment challenges
It includes the operations such as collecting, — Transportation logistics
grading, processing, preserving, transportation
and financing.
Marginal Land Holdings
The actors in product marketing include farmers, n Raising farm productivity is critical for long-term
traders, wholesalers, processors, importers,
increase in farmers income in India, as land
exporters, marketing cooperatives, regulated fragmentation means that many Indian farmers are
market committees and retailers. farming plots of such small sizes that even doubling
their incomes would leave them with meagre earnings.
Various Marketing Methods n In India, nearly 85% of agricultural land holdings are
The various marketing methods are as follows : small and marginal (less than 2 hectare).
n The Ashok Dalwai Committee Report on doubling
Rural Primary Markets Periodic markets or haats
farmers’ income, estimated that doubling farmers’
and fairs (melas, jatras) are the major rural
income will require an agricultural growth rate of
markets in India. Rural primary markets include 10-11% per annum, until 2022–23.
mainly the periodical markets known as haats, n However, agricultural growth rate and farmers’ income
shandies, painths and fairs. The producers sell growth rate has been stagnating and well below the
their produce directly to the consumers or to small required rate of growth.
rural retailers.
Cooperative Marketing The cooperative
marketing is an alternative to the private dealers
Efforts of Government in the
with the main objective of securing a large share Field of Agriculture
of profits for the producer. Government has taken many steps to improve
Contract Farming It can be defined as agricultural agriculture marketing. Some of these are :
production carried out according to an agreement Kisan Rail They are multi commodity trains
between a buyer and farmers, which establishes consisting of refrigerated coaches to swiftly transport
conditions for the production and marketing of a perishable agricultural products from supply centres
farm product or products. Typically, the farmer to demand centres.
agrees to provide agreed quantities of a specific
agricultural product.
34
Agricultural Produce Market Committee (APMC) An Kaleshwaram Lift Irrigation Project The
APMC is a marketing board established by a state Kaleshwaram project is an off-shoot of the original
government in India to ensure: farmers are Pranahita-Chevella Lift Irrigation Scheme taken
safeguarded from exploitation by large retailers. They up by the government in 2007 when Andhra
also ensure that the farm to retail price spread does Pradesh was not divided. It is aimed to make
not reach excessively high levels. Telangana drought proof by harnessing the flood
Agricultural Marketing Information Network waters of the Godavari.
(AGMARKNET) The AGMARKNET is a G2C
e-governance portal. It caters to the needs of various Organic Farming
stakeholders such as farmers, industry, policy-makers
According to Food Safety and Standard Authority
and academic institutions by providing agricultural
of India (FSSAI), “Organic farming is a system of
marketing related information from a single window.
farm design and management to create an
e- NAM National Agriculture Market (e-NAM) is ecosystem of agriculture production without the
pan-India electronic trading portal linking existing use of synthetic external inputs such as chemical
APMC mandis to create a unified national market for fertilisers, pesticides and synthetic hormones or
agricultural commodities. genetically modified organisms.”
Commodity Boards Commodity Boards were set up to Organic farm produce means the produce obtained
operate for rubber, coffee, tea, tobacco, spices, from organic agriculture, while organic food
coconut, oilseed and vegetable oils, horticulture, etc. means food products that have been produced in
The National Dairy Development Board is also accordance with specified standards for organic
engaged in the marketing of agricultural commodities. production.
Soil Health Card Scheme The scheme was launched
by Government of India in February, 2015. Under this Indian Scenario
scheme, the government plans to issue soil cards to Regarding Organic Farming
farmers which will carry crop-wise recommendations
of nutrients and fertilisers required for the individual Sikkim became the first State in the world to
farmers to help farmers to improve productivity. become fully organic in 2016.
Agri-export Policy 2018 The government introduced North-East India has traditionally been organic
the policy with the objectives- to strive to double and the consumption of chemicals is far less than
India’s share in world agri-exports by integrating the rest of the country.
with global value chains and enables farmers to get Similarly, the tribal and island territories have
benefit of export opportunities in overseas market. been traditionally practicing organic farming. The
Pradhan Mantri Krishi Sinchayee Yojana (PMKSY) major organic exports from India have been flax
PMKSY is a centrally sponsored scheme (Core Scheme) seeds, sesame, soyabean, tea, medicinal plants,
launched in 2015. Under the scheme, Centre-States ratio rice and pulses.
will be 75:25%. In the case of the North-Eastern region
and hilly states, this ratio will be 90:10. Government Initiatives
Kisan Urja Suraksha evam Utthaan Mahabhiyan in the Field of Organic Farming
(KUSUM) It aims to promote use of solar energy Government initiatives to promote organic farming
among the farmers. Installation of standalone off-grid are as follows :
solar water pumps to fulfil irrigation needs of farmers
Mission Organic Value Chain Development for
not connected to grid. Solarisation of existing
North-East Region (MOVCD) It is a Central Sector
grid-connected agriculture pumps to make farmers
Scheme, a sub-mission under National Mission for
independent of grid supply and also sell surplus solar
Sustainable Agriculture (NMSA).
power generated to Discom and get extra income.
It was launched by the Ministry of Agriculture and
Meghdoot App The Ministry of Earth Sciences and
Farmers Welfare in 2015 for implementation in the
Agriculture have launched a mobile application that
states of Arunachal Pradesh, Assam, Manipur,
will provide location and crop or livestock-specific
Meghalaya, Mizoram, Nagaland, Sikkim and
weather-based agro advisories to farmers in local
Tripura.
languages. It has been developed by experts from the
India Meteorological Department and Indian The scheme aims to develop certified organic
Institute of Tropical Meteorology and the Indian production in a value chain mode to link growers
Council of Agricultural Research. with consumers and to support the development of
the entire value chain.
35
Paramparagat Krishi Vikas Yojana (PKVY) was MSP is a ‘minimum price’ for any crop that the
launched in 2015 is an extended component of Soil government considers as remunerative for farmers
Health Management (SHM) of the major project and hence deserving of ‘support’.
National Mission of Sustainable Agriculture The Commission for Agricultural Costs and Prices
(NMSA). Under PKVY, Organic Farming is (CACP) recommends MSPs for 22 mandated crops and
promoted through adoption of organic villages by Fair and Remunerative Price (FRP) for sugarcane.
cluster approach and Participatory Guarantee CACP is an attached office of the Ministry of
System (PGS) certification. Agriculture and Farmers Welfare.
Certification Schemes Food Safety and Standards The mandated crops include 14 crops of the kharif
Authority of India (FSSAI) is the food regulator in season, 6 rabi crops and 2 other commercial crops.
the country and is also responsible for regulating
In addition, the MSPs of toria and de-husked coconut
organic food in the domestic market and imports.
are fixed on the basis of the MSPs of rapeseed/mustard
Participatory Guarantee System (PGS) It is a and copra, respectively.
process of certifying organic products, which The CACP considers various factors while
ensures that their production takes place in recommending the MSP for a commodity, including
accordance with laid-down quality standards. cost of cultivation.
PGS Green is given to chemical free produce
It takes into account the supply and demand situation
under transition to ‘organic’ which takes 3 years.
for the commodity, market price trends (domestic and
It is mainly for domestic purposes.
global) and parity vis-a-vis other crops, and
One District - One Product (ODOP) The implications for consumers (inflation), environment
programme aims to encourage more visibility and (soil and water use) and terms of trade between
sale of indigenous and specialised products/crafts agriculture and non-agriculture sectors.
of a particular region or district, generating
The Cabinet Committee on Economic Affairs (CCEA)
employment at the district level. The presence of
of the Union Government takes a final decision on the
aggregators is imperative to bring about
level of MSPs and other recommendations made by
economies of scale for the small and marginal
CACP.
farmers.
PM Formalisation of Micro Food Processing Government Steps for MSP
Enterprises (PM FME) The Ministry of Food
The following steps were taken by the government of
Processing Industries (MoFPI) launched the PM
India for MSP :
FME scheme as a part of ‘Atmanirbhar Bharat
Abhiyan’. It aims to bring in new technology, Pradhan Mantri Annadata Aay Sanrakshan Abhiyan
apart from affordable credit to help small (PM-AASHA) PM-AASHA was launched to ensure
entrepreneurs penetrate new markets. adequate prices to farm produce. It was launched in
2018. It had following three components:
Zero Budget Natural Farming It is a method of
— Price Support Scheme (PSS)
chemical-free agriculture drawing from
traditional Indian practices. — Price Deficiency Payment Scheme (PDPS)
— Private Procurement and Stockist Scheme (PPSS)
National Programme for organic Production
(NPoP) NPoP is managed by Agriculture and Pradhan Mantri Kisan Samman Nidhi (PM-KISAN)
Processed Food Products Export Development Under the scheme, the Centre transfers an amount of
Authority (APEDA) under the ministry of ` 6,000 per year, in three equal installments, directly
Commerce and Industry. NPoP provides standards into the bank accounts of all landholding farmers
for organic production, systems, criteria irrespective of the size of their land holdings. It was
and procedure for accreditation of certification launched in February 2019. It is a Central Sector
bodies. Scheme with 100% funding from the Government of
India.
It is being implemented by the Ministry of Agriculture
Minimum Support Price (MSP) and Farmers Welfare. The entire responsibility of
The MSP is the rate at which the government identification of beneficiary farmer families rests with
purchases crops from farmers, and is based on a the State / UT Governments.
calculation of at least one-and-a-half times the
cost of production incurred by the farmers.
36
It works towards restoring soil fertility and

Crop Insurance productivity at the individual farm level and
Crop insurance is to protect farmers against either enhancing farm level economy.
the loss of their crops due to natural disasters, It further aims to augment the availability of vegetable
such as hail, drought and floods, or the loss of oils and to reduce the import of edible oils.
revenue due to declines in the prices of
agricultural commodities. National Food Security Act (NFSA), 2013
The scheme Pradhan Mantri Fasal Bima Yojana It legally entitles up to 75% of the rural population
(PMFBY) was launched in 2016 and is being and 50% of the urban population to receive subsidised
administered by the Ministry of Agriculture and food grains under the Targeted Public Distribution
Farmers Welfare. System.
It replaced the National Agricultural Insurance The eldest woman of the household of age 18 years or
Scheme (NAIS) and Modified National above is mandated to be the head of the household for
Agricultural Insurance Scheme (MNAIS). the purpose of issuing ration cards under the Act.
It aims to provide a comprehensive insurance
cover against the failure of the crop thus helping Public Distribution System (PDS)
in stabilising the income of the farmers. It is an Indian Food Security System established under
All food and oilseed crops and annual the Ministry of Consumer Affairs, Food and Public
commercial/horticultural crops for which past Distribution.
yield data is available are covered. PDS evolved as a system of management of scarcity
The prescribed premium is 2% to be paid by through distribution of food grains at affordable
farmers for all kharif crops and 1.5% for all rabi prices.
crops. In the case of annual commercial and PDS is operated under the joint responsibility of the
horticultural crops, the premium is 5%. Central and the State Governments.
The Central Government, through Food Corporation
Food Security of India (FCI), has assumed the responsibility for
procurement, storage, transportation and bulk
Food security, as defined by the United Nations’ allocation of food grains to the State Governments.
Committee on World Food Security, means that all
The operational responsibilities including allocation
people, at all times, have physical, social and
within the State, identification of eligible families,
economic access to sufficient, safe and nutritious
issue of Ration Cards and supervision of the
food that meets their food preferences and dietary
functioning of Fair Price Shops (FPSs) etc., rest with
needs for an active and healthy life.
the State Governments.
Food security is the combination of the following
Under the PDS, presently the commodities namely
three elements:
wheat, rice, sugar and kerosene are being allocated to
— Food Availability i.e. food must be available in the States/UTs for distribution. Some States/UTs also
sufficient quantities and on a consistent basis. It distribute additional items of mass consumption
considers stock and production in a given area through the PDS outlets such as pulses, edible oils,
and the capacity to bring in food from elsewhere, iodised salt, spices, etc.
through trade or aid.
— Food Accessibility i.e. people must be able to
regularly acquire adequate quantities of food,
Agriculture Allied Sector
through purchase, home production, barter, Agriculture allied sector include livestock/animal
gifts, borrowing or food aid. rearing, fisheries sector horticulture, floriculture, etc.
— Food Affordability i.e. people must be able to
afford food.
Livestock/Animal Rearing
Livestock is commonly defined as domesticated
National Food Security Mission animals raised in an agricultural setting to produce
It is a centrally sponsored scheme launched in 2007. labour and commodities such as meat, eggs, milk, fur,
leather and wool.
It aims to increase production of rice, wheat,
pulses, coarse cereals and commercial crops, There are about 302.79 million bovines, 74.26 million
through area expansion and productivity sheep, 148.88 million goats and about 9.06 million pigs
enhancement. as per 20th livestock census in the country.
37
According to estimates of the Central Statistics Government Steps Related to

Office (CSO), the value of the output livestock Agricultural Allied Sectors
sector at current prices was about ` 5,91691 crore
during 2015-16 which is about 28.5% of the value Horticulture Cluster Development Programme The
of output from agricultural and allied sectors. Ministry of Agriculture and Farmers Welfare launched
the Horticulture Cluster Development Programme
India accounts for about 17% of the cattle
(HCDP) on 31st May, 2021 to promote the export of
population and 64% of the buffalo population.
horticultural produce.
India is the largest producer of milk in the world.
It is a Central sector programme aimed at growing and
Fisheries Sector developing identified horticulture clusters to make
them globally competitive. It will be implemented by
India has a coastline of 7516.6 km (6100 km of the National Horticulture Board (NHB) of the Ministry
mainland coastline and coastline of 1197 km of Agriculture and Farmers’ Welfare.
Indian islands) touching 13 States and Union
Kisan Sarathi Indian Council of Agriculture Research
Territories (UTs).
(ICAR) celebrated its 93rd foundation day on 16th July,
Indian ocean is the least exploited of all the 2021 and on the occasion, the Kisan Sarathi platform was
oceans in the world in terms of fishing. launched. It was jointly launched by the Union Minister
In India, 75% of marine fish production comes for Agriculture and Farmers’ Welfare and the Union
from the West coast. Minister of Electronics and Information Technology. It
Presently, India is the second largest fish will help farmers to interact and avail personalised
producing and aquaculture nation in the world. advisories on agriculture and allied areas directly from
The Indian fisheries sector is a sunrise sector. India the respective scientists of Krishi Vigyan Kendra (KVKs).
is also a major producer of fish through aquaculture Pradhan Mantri Matsya Sampada Yojana This scheme
and ranks second in the world after China. was launched for Sustainable Development of
According to Food and Agricultural Organisation Fisheries sector on 10th September, 2020 as part of
(FAO), India is home to more than 10% of the Atma Nirbhar Bharat Package.
global fish diversity. The total fish production The investment of ` 20,5000 crores under PMMSY is the
during 2019-20 (provisional) stood at 14.16 highest ever in the fisheries sector. Out of this, an
million Metric Tonne (MMT) with a contribution investment of about ` 12,340 crores is proposed for
of 10.43 MMT from the inland sector and 3.72 beneficiary oriented activities in marine, Inland
MMT from the marine sector. fisheries and aquaculture and about 7710 crores
investment is proposed for fisheries infrastructure.
Horticulture Agriculture Infrastructure Fund It was launched in 2020
It is the branch of agriculture concerned with as a part of the stimulus package of ` 20 lakh crore
intensively cultured plants directly used by man announced in response to the Covid-19 crisis.
for food, medicinal purposes and aesthetic It aims to provide medium-long term debt financing
gratification. facility for investment in viable projects for post-harvest
In other words, it is cultivation, production and management infrastructure and community farming assets.
sale of vegetables, fruits, flowers, herbs, Biotech-KISAN Programme It is a scientist-farmer
ornamental or exotic plants. partnership scheme launched in 2017. The Ministry of
Science and Technology has issued a special call for
Floriculture the North-East Region as a part of its Mission
It is a branch of horticulture that deals with the Programme ‘Biotech-Krishi Innovation Science
cultivation, processing and marketing of ornamental Application Network (Biotech-KISAN)’.
plants vis-a-vis landscaping of small or large areas. Aroma Mission and Floriculture Mission The Union
It involves maintenance of gardens so that the Minister of State Science and Technology has
surroundings may appear aesthetically pleasant. proposed Integrated Aroma Dairy Entrepreneurship
The mission will focus on commercial floral crops, for Jammu and Kashmir to augment the income of
seasonal/annual crops, wild ornaments and farmers in the year 2016. The Aroma Mission, also
cultivation of flower crops for honey bee rearing. popularly referred as ‘Lavender or Purple Revolution’,
has started from Jammu Kashmir and transformed the
Some of the popular crops include Gladiolus, lives of farmers who are able to grow lavender, make
Canna, Carnation, Chrysanthemum, Gerbera, lucrative profit and improve their lives. Earlier, the
Lilium, Marigold, Rose, Tuberose etc. floriculture mission was launched in 21 States and
Union Territories.
38
National Gene Bank Gene Banks are a type of National Cooperative Development
bio-repository which preserve genetic material, a Corporation (NCDC)
collection of seed plants, tissue cultures etc. The
It is a statutory corporation set up under an Act of
Union Minister for Agriculture and Farmers Welfare
Indian Parliament on 13th March, 1963.
inaugurated the world’s second-largest refurbished
state-of-the-art National Gene Bank at the National Its objectives are planning and promoting
Bureau of Plant Genetic Resources (NBPGR) in the programmes for production, processing, marketing,
year 1996. storage, export, import of agricultural produce, etc.
National Agricultural Cooperative Marketing
Agricultural Institutions Federation of India Ltd (NAFED)
Various agricultural institutions are as follows: NAFED is an apex organisation of marketing
cooperatives for agricultural produce in India. It
Indian Council for Agricultural Research (ICAR) was established on 2nd October, 1958.
The Indian Council for Agricultural Research NAFED is the nodal agency to implement price
(ICAR) was established on 16th July, 1929 as a stabilisation measures under ‘Operation Greens’
registered society under the Societies Registration which aims to double the farmers’ income by 2022.
Act, 1860.
It is an autonomous organisation under the
Agricultural and Processed Food Products Export
Department of Agricultural Research and Education Development Authority (APEDA)
(DARE), Ministry of Agriculture and Farmers It was established by the Government of India under
Welfare, Government of India. the Agricultural and Processed Food Products
It is headquartered at New Delhi with 102 ICAR Export Development Authority Act, 1985. It was
institutes and 71 agricultural universities spread established on 13th February, 1986.
across the country, this is one of the largest national It functions under the Ministry of Commerce and
agricultural systems in the world. Industry. The Authority has its headquarters in New
It is the apex body for coordinating, guiding and Delhi.
managing research and education in agriculture APEDA is mandated with the responsibility of
including horticulture, fisheries and animal export, promotion and development of the
sciences in the entire country. scheduled products viz.
The ICAR has played a pioneering role in promoting — Fruits, vegetables and their products;
Green Revolution and subsequent developments in — Meat and meat products; poultry and poultry
agriculture in India. Through its research and Products; dairy products;
technology development, it has enabled the country — Confectionery, biscuits and bakery products;
to increase the production of foodgrains,
— Honey, jaggery and sugar products;
horticultural crops, fish, milk and eggs since
— Cocoa and its products, chocolates of all kinds;
1950-51.
alcoholic and non-alcoholic beverages;
Food and Agriculture Organisation (FAO) — Cereal and cereal products;
FAO is a specialised agency of the United Nations — Groundnuts, peanuts and walnuts, pickles, papads
that leads international efforts to defeat hunger. and chutneys;
World Food Day is celebrated every year on 16th — Guar gum;
October to mark the anniversary of the FAO in 1945. — Floriculture and floriculture products; herbal and
It is one of the UN Food Aid Organisations based in medicinal plants.
Rome (Italy). Its sister bodies are the World Food
Programme and the International Fund for Tribal Co-operative Marketing Development
Agricultural Development (IFAD). Federation of India (TRIFED)
It came into existence in 1987. It is a national-level
Council for Advancement of People Action and
apex organisation functioning under the
Rural Technology (CAPART) administrative control of the Ministry of Tribal
It is an autonomous body set up by the ministry of Affairs.
Rural Development to interface between the TRIFED has its Head Office located in New Delhi
government and NGOs that seek to improve the and has a network of 13 Regional Offices located at
quality of life in rural areas. It was constituted on various places in the country.
1st September, 1986.
39
The ultimate objective of TRIFED is Fourth Five Year Plan (1969-1974) In this plan, special
socio-economic development of tribal people in emphasis was laid to plan research in agriculture
the country by way of marketing development of through science and technology, that helped in
the tribal products such as metal craft, tribal advancement of agriculture sector. This plan was based
textiles, pottery, tribal paintings and pottery on on Ashok Rudra and AS Mannis model.
which the tribals depend heavily for a major Fifth Five Year Plan (1974-1979) 15% revenue was
portion of their income. allotted for agriculture sector during this plan. 1520
Agriculture Technology Infrastructure Fund lakhs tonnes was the target for food production, but the
results achieved were more than that.
For promoting, agricultural distribution at
national level, Agriculture Technology Sixth Five Year Plan (1980-1985) The second part of
Infrastructure Fund was established in the year Green revolution was started during this plan, with
2015. major emphasis on investment in agriculture sector.
The entire focus of this plan was on population control
Agriculture and Farmers’ Welfare Ministry
and modernisation.
promotes this fund for providing basic
agricultural techniques to the farmers. Seventh Five Year Plan (1985-1990) Other than cotton
production, all the other crops exceeded the setted
targets. Modernisation in agriculture sector was able to
Agri Export Zones (AEZs) reduce the poverty prevailing in rural areas.
n Under Export-Import Policy, in the year 2001-02, Eighth Five Year Plan (1992-1997) During this period,
eight new Agri Export Zones were established in agriculture growth was at 4.7‰ Liberalisation,
seven states. Privatisation and Globalisation were the major focus of
n In India, more than 60 Agri Export zones have this plan, not much attention was paid in the field of
been established till now. Among them, some agriculture.
prominent ones are Madhya Pradesh for spices,
Uttarakhand for Basmati rice, West Bengal and Ninth Five Year Plan (1997-2002) Agriculture sector
Tamil Nadu for mango, West Bengal for green grew at 2.06% during this period. Rural development
vegetables, Maharashtra for onion, etc. along with agriculture and generating employment
opportunities were the major points of focus during this
period.
Agriculture in Five Years Plans Tenth Five Year Plan (2002-2007) National Agriculture
Policy, 2000 was adopted during this plan. Special
First Five Year Plan (1951-1956) Under this plan,
emphasis were given on soil, health and management of
the agriculture sector was given priority 31% of
water resources.
the total revenue allocation was provided to the
agriculture sector. Under this plan, the average Eleventh Five Year Plan (2007-2012) A target of 4%
annual production was 67 lakh tonnes. The annual growth rate was set during this plan. The major
agriculture sector registered a growth of 2.71% objectives of this plan were growth in agriculture
in this five year plan. productivity, employment generation, population
pressure on land etc.
During this plan, the major emphasis was given
in construction of dams and improving the Twelfth Five Year Plan (2012-2017) 4% annual growth
irrigation facilities for agriculture purposes. rate was the seted target set for agriculture sector, in
which technology as engine of growth was declared for
Work on projects like Bhakra Nangal Dam,
agriculture sector.
Hirakud dam was started in this period.
Second Five Year Plan (1956-1961) A total of
20% revenue was allocated to agriculture sector
Agricultural Revolutions
in this plan. During this time, the productivity Various agricultural revolutions are as follows:
remained less, because industries were the focus
point. Green Revolution
Third Five Year Plan (1961-1966) In this plan, Green Revolution was expanded in two phases, first was
agriculture was again back in focus, intensive from 1960s to mid 1970s and the second phase was from
agriculture programme and high yield varieties the mid 1970s to mid 1980s.
of seeds were promoted in agri based districts. An American agronomist Norman Borlaug started the
The effects of Green revolution started giving Green Revolution in the 1960s, he is considered as the
positive results, during the period the ‘Father of Green Revolution’. In India, Green
production of wheat improved. Revolution was led by MS Swaminathan.
40
Due to spread of technology in Green Evergreen Revolution

Revolution, India is able to achieve self-reliance
Renowned agricultural scientists Dr. MS Swaminathan
in production of food grains. Now, India is no
conceptualised the Evergreen Revolution in year 2006.
longer dependent on imports of food grains.
The focus of the Evergreen Revolution is the
The Green Revolution has increased the income
achievement of the goal of sustainable agriculture
of the farmers and reduced their dependency on
development with present perspective the Blue, Green,
the monsoon.
Yellow, Pink, White and Brown Revolutions are also
Green Revolution ended the agricultural included under the Evergreen Revolution.
stagnation of the colonial period, it was due to
The main objective of the Evergreen Revolution is to
the use of high yielding varieties of seeds
increase productivity, along with relying on products
(HYV-seeds).
which are environmentally safe, economically viable
The irrigation facilities and use of fertilisers has and socially sustainable.
enhanced the agriculture productivity in India,
which helped in rise of wheat and rice Important Revolutions of Indian Agriculture and Allied Sector
production in the country.
Revolution Father of the Products/Objectives
White Revolution Revolution
The programme for increasing the production Evergreen MS Swaminathan Integration of ecological
Revolution principles in technology
of milk in the country is called as White development
Revolution. The government launched
‘Operation Flood’ to intensify the speed in Protein Revolution Coined by Higher Production
Narendra Modi (Technology-driven
White Revolution. and Arun Jaitley Second Green Revolution)
‘Operation Flood’ was launched on 13th
Yellow Revolution Sam Pitroda Oilseed Production
January, 1970 and Dr. Verghese Kurien was the (Especially Mustard and
lead person to promote it. He is called the Sunflower)
‘Father of White Revolution’ in India.
Black Revolution – Petroleum products
Blue Revolution Blue Revolution Dr Arun Krishnan Fish Production
Progress made in the field of fish production is Brown Revolution – Leather / Cocoa /
called as Blue Revolution. India is the third Non-Conventional
largest country in the world in the field of fish Products
production. The Blue Revolution was initiated Golden Fiber – Jute Production
through one package programme in the 1960s. Revolution
Its expansion in India is increased during the Golden Revolution Nirpakh Tutej Fruits / Honey Production
Seventh Five Year Plan. With the help of World / Horticulture
Development
Bank, the one package programme was first
implemented in 5 coastal states of India. Grey Revolution – Fertilisers
As per 2020-21, the total fish production in the Pink Revolution Durgesh Patel Onion Production /
country was 14.16 million tonnes. Pharmaceuticals / Prawn
Production
Second Green Revolution Silver Revolution Indira Gandhi Egg Production / Poultry
In 2006, Science conference, to counter the ill (Mother of the Production
effects of first Green Revolution and ensure Revolution)
holistic development in the agriculture sector Silver Fiber – Cotton
keeping in view the environmental interests. Revolution
Dr APJ Abdul Kalam started the Second Green Red Revolution Vishal Tewari Meat Production / Tomato
Revolution in the country. Under this, the seed Production
selection is done on the basis of land. Round Revolution – Potato
In Second Green Revolution through the Green Revolution MS Swaminathan Food Grains
medium of Biotechnology and genetic
engineering the emphasis was laid upon White Revolution Verghese Kurien Milk Production
development of high productivity and quality of
seeds.
INDIAN ECONOMY
NCERT Notes
CHAPTER 07 41
Industry and
Industrial Policies
Sources Class-IX & X Old NCERT Chap 4 (Towards Economic Development), Chap 5 (The State and Economic Development),
Class-XI New NCERT Chap 1 (Indian Economy on the Eve of Independence, Chap 2 (Indian Economy 1950-1990),
Chap 3 (Liberalisation, Privatisation and Globalisation : An Appraisal)
Industry Industrial Sectors in India

Industry refers to an economic activity concerned The Industrial sector of the Indian economy is divided into
with the processing of raw materials and three sectors.
manufacture of goods in factories.
1. Public Sector
Industries are often classified based on their
principal products e.g. steel industry, automobile All the enterprises under public sector are government-
industry, textile industry etc. owned.
Some of the enterprises under public sector are postal,
The secondary sector covers activities in which
railway, telegram etc. These enterprises are under
natural products are changed into other forms
different ministries.
through ways of manufacturing that we associate
with industrial activity. Since, this sector gradually In addition, there are also non-departmental enterprises
became associated with the different kinds of whose establishment are in the form of public issues
industries, it is also called the industrial sector. under act passed by Parliament.
The purpose of public sector is not only to make profit,
but also public welfare activities.
Industrial Development in India
Industrial development is important for economic 2. Private Sector
development and economic prosperity of a Enterprises coming under the private sector has a private
country. For enhancing the national income of the ownership.
country industrialisation plays a major role. After independence, India adopted the mixed economy
The Indian government has been trying to promote policy under which private sector plays an important role.
rapid industrial growth since independence. As a In the Industrial Policy of 1956, private sector is placed
result of various efforts, the industrial sector in under major industries.
India has grown in multifarious dimensions. The private sector in India is very wide, countries most
As industry provides employment which is more important economic activity i.e. agriculture is completely
stable than the employment in agriculture along under private sector.
with modernisation and overall prosperity. Due to Tata Iron and Steel Company Limited (TISCO) and
this, the Five Year Plans emphasised a lot on Reliance companies are India’s major privately owned
industrial development. enterprises.
42
3. Joint Sector It classified industries into four broad areas :

Joint sector is a type of partnership between private and — Strategic Industries (Public Sector) It included
public sector. three industries in which Central Government
had a monopoly. These included Arms and
The control, management and ownership of joint sector
enterprises distributed between the government and ammunition, Atomic energy and Rail transport.
private. — Basic/Key Industries (Public-cum-Private
In 1969, under the leadership of Subimal Dutt the Sector) Six industries viz. coal, iron and steel,
‘Industrial licensing Policy Inquiring Committee’ or ‘Dutt aircraft manufacturing, ship-building,
Committee’ was established, to follow up reports of manufacture of telephone, telegraph and
Monopolies Inquiry Commission and Hazari Committee. wireless apparatus and mineral oil were
designated as ‘Key Industrie’s’ or ‘Basic
Industries’.
Industrial Policy These industries were to be set-up by the Central
For the balanced industrial growth, industrial policy is Government. However, the existing private
essential. Department for Promotion of Industry and sector enterprises were allowed to continue.
Internal Trade (DPIIT) is responsible for the formulation — Important Industries (Controlled Private
of industrial policies. Sector) It included 18 industries including heavy
Government actions influence the ownership and chemicals, sugar, cotton textile and woollen
structure of the industry and its performance in the form industry, cement, paper, salt, machine tools,
of paying subsidies, providing finance, imposing fertiliser, rubber, air and sea transport, motor,
regulation, etc. tractor, electricity etc.
It includes procedures, principles (i.e., the philosophy of a These industries continue to remain under the
given economy), policies, rules and regulations, incentives private sector. However, the Central
and punishments, the tariff policy, the labour policy, Government, in consultation with the state
government’s attitude towards foreign capital, etc. government, had general control over them.
The main objectives of the Industrial Policy of the — Other Industries (Private and Cooperative
Government in India are: Sector) All other industries which were not
— To maintain a sustained growth in productivity included in the above-mentioned three
— To enhance gainful employment categories were left open for the private sector.
— To achieve optimal utilisation of human resources Industrial Policy Resolution, 1956
— To attain international competitiveness Government revised its first Industrial Policy (i.e.
— To transform India into a major partner and player in the the policy of 1948) through the Industrial Policy of
global arena 1956.
It was regarded as the ‘Economic Constitution of
Industrial Policies in India Since India’ or ‘The Bible of State Capitalism’.
Independence The 1956 Policy emphasised the need to expand
Since Independence, many industrial policies have been the public sector, to build up a large and growing
implemented. These are discussed as follows : cooperative sector and to encourage the
separation of ownership and management in
Industrial Policy Resolution, 1948 private industries and, above all, prevent the rise
First industrial policy was announced in April 1948 by of private monopolies.
then Industrial Minister late Shyama Prasad Mukherjee. It provided the basic framework for the
It defined the broad contours of the policy delineating the government’s policy in regard to industries till
role of the nation in industrial development both as an June 1991.
entrepreneur and authority. It made clear that India is The Industrial Policy Resolution 1956, stressed
going to have a Mixed Economic Model. the importance of cottage and small scale
industries for expanding employment
The Industries (Development and Regulation) Act was
opportunities and for wider decentralisation of
passed in 1951 to implement the Industrial Policy
economic power and activity.
Resolution (IPR), 1948.
43
Industrial Policy Resolution, 1956 classified Industrial Policy, 1980

industries into three categories :
This policy was adopted on 23rd July, 1980. Its main
— Schedule A consisting of 17 industries was the objective was to facilitate an increase in industrial
exclusive responsibility of the State. Out of these production through optimum utilisation of installed
17 industries, four industries, namely arms and capacity and expansion of industries.
ammunition, atomic energy, railways and air It aimed to reverse the trend of industrial production of
transport had Central Government monopolies; the past three years and reaffirmed its faith in
new units in the remaining industries were the Monopolies and Restrictive Trade Practices (MRTP)
developed by the State Governments. Act and the Foreign Exchange Regulation Act, (FERA).
— Schedule B consisting of 12 industries, was open
to both the private and public sectors; however, New Industrial Policy, 1991
such industries were progressively state-owned. The long-awaited liberalised industrial policy was
— Schedule C all the other industries not included announced by the Government of India in 1991, in the
in the above two schedules constituted the third midst of severe economic instability in the country.
category which was left open to the private sector. The objective of the policy was to raise efficiency and
However, the State reserved the right to accelerate economic growth.
undertake any type of industrial production.
Features of New Industrial Policy
Industrial Licences Various features of New Industrial Policy are as follows :
In order to open new industry or to expand
De-reservation of Public Sector
production, obtaining a license from the
government was a prerequisite. Sectors that were earlier exclusively reserved for the
public sector were reduced. However, the pre-eminent
Opening new industries in economically backward
place of public sector in 5 core areas like arms and
areas was incentivised through easy licensing and
ammunition, atomic energy, mineral oils, rail transport
subsidisation of critical inputs like electricity and
and mining was continued.
water. This was done to counter regional disparities
that existed in the country. Presently, only two sectors Atomic Energy and Railway
operations are reserved exclusively for the public sector.
Licences to increase production were issued only if
the government was convinced that the economy De-licensing
required more of the goods. Abolition of Industrial licensing for all projects except for a
short list of industries. There are only four industries at
Industrial Policy, 1977 present related to security, strategic and environmental
Industrial Policy, 1977 was announced in December concerns, where an industrial licence is required.
1977 through a statement in the Parliament. Some of These are :
the important provisions of the policy are as follows :
Electronic, aerospace and defence equipment
The main thrust of this policy was the effective
Specified hazardous chemicals
promotion of cottage and small industries widely
dispersed in rural areas and small towns. Industrial explosives
In this policy, the small sector was classified into Cigars and cigarettes of tobacco and manufactured
three groups i.e., cottage and household sector, tiny tobacco substitutes
sector and small scale industries. Disinvestment of Public Sector
It prescribed different areas for the large scale Government stakes in Public Sector Enterprises were
industrial sector i.e., Basic industries, Capital goods reduced to enhance their efficiency and competitiveness.
industries, High technology industries and other
industries outside the list of reserved items for the Liberalisation of Foreign Investment
small scale sector. This was the first Industrial policy in which foreign
It restricted the scope of large business houses so companies were allowed to have majority stake in India.
that no unit of the same business group acquired a In 47 high priority industries, upto 51% FDI was
dominant and monopolistic position in the market. allowed. For export trading houses, FDI upto 74% was
allowed. Today, there are numerous sectors in the
It put emphasis on reducing the occurrence of
economy where the government allows 100% FDI.
labour unrest. The Government encouraged the
worker’s participation in management from shop Foreign Technology Agreement automatically gives
floor level to board level. approvals for technology related agreements.
44
Fair Trade Companies Act, 2013

The Monopolistic and Restrictive Trade Practices Act,
This Act introduced significant changes in the
was amended to remove the threshold limits of assets
provisions related to governance, e-management,
in respect of MRTP companies and dominant
compliance and enforcement, disclosure norms,
undertakings. The MRTP Act was replaced by the
auditors and mergers and acquisitions. New concepts
Competition Act, 2002.
such as one-person company, small companies,
Outcomes of New Industrial Policy dormant company, class action suits, registered
The 1991 policy made ‘Licence, Permit and Quota Raj’ valuers and Corporate Social Responsibility (CSR)
a thing of the past. It attempted to liberalise the have also been included.
economy by removing bureaucratic hurdles in The 2013 Act has introduced several new concepts
industrial growth. and has also tried to streamline many of the
Limited role of the Public sector reduced the burden requirements by introducing new definitions i.e., :
of the Government. — One-Person Company The 2013 Act introduces a
Easy entry of Multinational Companies, privatisation, new type of entity to the existing list i.e. apart from
removal of assets limits on MRTP companies, liberal forming a public or private limited company, the
licensing etc were some of the key features of the 2013 Act enables the formation of a new entity, a
policy. ‘One-Person Company’ (OPC).
All this resulted in increased competition that led to — Small Company A small company has been defined
lower prices in many goods such as electronics as a company, other than a public company. Paid-up
prices. This brought domestic as well as foreign share capital of which does not exceed ` 50 lakh.
investment in almost every sector opened to the Turnover of which as per its last profit and loss
private sector. account does not exceed ` 2 crore or such higher
amount as may be prescribed which shall not be
The policy was followed by special efforts to increase
more than ` 20 crore.
exports. Concepts like Export Oriented Units, Export
Processing Zones, Agri-Export Zones, Special — Dormant Company The 2013 Act states that a
Economic Zones and lately National Investment and company can be classified as dormant when it is
Manufacturing Zones emerged. All these have formed and registered under this 2013 Act for a
benefitted the export sector of the country. future project or to hold an asset or intellectual
property and has no significant accounting
National Manufacturing Policy transaction.
— National Financial Reporting Authority (NFRA)
(NMP), 2011 The 2013 Act requires the Constitution of NFRA,
The major objectives of the National Manufacturing which has been bestowed with significant powers
Policy (NMP), 2011 are as follows : not only in issuing the authoritative
To increase the sectoral share of manufacturing in pronouncements, but also in regulating the audit
GDP to atleast 25% by the year 2022. profession.
To increase the rate of job creation so as to create 100 — Serious Fraud Investigation Office (SFIO) The 2013
million additional jobs by the year 2022. Act has bestowed legal status to SFIO.
To enhance global competitiveness, domestic value — Corporate Social Responsibility The 2013 Act
addition, technological depth and environmental makes an effort to introduce the culture of Corporate
sustainability of growth. Social Responsibility (CSR) in Indian corporates by
To provide a productive environment to persons requiring companies to formulate a corporate social
transitioning from the primary to the secondary and responsibility policy and atleast incur a given
minimum expenditure on social activities.
tertiary sectors by creating National Investment and
Manufacturing Zones (NIMZs).
To ensure compliance of labour and environmental
Companies Amendment Act, 2020
laws while introducing procedural simplifications and This bill was introduced in the Parliament in March 2020
rationalisation, so that the regulatory burden on to further the government’s agenda of Ease of Doing
industry is reduced. Business (EoDB) and also to decriminalise the
To provide an enabling environment for tapping the Companies Law Act, 2013.
potential of the private sector and the entrepreneurial President of India gave his assent to the bill on 28th
skills of the younger population. September, 2020.
45
Some key amendments, as proposed by this Act are given below : The purpose of the PMI is to provide
In context of offences it makes three changes, i.e., (i) penalties information about current and future business
for few offences have been removed, (ii) imprisonment for conditions to company decision makers,
few offences has been removed (iii) the amount of fine analysts and investors.
payable in certain offences has been also reduced. The PMI is a number from 0 to 100.
It empowers the government to allow certain classes of PMI above 50 represents an expansion when
public companies to list classes of securities (as may be compared to the previous month; PMI under 50
prescribed) in foreign jurisdictions. represents a contraction and a reading at 50
Earlier a person holding at least 10% of company’s share was indicates no change.
required to make a declaration of his interest to the company. The PMI is usually released at the start of every
To reduce compliances and boost EoDB, this amendment month. It is, therefore, considered a good
empowers government to exempt any class of persons from leading indicator of economic activity.
complying with these requirements. It is different from the Index of Industrial
It empowers the government to require classes of unlisted Production (IIP), which also gauges the level of
companies to prepare and file periodical financial results, activity in the economy.
and to complete the audit or review of such results.
The provision related with remuneration of executive Index of Industrial Production (IIP)
director even in the year when company has not registered It is an index which helps us understand the
any profit has been extended to non-executive directors, growth of various sectors in the Indian
including independent directors. economy such as mining, electricity and
manufacturing.
Contribution of Different IIP is a short term indicator of industrial
Industries in Economy growth till the results from Annual Survey of
According to the 2021 Report of World Steel Association, Industries (ASI) and National Accounts
India ranks second in the production of steel after China. Statistics (e.g. GDP) are available.
Japan stands third in the world production of steel. The base year of the index is given a value of
Steel industry provides employment to around 25 lakh people 100.
in India, which is 2% of the India’s Gross Domestic Product The current base year for the IIP series in India
(GDP). is 2011-12. When the current IIP reads 180, it
Automobile industry contributes 7.1% to India’s GDP. This means that there has been 80% industrial
share of automobile industry is 49% in India’s manufacturing growth compared to the base year, i.e. 2011-12.
industries sector for its special contribution in the Indian Index of Industrial Production (IIP) is released
Economy, automobile industry is also known as ‘Sunrise by the National Statistics Office (NSO) of the
Industry’. Ministry of Statistics and Programme
Implementation.
Textile industry contributes 4% to the India’s GDP and 11%
to foreign income. IIP is published monthly and six weeks after
the reference month ends.
Chemical industry contributes 3% to the India’s GDP and
Indian Chemical Industry is ranked sixth in the world.
Difference Between PMI and IIP
IIP covers the broader industrial sector
Measures of Industrial Production
n
compared to PMI.
Industrial production in India is measured broadly by the n IIP shows the change in production volume in
following indicators : major industrial sub sectors like
manufacturing, mining and electricity.
Purchasing Managers’ Index (PMI) n Similarly, the IIP also gives use based (capital
goods, consumer goods etc) trends in industrial
Purchasing Managers’ Index (PMI) is an indicator of business production.
activity-both in the manufacturing and services sectors. n PMI is more dynamic compared to a standard
It is calculated separately for the manufacturing and services industrial production index.
sectors and then a composite index is also constructed. n The PMI can sense dynamic trends as it uses
The PMI summarises whether market conditions as viewed variables for the construction of the index as
compared to volume based production
by purchasing managers are expanding, neutral or
indicators of IIP.
contracting.
46
Annual Survey of Industries (ASI) Presently there are 11 Maharatna Companies.

The Maharatna CPSEs are as follows :
ASI is calculated on an annual basis. The ASI has been
— Oil and Natural Gas Corporation (ONGC) Limited
conducted under the Collection of Statistics Act,
since 1959. — Indian Oil Corporation Limited (IOCL)
The objective is to obtain comprehensive and detailed — Steel Authority of India Limited (SAIL)
statistics of industrial sector with the objective of — National Thermal Power Corporation (NTPC)
estimating the contribution of registered
— Coal India Limited (CIL)
manufacturing industries as a whole to the national
income. — Bharat Heavy Electrical Limited (BHEL)
ASI data is based on the actual book of accounts and — Gas Authority of India Limited (GAIL)
other documents maintained by registered factories. — Bharat Petroleum Corporation Limited (BPCL)
— Hindustan Petroleum Corporation Limited (HPCL)
Public Sector Undertakings — Power Grid Corporation of India Limited (PGCIL)
In our country, a Public Sector Undertaking (PSU) is a — Power Finance Corporation Limited (PFCL)
government-owned corporation. These companies are
owned and operated by the Union Government of Criteria for Grant of Navratna Status
India or a state government individually or This category was started in 1997. The Miniratna
collectively. Category – I and Schedule ‘A’ CPSEs, which have
The equity of such company is majorly owned by the obtained ‘excellent’ or ‘very good’ rating under the
government, hence named PSU. Memorandum of Understanding system in three of the
The need for setting up of PSUs arises because last five years and have composite score of 60 or above
industrial development of any country requires a in the six selected performance parameters, namely :
strong foundation supported by reliable — net profit to net worth.
infrastructure. — manpower cost to total cost of production/services.
After economic reforms, various PSUs have been — profit before depreciation, interest and taxes to
awarded additional financial autonomy by the capital employed.
Government. — profit before interest and taxes to turnover.
The PSUs are divided into the following three — earning per share.
categories :
— inter-sectoral performance.
— Maharatna
— Navratna
Presently there are 13 Navratna Companies.
Navratna CPSEs are as follows :
— Miniratna Category - I and II
— Bharat Electronics Limited (BEL)
Criteria for Grant of Maharatna Status — Hindustan Aeronautics Limited (HAL)
This category was granted in 2009. Maharatna status — Mahanagar Telephone Nigam Limited (MTNL)
shall be given to Central Public Sector Enterprises — National Aluminium Company Limited (NACL)
(CPSEs) :
— National Mineral Development Corporation (NMDC)
— Having Navratna status. Limited
— Listed on Indian stock exchange with minimum — Oil India Limited
prescribed public shareholding under SEBI
— Rashtriya Ispat Nigam Limited (RINL)
regulations.
— Rural Electrification Corporation Limited (RECL)
— Average annual turnover of more than ` 25,000
crore, during the last 3 years. — Shipping Corporation of India Limited (SCIL)
— Average annual net worth of more than ` 15,000 — Nevyeli Lignite Corporation Limited (NLCL)
crore, during the last 3 years. — Container Corporation of India Limited (CONCOR)
— Average annual net profit after tax of more than — Engineers India Limited (EIL)
` 5,000 crore, during the last 3 years. — National Buildings Consumption Corporation
— Should have significant global presence/ Limited (NBCCL)
international operations.
47
Criteria for Grant of Miniratna Status Micro, Small and Medium

This category was started in 1997. Those CPSEs that Enterprises (MSME)
have shown profits in the last continuous three years and MSMEs have been accepted as the engine of
have positive net worth, can be considered eligible for economic growth and for promoting equitable
grant of Miniratna status. Presently, there are total 72 development throughout the world.
Miniratnas.
They constitute over 90% of total enterprises in
The Miniratnas are divided in two categories – I and II. most of the economies and are credited with
— Category I These have made profits for the last three generating the highest rates of employment growth.
years continuously or earned a net profit of ` 30 crores With low investment requirements, operational
or more in one of these three years. There are 60 such flexibility and the capacity to develop appropriate
companies. indigenous technology, MSMEs have the power to
— Category II These companies have made profits propel India to new heights. Hence, it seems like
continuously for the last three years and must have a there is a silent revolution happening in India
positive net worth. There are 12 such companies in this powered by MSMEs.
category. The Micro, Small and Medium Enterprises
Development (Amendment) Bill, 2018 proposes to
Disinvestment vs Privatisation reclassify all MSMEs, whether they are
Disinvestment refers to selling of equity of a PSU to a private manufacturing or service-providing enterprises, on
organisation or to general public. Privatisation refers to the basis of their annual turnover.
providing for larger role for private capital and enterprise in
the functioning of an economy. Importance of MSMEs for Indian Economy
Privatisation is a wider term than disinvestment. The following points highlight importance of MSMEs
Disinvestment is one of the means for achieving privatisation.
for Indian economy:
Privatisation may result from any of the following :
n Disinvestment
Employment It is the second largest employment
n Denationalisation (i.e. complete sell off of a PSUs)
generating sector after agriculture. It provides
n Transfer of management and control of a PSUs to the
employment to around 120 million persons in
private sector India.
n Dereservation of areas reserved for the public sector etc. Contribution to GDP With around 36.1 million
units throughout the geographical expanse of the
country, MSMEs contribute around 6.11% of the
Large Scale Industries manufacturing GDP and 24.63% of the GDP from
Large scale industries are referred to as those industries that service activities.
are having huge infrastructure, raw material, high MSME ministry has set a target to up its contribution
manpower requirements and large capital requirements. to GDP to 50% by 2025 as India becomes a $5 trillion
The large-scale industries of India fall broadly into four economy.
important classes : Exports It contributes around 45% of the overall
(i) The basic industries are those that provide essential exports from India.
inputs to all important industries and agriculture. They Inclusive Growth MSMEs promote inclusive
comprise coal, iron ore, fertilisers, caustic soda, etc. growth by providing employment opportunities in
(ii) The Capital goods industries are those that produce the rural areas especially to people belonging to weaker
machinery and equipment for all industries and sections of the society. For example, Khadi and
agriculture. These include machine tools, industrial Village industries require low per capita investment
machinery, process plant equipment, construction and and employ a large number of women in rural
mining equipment, electrical equipment, textile areas.
machinery, printing and packaging machinery etc. Financial Inclusion Small industries and retail
(iii) The Intermediate goods industries produce goods that businesses in tier-II and tier-III cities create
are used in the process of production in other industries opportunities for people to use banking services
or as accessory to the capital goods in the industries like and products.
automobile tyres and petroleum refinery products. Promote Innovation It provides opportunity for
(iv) The Consumer goods industries includes textiles, budding entrepreneurs to build creative products
sugar, paper, etc. boosting business competition and fuels growth.
48
Classification of Enterprises as MSMEs (2020) up to` 2.5 crore and Major Cluster (more than 500
artisans) with Government assistance up to
Type of Enterprise Investment in Plant and Annual
Machinery or Equipment Turnover ` 5 crore.
Micro ` 1 crore ` 5 crore Udyog Aadhaar Memorandum (UAM) It is a
Small ` 10 crore ` 50 crore simple one-page registration form to promote Ease
of Doing Business for MSMEs in India.
Medium ` 50 crore ` 250 crore
A Scheme for Promoting Innovation, Rural
Organisations Related to MSMEs Industry and Entrepreneurship (ASPIRE) The
scheme promotes innovation and rural
Some important organisations related to micro, small and entrepreneurship through rural Livelihood
medium enterprises are as follows : Business Incubator (LBI), Technology Business
Small Industries Development Organisation (SIDO) Incubator (TBI) and Fund of Funds for start-up
It was founded in the year 1954. SIDO is an apex body creation in the agro-based industry.
and nodal agency for formulating, coordinating and Credit Guarantee Fund Scheme To facilitate easy
monitoring the policies and programmes for promotion flow of credit, guarantee cover is provided for
and development of small scale industries. collateral free credit extended to MSMEs.
It provides services for micro, small and medium Prime Minister’s Employment Generation
industries also. Programme (PMEGP) It is a credit linked subsidy
scheme, for setting up of new micro-enterprises
National Small Industries Corporation Limited
and to generate employment opportunities in rural
It is a PSU established by the Government of India in as well as urban areas of the country.
1955. It falls under Ministry of Micro, Small and Medium
Credit Linked Capital Subsidy Scheme (CLCSS)
Enterprises of India.
for Technology Upgradation It aims at facilitating
Government of India in order to promote small and technology upgradation of Micro and Small
budding entrepreneurs of post independent India, Enterprises (MSMEs) by providing 15% capital
decided to establish a government agency which can subsidy for purchase of plant and machinery.
mediate and provide help to Small Scale Industries (SSI).
Policy Reforms for Startups These include
Government had established National Small Industries requirement of distributable profits for three years
Corporation with an objective to provide machinery on for a company to be eligible to issue shares with
hire-purchase basis assisting and marketing in exports. differential voting rights.
Micro, Small and Medium Enterprises Development Start up Cells These cells will work towards
Organisation redressal of grievances and tax-related issues of
It was constituted in 1954 as a Small Industries Startups with respect to the administration of the
Development Organisation. Income-tax Act, 1961.
It works as an apex body for micro, small and medium National Startup Advisory Council To advise the
enterprises. Centre on measures needed to build a strong
It plays a key role in the implementation of programmes ecosystem for nurturing innovation and start-ups in
and policies of micro, small and medium enterprises. the country.
Aatmanirbhar Bharat ARISE-Atal New India
Schemes Related to MSMEs Challenge It is a national initiative to promote
Some important schemes related to MSMEs are : research and innovation and increase
Scheme of Fund for Regeneration of Traditional competitiveness of Indian startups and Micro,
Industries The Ministry of MSMEs launched this Small and Medium Enterprises (MSMEs).
scheme in the year 2005 with the view to promote AIM-iCREST It is an Incubator Capabilities
Cluster development. Enhancement programme launched by NITI Aayog
SFURTI Its clusters are of two types i.e., Regular for a Robust Ecosystem focused on creating high
Cluster (500 artisans) with Government assistance of performing Startups.
49
Abid Hussain Committee on Small Scale Industries Startup India

It was appointed to suggest measures for improving the It envisages building a robust Startup ecosystem in
Small-Scale Industries (SSIs). The committee submitted its the country for nurturing innovation and
report in January, 1997. providing opportunities to budding entrepreneurs.
The main recommendations were as follows : It was launched in 2016. The action plan of this
n The concept of SSI should be widened to include
initiative focuses on following three areas :
small-scale business and service enterprises. — Simplification and Handholding.
n Instead of protecting the SSI on the ground of infant
— Funding Support and Incentives.
industry, they should rather be promoted.
— Industry-Academia Partnership and Incubation.
n This policy of promotion should consist of adequate supply
of credit, service, technology assistance, infrastructure, low Stand-up India

transaction cost etc.
n Setting up support systems for small enterprises by
Stand-up India was launched by the Government
developing clusters of small enterprises to reap the benefits of India on 5th April, 2016 to support
of informational economies and economies in entrepreneurship among women and SC and ST
infrastructure development. communities. The scheme offers bank loans of
n Abolishing all reserved products which had been between ` 10 lakh (US$13,000) and ` 1 crore
earmarked exclusively for SSI. (US$130,000) for Scheduled Castes and Scheduled
Tribes and women setting up new enterprises
outside of the farm sector.
Central Government Schemes Related
to Industrialisation Pradhan Mantri Mudra Yojana (PMMY)
It was launched by the government in 2015 for
Important Central government schemes related to
providing loans upto ` 10 lakh to the
industrialisation are as follows :
non-corporate, non-farm small/micro-enterprises.
National Technical Textile Mission It provides funding to the non-corporate small
The decision to start this mission was taken by Cabinet business sector through various last-mile financial
Committee on Economic Affairs (CCEA) in February 2020. institutions like Banks, Non-Banking Financial
Companies (NBFCs) and Micro Finance
It aims at taking the domestic market size from $ 40
Institutions (MFIs).
billion to $ 50 billion by 2024.
It has created three products i.e. ‘Shishu’,
FAME India Scheme ‘Kishore’ and ‘Tarun’ as per the stage of growth
Faster Adoption and Manufacturing of Hybrid and Electric and funding needs of the beneficiary micro unit.
Vehicles (FAME) India Scheme is mainly associated with — Shishu Covering loans upto ` 50,000.
electric vehicles. — Kishore Covering loans above ` 50,000 and upto
It was started in the year 2019 and its second edition was ` 5 lakh.
launched in June 2021. — Tarun Covering loans above ` 5 lakh and upto
` 10 lakh.
Make in India
The Make in India campaign was launched by the Prime
Eight Core Industries and
Minister of India on 25th September, 2014. Its objectives their Performance
are as follows : The Base Year of the Index of Eight Core Industries
— To attract foreign investment for new industrialisation has been revised from the year 2004-05 to 2011-12
and develop the already existing industry base in India from April, 2017. The shift is in line with the new
to surpass that of China. base year of Index of Industrial Production (IIP).
— Target of an increase in manufacturing sector growth to The industries covered in the Index of Eight Core are
12-14% per annum over the medium term. namely Coal, Crude Oil, Natural Gas, Refinery
— To increase the share of the manufacturing sector in the Products, Fertilisers, Steel, Cement and Electricity.
country’s Gross Domestic Product from 16% to 25% by These remain the same as in the 2004-05 series. The
2022. revised Eight Core Industries have a combined weight
— To create 100 million additional jobs by 2022. of 40.27% in the IIP. The combined Index of Eight
Core Industries stands at 118.6 in April 2017, which is
— To promote export-led growth.
2.5% higher compared to the index of April 2016.
50
The weightage of core industries are as follows : It was established on 2nd April, 1990 through an Act of
Parliament (thus, it is a statutory body). It is
Industry Weight age headquartered in Lucknow, Uttar Pradesh.
Electricity 19.85% SIDBI aims to facilitate and strengthen credit flow to
MSMEs and address both financial and developmental
Steel (Alloy Non-alloy) 17.92%
gaps in the MSME ecosystem across the country.
Refinery Products 28.04% It co-ordinates functions of institutions engaged in
Crude Oil 8.98 % similar activities.
Coal 16.33% Currently, the shares of SIDBI are held by the Central
Government and 29 other institutions including Public
Cement 5.37% Sector Banks (PSBs), insurance companies owned and
Natural Gas 6.88% controlled by the Central Government.
Fertilisers 2.63%
National Investment Fund (NIF)
In pursuance of the policy laid down in National
Organisations Related Common Minimum Programme (NCMP), the Central
Government set-up a National Investment Fund (NIF) in
to Industrial Sector November 2005. The proceeds from disinvestment of
Different organisations related to industrial sector are Central Public Sector Undertakings (CPSUs) will be
as follows : channelised into NIF, which is to be maintained outside
the Consolidated Fund of India.
Department for Promotion of Industry NIF will be professionally managed to provide
and Internal Trade (DPIIT) sustainable returns to the government, without
depleting the corpus.
It was established in the year 1995 and was
In order to align the NIF with the disinvestment policy,
reconstituted in the year 2000 with the merger of
government decided in 2013 that the disinvestment
the Department of Industrial Development.
proceeds, with effect from the fiscal year 2013-14, will
Earlier, separate ministries of Small Scale Industries be credited to the existing NIF which is a public account
and Agro and Rural Industries (SSI and ARI) and under the government accounts and the funds would
Heavy Industries and Public Enterprises (HI and PE) remain there until withdrawn/invested for the approved
were created in October, 1999. purposes.
The department was earlier called Department of
Industrial Policy and Promotion and was renamed
as DPIIT in January, 2019.
Ease of Doing Business Report
In 2018, matters related to e-commerce were The report was introduced in 2003 by the World Bank to
transferred to the Department and in 2019, the provide an assessment of objective measures of business
Department has been given charge for matters regulations and their enforcement across 190 economies
related to Internal Trade, welfare of traders and on ten parameters affecting a business through its life
their employees and Startups. cycle.
The role of DPIIT is to promote/accelerate industrial The report measures the performance of countries
development of the country by facilitating across 10 different parameters namely :
investment in new and upcoming technology, 1. Starting a Business,
foreign direct investment and supporting balanced 2. Dealing with Construction permits,
development of industries. 3. Electricity availability,
4. Property registration,
Small Industries Development 5. Credit availability,
Bank of India (SIDBI) 6. Protecting minority investors,
SIDBI is the principal financial institution for 7. Paying Taxes,
promotion, financing and development of Micro, 8. Trading across borders,
Small and Medium Enterprises (MSME) sector in 9. Contracts enforcement, and
India. 10. Resolving Insolvency.
51
It ranks countries on the basis of Distance To Frontier Fifth Five Year Plan (1974-1978) Under this plan,
(DTF) score that highlights the gap of an economy the Minimum Need Programme (MNP) was started.
with respect to the global best practice. For example, Under this programme in 1975 the twenty fold
a score of 75 means an economy was 25% points away programme was also started. Under this plan
from the frontier constructed from the best performances 22.8% of expenditure was incurred of total
across all economies and across time. planned expenditure, which was the highest in
comparison to other plans.
Ease of Doing Business Rankings Sixth Five Year Plan (1980-1985) Under this plan,
of the States the process of liberalisation was started 13.8% was
the total expenditure incurred in industrialisation
It is released by the Department for Promotion of Industry
under this plan.
and Internal Trade (Ministry of Commerce and Industry).
Seventh Five Year Plan (1985-1990) Technological
The rankings were started with an objective of fostering
development had positive impact on industries and
competitiveness, mutual learning and propel States and
along with social justice the process of
Union Territories (UTs) to work proactively towards
development got speed up. In this Five Year Plan,
uplifting the startup ecosystem.
11.9% of the total revenue was spent on the
industrial sector.
Five Year Plans and Industrial Eighth Five Year Plan (1992-1997) The new
Development economic policy, 1999 was implemented in this
Five Year Plan. Under this plan, 9.3% of the total
Following is a brief description of Five Year Plans and plan expenditure was provided to the industrial
industrial development : sector.
First Five Year Plan (1951-1956) The role of both public Ninth Five Year Plan (1997-2002) Importance was
and private sectors was acknowledged under this plan. given to the industrial sector. Under this plan,
Started the process of mixed economy through this Five many new schemes were introduced for
Year Plan. Out of total expenditure 2.8% was provided for enhancement of economic efficiency and capacity.
industries and mineral sectors. A total 5% expenditure was incurred to industrial
Second Five Year Plan (1956-1961) Industrialisation was sector.
the central focus of the plan. Under this rapid industrial Tenth Five Year Plan (2002-2007) In place of
development was ensured with establishment of basic industrial sector investment in the social sector
industries. A total of 20.1% of total expenditure was was given importance. Only 3.9% of total revenue
provided to industrial sectors in the Five Year Plan. expenditure was provided for industrial sector,
Third Five Year Plan (1961-1966) Under this plan, which was the least in comparison of any Five
cement and fertilisers industries were established. In this Years Plan.
plan, the goals of second Five Year Plans were pursued. Eleventh Five Year Plan (2007-2012) Under this
A total of 20.1% of total expenditure was provided during five year plan, 10% was set as growth goal for
this plan. industrial sector 4.5% of total expenditure was
Fourth Five Year Plan (1969-1974) Under this plan, given to the industrial sector.
development of industries were encouraged more. Twelfth Five Year Plan (2012-2017) A target of
Under the impact of Green revolution the dynamism in 9.6% was kept for development of Industries in
field of agriculture promoted industrialisation. In this this Five Year Plan. For development in industries,
Five Year Plan, the expenditure on the industrial sector emphasis was given to the infrastructure
was 18.2%. development.
CHAPTER 08
52
Money and Banking
Sources Class-IX & X Old NCERT Chap 3 (The Infrastructure of the Indian Economy), Chap 5 (The State and Economic
Development), Class-X New NCERT Chap 3 (Money and Credit), Class-XII New NCERT Chap 3 (Money and Banking),
Class-XII Old NCERT Chap 7 (Money and Banking System Appendix)
Introduction Types of Money

Money and banking are the cornerstones of a strong and The types of money circulated in an economy are as
effective economic and financial system. Both money and follows:
banking have evolved over centuries. Money
In past times, there was no concept of money and people

simply exchanged commodities with each other i.e. Actual Money Acceptable Money
through barter system.
Exchange of commodities without mediation of money is
Metallic Money Paper Money
called Barter exchange. There were many issues with
barter exchanges like Double coincidence of want,
difficult to carry forward wealth and absence of a
Full Bodied Token Representative Convertible Fiat
standard unit of account. Therefore, it became essential to Money Money Paper Money Paper Money Paper Money
accept a common medium of exchange i.e. money.
Legal Tender Money
Money Bank Money Credit Money
Money is the most commonly accepted medium of Limited Unlimited

exchange, any object which is generally accepted as Legal Tender Legal Tender
means of payment is money. Currency, in the form of
notes or coins, is one type of money. Actual Money
Money, which actually circulates in the economy in
Purchasing Power of Money terms of, which all payments are made and general
The value of a currency expressed in terms of the number of purchasing power is held as a medium of exchange.
goods and services that one unit of money can buy, is Actual money is divided into two types :
referred to as purchasing power of money.
1. Metallic Money
It can be categorised into following two parts :
(i) Domestic Purchasing Power Such purchasing power It is made of metal such as gold and silver. Coins of all
under by which goods are purchase within the territories denominations circulating in the economy are
of a nation, is termed as Domestic Purchasing Power. examples of metallic money. Metallic money is
classified into two categories :
(ii) International Purchasing Power Such domestic
purchasing power by which goods and services are Full bodied money If the face value of money is
purchased from another nation is termed as equal to its value as a commodity, it is called full
International Purchasing Power. bodied money.
53
If a gold coin of face value ` 100/- contains gold worth Demand Draft It is a pre-payment tool, issued by
of ` 100/- it will be called full bodied money or banks after collecting the amount and commission. It
sometimes standard money. can be issued in the name of individual or entity and it
Token Money If the face value of money is more than can be received only at a particular branch of a
its value as commodity or intrinsic value it is known particular city.
as token money. Travellers Cheque It is a cheque on which applicants
signature is on the front page, the payment of cheque
2. Paper Money
can be received from any branch of the concerned
Money made of paper is called paper money. It includes bank in the country.
different denominations. Paper money is further
Postal Order Money can be sent by post through this
classified into following forms :
system. It can be purchased at a post office and is
Representative Paper Money If paper is issued by payable at another post office to the named recipient.
keeping a 100% gold reserve of full bodied coins or In return, a fee for service is paid by the purchaser to
gold bullion, it will be called representative money. the post office.
Convertible Paper Money If paper money can be
3. Credit Money
converted into gold coins or gold bullion on demand it
is referred to as convertible money. This type of Credit currency means the currency in which the credit is
money is issued by keeping a metallic reserve of equal denominated, provided that financing agreement
amount behind it. between the two parties. It can be classified as follows :
Fiat or In-convertible Paper Money Money which Bill of Exchange It is an instrument in writing
cannot be converted into full bodied coins or gold containing an unconditional order, signed by the maker,
bullion on demand is called Fiat or In-convertible directing a certain person to pay on demand or at fixed
paper money. It is usually issued without keeping or determinable future time a certain sum of money.
metallic reserve behind it. Hundi A financial instrument developed in Medieval
India for use in trade and credit transaction. It is an
Acceptable Money unconditional order in writing made by a person
It is broadly divided into legal tender money, bank money directing another to pay certain sum of money to a
and credit money. person named in the order.
1. Legal Tender Money Classification of Money on the basis
Money which has a legal approval behind it and people of Money Supply
are bound by law to accept it in all payments. Nobody can
refuse to accept it. The total stock of money in circulation among the
public at a particular point of time is called money
Legal Tender Money can be classified into : supply. The measures of money supply in India are
Limited Legal Tender It can be given in payments classified into four categories M1, M2, M3 and M4
only upto a certain limit. The payee can refuse to along with M0.
accept it beyond that limit. In many Asian countries, This classification was introduced in April, 1977 by
25 paise coins and coins of low denominations are the Reserve Bank of India as follows :
limited legal tender. The coins in India are also
— Reserve Money (M0) Currency in Circulation +
considered as Limited Legal Tender. These coins can
Bankers’ Deposits with RBI + Other deposits with
be given as payments up to ` 1000 only.
RBI. It is also known as High-Powered Money,
Unlimited Legal Tender Unlimited legal tender monetary base, base money etc. It is the monetary
means that money, which can be given in payments base of the economy.
upto any limit.
— Narrow Money (M1) Currency with public +
2. Bank Money Demand Deposits with the Banking System (current
Currency which is operated by banks, post offices and account, saving account) + Other Deposits with RBI.
other financial institutions is called banking currency or M2 = M1 + Savings Deposits of Post Office Savings
money. It can be classified as follows : Banks.
Cheque It is provided by banks to account holders. — Broad Money (M3) M1 + Time Deposits with the
Through this, a person can transfer money from his Banking System.
account to the other person account without using M4 = M3 + All Deposits with Post Office Savings
physical money. Banks.
54
Functions of Money Other Deposits Demand Deposits with RBI, which

includes demand deposits of public financial
Various functions of money are as follows : institutions, demand deposits of foreign central banks
It acts as a medium of exchange Any commodity and international financial institutions like IMF, World
can be bought through money. Bank, etc.
A common measure of value All commodities have
their value that is expressed in terms of money. Development of Banking System in India
Store of value acts as a standard for deferred The first bank to be established in India was Bank of
payments Future monetary obligations can be Hindustan in the year 1770 in Calcutta. This Bank was
settled using money. For example, a loan, which is completely based on European Banking System.
taken today is settled in installments. For the benefits of East India Company, Bank of Bengal
in 1806, Bank of Bombay in 1840 and Bank of Madras in
Banking System 1843 were established. In 1921, these three banks were
merged to form Imperial Bank of India.
A bank is a financial institution, which performs the
deposit and lending function. A bank allows a In 1894, Punjab National Bank was established. This
person with excess money (Saver) to deposit his was the first bank to be completely established and run
money in the bank and earns an interest rate. by Indians.
The bank lends to a person who needs money In 1934, Indian Reserve Bank Act was passed by
(investor/ borrower) at an interest rate. Thus, the Central Banking Investigation Committee. As a result,
banks act as an intermediary between the saver and Reserve Bank of India started functioning on 1st April,
the borrower. 1935.
The bank usually takes deposit from the public at a Period of 1939-1946 is referred to as duration of
much lower rate called deposit rate and lends the Banking Expansion in India.
money to the borrower at a higher interest rate On 1st January, 1949, Reserve Bank of India was
called lending rate. nationalised.
The difference between the deposit and lending rate On 1st July, 1955, Imperial Bank of India was
is called ‘net interest spread’ and the interest spread nationalised and renamed as the State Bank of India.
constitutes the bank’s income. After implementation of New Economic Policy, foreign
The important functions of a bank are as follows : Banks were allowed to open their branches in India.
— Accepting deposits
— Lending money
Types of Banks in India
— Financial intermediation There are various types of banks in India such as Central
— Easy payment and withdrawals
bank, Cooperative banks, Commercial banks, Local Area
banks, Regional Rural banks, Specialised banks, Small
— Risk management
Finance banks, Payments banks etc.
— Economic development
Central Bank
Types of Deposits Held by a Bank Each country has a Central bank that looks after all of
The various types of deposits held by a bank are as the country’s other financial institutions. Our country’s
follows : Central bank is the Reserve Bank of India.
Demand Deposits This money can be withdrawn at The Central bank’s principal role is to serve as the
any time (on-demand) from the bank. These government’s bank and to oversee and regulate the
deposits are 100% liquid. These deposits include : country’s other banking institutions.
— Current account The functions of a country’s Central bank are listed
— The demand liability portion of a saving account below:
Time Deposits Money can be withdrawn only after — assisting other financial institutions.
maturity or with a penalty before maturity. These — Issuing money and enforcing monetary policies.
include : — Supervising of the financial systems.
— Fixed Deposits In other words, the country’s Central bank is also known
— Recurring Deposits as the banker’s bank because it assists other banks in the
— Time liability of saving account country and runs the country’s financial system under
the supervision of the Government.
55
Commercial Banks Non-Scheduled Commercial Banks

All banks which are mentioned in the Second Schedule of Non-scheduled commercial banks are those
RBI Act, 1934 are known as Scheduled Banks. These banks which have not been included in the second
comprise scheduled commercial banks and scheduled Schedule of the Act. Non-scheduled banks are
cooperative banks. Scheduled Commercial Banks in India also subject to the statutory cash reserve
are categorised into five different groups according to their requirement.
ownership and/or nature of operation. But they are not required to keep them with the
Apart from basic banking business, banks also undertake RBI; they may keep these balances with
other services such as safe custody of valuables, granting themselves. They are not entitled to borrow from
and issuance of letters of credit to facilitate International the RBI for normal banking purposes, though
Trade, buying and selling in foreign exchange and they may approach the RBI for accommodation
collection of bills among others. Banks also act as agent of under abnormal circumstances.
the government and other entities to undertake agency Cooperative Banks
business.
These banks are governed by a law enacted by
Extending loans and advances to the needy sectors of the
the state government.
economy on a priority basis is a very crucial function of the
banking sector. Advances, deposits, money at call and short They provide short-term loans to agriculture and
notice etc., is included in the assets of a Commercial Bank related industries.
in India. Cooperative bank’s principal purpose is to
The first bank of limited liability managed by Indians was enhance social welfare by providing low-interest
Oudh Commercial Bank founded in 1881. Subsequently, loans.
Punjab National Bank was established in 1894. Swadeshi They are arranged in a three-tier system :
Movement, which began in 1906, encouraged the formation — State Cooperative Banks, Tier 1 (State Level)
of a number of commercial banks. (regulated by RBI, State Government,
These bank’s primary source of funds is public deposits. NABARD)
Commercial banks can be public sector banks, private — Central/District Cooperative Banks, Tier 2
sector banks and foreign banks. (District Level)
— Public sector banks are those in which, the government — Tier 3 (Village Level) – Agriculture (Primary)
or the country’s central bank owns the majority of the Cooperative Banks
stock.
— Banks in the private sector are those in which a private Local Area Banks (LAB)
entity, an individual, or a group of people owns the These banks were introduced in India in 1906
majority of the stock. with the purpose of enabling the local
— Foreign Banks category includes banks with institutions to pool and mobilise the rural
headquarters in other nations and branches in the United savings.
States. These banks are governed by the Companies
Act, 1956.
Classification of Commercial Banks
There are two types of commercial banks : Regional Rural Banks (RRB)
Scheduled Commercial Banks Operating under the Regional Rural Bank, Act of
1976, these banks started in 1975. The
Scheduled Commercial Banks in India are those banks
establishment of 196 RRBs took place in between
which have been included in the Second Schedule of
1987 – 2005.
Reserve Bank of India (RBI) Act, 1934.
These banks aim at the development of rural and
Reserve Bank of India (RBI) in turn includes only those
agricultural areas with the help of concessional
banks in this schedule which satisfy the criteria mentioned
loan offerings.
in Section 42(6) (a) of the Reserve Bank of India Act, 1934.
The ownership of these banks belong 50% to the
Criteria for scheduled bank are:
national government, 15% to the state
— Scheduled banks are those banks whose minimum paid government and 35% to the commercial bank.
up capital and reserve amount is upto ` 5 lakh.
From 2005 onwards, the merging of these banks
— These banks have to submit details of their activities to by the government took place due to which the
the Reserve Bank of India every week. number was reduced to 86.
56
Specialised Banks The undertakings of these banks are taken over and
vested in six corresponding new banks under the
Certain banks exist just to serve a certain purpose.
Banking Companies (Acquisition and Transfer of
Specialised banks are the name for several types of
Undertakings) Act, 1980.
financial institutions. These are classified as :
Later on, in the year 1993, the government merged
Micro Units Development and Refinance Agency
New Bank of India with Punjab National Bank. It was the
Bank (MUDRA Bank) It is a public sector financial only merger between nationalised banks and resulted
institution in India. It provides loans at low rates to in the reduction of the number of nationalised banks
micro-finance institutions and non-banking financial from 20 to 19.
institutions, which then provide credit to MSMEs.
SIDBI (Small Industries Development Bank of India) Merging of SBI and Mahila Bank
SIDBI can provide loan for a small scale enterprise or n State Bank of India (SBI) was previously called
business. With the support of this bank, small Imperial Bank of India in 1921, which was created by
businesses can get current technology and equipment. amalgamation of 3 Presidency Banks viz, Bank of
Export and Import Bank (EXIM Bank) EXIM Bank Bengal, Bank of Bombay and Bank of Madras. It was
stands for Export and Import Bank. This type of bank nationalised in 1955.
can provide loans or other financial help to foreign
n Bharatiya Mahila Bank (BMB) was created and
incorporated through an Act of Parliament in Mumbai
countries that are exporting or importing goods.
on 19th November, 2013. This was the only and first
NABARD (National Bank for Agricultural and Rural public sector bank incorporated through an Act of
Development) People can resort to NABARD for any Parliament.
type of financial support for rural, handicraft, village n State Bank of India, merged five of its Associate Banks
and agricultural development. and Bharatiya Mahila Bank with itself on 1st April,
2017. With the merger, SBI became one of the top 50
Small Finance Banks global banks.
As the name implies, this type of bank, provides loans Merger of Other Banks
and financial help to micro industries, small farmers n The Bank of Baroda was founded by Maharaja of
and the unorganised sector of society. Baroda on 20th July, 1908. It was nationalised on 19th
The country’s Central bank oversees these July, 1969 by the Government of India.
institutions, e.g., Ujjivan Small Finance. n Vijaya Bank and Dena Bank merged with Bank of
Baroda (BoB) on 1st April, 2019. This merger has created
Payments Banks BoB as the third largest public sector bank of India.
The Reserve Bank of India conceptualised the
n Government has merged Indian Bank with Allahabad
Bank, Oriental Bank of Commerce (OBC) and United
payments bank, a newly developed form of banking.
Bank of India with Punjab National Bank, Syndicate
People who have a payment bank account can only Bank with Canara Bank and Andhra Bank with Union
deposit upto ` 1,00,000 and cannot apply for loans or Bank of India on 1st April, 2020. After merger, there are
credit cards through this account. only 12 Public Sector Banks of India.
Payment banks provide services such as internet
banking, mobile banking and debit card issuance. e.g.,
Paytm Post Payments Bank. Reserve Bank of India (RBI)
The RBI is the supreme monetary and banking
Nationalisation of Banks authority in the country and controls the banking
From 1st February, 1969, the government imposed system in India.
social control on banks by introducing certain It is called the ‘Reserve Bank’ as it keeps the reserves
provisions in the Banking Regulation Act, 1949. of all commercial banks.
Then, all those banks which were taken over through Before the establishment of RBI, the functions of a
Banking Companies Bill are called nationalised Central Bank were virtually done by the Imperial
banks. Bank of India. RBI started its operations from 1st
Government of India issued an ordinance in 1969 and April, 1935.
nationalised 14 largest commercial banks in India It was established via the RBI Act 1934, that’s why it is
from the midnight of 19th July, 1969. On 15th April, a statutory body. Similarly, SBI is also a statutory body
1980, six more banks having demand and time deriving its legality from SBI Act, 1955.
liabilities of not less than ` 200 crore were
RBI did not start as a Government-owned bank but as a
nationalised.
private-owned bank.
57
After the independence, the Government passed Sources of Income and Expenditure of RBI
Reserve Bank (Transfer to Public Ownership) Act,
Income Expenditure
1948 and took over RBI from private shareholders
after paying appropriate compensation. Thus, Returns from foreign currency Expenditure on Printing of
assets. currency.
nationalisation of RBI took place in 1949 and from
1st January, 1949, RBI started working as a Interest on rupee-denominated Expenditure on Staff.
government-owned bank. government bonds.
Original headquarters of RBI was in Kolkata, but in Interest on overnight lending to Commission given to Commercial
1937, it was shifted to Mumbai. Commercial banks. banks.
Management commission on Commission given to primary
Functions of the RBI handling the borrowings of dealers.
Central and State governments.
The functions of RBI are as follows :
Bank of Issue Issuing money is the exclusive right
of RBI. All notes except ` 1 note and coins are Monetary Policy of RBI
issued by the RBI. ` 1 notes and coins are issued by Monetary Policy is an instrument under RBI, aimed at
the Ministry of Finance and circulated by RBI. regulating interest rates, money supply and availability of
credit in an economy. RBI decides monetary policy cycle on
Custodian and Manager of Foreign exchange It
bi-monthly basis.
keeps the foreign exchange (i.e. foreign currency)
which flows into the country. It also keeps the Various objectives of Monetary Policy are as follows :
foreign exchange rate stable to a certain extent. Economic and financial stability To regulate monetary
Banker and Debt Manager to Government It acts expansion so as to maintain a reasonable degree of price
as a banker to both Central and state governments. stability.
It keeps deposits of government and lend to Development To ensure adequate financial resources for
government. the purpose of development.
Banker to bank It is the banker of all the banks. It Flow of credit To provide adequate flow of credit to
keeps the reserve of the banks like Cash Reserve productive sectors.
Ratio (CRR) with it. It provides financial assistance Employment and growth Promotion of productive
to banks against mortgaged securities. Usually investments and trade. Equitable distribution of income.
banks borrow and lend money among themselves Employment generation.
via call money market, regulated by RBI.
International trade and exports Promotion of exports
Monetary Management Controller of Money and economic growth. Maintaining exchange rate
supply, makes monetary policy, control credit etc. stability.
Financial Regulator It is financial regulator for
Commercial banks, Credit information companies, Tools of Monetary Policy
Regional Rural Banks (RRBs), Local Area Banks, Quantitative tools of monetary policy include Liquidity
Non-Banking Financial Company (NBFC) etc. Adjustment Facility (Repo and Reverse Repo), Open Market
Representative role RBI represents the Operations, SLR and CRR, Bank Rate, Credit Ceiling,
Government as a member of the International Marginal Standing Facility.
Monetary Fund (IMF) and World Bank. Qualitative tools of monetary policy include Credit
Central clearance and Accounts settlement As RBI Rationing, Moral Suasion, Prompt Corrective Action(PCA),
keeps cash reserves from commercial banks Direct action by RBI on banks and Differential Interests Rates.
therefore it rediscounts their bills of exchange
easily.
Quantitative Instruments of Monetary Policy
Developmental role Performing a variety of The quantitative instruments of monetary policy are as
developmental and promotional functions under follows :
which it set up institutions like Industrial 1. Cash Reserve Ratio (CRR)
Development Bank (IDBI), Small Industries
It is the certain percentage (fixed by the RBI) of Net Time
Development Bank (SIDBI), etc.
and Demand Deposits of a Scheduled Bank in India, need
Promotional roles Consumer protection, to be kept with the RBI in the form of cash only. It aims
Ombudsman, Financial Inclusion through Priority to have control over banks credit.
Sector Lending (PSL) norms, 25% rural branch The ratio between 3% (floor) -15% (ceiling) is removed
requirements etc. via RBI (Amendment) Bill 2006.
58
An increase in CRR - higher proportion of Reduction in Repo rate helps the banks to get money at a
deposits to be kept with RBI by banks - less cheaper rate and increase in Repo rate discourages the
funds are available to be provided as credit to banks to borrow from RBI.
the economy, money supply will decrease. The Call Money Market of India (inter-bank market)
2. Statutory Liquidity Ratio (SLR) operates at this rate and banks use this route for overnight
borrowings.
The Scheduled banks need to keep certain
percentage (fixed by the RBI) of their Net Time Repo rate has direct relation with the interest rates banks
and Demand Deposits kept with themselves (i.e. charge on the loans they offer (as it affects the operational
not with RBI) in the form of liquid assets such as cost of the banks).
cash, gold and selected government securities. 5. Reverse Repo Rate
Need of SLR is to prevent banks from lending all It is the rate at which RBI borrows from Commercial Banks
its deposits, which is too risky and it is by mortgaging its dated Government securities and
mandatory under Banking Regulation Act 1949. Treasury bills.
Similar to CRR, SLR aimed to have control over An increase in Reverse Repo rate means that Commercial
banks credit. banks will get more incentives to park their funds with the
It includes G-Secs, thus it ensures a certain RBI, thereby decreasing the supply of money in the market.
amount of money is secured for the government. A decrease in Reverse Repo rate means that Commercial
There were excessively high rates (about banks will get less incentive to park their funds with RBI
25-30%) prevalent before 1991 reforms with and thus more money is available in the market increasing
provision of ceiling and floor. the money supply.
An increase in SLR - higher proportion of funds It has a direct bearing on the interest rates charged by the
to be kept aside by banks in liquid form - less banks and the financial institutions on their different forms
funds available to be provided as credit to the of loans.
economy - money supply will decrease.
6. Marginal Standing Facility (MSF)
Higher the CRR and SLR, lower will be the
It was introduced to deal with unforeseen liquidity crunch
liquidity in the system as Banks will have lesser
because under Liquidity Adjustment Facility (LAF) banks
money for providing loans.
can borrow overnight liquidity only by pledging securities
For instance, the CRR and SLR rate is 4% and over and above the securities held under SLR requirement.
19.5% respectively. Bank deposits are` 100
Liquidity management window given by RBI under, which
crores then banks can sanction loans upto ` 76.5
banks can borrow additional overnight (one day) liquidity
crores.
over and above LAF window.
3. Bank Rate The interest rate for MSF is Repo rate + 1%. Usually, the
Rate at which RBI provides long-term Reverse Repo rate is Repo rate − 1%. Therefore, the Repo
borrowings to its clients. Its clients include rate acts as an anchor rate. The Repo rate stands in the
Central government, state governments, banks, middle of two. The MSF rate stands above and Reverse
financial institutions, cooperative banks etc. Repo rate stands below the Repo Rate.
An increase in the bank rate symbolises Under this facility, banks can borrow funds up to 1% of
tightening of RBI monetary policy (i.e. Dearer their Net Demand and Time Liabilities (NDTL).
Monetary Policy). NDTL shows the difference between the sum of demand
An increase in bank rate will make borrowing and time liabilities (deposits) of a bank (with the public or
from RBI expensive - discourage banks from the other bank) and the deposits in the form of assets held
borrowing from RBI - money supply will tend to by the other bank.
decrease. Bank’s NDTL = Demand and Time Liabilities – Deposits with
It presently uses it as a penalty rate imposed by other Banks
RBI on banks for violations of RBI directives.
7. Open Market Operations (OMO)
4. Repo Rate (Policy Rate) OMO refers to sale and purchase of government securities
It is the rate (Rate of Repurchase) at, which by RBI in the open market with the aim of influencing
Commercial banks borrow from RBI (which liquidity in the economy in the medium term.
provides short-term liquidity to banks) by If the RBI sells these instruments, banks and the public will
mortgaging their dated Government securities buy it and pay money to the RBI.
and Treasury bills (T-Bills).
59
If the RBI buys these instruments from instrument 3. Moral Suasion

holders, it will pay money to the latter. It refers to a method adopted by the Central Bank to
During inflation, the RBI sells government persuade or convince the Commercial banks to advance
securities. As a result money supply in the credit in the economic interest of the country.
economy falls causing prices to fall. During Since, it involves no administrative compulsion or threats
deflation, the RBI will buy back the securities thus of punitive action, it is a psychological and informal
causing money supply to rise, which cures means of selective credit control.
deficiency in demand.
4. Differential Rate of Interest (DRI)
8. Liquidity Adjustment Facilities (LAF)
It is a lending programme launched by the government in
Monetary policy instrument that the RBI uses in April, 1972.
order to influence the liquidity conditions in the
It makes obligatory for all the public sector banks in India
market in the short-term.
to lend 1% of the total lending of the preceding year to
Under the LAF window, the RBI uses various ‘the poorest among the poor’ at an interest rate of 4% per
instruments to inject or absorb liquidity to or from annum.
the market respectively.
Repo and Reverse Repo rates are a part of RBI’s 5. Direct Action
‘Liquidity Adjustment Facility (LAF)’. This step is taken by the RBI against banks that don’t
The RBI introduced LAF as a result of the fulfill conditions and requirements.
Narasimham Committee on Banking Sector RBI may refuse to rediscount their papers or may give
Reforms (1998). excess credits or charge a penal rate of interest over and
above the Bank rate, for credit demanded beyond a limit.
9. Long-Term Repo Operations (LTRO)
New policy tool used by the RBI to inject more 6. Prompt Corrective Action (PCA)
liquidity into the economy similar to the term The PCA is triggered when banks breach certain
Repos, but with a longer maturity period of 1 year regulatory requirements like minimum capital and
and 3 years. quantum of non-performing Assets.
Through the LTRO, the RBI seeks to inject long- To ensure that banks don’t go bust, RBI has put in place
term liquidity into the economy at a lower interest some trigger points to assess, monitor, control and take
rate. corrective actions on banks, which are weak and troubled.
The LTROs would be carried out through e-Kuber. 7. Consumer Credit Regulation
e-Kuber is the Core Banking Solution (CBS) of the
In 1968, the Consumer Credit Protection Act, was passed
RBI, which enables each bank to connect their
to regulate the Consumer Credit Industry.
single current account across the country.
It is designed to check the flow of credit for Consumer
Qualitative Instruments of Monetary Policy Durable Goods.
The qualitative instruments of monetary policy are as
follows : Monetary Policy Committee
n The Monetary Policy Committee (MPC) is a statutory and
1. Credit Rationing institutionalised framework under the Reserve Bank of
It is a method by which the RBI seeks to limit the India Act, 1934, for maintaining price stability, while
maximum amount of loans and advances. keeping in mind the objective of growth.
In certain cases, it also fix ceilings for specific n An RBI-appointed committee led by the then Deputy
categories of loans and advances. Governor Urjit Patel in 2014 recommended the
establishment of the Monetary Policy Committee.
2. Margin Requirements n The Governor of RBI is ex-officio Chairman of the
Qualitative tool used by the RBI in order to committee.
regulate the credit flow to a particular sector. n The committee comprises six members (including the
Chairman) - three officials of the RBI and three external
When a bank advances credit to its customers it
members nominated by the Government of India.
does so against collateral. n Its all decisions are taken by majority with the Governor
However, there is a difference between the value having the casting vote in case of a tie.
of the security and the loan offered. This n The MPC determines the policy interest rate (Repo rate)
difference is called ‘Margin’. required to achieve the Inflation target (4%).
60
Unfavourable Balance of Payments Export decreases

Inflation and import increases from other countries, which lead to
Inflation refers to the rise in the prices of most a decrease in the forex reserve.
goods and services of daily or common use, such as
food, clothing, housing, recreation, transport,
consumer staples, etc. Other Important Terms Associated with Inflation
n Deflation It is the opposite of Inflation. It is known as the
Inflation measures the average price change in a
reduction of the general level of price in an economy. In
basket of commodities and services over time. this price index measure is negative.
Inflation is indicative of the decrease in the n Stagflation It is a situation of slow economic growth and
purchasing power of a unit of a country’s currency. relatively high unemployment.
This could ultimately lead to a deceleration in n Disinflation It is a situation when the rate of inflation is at
economic growth. However, a moderate level of a slower rate. For example, if the Inflation of last month
inflation is required in the economy to ensure that was 4% and the rate of inflation in the current month
production is promoted. is 3%.
n Reflation It is deliberate action of the government to
Types of Inflation increase the rate of inflation to redeem the economy from
a deflationary situation.
The various types of Inflation are discussed below : n Core Inflation It is a measure of price rise in the economy
excluding the price rise of some products (whose price is
1. Based on the Rate of Rising in Inflation volatile and temporary in nature).
Creeping Inflation Price rises at a very small rate n Devaluation of Money It is a deliberate downward
(< 3 %). It is considered safe and essential for the adjustment to the value of a country’s currency, relative to
economy. another currency, group of currencies or standard.
Walking or Trotting Inflation Price rises at
moderate rate (3 % < Inflation < 10 %). Inflation at Measures to Control Inflation
this rate is a warning signal for the economy.
Some important and effective measures to control
Running Inflation Price rises at high rate (10 % <
inflation are:
Inflation < 20 %). It affects the economy adversely.
Hyperinflation or Galloping Inflation or Runway Monetary Measures
Inflation Prices rise at a very high rate (20 % < Credit Contraction It is used by the RBI to control credit.
Inflation < 100 %) and sometimes more than
Demonetisation of Currency Inflation can be controlled
100%. Hyperinflation brings the total collapse of
by demonetise currency of higher denominations. It is
the Economy. e.g., Venezuela (9900%), Zimbabwe
adopted when there is abundance of black money in the
(670%), Sudan (76%) etc.
country.
2. Based on the Causes Issue of New Currency Under this measure, one new
Demand Pull Inflation When inflation arises due note is exchanged for a number of notes of the old
to higher demand for goods and services over the currency. The value of bank deposit is also fixed
limited supply. accordingly. It is adopted when there is excessive issue of
notes and there is hyper inflation in the country.
Cost-Push Inflation When inflation arises due to
higher input cost (for example, raw material, Fiscal Measures
wages etc.) for goods and services over the limited
Increase in Direct Taxes Due to the increase in direct
supply.
taxes, people have less money available to them and low
demand from them leads to a lower price.
Effects of Inflation
Price Control By fixing the maximum price limit by
Effects of inflation discussed are as follows :
authorities.
Redistribution of Income and Wealth Due to the
Reduction in Unnecessary Expenditure Inflation can be
effect of inflation, some group of people loses and
curbed by reducing expenditure on non-development
another group of people gain.
activities.
Effects on Production and Consumption Due to
Increase in Savings By motivating people to save money
inflation, the demand decreases, which curtails the
can help in reducing inflation. This will reduce
production. People try to use fewer services, which
disposable income and personal consumption
lead to a decrease in consumption.
expenditure.
61
Surplus Budget This measure helps to reduce (iii) CPI for Rural Labourer (RL)
inflation by collecting more revenues and spending (iv) CPI (Rural/Urban/Combined)
less. Of these, the first three are compiled by the Labour
Public Debt Inflation can be curbed by stopping Bureau in the Ministry of Labour and Employment
repayment of public debt and postponing it to future whereas fourth is compiled by the NSO in the Ministry
till inflationary pressure is controlled in the economy. of Statistics and Programme Implementation. Base
Year for CPI is 2012.
Other Measures
The Monetary Policy Committee (MPC) uses CPI data
Trade Measures Maintain proper supply in the to control inflation. In April 2014, the Reserve Bank of
economy by export and import of goods and services. India (RBI) had adopted the CPI as its key measure of
Increasing Production By increasing production of inflation.
essential goods, inflation can be controlled.
Rational Wage Policy Under hyperinflation, there is a Demonetisation
wage-price spiral. To control this, the government n Demonetisation of currency means discontinuity of the
adopts a rational wage and income policy by freezing particular currency and replacing it with a new currency.
wages, incomes, profits, dividends, bonus, etc. In the current context ` 500 and ` 1000 denomination
Rationing It also helps to control inflation by currency notes discontinued to be as a legal tender and
new ` 200, ` 500 and ` 2000 Currency notes were introduced.
distributing consumption of scarce goods to large
number of consumers. It helps to stabilise the prices
n This step has been taken by the Government on 8th
November, 2016. The Indian Government had
of necessary goods and assure distributive Justice.
demonetised bank notes on two prior occasions also,
once in 1946 and other in 1978.
Measures of Inflation
In India, inflation is primarily measured by two main
indices WPI and CPI, which measure wholesale and Banking Sector Reforms
retail-level price changes, respectively.
Government of India have introduce many banking sector
Wholesale Price Index (WPI) reforms from time to time. Some of these are discussed as
follows :
It measures the changes in the prices of goods sold
and traded in bulk by wholesale businesses to other Goiporia Committee
businesses.
This committee was constituted in 1990 under the
It is published by the Office of Economic Adviser, chairmanship of MN Goiporia with an objective of
Ministry of Commerce and Industry. exploring and giving recommendations for improving
It is the most widely used inflation indicator in India. customer service in the banks.
Major criticism for this index is that the general On its recommendations, Banking Ombudsman
public does not buy products at wholesale price. Scheme was launched in 1995.
The base year of All-India WPI has been revised from
2004-05 to 2011-12 in 2017. Narasimham Committee Report I, 1991
For promoting the healthy development of the
Consumer Price Index (CPI) financial sector, the Narasimham Committee made
It measures price changes from the perspective of a recommendations first in 1991.
retail buyer. It is released by the National Statistical Recommendations of Narasimham Committee are :
Office (NSO).
Establishment of 4 tier hierarchy for banking structure
The CPI calculates the difference in the price of with 3 to 4 large banks (including SBI) at the top and at
commodities and services such as food, medical care, bottom rural banks engaged in agricultural activities.
education, electronics etc, which Indian consumers
The supervisory functions over banks and financial
buy for use.
institutions can be assigned to a quasi-autonomous
The CPI has several sub-groups including food and body sponsored by RBI.
beverages, fuel and light, housing and clothing,
Proper classification of assets and full disclosure of
bedding and footwear.
accounts of banks and financial institutions.
Four types of CPI are as follows :
Setting up an asset reconstruction fund to take over a
(i) CPI for Industrial Workers (IW) portion of the loan portfolio of banks whose recovery
(ii) CPI for Agricultural Labourer (AL) has become difficult.
62
Narasimham Committee Report II, 1998 MV Nair Committee

It submitted its report to the Government in April, 1998 The Reserve Bank had constituted the Committee
with the following recommendations : under the chairmanship of Shri M V Nair on 25th
Strengthening Banks in India The Committee August, 2011 pursuant to the announcement made in
considered the stronger banking system in the the Monetary Policy Statement 2011-12.
context of the Current Account Convertibility (CAC). The Committee was to re-examine the existing
It thought that Indian banks must be capable of classification and suggest revised guidelines with
handling problems regarding domestic liquidity and regard to priority sector lending and related issues.
exchange rate management in the light of CAC. Thus,
it recommended the merger of strong banks, which Urjit Patel Committee
will have a ‘multiplier effect’ on the industry. Reserve Bank of India constituted Urjit Patel
Narrow Banking For successful rehabilitation of Committee on 12th September, 2013 to review and
public sector banks, this committee recommended strengthen the monetary policy Framework.
‘Narrow Banking Concept’. According to it, weak This committee submitted its report in January 2014 to
banks allowed to place their funds only in the the then Governor.
short-term and risk-free assets. It suggested to keep Consumer Price Index under
Capital Adequacy Ratio In order to improve the Monetary Policy.
inherent strength of the Indian banking system, the
committee recommended that the Government Nachiket Mor Committee
should raise the prescribed capital adequacy norms. The Committee on Comprehensive Financial Services
Review of Banking Laws The committee for Small Businesses and Low-Income Households was
emphasised need for reviewing and amending main set up by the RBI in September 2013. This committee is
laws governing Indian Banking Industry like RBI Act, commonly known as Nachiket Mor Committee. This
Banking Regulation Act, Bank Nationalisation Act, committee was mandated with the task of framing a
etc. This upgrade will bring them in line with the clear and detailed vision for financial inclusion and
present needs of the banking sector in India. financial deepening in India.
The Wholesale Consumer Banks and Wholesale
Damodaran Committee Investment Banks would not take retail deposits but
This Committee was formed in 2011 under the would instead focus their attention on expanding the
chairmanship of former SEBI Chairman penetration of credit services.
M Damodaran. The committee has suggested a fixed term of 5 years for
It was set-up by the Central Bank to look into the the Chairman/Managing Director of a bank and a term
issues of customer services and evaluate the existing of 3 years for a whole-time director.
system of grievance redressal mechanism prevalent
in banks, its structure and efficacy and recommend PJ Nayak Committee
measures for expeditious resolution of complaints. The PJ Nayak Committee or officially the Committee to
Review Governance of Boards of Banks in India was set
Usha Thorat Committee
up by the Reserve Bank of India (RBI) in January, 2014.
Reserve Bank of India (RBI) panel headed by Usha
Various recommendations related to PJ Nayak
Thorat, Director of Centre for Advanced Financial
Committee are :
Research and Learning (CAFRAL) on 29th August,
2011 presented its suggestion on Non-banking — Repeal the Bank Nationalisation Act (1970, 1980), the
Finance Company (NBFC). SBI Act and SBI Subsidiaries Act. This is because
these acts require the government to have above 50%
It has recommended :
share in the banks.
— a higher capital norm of 12% for NBFCs;
— After the above acts are repealed, the government
— asset classification and provisioning on the lines of should set up a Bank Investment Company (BIC) as a
banks; holding company or a Core Investment Company
— more capital to be set aside by non-banking firms (CIC).
which are not sponsored by banks for capital — The government transfers its share in the banks to
market related and real estate lending; this BIC. Thus, the BIC would become the parent
— a minimum asset size of over ` 50 crore for holding company of all these national banks, which
registering a new NBFC. would become subsidiaries.
63
— As a result of this, all the PSBs (Public Sector Banks) Bank Board Bureau
would become ‘limited’ banks. BIC will be The Bank Board Bureau was constituted on 28th
autonomous and have the power to appoint the February, 2016. The Bureau is mandated to play a
Board of Directors and make other policy decisions. critical role in reforming the troubled public sector
— Until the BIC is formed, a temporary body called the banks by recommending appointments to leadership
Bank Boards Bureau (BBB) will be formed to do the positions (including Chairman of PSUs) and boards in
functions of the BIC. Once BIC is formed, the BBB banks and advise them on ways to raise funds and
will be dissolved. how to go ahead with mergers and acquisitions.
— The BBB will advise on appointments to the board, Vinod Rai, former Comptroller and Auditor General
banks’ chairman and other executive directors. of India, was named the first Chairman of the Banks
Board Bureau. Currently, Bhanu Pratap Sharma is the
Bimal Jalan Committee new Chairman.
A committee, under the Chairmanship of former RBI Sovereign Gold Bond Scheme
Governor Bimal Jalan, was constituted to scrutinise The Sovereign Gold Bond (SGB) scheme was
the application for new banks in India. launched by the Union Government on 22nd October
The Committee submitted its report in February 2014, 2015. SGBs are government securities denominated in
recommending for the ‘in-principle approval’ of grams of gold.
banking licenses to Bandhan Microfinance and IDFC They are substitutes for holding physical gold. The
(Infrastructure Development and Finance Bond is issued by Reserve Bank on behalf of
Corporation). government of India.
The Gold Bond Scheme, aimed at providing an
Basel Norms alternative to buying physical gold, will offer
n Basel norms or Basel accords are the international investors a choice to buy bonds worth up to a
banking regulations issued by the Basel Committee on maximum of 500 gm. These bonds will be issued in
Banking Supervision. denominations of 5,10,50 and 100 grams of gold or
n The Basel norms is an effort to coordinate banking other denominations.
regulations across the globe, with the goal of
strengthening the international banking system.
MUDRA Bank
n It is the set of the agreement by the Basel Committee of Micro Units Development and Refinance Agency Bank
Banking Supervision, which focuses on the risks to (MUDRA Bank) was launched by Prime Minister
banks and the financial system. Narendra Modi on 8th April, 2015 with a corpus of
n The Basel Committee has issued three sets of ` 20,000 crore and a credit guarantee corpus of ` 3,000
regulations, which are known as Basel-I, II and III. crore. It is a public sector financial institution in
n Basel II norms in India and overseas are yet to be fully India. It provides loans at low rates to small
implemented though India follows these norms. entrepreneurs.
n The deadline for the implementation of Basel-III was MUDRA Bank was set-up through a statutory
March, 2019 in India. It was postponed to March, 2020. enactment. It will be responsible for developing and
In light of the coronavirus pandemic, the RBI decided refinancing all Micro-Finance Institutions (MFIs)
to defer the implementation of Basel norms by further 6
which are in the business of lending to micro and
months.
small business entities engaged in manufacturing,
trading and service activities. The formation of the
Governments Schemes/Organisations agency was initially announced in the 2015 Union
Associated with Banking Budget of India in February 2015.
Some of the governments schemes/organisations Indradhanush Scheme, 2015

associated with Banking are as follows : The Public Sector Banks (PSBs) plays a vital role in
Indian financial system. The assests quality of PSBs
New Bad Bank Structure
have deteriorated because of rising Non-Performing
The Union Cabinet approved ` 30,600 crore guarantee Assets (NPA). Indradhanush Scheme is for the
to back Security Receipts issued by National Asset banking reforms in India.
Reconstruction Company Limited (NARCL) for
The seven Key reforms of Indradhanush mission
acquiring stressed loan assets.
include appointments, de-stressing capitalisation,
The NARCL is a part of a New Bad Bank Structure that empowerment, frame work of accountability and
was announced in the Budget 2021. governance reforms.
64
Financial Stability and Development NBFCs are officially classified under the 2010
Council (FSDC) Dodd-Frank Wall Street Reform and Consumer
Protection Act. The Act describes them as
The Finance Minister chaired the 24th meeting of the
companies whose more than 85% consolidated
Financial Stability and Development Council (FSDC).
annual gross revenues or consolidated assets are
FSDC is a non-statutory apex council under the Ministry financial in nature.
of Finance constituted by the Executive Order in 2010.
This classification technically encompasses a wide
The Raghuram Rajan Committee (2008) on financial range of companies offering bank-like financing and
sector reforms first proposed the creation of FSDC. investing services. Examples of NBFCs include
It is chaired by the Finance Minister and its members insurance companies, money market funds, asset
include the heads of all Financial Sector Regulators managers, hedge funds, private equity firms, mobile
(RBI, SEBI, PFRDA and IRDA), Finance Secretary, payment systems, micro-lenders and peer-to-peer
Secretary of Department of Economic Affairs (DEA), lenders.
Secretary of Department of Financial Services (DFS),
and Chief Economic Adviser. Different Types/Categories of NBFCs
Banking Ombudsman Scheme
Registered with RBI
This scheme was introduced in 1995. Presently, the Within the broad categorisation, the different types of
Banking Ombudsman Scheme, 2006 is in operation. NBFCs are as follows :
Asset Finance Company (AFC)
Its objective is to resolve complaints of customers of
banks relating to certain services rendered by the banks. Investment Company (IC)
There are 22 regional offices of Banking Ombudsman in Loan Company (LC)
India. Infrastructure Finance Company (IFC)
Domestic Systemically Important Banks Systemically Important Core Investment Company
(CIC-ND-SI)
The Reserve Bank of India (RBI) has retained State Bank
of India, ICICI Bank and HDFC Bank as Domestic Infrastructure Debt Fund - Non-Banking Financial
Systemically Important Banks (D-SIBs) or banks that are Company (IDF-NBFC)
considered as ‘Too Big To Fail (TBTF)’. Non-Banking Financial Company - Micro Finance
Some banks, due to their size, cross-jurisdictional Institution (NBFC-MFI)
activities, complexity, lack of substitutability and Non-Banking Financial Company – Factors
interconnectedness, become systemically important. (NBFC-Factors)
SIBs are perceived as banks that are ‘Too Big To Mortgage Guarantee Companies (MGC)
Fail (TBTF)’. This perception of TBTF creates an NBFC- Non-Operative Financial Holding Company
expectation of government support for these banks at (NOFHC)
the time of distress.
Bitcoin and Cryptocurrency

Non-Banking Financial Companies n El Salvador has become the first country to formally
Non-Banking Financial Companies (NBFCs) are adopt bitcoin as legal tender.
financial institutions that offer various banking services n Bitcoin is a type of digital currency that enables
but do not have a banking licence. instant payments to anyone. Bitcoin was introduced
in 2009. Bitcoin is based on an open-source protocol
Generally, these institutions are not allowed to take and is not issued by any either one Central authority.
traditional demand deposits–readily available funds, n A digital asset, which works as a medium of
such as those in checking or savings accounts from the exchange wherein individual coin ownership
public. This limitation keeps them outside the scope of records are stored in the form of a computerised
conventional oversight from federal and state financial database.
regulators. n Strong cryptography is used to secure transaction
NBFCs can offer banking services such as loans and records, to control creation of additional coins and to
credit Facilities, Currency Exchange, retirement verify transfer of ownership of coins. It does not exist
planning, money markets, underwriting and merger in physical form and is not issued by central
activities. authority.
INDIAN ECONOMY
NCERT Notes 65
CHAPTER 09
Public Finance, Fiscal

Policy and Budget
Sources Class-IX & X Old NCERT Chap 5 (The State and Economic Development), Class-XII New NCERT Chap 5
(Government Budget and Economy), Class-XII Old NCERT Chap 8 (Economy and Government Budget)
— Non-tax revenue includes all other revenue

Public Finance receipts of the government. These include the
The study of government’s revenue and expenditure is prices of goods and services provided by the
called as Public Finance. The boundary of public finance in government on a commercial basis under
modern times is not limited to ways and means of commercial revenue.
government income and expenditure only, but it also
These include the prices of postal materials, all
studies public debt, financial administration and fiscal
toll taxes, from government authorities, interest
policy of the economy.
on loans taken, receipts of electricity and railway
Public finance studies revenue and expenditure of services are included.
government of an economy and all the activities related to it.
Another sources of revenue on investments
made by the government are accrued dividends
Division of Public Finance and interests.
Public finance is divided into Public Income and Public Following are the major sources of revenue:
Expenditure.
(i) Taxable income It is an obligatory payment
Public Income made by the public to the government, through
All the financial resources of the Central government are called which the government receives money for
Public finance. Under this, public income and all expenditure public expenditure.
are included. The income received from taxes is divided into
Public income has following two parts : two parts.
— Direct tax It is the tax which is collected
1. Revenue Receipts from the person on whom it is levied i.e., it
Those public receipts in which neither the government’s is directly levied on income tax. Income tax
contribution increases nor the government’s assets is the main direct tax.
decreases, they are called as revenue receipts.
— Indirect tax This is a tax that is collected
Revenue receipts has two sub-categories i.e., tax revenue through an intermediary. These taxes are
and non-tax revenue.
levied on goods and services. Goods and
— In tax revenue includes taxes and duties imposed by the Services Tax (GST) applicable from 1st July,
Federal government. In the budget, new taxes of the 2017 is an adjustment of more than 17
government, old taxes, rates etc., are proposed to be indirect taxes.
amended or continued in their present form.
66 NCERT Notes INDIAN ECONOMY
(ii) Profits and Dividends The government receives 2. Capital Expenditure

profits and dividends every year from various types These are those expenditure of the government which
of companies like Steel Authority of India Limited, result in physical or financial creation of assets or
Oil and Natural Gas Corporation etc. reduction of financial liabilities.
(iii) Interest Income The Central government gives Capital expenditure mainly consists of land, building,
loans to the state government and other institutions, machinery, investments in plants and components are
from which the Central government receives included.
income in the form of annual interest. Income
Under this head loans given by the Center to states,
received in the form of interest is an important
government companies and corporations and other
formula for income from non-tax sources.
institutions are also shown.
2. Capital Receipts These expenditures increase the assets of the
Those receipts in return of which the government government, these expenditures are productive, whose
has to pay are called capital receipts. This payment value keeps getting available for many years.
is made in the coming financial year. The most
prominent of these is the loan taken by the Fiscal Policy
government from the public, which is named as Fiscal policy refers to the use of government spending
market loan. and tax policies to influence economic conditions,
Capital gains are also known as capital account and especially macroeconomic conditions, including
they are long-term in nature. aggregate demand for goods and services, employment,
inflation and economic growth.
Public Expenditure Fiscal policy is largely based on ideas from John
The entire public expenditure incurred by the Maynard Keynes, who argued governments could
government is divided into two parts : stabilise the business cycle and regulate economic
output.
1. Revenue Expenditure
The expenditure which ordinarily does not Through fiscal policy, the government of a country
constitute an asset is called Revenue expenditure. controls the flow of tax revenues and public
expenditure to navigate the economy. This is done by
It is the expenditure of the Central government for
way of Government Budgeting.
purpose other than the creation of physical or
financial assets. Features of Fiscal Policy
It is related to governments general functioning of The features of fiscal policy are as follows :
departments and miscellaneous services, debt
conveyed by the government interest payment, Fiscal Policy means measures by which a government
grants made to state government and other parties adjusts its level of spending in order to monitor and
etc. are incurred. influence the nation’s economy. Fiscal Policy is based
on the theories of British economist John Maynard
In the budget document, the total revenue
Keynes.
expenditure is divided into two parts:
(i) Planned Revenue Expenditure This expenditure is The Keynesian theory, basically, states that government
called planned revenue expenditure, through this can influence macro-economic productivity levels by
expenditure, production assets are created. It is increasing or decreasing tax levels and public spending.
related to various economic welfare schemes. This influence, in turn, curbs inflation, increases
Central plans, central assistance for planning of employment and maintains healthy value of money.
states and Union Territories are included in this Fiscal Policy also feeds into economic trends and
expenditure. influences Monetary Policy. When the government
(ii) Non-Planned Revenue Expenditure This revenue receives more than it spends, it has a surplus. If the
expenditure includes comprehensive expenditure government spends more than it receives, it has a
on general economic and social services rendered. deficit.
The main components of this expenditure are
interest, payment, defense services, gratuity, salary Financial Deficit
and pension. No development work is done from A deficit is the amount by which a sum falls short of some
this public expenditure, for this, money is arranged reference amount. The meaning of deficit differs from that
from the Consolidated Funds of India. of debt, which is an accumulation of yearly deficits.
NCERT Notes INDIAN ECONOMY 67
There are four types of financial deficit as follows : A higher revenue deficit implies that the government is
using up its saved resources, due to a scarcity of the
1. Fiscal Deficit receipts.
A more comprehensive indicator of the It is an undesirable situation as the government is forced
government’s deficit is the fiscal deficit. This is the to borrow for its regular consumption processes. This
sum of revenue and capital expenditures less all leads to additional burden of loans and liabilities on the
revenue and capital receipts other than loans government, which might force the government to cut its
taken. planned expenditure (because the non-planned
This gives a more holistic view of the government’s expenditure cannot be curbed much).
funding situation, since it gives the difference
between all receipts and expenditures other than 3. Capital Deficit
loans taken to meet such expenditures. It refers to an imbalance in a nation’s Balance of
Payments capital account, in which payments made by
Fiscal Deficit = Difference between Country’s Expenditures and the country for purchasing foreign assets exceed
Earnings Fiscal Deficit = Revenue Receipts (Net tax revenue + payments received by the country for selling domestic
Non-tax revenue) + Capital Receipts (only recoveries of loans assets. In other words, investment by the domestic
and other receipts) – Total Expenditure (Plan and Non-plan)
economy in foreign assets is less than foreign investment
There are three types of fiscal deficit as follows : in domestic assets. This is generally not a desirable
situation for a domestic economy.
(i) Gross Fiscal Deficit
The Gross Fiscal Deficit (GFD) of government is Capital Deficit = Capital Receipts − Disbursement on Capital Account
the excess of its total expenditure, current and
capital, including loans net of recovery, over Capital deficit can be divided into three parts which are
revenue receipts (including external grants) and as follows :
non-debt capital receipts. (i) Budget Deficit
The amount by which a government, company, or
Gross Fiscal Deficit = Total Expenditure – (Revenue Receipts
+ Non-debt Creating Capital Receipts) individual’s spending exceeds its income over a
particular period of time is known as budget deficit, also
Non-debt creating capital receipts are those called deficit or deficit spending, opposite of budget
receipts which are not borrowings and therefore, surplus.
do not give rise to debt. Examples are recovery of
loans and the proceeds from the sale of Public (ii) Primary Deficit
Sector Units (PSUs). The borrowing requirements of the government include
interest obligations on accumulated debt. The primary
(ii) Net Fiscal Deficit deficit indicates the deficit amount that the government
The Net Fiscal Deficit is the Gross Fiscal Deficit needs to borrow for consumption and investment
(GFD) reduced by net lending by government. purposes. Thus, primary deficit can be defined as
(iii) Fiscal Imbalance and Deficit Financing Primary Deficit = Gross Fiscal Deficit − Net Interest Liabilities
Fiscal imbalance is a situation, in which there is a
The net liabilities consist of interest payments minus
gap between revenue and expenditure.
interest receipts by the government on net domestic
Deficit financing is a method of filling this gap lending.
which in India means borrowing from the RBI
against the issue of Treasury Bills and running (iii) Gross Primary Deficit
down of accumulated cash balances. It is the Gross Fiscal Deficit less interest payments while
the primary revenue deficit is the revenue deficit less
2. Revenue Deficit interest payments.
It refers to an excess of government’s revenue
expenditure over the revenue receipts. It is expressed as 4. Monetary Losses
Increment in net credit of RBI is monetary loss for the
Revenue Deficit = Revenue Expenditure − Revenue Receipts Central Government.
This variable includes only those transactions that Monetary Losses = Net growth of holding of treasury bill of RBI +
affect the current income and expenditure of the Contribution of RBI in market borrowing of Central Government
government.
Government Budgeting Objectives of Government Budget

There is a constitutional requirement in India (Article The following are the objectives of Government
112) to present before the Parliament a statement of budgeting in India :
estimated receipts and expenditures of the government in Reallocation of Resources It helps to distribute
respect of every financial year which runs from 1st April resources keeping in view, the social and
to 31st March. This ‘Annual Financial Statement’ economic conditions of the country.
constitutes the main budget document of the government. Reducing Inequalities in Income and Wealth
In addition to it, the Budget contains : Government aims to bring economic equality by
— Estimates of revenue and capital receipts imposing taxes on the elite class and spending the
— Ways and means to raise the revenue collected money on the welfare of the poor.
— Estimates of expenditure Contributing to Economic Growth A country’s
— Details of the actual receipts and expenditure of the economic growth is based on the rate of
closing financial year and the reasons for any deficit or investment and savings. Therefore, the budgetary
surplus in that year plan focuses on preparing adequate resources for
— The economic and financial policy of the coming year, investing in the public sector and raising the
i.e., taxation proposals, prospects of revenue, spending overall rate of investments and savings.
programme and introduction of new schemes/projects. Bringing Economic Stability The Budget focuses
In Parliament, the Budget goes through following six on avoiding business fluctuations so as to
stages: accomplish the aim of financial stability. Policies
— Presentation of Budget such as Deficit Budget (during deflation) and
Surplus Budget (during inflation) assist in
— General discussion
balancing the prices in the economy.
— Scrutiny by Departmental Committees
Managing Public Enterprises Many public sector
— Voting on Demands for Grants
industries are built for the social welfare of the
— Passing of Appropriation Bill
people. The Budget is planned to deliver different
— Passing of Finance Bill
provisions for operating such business and
The Budget Division of the Department of Economic imparting financial help.
Affairs in the Finance Ministry is the nodal body Reducing Regional Differences It aims to reduce
responsible for preparing the Budget. regional inequalities by promoting the installation
of production units in the underdeveloped
Historical Preview of Indian Budget regions.
The term ‘Budget’ is actually derived from a French word
Bougette, which means a sack or a pouch. It was first used Types of Budget
in France in 1803. Traditional Budget A traditional budget indicates
In the Constitution of India, the term ‘Budget’ is no where the amount of money you allot during a set time
used. It is rather mentioned as Annual Financial period for specific financial obligations, such as
Statement under Article 112, comprising the Revenue rent, entertainment or insurance. The budget is
Budget, Capital Budget and also the estimates for the next designed to help you spend your income
fiscal year called Budget Estimates. according to a plan.
As per the British legacy, the Union Budget of India used A traditional budget starts with your income and
to be presented on the evening of last working day of the lists the categories on which you expect to spend
month of February to follow the British Budget. your money. At the end of the time period, it you
The first union budget of independent India was keep accurate records, you should know how
presented by RK Shanmukham Chetty on 26th closely your spending matched your intentions.
November, 1947. Zero Based Budgeting It is a method of budgeting
Morarji Desai has given budget for the maximum number in which all expenses are evaluated each time a
of times (10 times). During the NDA regime, Finance Budget is made and expenses must be justified for
Minister Yashwant Sinha was the first to present the each new period. Zero budgeting starts from the
budget on 28th February, 2001 at 11:00 AM. zero base and every function of the government is
The budget has to be passed by the Lok Sabha before it analysed for its needs and cost. Budget is then
can come into effect on 1st April. made based on the needs.
Outcome Budget It analyses the progress of each This fund was constituted under Article 266 (1) of the
ministry and department and what the respected Constitution of India. All revenues received by the
ministry has done with its Budget outlay. It measures government by way of direct taxes and indirect taxes,
the development outcomes of all government money borrowed and receipts from loans given by the
programmes. It was first introduced in the year 2005. government flow into the Consolidated Fund of India.
Performance Budgeting It is a method of budgeting All government expenditure is made from this fund,
that provides the purpose and objectives for which except exceptional items which are met from the
funds are needed, costs of programmes and related Contingency Fund or the Public Account. Importantly,
activities proposed to accomplish those objectives no money can be withdrawn from this fund without the
and outputs to be produced or services to be rendered Parliament’s approval.
under each programme.
Gender-Budgeting It is defined as “gender-based Public Account of India
assessment of budgets, incorporating a gender Public Account of India accounts for flows for those
perspective at all levels of the budgetary process and transactions where the government is merely acting
restructuring revenues and expenditures in order to as a banker. This fund was constituted under
promote gender equality”. It is actually budgeting for Article 266 (2) of the Constitution.
gender equity. It accounts for flows for those transactions where the
Through Gender Budget, the Government declares an government is merely acting as a banker. Examples of
amount to be spent over the development, welfare, those are provident funds, small savings and so on.
empowerment schemes and programmes for females. These funds do not belong of the government.
Balanced Budget A government Budget is assumed They have to be paid back at some time to their rightful
to be balanced if the estimated expenditure is equal owners. Due to this nature of the fund, expenditures
to the anticipated receipts for a fiscal year. from it are not required to be approved by Parliament.
Surplus Budget A Budget is said to be surplus when
the expected revenues surpass the estimated Contingency Fund of India
expenditure for a particular business year. Here, the Contingency Fund is created as an imprest account to
Budget becomes surplus, when taxes imposed, are meet some urgent or unforeseen expenditure of the
higher than the expenses. government. This fund was constituted by the
Deficit Budget A Budget is in deficit if the government under Article 267 of the Constitution of
expenditure surpasses the revenue for a designated India.
year. This fund is at the disposal of the President. Any
expenditure incurred from this fund requires a
Budget Formation in India subsequent approval from the Parliament and the
amount withdrawn is returned to the fund from the
A budget is a quantitative expression of a plan for a
Consolidated Fund.
defined period of time. In India, it is done for one
financial year, from 1st April to 31st March. Finance
Ministry starts preparing budget 5 to 6 months prior Components of Government Budget
to financial year (September-October). Various components of government budget are classified
Finance Ministry sends circular and forms to under flow chart given below:
administrative affair and demand for its expenditure Government
for the next financial year. Administrative affair Budget
sends these forms and circular to local and regional
officer who fill the form about the expenditure and Revenue Capital
send it to the Finance Ministry. Budget Budget
Constitutional Fund in Budget Revenue Revenue Capital Capital

Constitutional fund in budget are as follows : Receipts Expenditure Receipts Expenditure
Consolidated Fund of India

Tax Non-Tax
Consolidated Fund of India is the most important of Revenue Revenue
all government accounts. Revenues received by the
government and expenses made by it, excluding the
exceptional items, are part of the Consolidated Fund. Direct Tax Indirect Tax
Central Excise Duty It is the tax which is charged on

Revenue Budget excisable goods that are manufactured in India and are
It consists of the Revenue Receipts and Revenue for domestic consumption.
Expenditure.
Service Tax The Service Tax is levied on the gross
Revenue Receipts amount charged by the service provider on the receiver.
These are receipts which do not have a direct impact on Sales Tax Sales Tax in India is a form of tax that is
the assets and liabilities of the government. It consists of imposed by the Government on the sale or purchase of
the money earned by the government through tax (such a particular commodity within the country. Sales Tax is
as excise duty, income tax) and non-tax sources (such as imposed under both, Central and State Government
dividend income, profits, interest receipts). Legislation.
Value Added Tax (VAT) It is a tax on the estimated
Tax Revenue market value added to a product or material at each
Tax is a compulsory payment that is made to the stage of its manufacture or distribution, ultimately
government by the people or the companies without which is passed on to the consumer.
having any direct benefit in return. The sum of all Securities Transaction Tax (STT) STT is a tax levied
receipts from the taxes and all other duties under the on all transactions done on the stock exchanges.
government are referred to as tax revenue. They are
either from Direct taxes or Indirect taxes. Non-Tax Revenue
Non-Tax Revenue is the recurring income that is
Direct Taxes earned from sources other than taxes by the
In India, Direct Taxes are levied on income and government. They are the revenue receipts that are not
wealth. The most important direct tax from the point generated by taxing the public.
of view of revenue is personal income tax and
Interests that are received by the government through
corporation tax.
the loans provided by it to the state governments, UTs,
Income Tax Income tax is levied on the income of private enterprises and the general public are an
individuals, Hindu undivided families, unregistered important source of non-tax revenue.
firms and other associations of people. In India,
Fees, Fines, Penalties, etc are also examples of Non-Tax
the nature of income tax is progressive. For
Revenue.
taxation purposes, income from all sources is added
and taxed as per the income tax slabs of the
individual.
Tax on Wealth and Capital
n Estate Duty First introduced in 1953. It was levied on
Corporation Tax Corporation tax is levied on the
the total property passing on the death of a person.
income of corporate firms and corporations. For The whole property of the deceased person constitutes
taxation purposes, a company is treated as a separate his wealth and is liable for the tax. The tax now stands
entity and thus must pay a separate tax different from abolished w.e.f 1985.
the personal income tax of its owner. Companies n Wealth Tax First introduced in 1957. It was levied on
both public and private which are registered in India the excess of net wealth (over 30,00,00,0 @ 1%) of
under the Companies Act, 1956 are liable to pay individuals, Joint Hindu families and companies.
corporate tax. Wealth tax has been a minor source of revenue. The
tax now stands abolished w.e.f 2015.
Indirect Taxes n Gift Tax First introduced in 1958. The gift tax was
An indirect tax is a tax collected by an intermediary levied on all donations except the one given by the
from the person who bears the ultimate economic charitable institution’s government companies and
burden of the tax. It can be shifted by the taxpayer to private companies. The tax now stands abolished
someone else. w.e.f 1998.
n Capital Gain Tax Any profit or gain that arises from
Some important indirect taxes imposed in India are as
the sale of the capital asset is a capital gain. The profit
follows : from the sale of capital is taxed. Capital asset
Customs Duty Customs Duty is a tariff or tax includes land, building, house, jewellery, patents,
imposed on goods when transported across copyrights etc.
international borders. The purpose of it is to protect n Short-term capital asset An asset which is held for not
the country’s economy. Under the custom laws, the more than 36 months or less is a short-term capital
various types of duties are levied like Basic Duty, asset.
Countervailing Duty, Protective Duty, Anti-Dumping n Long-term capital asset An asset that is held for more
Duty, Export Duty. than 36 months is a long-term capital asset.
Direct Taxes vs Indirect Taxes

Goods and Services Tax (GST)
Basis Direct Tax Indirect Tax The GST is a value-added tax levied on most goods
Meaning The tax that is levied by The tax that is levied by and services sold for domestic consumption.
the government directly the government on one
on the individuals or entity (Manufacturer of The GST is paid by consumers, but it is remitted to
corporations are called goods), but is passed on to the government by the businesses selling the goods
Direct Taxes. the final consumer by the and services. GST, which subsumed almost all
manufacturer. domestic indirect taxes (e.g. petroleum, alcoholic
Incidence The incidence and impact The incidence and impact beverages and stamp duty are the major exceptions)
of the direct tax fall on the of the tax fall on different
same person. persons.
under one head, is perhaps the biggest tax reform in
Examples Income Tax, Corporation VAT, Service tax, GST, the history of independent India. It was launched into
Tax and Wealth Tax. Excise duty, operation on the midnight of 1st July, 2017.
entertainment tax and
Customs Duty. Types of GST
Nature They are progressive in They are regressive in Under the GST form, four types of GST are
nature. nature.
Objective Both Social and Only Economical. When Central GST (CGST)
Economical. Social an indirect tax is levied on Under the CGST, there is a provision to impose tax on
objective of direct tax is a product, both rich and the supply of goods and services by the Central
the distribution of poor must pay at the same
income. A person earning rate. A person earning
government.
more should contribute 10 lakh a month pays the Earlier, Central Excise, Excise (Drugs and Toilet
more in the provision of same tax on the Wheat construction), Excise duties on the taxes imposed by
public service by paying purchase as the person the Central Government, (Goods of special
more tax. This provision earning ` 3000 a month.
is also known as This principle is called importance), additional duty of custom duty (known
progressive taxation. regressive taxation. under CVD), Special Duty of Custom Duty (SAD),
Impact It is not at all Inflationary. It is inflationary. Service tax and gratuity surcharge related to the supply
of goods or services. All these are now included in
Revenue Expenditure CGST.
It is the expenditure by the government which does not State GST (SGST)
impact its assets or liabilities. For example, this includes Taxes imposed and collected by the State government
salaries, interest payments, pension and administrative on goods and services are levied under State GST
expenses. system.
Earlier, State governments used to levy VAT under
Some Concepts Related to Expenditure State taxes, purchase tax, entry tax, entertainment
n Plan Expenditure All expenditures done in the name of tax, advertisement tax, including State excise and
planning (i.e. Five Year Plans) are called plan surcharge related to State sub-tax and imposition,
expenditures. For example, expenditure on electricity lottery taxes, tax on speculation and gambling. All
generation, irrigation and rural developments, these taxes are now included in SGST.
construction of roads, bridges, canals, etc.
n Non-plan Expenditure All expenditures other than plan Integrated GST (IGST, State Indemnification)
expenditure are known as non-plan expenditure. For The Goods and Services tax provides an integrated
example, interest payments, pensions, statutory transfers to GST (IGST) levied on international commodities and
States governments and Union Territories etc. services. It is imposed and recovered by the Central
n Cess Different from the usual taxes and duties like Government.
excise and personal income tax, a Cess is imposed as an
The amount of taxes received under this is distributed
additional tax besides the existing tax (tax on tax) with
to the state for the loss of revenue generated to the
a purpose of raising funds for a specific task. For
example, the Swachh Bharat cess is levied by the States.
government for cleanliness activities that it is Union Territory GST (UTGST)
undertaking across India.
Arrangement or provision under the UTGST and Tax
n Surcharge The surcharge is a fee added to any tax that
system is for the Union Territory where they do not
has already been paid. The surcharge is a term that
have their own Legislative Assemblies, such as
refers to an extra fee or levy. A surcharge is a tax on tax
that is not levied for any particular reason, and the Andaman and Nicobar Island, Daman and Deu, Dadar
proceeds of surcharges are used by the Union and Nagar haveli, etc.
government for whatever purpose it sees fit. These Union Territories have the provision to levy
and collect taxes by the Central Government.
— Taxes on advertisements e.g. Purchase Tax

Features of GST
— Taxes on lotteries, betting and gambling
Features of GST are as follows :
— State Surcharges and Cesses so far as they relate
Applicable on Supply Side GST is applicable on ‘supply’
to supply of goods and services
of goods or services as against the old concept on the
manufacture of goods or on sale of goods or on provision Exemptions under GST :
of services. — Custom duty will still be collected along with the
Destination based Taxation GST is based on the levy of IGST on imported goods.
principle of destination based consumption taxation as — Petroleum and tobacco products are currently
against the principle of origin-based taxation. exempted.
Dual GST It is a dual GST with the Centre and the states — Excise duty on liquor, stamp duty and electricity
simultaneously levying tax on a common base. The GST taxes are also exempted.
to be levied by the Centre is called Central GST (CGST)
and that to be levied by the States is called State GST Capital Budget
(SGST). It includes the Capital Receipts and Capital
Import of goods or services would be treated as inter-state Expenditure.
supplies and would be subject to Integrated Goods and
Services Tax (IGST) in addition to the applicable customs Capital Receipts
duties. It indicates the receipts which lead to a decrease in
assets or an increase in liabilities of the government.
GST rates to be mutually decided CGST, SGST and
IGST are levied at rates to be mutually agreed upon by It consists of :
the Centre and the states. The rates are notified on the — the money earned by selling assets (or
recommendation of the GST Council. disinvestment) such as shares of public
Multiple Rates GST is levied at four rates i.e. 5%, enterprises and
12%, 18% and 28%. The schedule or list of items — the money received in the form of borrowings or
that would fall under these multiple slabs are worked repayment of loans by states.
out by the GST council. This is aside from the tax on
gold that is kept at 3% and rough precious and
Capital Expenditure
It is used to create assets or to reduce liabilities.
semi-precious stones that are placed at a special rate of
0.25% under GST. It consists of :
— the long-term investments by the government on
Taxes Replaced by GST creating assets such as roads and hospitals and
The GST replaced the following taxes : — the money given by the government in the form of
— Central Excise duty loans to states or repayment of its borrowings.
— Duties of Excise (Medicinal and Toilet Preparations)
— Additional Duties of Excise (Goods of Special
FRBM Act
Importance) The Fiscal Responsibility and Budget Management
Act, 2003 (FRBMA) is an act of the Parliament of
— Additional Duties of Excise (Textiles and Textile
India to institutionalise financial discipline, reduce
Products)
India’s fiscal deficit, improve macroeconomic
— Additional Duties of Customs (commonly known as
management and the overall management of the
CVD) public funds by moving towards a balanced budget.
— Special Additional Duty of Customs (SAD)
Various objectives related to FRBM Act are as
— Service Tax follows:
— Central Surcharges and Cesses so far as they relate to — To reduce fiscal deficit and revenue deficit.
supply of goods and services
— To achieve inter-generational equity in fiscal
State taxes subsumed under the GST are : management by reducing the debt burden of the
— State VAT future generation.
— Central Sales Tax — To achieve long-term macroeconomic stability.
— Luxury Tax — Better co-ordination between fiscal and monetary
— Entry Tax (all forms) policy.
— Entertainment and Amusement Tax (except when — Get transparency in fiscal operations of the
levied by the local bodies) government.
Amendments to FRBM Act The scheme aims to end litigation and legacy
Fiscal Responsibility and Budget Management Act, disputes under the direct taxes category as ` 9.32 lakh
2003 was amended in 2012. The amendment crore worth of revenue is blocked in approximately
mandated the Central Government to lay the following 4.8 lakh appeals pending at various income tax
before the Houses of Parliament : appellate forums.
— Macro-Economic Framework Statement
The entities who opt for the scheme have to pay a
requisite tax following which all litigation against
— Medium Term Fiscal Policy Statement
them are closed by the tax department and penal
— Fiscal Policy Strategy Statement along with the proceedings dropped.
Annual Financial Statement
— Demands for Grants 15th Finance Commission
The NK Singh Committee, which was set up in 2016 n The government accepted the 15th Finance
to review the FRBM Act, recommended that the Commission’s recommendation to maintain the
government must target a fiscal deficit of 3% of the States’ share in the divisible pool of taxes to 41%
for the five-year period starting 2021-22.
GDP in the years up to 31st March, 2020, subsequently
n The 15th Finance Commission was constituted by
cut it to 2.8% in 2020-21 and to 2.5% by 2023.
the President of India in November 2017, under the
Chairmanship of NK Singh.
Recent Developments n Its recommendations will cover a period of five
years from the year 2021-22 to 2025-26.
in Public Finance n It has recommended maintaining the vertical
Some of the important recent developments in Public devolution at 41%.
Finance are as follows: n For horizontal devolution, it has suggested 12.5%
weightage to demographic performance, 45% to
Interim Ways and Means Advances income, 15% each to population and area, 10% to
The Reserve Bank of India (RBI) has decided to forest and ecology and 2.5% to tax and fiscal efforts.
continue with the existing interim Ways and Means
Advances (WMA) scheme limit of ` 51,560 crore for all Committees related to Fiscal Policy
States/UTs upto September 2021, given the prevalence Name of the Focus Area
of COVID-19. Committee
The WMA scheme was introduced in 1997 to meet HR Khan Committee Evaluates the unclaimed PPP and
mismatches in the receipts and payments of the post office saving.
government. Justice MB Shah On black money.
Commission
The government can avail immediate cash from the
Basel Committee For banking supervision.
RBI, if required. But it has to return the amount within
Dinesh Sharma Proposing new regulation related to
90 days. Interest is charged at the existing repo rate. Committee virtual currencies or digital
currencies.
GST Compensation Kelkar Committee For tax structure reforms.
The Centre distinguished the GST shortfall into two Nachiket Mor Providing financial services for
types Committee low-income households and small
— Due to GST implementation itself. businesses.
PJ Nayak Committee Governance of boards in banks.
— Caused by the impact of COVID-19.
NK Singh Committee To review the budget management
The GST Compensation Act, 2017 guaranteed states act and fiscal responsibility.
that they would be compensated for any loss of Rattan P Watal Boosting the digital payment system
revenue in the first five years of GST implementation, Committee in India.
until 2022, using a cess levied on sin (harmful goods SN Verma Committee Restructuring the commercial banks.
like tobacco, alcohol, cigarette, etc) and luxury goods. (1999)
Urjit Patel Committee To examine the current monetary
Vivad se Vishwas Scheme policy framework.
The Direct Tax ‘Vivad se Vishwas’ Act, 2020 was RH Khan Committee For harmony among the roles of a
financial institution in banks.
enacted on 17th March, 2020, with the objective to
Raghuram Rajan For financial sector reforms.
reduce pending income tax litigation, generate Committee
timely revenue for the government and to benefit SP Talwar Committee For restructuring of weak public
taxpayers. sector bank.
CHAPTER
74 10
Foreign Trade and

Balance of Payment
Sources Class-IX & X Old NCERT Chap 4 (Towards Economic Development), Class-X New NCERT Chap 4 (Globalisation and the Indian
Economy), Class-XI New NCERT Chap 1 (Indian Economy on the Eve of Independence), Chap 2 (Indian Economy 1950-1990),
Class-XII New NCERT Chap 6 (Open Economy : Macroeconomics), Class-XII Old NCERT Chap 10 (Balance of Payment),
Chap 9 (Foreign Exchange Rates : Meaning and Assessment)
Goods exported from India can be categorised into

Foreign Trade following four categories :
Foreign trade or international trade is as old as human — Agriculture and Allied product
civilisation. Even in ancient times, when there were few
— Ore and Minerals
means of transport, merchants from one country used
— Manufactured Cotton and Silk Textiles and
to exchange goods with the other countries.
Handicraft
Foreign trade is based on the theory of Comparative
— Fuel and Lubricants
Costs. According to this theory, every country should
try to produce goods which it can provide at a cost Import
lower than other nations and should exchange supplies
of such goods for goods which other countries can It means a process by which goods services are
produce at a lower cost. brought from other country through purchase.
Theory of Comparative Cost (Comparative Advantage) Major items imported in India are as follows :
is regarded as the Classical Theory of International — Petroleum and Allied Products
Trade. — Edible oil and Fertiliser
— Machine Tools, Electric and Non-Electric Machinery
Types of Foreign Trade — Pearls, Precious and Semi-Precious Stones
Foreign trade is divided into visible and invisible trade.
Visible trade is trade in goods means, physical things
that you can touch and weigh.
Foreign Trade Policy (FTP)
Invisible trade is trade in services like tourism and First time, Foreign Trade Policy was announced in
banking. Foreign trade has got an important place in 2004-05. Union Commerce Ministry, Government of
the economic development of a country. India, announces integrated Foreign Trade Policy, also
called Export-Import (EXIM) Policy every 5 year.
Components of Foreign Trade
Export and import are two important components of Foreign Trade Policy Formulation in India
foreign trade. Foreign Trade policy is formulated and implemented
mainly by the Ministry of Commerce and Industry,
Export alongwith other concerned Ministries and agencies,
It means a process whereby goods produced in one including the Ministry of Finance, the Ministry of
country are shipped to another country for sale or Agriculture and the Reserve Bank of India.
trade.
75
India considers FTP as an instrument to attain its India is thus a net importer in March 2021, with a trade
overall economic policy objectives of growth, deficit of USD 14.11 billion.
industrial development and self-sufficiency. The lower trade deficit was accompanied by an increase
However, India also uses FTP to attain short-term in the export of software services from India. On account
goals such as containing inflation. of these reasons, the Current Account was set to register
The mandate of the Department of Commerce, at surplus for the first time in the last 17 years.
the Ministry of Commerce and Industry, is to India’s participation in foreign trade was continuously
formulate India’s International Trade and declining till 1980. Since 2001, it has continually
Commercial Policy and implement it. improved. As per the current ranking, India is the 19th
largest exporter and 13th largest importer of foreign
New Foreign Trade Policy (2015-20) trade.
The Foreign Trade Policy, 2015-20 was announced
Top Export Destinations (Year 2021)
by the Minister of Commerce and Industry, Nirmala
Sitharaman on 1st April, 2015. Country Export % Country Export %
The FTP has been announced in the backdrop of USA 15.88% Singapore 3.51%
several measures initiated by the Government of
India such as ‘Make in India’, ‘Digital India’ and UAE 9.13% United Kingdom 2.83%
‘Skills India’, among others. China 5.07% Bangladesh 2.79%
The focus of the new policy is to support both the
Hong Kong 3.94% Germany 2.7%
manufacturing and services sectors, with a special
emphasis on improving the ‘ease of doing business’.
Top Import Sources (Year 2021)
Foreign Trade Policy (2021-26) Country Import % Country Import %
The new Foreign Trade Policy 2021-26 came into China 13.68% Iraq 4.35%
effect from 1st April, 2021.
USA 6.92% Switzerland 3.52%
The goal of the New Foreign Trade Policy is to
make India a 5 trillion USD economy. UAE 5.79% Hong Kong 3.50%
Key highlights of the New Foreign Trade Policy are : Saudi Arabia 5.54%
— The District export hubs are to play a major role in
the new Foreign Trade Policy.
— The policy will aim to boost exports. Balance of Payment (BoP)
— It will enhance ease of doing business. The Balance of Payments (BoP) records the transactions
— It will bring improvements in the operations of the in goods, services and assets between residents of a
domestic manufacturing and services sector country with the rest of the world for a specified time
through infrastructure support. period typically a year.
— The policy will bring changes to regulatory and It is the net outcome of the current and capital accounts
operational framework and lower transaction of an economy. It might be favourable or unfavourable for
costs. the economy. However, negativity of the BoP does not
mean it is unfavourable.
India’s Foreign Trade Position A negative BoP is unfavourable for an economy if only
Preliminary data released by the government the economy lacks the means to fill the gap of negativity.
showed that India’s trade deficit in goods widened The BoP of an economy is calculated on the principles of
to USD 14.11 billion in March 2021 from USD 9.98 accountancy (double-entry book-keeping) and looks like
billion during March 2020. the balance sheet of a company—every entry shown
India’s merchandise exports in March 2021 were either as credit (inflow) or debit (outflow).
USD 34.45 billion as compared to USD 21.49 billion If there is a positive outcome at the end of the year, the
in March 2020, an increase of 60.29%. money is automatically transferred to the foreign
India’s merchandise imports were USD 48.38 exchange reserves of the economy and if there is any
billion as compared to USD 31.47 billion in March negative outcome, the same foreign exchange is drawn
2020, an increase of 53.47%. from the country’s forex reserves.
76
Current Account Deficit (CAD)

The Balance of Payment (BoP) Crisis of
There is a deficit in Current Account if the value of
1991 in India the goods and services imported exceeds the value of
n The Balance of Payment crisis occurs when there is
those exported.
insufficient capital account surplus and foreign
exchange reserves for financing the current account It is measured as a percentage of GDP.
deficit. The formula for calculating CAD is
n India faced the BoP crisis in 1991 due to factors such as
the Gulf War which increased the oil prices. Current Account Deficit = Trade Gap* + Net Current Transfers
+ Net Income Abroad
n The disintegration of the USSR also negatively
impacted India’s exports contributing to the BoP crisis.
n The value of the Indian rupee fell and the Reserve Bank *Trade gap = Exports – Imports
of India sold its forex reserves for making the Balance A country with rising CAD shows that it has become
of Payment zero. Since, the RBI did not have enough uncompetitive and investors may not be willing to
forex reserves, India had to pledge 65 tons of gold for invest there.
getting foreign loans to make the Balance of Payment
zero.
In India, the Current Account Deficit could be reduced
by boosting exports and curbing non-essential
imports such as gold, mobiles and electronics.
Components of BoP Current Account Deficit and Fiscal Deficit (also
Current account and capital account are the important known as ‘budget deficit’ is a situation when a
components BoP. nation’s expenditure exceeds its revenues) are
together known as twin deficits and both often
Current Account reinforce each other, i.e., A high fiscal deficit leads to
Current Account is the record of trade in goods and higher CAD and vice versa.
services and transfer payments. Capital Account
Trade in goods includes exports and imports of goods.
Capital Account records all international transactions
Trade in services includes factor income and of assets. Purchase of assets is a debit item on the
non-factor income transactions. capital account. If an Indian buys a UK Car Company,
Transfer payments are the receipts which the it enters capital account transactions as a debit item
residents of a country get for ‘free’, without having to (as foreign exchange is flowing out of India).
provide any goods or services in return. They consist On the other hand, the sale of assets like the sale of
of gifts, remittances and grants. They could be given shares of an Indian company to a Chinese customer is
by the government or by private citizens living abroad. a credit item on the capital account.
Balance on Current Account Components of Capital Account
Balance on current account has following two components : The components of capital account are :
Balance of Trade (BoT) or Trade Balance It is the Borrowing and Lendings from Foreign Countries
difference between the value of exports and value of It includes the financial transactions related to
imports of goods of a country in a given period of time. borrowing money from foreign countries by the
Export of goods is entered as a credit item in BoT, private sector companies or individuals, government
whereas import of goods is entered as a debit item etc. The receipts from abroad which include the
in BoT. repayment of loans from the foreign citizens etc. are
Balance on Invisibles Net Invisibles is the difference shown as a credit in the capital account.
between the value of exports and the value of imports The financial transactions dealing with lending to
of invisibles of a country in a given period of time. abroad by the private sector companies, individuals
Invisibles include services, transfers and flows of and the government and the repayment of loans taken
income that take place between different countries. from foreign countries is shown as a debit in the capital
Services trade includes both factor and non-factor account.
income. Factor income includes net international Investments to and from the Foreign Countries The
earnings on factors of production (like labour, land and investments from the foreign countries in the Indian
capital). Non-factor income is net sale of service companies, government bonds, real estate etc., in
products like shipping, banking, tourism, software India are shown as a credit in the capital account as
services, etc. they lead to the inflow of foreign exchange.
77
The investments made by the Indian residents in the stocks Surplus in capital accounts arises when capital
and shares of companies abroad, government bonds, real inflows are greater than capital outflows, whereas
estate etc. are shown as a debit in the capital account as deficit in capital account arises when capital
they lead to the outflow of foreign exchange. inflows are lesser than capital outflows.
Foreign Direct Investment (FDI) When the foreign
residents buy Indian capital assets such as companies, Other Concepts related to
industrial complexes, machines etc., it is shown as a
Balance of Payments
credit to the capital account. The FDI investment made by n Official Reserve Sale The country could use its
Indians in the foreign countries is shown as a debit in the
reserves of foreign exchange in order to balance
capital account. any deficit in its Balance of Payments. The Reserve
Foreign Portfolio Investment (FPI) When the foreign Bank sells foreign exchange when there is a
residents purchase stocks, government bonds, corporate deficit. This is called the Official Reserve Sale.
securities etc., then these transactions are shown as a n Autonomous Transaction International economic
credit to the capital account. When Indian residents transactions are called autonomous when
purchase securities and bonds in foreign countries, it is transactions are made due to some reason other
shown as a debit in the capital account. than to bridge the gap in the Balance of Payments,
that is, when they are independent of the state
Participatory Notes or P-Notes These are financial of BoP.
instruments used by investors or hedge funds, that are not n Accommodating Transactions These are
registered with the Securities and Exchange Board of determined by the gap in the Balance of Payments,
India (SEBI) to invest in Indian securities. India-based that is, whether there is a deficit or surplus in the
brokerages buy India-based securities and then issue Balance of Payments.
participatory notes to foreign investors. n Errors and Omissions It is difficult to record all
Changes in the Foreign Exchange Reserves The foreign international transactions accurately. Thus, we
exchange reserves are the financial assets held by the have a third element of BoP (apart from the
Central bank (RBI for India) of the country. These reserves current and capital accounts) called errors and
omissions which reflects this.
serve as financing items in the Balance of Payments. Any
withdrawal from the foreign exchange reserves is shown
as credit, while any addition in the reserves is shown as a Present Status of Balance of
debit in the capital account. The changes in foreign
exchange reserves are shown in the BoP account and not Payments in India
the actual foreign exchange reserves. The reforms of 1990’s have facilitated India to move
away from closed economy framework towards a
Difference between Foreign Direct Investment more open and liberal economy. Foreign exchange
and Foreign Portfolio Investment reserves were built to very comfortable positions and
Foreign Portfolio Investment Foreign Direct Investment the difficulties of BoP came under control.
Foreign Portfolio Investment or Foreign Direct Investment or FDI The important reasons for deficit in India’s BoP
FPI refers to the investment made pertains to international position can be cited as follows:
in the financial assets of an investment in which the investor
Irreversible Trade Deficit Our imperative
enterprise, based in one country, obtains a lasting interest in an
by the foreign investors. enterprise in another country. imports of oil and coal and India’s passion for
gold.
An investor is inactive. An investor is active.
Indirect investments in assets are Direct investments in assets are
Rise in Imports The reasons for rapid rise in
made. made. imports are building industrial base (in the early
stages), increase in export related imports (gems,
Investments made are short term Investments made are long-term
in nature. in nature. jewellery, capital goods) increase in imports of
industrial raw materials, rise in the price and
It is volatile in nature. It is stable in nature.
imports of Petroleum, Oil and Lubricants (POL)
products etc.
Balance on Capital Account
Devaluation and Depreciation of the Rupee The
Capital account is in balance when capital inflows (like
devaluation and depreciation of the rupee have
receipt of loans from abroad, sale of assets or shares in
led to an increase in the price of imports. Exports
foreign companies) are equal to capital outflows (like
have become cheaper, the low price and income
repayment of loans, purchase of assets or shares in foreign
elasticities of demand for exports have resulted in
countries).
slow increase in exports.
78
Slow Rise in Export Earnings Export earnings rose, Capital Account Convertibility
however, they were not sufficient enough to meet the
It is the freedom to convert the local financial assets
rising imports. Thus, rise in exports has neither been
into foreign financial assets at the market determined
substantial nor continuous. The growth in exports has
exchange rates. Full capital account convertibility
not been sufficient enough to finance the rising
would ultimately lead to unrestricted movement of
imports.
capital.
Debt Service The Balance of Payments (BoP) problem
After the recommendations of the SS Tarapore
has also aggravated due to the rising obligation of
Committee (1997) on Capital Account Convertibility,
amortising payments in 2011-12, debt service ratio was
India has been moving in the direction of allowing
6% with the ever increasing imports and slow pace of
full convertibility in this account, but with required
exports, the most effective solution for India’s Balance
precautions.
of Payments (BoP) problem is cost reduction and
competitiveness in global market. Conditions to be fulfilled before adopting full Capital
Account Convertibility in India are as follows :
Appreciation The recent appreciation of the rupee has
made exports costlier and imports cheaper. It may also — The government should reduce the fiscal deficit to
add to the Balance of Payments (BoP) problem. 3.5% of the GDP. The committee recommended
setting up the Consolidated Sinking Fund (CSF) for
Currency Convertibility the reduction of government debt.
Currency Convertibility is the ease with which the — It recommended mandated inflation targeting
currency of a country can be freely converted into any between 3% to 5%. The RBI was to be given full
other foreign currency or gold, at market determines freedom for using monetary policy tools for
exchange rate based on demand and supply for that achieving this inflation target.
currency. — The committee recommended strengthening the
For example, convertibility of Indian rupee is the ease with financial sector by deregulating the interest rates,
which rupee can be converted into any foreign exchange reducing the Non-Performing Assets to 5 and the
like US dollars, Pound Sterling, Euro etc and vice versa. Cash Reserve Ratio to 3%. It recommended either
the liquidation of weak banks or their merger with
Current Account Convertibility other strong banks.
It refers to the freedom in payments and transfers in the — The Current Account Deficit should be brought
current account international transactions. down to manageable limits and the debt service
At present, current account is completely convertible ratio to be reduced to 20 % from the present 25% of
(operationalised on 19th August, 1994). the export earnings.
It means that the full amount of the foreign exchange
required by someone for current purposes will be made FERA and FEMA Act
available to him at the official exchange rate and there FERA (Foreign Exchange Regulation Act), 1974 was
could be an unprohibited outflow of foreign exchange not successful in restricting activities such as the
(earlier it was partially convertible). expansion of Trans National Corporations (TNCs).
India was obliged to do so as per Article 8 of the After the Amendment of FERA in 1993, it was
International Monetary Fund (IMF) which prohibits decided that the act would become the FEMA
any exchange restrictions on current international
(Foreign Exchange Management Act).
transactions (keep in mind that India was under
pre-conditions of the IMF since 1991). This was done in order to relax the controls on
foreign exchange in India, as a result of economic
Some restrictions from the Foreign Exchange
liberalisation. FEMA served to make transactions for
Management Act (FEMA), 1999 are still applicable. external trade (exports and imports) easier. Involving
These restrictions include non-convertibility for current account for external trade no longer required
activities such as betting, gambling and on prohibited RBI’s permission.
items.
The deals in foreign exchange were to be ‘managed’
Different limits have been imposed on convertibility in instead of ‘regulated’. The switch to FEMA shows the
the current account for travelling to other countries, change on the part of the government in terms of
sending gifts, educational purposes, employment and foreign capital.
medical treatment etc.
79
The foreign Exchange Regulation Act (FERA) was a The government has the responsibility to intervene
legislation passed by the Indian Parliament in 1973 and and maintain the exchange rate equilibrium in case
come into force on 1st January, 1974. of any fluctuations due to any reason.
FERA imposed strict regulation on certain kinds of The benefit of the fixed exchange rate regime is
payments. It deals with foreign exchange and scousitles that it ensures stability in the exchange rate of the
and the transactions which had an impact on the foreign domestic currency. It ensures that the domestic
exchange and import and export of currency. currency does not appreciate or depreciate beyond
The Foreign Exchange Management Act (FEMA) was an the predetermined level.
act passed in the winter session of parliament in 1999 Fixed exchange rate regime has the disadvantage
which replaced foreign exchange Regulation Act. that it puts a massive burden on the government for
FEMA has brought a new management regime of foreign maintenance of the exchange rate and the
exchange consistent with the emerging frame work of the government may have to infuse a large amount of
World Trade Organisation (WTO). money for the maintenance of the exchange rates.
The foreign investment can reduce under the fixed
Foreign Exchange Market exchange rate regime as investors may lose their
confidence if they believe that the exchange rate of
The market in which national currencies are traded for one the domestic currency does not represent the real
another is known as the foreign exchange market. value of the economy.
The major participants in the foreign exchange market are
commercial banks, foreign exchange brokers and other
Floating Exchange Rate
authorised dealers and monetary authorities. Under the floating exchange rate regime, the
market forces determine the value of domestic
Foreign Exchange Rate currency on the basis of the forces of demand and
supply of the domestic currency.
Foreign Exchange Rate (also called Forex Rate) is the
price of one currency in terms of another. In this system, neither the government nor the
central bank intervenes and the market functions
It links the currencies of different countries and enables
freely determine the real value of domestic
comparison of international costs and prices. For
currency.
example, if we have to pay ` 50 for $1 then the exchange
rate is ` 50 per dollar. The floating exchange rate regime establishes trust
among the foreign investors which can help in the
A rise in the price of foreign exchange will increase the
increase in foreign investment in the domestic
cost (in terms of rupees) of purchasing a foreign good.
economy.
This reduces demand for imports and hence demand for
foreign exchange also decreases, other things remaining This system ensures that a country can get easy
constant. access to loans from the IMF and other
international financial Institutions.
A rise in the price of foreign exchange will reduce the
foreigner’s cost (in terms of USD) while purchasing Managed Floating Exchange Rate
products from India, other things remaining constant.
Managed floating exchange rate regime lies between
This increases India’s exports and hence supply for
the fixed exchange rate regime and the floating
foreign exchange may increase.
exchange rate regime. In this system, the exchange
Determination of the Exchange Rate rate of domestic currency is allowed to move freely
based on the market forces of demand and supply.
Different countries have different methods of determining However, during difficult circumstances, the Central
their currency’s exchange rate. It can be determined through Bank intervene to stabilise the exchange rate of the
Flexible Exchange Rate, Fixed Exchange Rate or Managed domestic currency.
Floating Exchange Rate.
It can further be categorised as follows :
Fixed Exchange Rate Adjusted Peg System Under this, the Central Bank
Under the fixed exchange rate regime, the government or tries to hold the exchange rate of domestic
the Central bank has complete intervention in the currency until the foreign exchange reserves of that
determination of the currency’s exchange rate. This is country gets exhausted. After this, the Central Bank
achieved by linking the domestic currency to the value of goes for the devaluation of the domestic currency
gold or with other major currencies such as the US dollar to move to another equilibrium of the exchange
etc. rate.
80
Crawling Peg System Under this, the Central Bank Other Concepts Related to
keeps on adjusting exchange rate based on the new
demand and supply conditions of the exchange rate Exchange Rate
market. It follows a system of regular checks and The other concepts related to exchange rate are :
balances and the Central Bank undertakes small Nominal Effective Exchange Rate (NEER) and Real
devaluations based on the market conditions. Effective Exchange Rate (REER) The indices NEER
Clean Floating Under this, the exchange rate of and REER are used as indicators of external
domestic currency is based on the market forces of competitiveness. NEER is the weighted average of
demand and supply without the government bilateral nominal exchange rates of the home currency
intervention. This system is identical to the floating in terms of foreign currencies.
exchange rate. The REER, defined as a weighted average of nominal
Dirty Floating Under this, the exchange rate is exchange rates adjusted for relative price differential
mainly determined by the market forces of demand between the domestic and foreign countries, relates to
and supply but the Central Bank occasionally the Purchasing Power Parity (PPP) hypothesis.
intervened to remove excessive fluctuations from the These are prepared jointly in the Division of
foreign exchange markets. International Finance, Department of Economic
Analysis and Policy and the Department of External
Exchange Rate Management in India Investments and Operations, Reserve Bank of India.
The exchange rate management system in India has The Gold Standard From around 1870 to the outbreak
undergone a systematic change since Independence of the First World War in 1914, the prevailing system
from the system of the pegged exchange rate to the was the gold standard which was the epitome of the
present form of market determined exchange rate after fixed exchange rate system. All currencies were
liberalisation in 1993. These changes are : defined in terms of gold. Each participant country
Par Value System Till 1971 Under this system, the committed to guarantee the free convertibility of its
external value of rupee was fixed by the government currency into gold at a fixed price.
to the UK pound sterling and gold. In 1966, the Special Drawing Rights (SDRs) The SDR is an
Indian Rupee was devalued by 36 %. international reserve asset, created by the IMF in 1969
Pegged Regime (1971-1992) The value of Indian to supplement its member countries’ official reserves.
rupee was pegged to US dollar (1971-1991) and to the The value of the SDR is based on a basket of five
pound sterling (1971-1975). After the breakdown of currencies i.e. the US dollar, the Euro, the Chinese
the Bretton Woods System and the collapse of the renminbi, the Japanese yen and the British pound
pound sterling, the value of Indian rupee was pegged sterling.
on the basis of the weighted average of a basket of
currencies of the major trading partners of India. The
Mayaram Committee Report on Foreign Trade
RBI determined the exchange rate within a band of
plus minus 5 % of this weighted average.
n This report on foreign trade was accepted by
Government of India in 2014. According to it, foreign
Partial Convertibility After 1991 Partial investment of 10% or more in a listed company will
convertibility of Indian rupee was in operation till now be treated as FDI.
1993 under the Liberalised Exchange Rate n An investor may be allowed to invest below 10% and
Management System (LERMS). In this system, 40 % this can be treated as FDI subject to the condition that
of the exchange rate was to be converted on the basis the FDI stake is raised to 10% or beyond within one
of the official exchange rate and the remaining 60 % year from the date of the first purchase. If the stake is
was based on the market determined exchange rate. not raised to 10% or above, then the investment can be
treated as portfolio investment.
Market Based Exchange Rate Regime Since 1993
India adopted the market based exchange rate in
n Foreign Portfolio Investors include Foreign Institutional
Investors (FIIs) and Qualified Foreign Investors (QFIs).
1993 and the LERMS was removed in the budget
n Foreign investment in an unlisted company,
1994. RBI intervenes in the market only to reduce
irrespective of the threshold limit, may be treated
volatility and sudden appreciation or depreciation of
as FDI.
Indian rupee.
INDIAN ECONOMY
NCERT Notes
CHAPTER 11 81
Liberalisation, Privatisation
and Globalisation
Sources Class-X New NCERT Chap 4 (Globalisation and the Indian Economy),
Class-XI New NCERT Chap 3 (Liberalisation, Privatisation and Globalisation : An Appraisal)
Fall in Foreign Exchange Reserves India’s foreign

Economic Reforms, 1991 exchange reserve fell to low level in 1990-91 and it
The economic reforms which changed the path of the was insufficient to pay for an import bill for 2 weeks.
economy that the country witnessed in later years
were the LPG reforms. The LPG (Liberalisation,
Privatisation, Globalisation) sometimes also referred Liberalisation
to as LPGM where M stands for Marketisation Economic liberalisation refers to a situation where
introduced in 1991 during the crisis that affected the unnecessary restrictions and controls are removed
government. from a country’s economy to ensure that businesses
and enterprises can maximise their contribution.
Factors Responsible for Economic Reforms However, it is important to note that liberalisation
Rise in Prices The inflation rate increased from 6.7% does not mean an uncontrolled economy.
to 16.7% and the country’s economic position became The Indian economy was liberalised in the year 1991.
worse. In India, the concept of economic liberalisation was
Rise in Fiscal Deficit Due to increase in introduced to attain several objectives i.e.,
non-development expenditure, the fiscal deficit of the industrialisation, expansion in the role of private
government increased. Due to the rise in fiscal deficit, and foreign investment and introducing a free market
there was a rise in public debt and interest. In 1991, system.
interest liability became 36.4% of total government Restrictions were relaxed for private companies to
expenditure. enter several core industries, which were previously
Increase in Adverse Balance of Payments In reserved for the public sector.
1980-81, it was ` 2,214 crores and rose in 1990- 91 to `
17,367 crores. To cover this deficit a large amount of Objectives of Liberalisation in India
foreign loans had to be obtained and the interest
The primary objectives of initiating liberalisation in India
payment got increased.
can be summarised as follows :
Iraq War In 1990-91, war in Iraq broke, which led to a
To solve India’s impending Balance of Payment crisis
rise in petrol prices. The flow of foreign currency
and boost the private sector’s participation in the
from Gulf countries stopped and this further
development of India’s economy.
aggravated the problem.
To increase the volume of Foreign Direct Investment
Dismal Performance of PSUs These were not
in India’s businesses and introduce competition
performing well due to political interference and
between India’s domestic businesses.
became a big liability for the government.
82
To maximise India’s economic potential by encouraging In order to encourage better compliance on the part of
multinational and private companies to expand. taxpayers, many procedures have been simplified and
To usher in globalisation for the Indian economy and the rates were also lowered substantially.
regulate export and import and promote foreign trade.
Foreign Exchange Reforms
Liberalisation Measures in India In 1991, as an immediate measure to resolve the
Balance of Payments crisis, the rupee was devalued
Though a few liberalisation measures were introduced in
against foreign currencies. This led to an increase in
the 1980s in areas of industrial licensing, export-import
the inflow of foreign exchange.
policy and foreign investment, reform policies initiated in
1991 were more comprehensive. These measures are : It also set the tone to free the determination of rupee
value in the foreign exchange market from
De-regulation of Industrial Sector government control.
Industrial licensing was abolished for almost all except Trade and Investment Policy Reforms
product categories alcohol, cigarettes, hazardous
chemicals, industrial explosives, electronics, The trade policy reforms aimed at :
aerospace and drugs and pharmaceuticals. — dismantling of quantitative restrictions on imports
The only industries which are now reserved for the and exports,
public sector are a part of atomic energy generation — reduction of tariff rates and,
and some core activities in railway transport. — removal of licensing procedures for imports.
Many goods produced by small-scale industries have Import licensing was abolished except in case of
now been dereserved. hazardous and environmentally sensitive industries.
In most industries, the market has been allowed to Quantitative restrictions on imports of manufactured
determine the prices. consumer goods and agricultural products were also
fully removed from April, 2001.
Financial Sector Reforms Export duties have been removed to increase the
The reform policies led to the establishment of private competitive position of Indian goods in the
sector banks, Indian as well as foreign. Foreign international markets.
investment limit in banks was raised to around 74%.
Those banks which fulfil certain conditions have been Privatisation
given freedom to set up new branches without the
It implies shedding of the ownership or management of a
approval of the RBI and rationalise their existing
government owned enterprise by private companies.
branch networks.
Various features of privatisation are as follows :
Though banks have been given permission to generate
resources from India and abroad, certain managerial Government companies are converted into private
aspects have been retained with the RBI to safeguard companies in two ways :
the interests of the account-holders and the nation. — By withdrawal of the government from ownership
Foreign Institutional Investors (FII), such as merchant and management of public sector companies.
bankers, mutual funds and pension funds, are now — By outright sale of public sector companies.
allowed to invest in Indian financial markets. Privatisation of the public sector enterprises by selling
off part of the equity of PSEs to the public is known as
Tax Reforms disinvestment.
The rate of corporation tax, which was very high The government has also made attempts to improve
earlier, has been gradually reduced. Efforts have the efficiency of PSUs by giving them autonomy in
also been made to reform the indirect taxes, taxes taking managerial decisions. For instance, some PSUs
levied on commodities, in order to facilitate the have been granted special status as maharatnas,
establishment of a common national market for goods navratnas and miniratnas.
and commodities.
The following are the objectives of privatisation :
In 2016, the Indian Parliament passed a law, Goods
— To reduce the financial burden on the government.
and Services Tax (GST) Act, 2016 to simplify and
— To improve public finances.
introduce a unified indirect tax system in India. This
is expected to generate additional revenue for the — To introduce competition and market discipline.
government, reduce tax evasion and create ‘one — To de-politicise non-essential services.
nation, one tax and one market’. — To encourage a wider share of ownership.
83
Privatisation and Disinvestment Disadvantages of Globalisation

Privatisation implies a change in ownership, resulting Due to globalisation, the number of rural landless
in a change in management. The privatisation of families increased from 35% in 1987 to 45 % in 1999,
public sector enterprises will occur only when the further to 55% in 2005.
government sells more than 51% of its ownership to The farmers are destined to die of starvation or suicide.
private entrepreneurs.
Disinvestment, on the other hand, has a much wider New Disinvestment Policy, 2014
connotation as it could either involve dilution of the n In 2014, New Disinvestment Policy was formulated.
government. Stake to a level that results in a transfer n It aimed at promoting public owership Central Pucblic
of management or could also be limited to such a level Sector Enterprises (CPSE).
as would permit government to retain control over the
organisation.
Outcomes of LPG Reforms
Disinvestment beyond 50% involves the transfer of
Some important positive and negative outcomes of the
management, whereas disinvestment below 50%
LPG reforms in India are as follows :
would result in the government continuing to have a
major say in the undertaking. Minority and majority Positive Outcomes
are the two types of disinvestment.
India’s GDP growth rate increased. During 1990-91,
— Minority Disinvestment A minority disinvestment is India’s GDP growth rate was only 1.1% but after 1991
one such that, at the end of it, the government retains reforms, GDP growth rate increased year by year and
a majority stake in the company, typically greater in 2015-16, it was estimated to be 7.5% by the IMF.
than 51%, thus ensuring management control. Since 1991, India has firmly established itself as a
— Majority Disinvestment A majority disinvestment is lucrative foreign investment destination and FDI
one in which the government, post disinvestment, equity inflows in India in 2019-20 (till August) stood
retains a minority stake in the company i.e. it sells at US$ 19.33 billion.
off a majority stake. In 1991, the unemployment rate was high but after
India adopted a new LPG policy, more employment
Globalisation got generated as new foreign companies came to India
and due to liberalisation, many new entrepreneurs
Although globalisation is generally understood to started companies.
mean integration of the economy of the country with
Per Capita Income increased due to an increase in
the world economy, it is a complex phenomenon.
employment. Exports have increased and stood at US$
It is an outcome of the set of various policies that are 26.38 billion as of October, 2019.
aimed at transforming the world towards greater
interdependence and integration. Negative Outcomes
It involves creation of networks and activities Since 1991, share of agriculture in the GDP has gone
transcending economic, social and geographical down drastically to 18%. This has resulted in
boundaries. lowering the Per Capita Income of the farmers and
increasing the rural indebtedness.
Effects of Globalisation in India Due to opening up of the Indian economy to foreign
Owing to globalisation, many Indian companies have competition, more MNCs are competing with local
expanded their wings to many other countries. For businesses and companies which are facing problems
example, ONGC Videsh, a subsidiary of the Indian due to financial constraints, lack of advanced
public sector enterprise, Oil and Natural Gas technology and production line.
Corporation engaged in Oil and Gas exploration and Globalisation has also contributed to the destruction
production has projects in 16 countries. of the environment through pollution by emissions
The low wage rates and availability of skilled from manufacturing plants and clearing of vegetation
manpower in India have made it a destination for cover.
global outsourcing in the post-reform period. LPG policies have led to widening income gaps within
Increase in flow of investments from developed the country.
countries to India is used for economic reconstruction. The higher growth rate is achieved by an economy at
Technological development has resulted in reverse the expense of declining incomes of people who may
brain-drain in India. be rendered redundant.
CHAPTER
84 12
International Organisations
Sources Class-X New NCERT Chap 4 (Globalisation and the Indian Economy), Class XI New NCERT Chap 3 (Liberalisation,
Privatisation and Globalisation : An Appraisal), Class XI New NCERT Chap 10 (Comparative Development
Experiences of Indian and Its Neighbours)
An international economic organisation is a forum of IBRD was created in 1944 to help Europe
cooperation of sovereign states based on multilateral reconstruct/rebuild after World War II. To be a
international agreement and comprises relatively stable member of IBRD, a country has to first join the
range of participants. International Monetary Fund (IMF).
The organisations such as the IMF, the World Bank and Various functions of IBRD are as follows :
other multilateral development banks; are heavily It works closely with the rest of the World Bank
involved in ‘managing’ financial crises. Group to help developing countries reduce poverty,
These organisations try to assess national economies in promote economic growth and build prosperity.
order to prevent fundamental issues that can affect the It supports long-term human and social
growth and stability of the world economy. development that private creditors do not finance.
It preserves borrowers’ financial strength by
World Bank Group providing support in times of crisis, when poor
people are most adversely affected.
The World Bank Group (WBG) is a family of five
It promotes policy and institutional reforms (such
international organisations that provide loans to
as safety net or anti-corruption reforms).
developing countries.
It creates a favourable investment climate to
It is the largest and most famous development bank in
catalyse the provision of private capital.
the world and is an observer at the United Nations
Development Group. It facilitates access to financial markets often at
more favourable terms than members can achieve
Its five organisations are the International Bank for on their own. Its resources of the Bank consist of
Reconstruction and Development (IBRD), the the capital and borrowings.
International Development Association (IDA), the
International Finance Corporation (IFC), the Multilateral International Development
Investment Guarantee Agency (MIGA) and the Association (IDA)
International Centre for Settlement of Investment
Disputes (ICSID). The International Development Association (IDA) is
the part of the World Bank group that helps the
International Bank for Reconstruction and world’s poorest countries.
Development (IBRD) Overseen by 173 shareholder nations, IDA aims to
IBRD provides loans and other assistance primarily to reduce poverty by providing loans (credits) and
middle income and credit-worthy poor countries. Its grants for programmes that boost economic growth,
interest rates are slightly lower than that offered by other reduce inequalities and improve people’s living
financial institutions but with long-term maturity. conditions.
85
IDA complements the World Bank’s original lending MIGA is a member of the World Bank Group and is
arm—the International Bank for Reconstruction and headquartered in Washington DC, United States. It was
Development (IBRD). established in 1988 as an investment insurance facility
IBRD and IDA share the same staff and headquarters to encourage confident investment in developing
and evaluate projects with the same rigorous countries.
standards. MIGA’s stated mission is “to promote foreign direct
IDA is one of the largest sources of assistance for the investment into developing countries to support
world’s 771 poorest countries, 39 of which are in economic growth, reduce poverty and improve
Africa and is the single largest source of donor funds people’s lives”. It targets projects that endeavour to
for basic social services in these countries. create new jobs, develop infrastructure, generate new
tax revenues and take advantage of natural resources
IDA lends money on concessional terms. This means
through sustainable policies and programmes.
that IDA credits have a zero or very low-interest
charge and repayments are stretched over 25 to 40 International Centre for the Settlement of
years, including a 5 to 10 year grace period. IDA also
Investment Disputes (ICSID)
provides grants to countries at risk of debt distress.
It is an multilateral, autonomous and international
In addition to concessional loans and grants, IDA
arbitation institution established in 1966 for resolving
provides significant levels of debt relief to the Heavily
legal disputes between international investors and
Indebted Poor Countries (HIPC), through the
nations. It’s headquatered in Washington DC.
Multilateral Debt Relief Initiative (MDRI).
It encourages the flow of foreign investment to
International Finance Corporation (IFC) develop countries through arbitration and conciliation
It is the largest global development institution focused facilities.
exclusively on the private sector in developing India is not a member of ICSID.
countries established in 1956. It was formally organised on 27th December, 1945.
Various objectives of the IFC are as follows : When 29 countries signed it Article of Agreement.
— To achieve more economic development by
encouraging the growth of private enterprise in International Monetary Fund (IMF)
member countries. It was conceived at a UN conference in Bretton Woods,
— To invest in private enterprise in member countries New Hampshire, United States, in July, 1944.
in association with private investors and without a The IMF works to foster global monetary cooperation,
Government guarantee, in cases where sufficient secure financial stability, facilitate international trade,
private capital is not available on reasonable terms. promote high employment and sustainable economic
— To seek for bringing together investment growth.
opportunities, private capital of both foreign and In November 1947, it became special agency of United
domestic origin and experienced management. Nations.
— To stimulate conditions conducive to the flow of It’s headquartered at Washington DC and its regional
private capital (domestic and foreign) into offices are at Paris and Geneva.
productive investments in member countries. It is an organisation of 190 member countries, each of
IFC investment normally does not exceed 40% of the which has representation on the IMF’s executive
total investment of the enterprise. board in proportion to its financial importance. Due to
In case of its investment by equity participation, it this reason, the most powerful countries in the global
does not exceed 25% of the share capital. economy have the most voting power.
Various objectives of IMF are as follows :
Multilateral Investment Guarantee
— To foster global monetary cooperation.
Agency (MIGA)
— To secure financial stability.
It is an international financial institution which offers
— To facilitate international trade.
political risk insurance and credit enhancement
guarantees. Such guarantees help investors protect — To promote high employment and sustainable
foreign direct investments against political and economic growth.
non-commercial risks in developing countries. — To reduce poverty around the world.
86
Various functions of UNCTAD are as follows :

India and the IMF
— It functions as a forum for intergovernmental
n India is one of the 44 nations who participated in
Bretton Woods Conference, that’s why it is member of deliberations, supported by discussions with
IMF. experts and exchanges of experience, aimed at
n Finance Minister of India is the ex-officio Governor on consensus building.
the Board of Governors of the IMF. RBI Governor is the — It undertakes research, policy analysis and data
Alternate Governor at the IMF. collection for the debates of government
n India is represented at the IMF by an Executive representatives and experts.
Director, who also represents three other countries as
— It provides technical assistance tailored to the
well, viz. Bangladesh, Sri Lanka and Bhutan.
specific requirements of developing countries, with
special attention to the needs of the least developed
World Trade Organisation (WTO) countries and of economies in transition.
The WTO is the successor to the General Agreement on World Economic Forum (WEF)
Tariffs and Trade (GATT), which was created in 1947.
It is a Swiss non-profit foundation established in
The Uruguay Round (1986-94) of the GATT led to the
1971, based in Geneva, Switzerland.
creation of WTO. India is a founder member of the
1947 GATT and its successor, the WTO. WTO began It is recognised by the Swiss authorities as the
operations on 1st January, 1995. Its headquarters is in international institution for public-private
Geneva, Switzerland. cooperation.
The Agreement establishing the WTO, commonly Its mission is committed to improve the state of the
known as the “Marrakesh Agreement”, was signed in world by engaging business, political, academic and
Marrakesh, Morocco in 1994. other leaders of society to shape global, regional and
industry agendas.
WTO is an international organisation dealing with the
rules of trade between nations.
The main difference between GATT and WTO was that
G-8 (Formerly G-7)
GATT mostly dealt with trade in goods, the WTO and G-7 was organisation of 7 non-socialist countries,
its agreements could not only cover goods but also which were highly industrialised in the world.
trade in services and other intellectual properties like G-7 includes USA, Canada, Germany, Britain, France,
trade creations, designs and inventions. Italy and Japan. After adopting free market policies in
The WTO has 164 members (including the European economy, Russia was also made member of the
Union) and 23 observer governments (like Iran, Iraq, organisation in June, 1997. At present, it is
Bhutan, Libya etc). known as G-8.
United Nations Conference on Trade and G-8+5

Development (UNCTAD) This is a political term used to describe an international
group, which consists the G-8 nations, plus the five
The United Nations Conference on Trade and
leading emerging economies (Brazil, China, India,
Development (UNCTAD) was established in 1964. Mexico, South Africa).
It is an intergovernmental body of the United Nations
General Assembly for promoting the
development-friendly integration of developing G-20
countries into the world economy. The G20 is an informal group of 19 countries and the
UNCTAD grew from the view that existing institutions European Union, with representatives of the
like GATT (now WTO), the International Monetary International Monetary Fund and the World Bank.
Fund (IMF) and World Bank were not properly The G20 membership comprises a mix of the world’s
organised to handle the particular problems of largest advanced and emerging economies,
developing countries. representing about two-thirds of the world’s
UNCTAD’s objective is to maximise the trade, population, 85% of global Gross Domestic Product,
investment and development opportunities of 80% of global investment and over 75% of global
developing countries and assist them in their efforts trade.
to integrate into the world economy on an equitable Its origin can be traced back to the 1997-1999 ASIAN
basis. Financial Crisis. This was a ministerial-level forum
87
which emerged after G7 invited both developed and India-Brazil-South Africa (IBSA)
developing economies.
It is a international group free promoting international
The Finance Ministers and Central bank Governors
cooperation between India, Brazil and South Africa.
began meeting in 1999.
It was created to promote South cooperation and build
The members of the G20 are Argentina, Australia,
consensus on the issue of international importance.
Brazil, Canada, China, France, Germany, India,
Indonesia, Italy, Japan, Republic of Korea, Mexico, It represents an important pole for galvanising.
Russia, Saudi Arabia, South Africa, Turkey, the
United Kingdom, the United States, and the Brazil-Russia-India-China-South Africa
European Union. (BRICS)
Spain as a permanent, non-member invitee, also BRICS is the acronym for an association of 5 major
attends leader summits. emerging national economies : Brazil, Russia, India, China
and South Africa.
International Labour The BRICS first summit was held in Yekaterinburg,
Organisation (ILO) Russia on 16th June, 2009 and the term was coined by
economist Jim O’Neill.
It was established in 1919 by the Treaty of
Versailles as an affiliated agency of the League of 13th summit of BRICS was held on 9th September, 2021
Nations. virtually through video conferencing by the host country
India.
It became the first affiliated specialised agency of
the United Nations in 1946. Its headquarter is in
Geneva, Switzerland.
Brexit
It promotes internationally recognised human and Brexit is an acronym for British Exit. It is used for the
labour rights. separation of the UK from European Union.
Its founding mission is ‘‘Social justice is essential to In the Brexit referendum; the ‘leave’ side won decisively
universal and lasting peace.’’ by securing 51.9% of the total votes.
The eight-core conventions of the ILO are : South Asian Association for
— Forced Labour Convention (No. 29)
Regional Cooperation (SAARC)
— Abolition of Forced Labour Convention (No.105)
— Equal Remuneration Convention (No.100)
It was founded in 1985 and dedicated to economic,
technological, social and cultural development
— Discrimination (Employment Occupation)
emphasising collective self-reliance.
Convention (No.111)
Its member countries are Afghanistan, Bangladesh,
— Minimum Age Convention (No.138)
Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.
— Worst forms of Child Labour Convention (No.182)
It promotes the welfare of the people of South Asia and to
— Freedom of Association and Protection of Right to
improve their quality of life.
Organised Convention (No.87)
It strengthen cooperation among themselves in
— Right to Organise and Collective Bargaining
international forums on matters of common interest.
Convention (No.98)
It was established to contribute to mutual trust,
Asia-Pacific Economic understanding and appreciation of one another’s problems.
Cooperation (APEC) Association of South-East Asian Nations
It is a regional economic forum to promote
sustainable growth and better economic relations
(ASEAN)
among the member countries or economies. It was It was established in 1967 in Bangkok, Thailand by
established in 1989. Indonesia, Malaysia, Philippines, Singapore and
Thailand. Today it has 10 member (Apart from founding
India is not a member of APEC. Its members are
members Brunei, Darussalam, Vietnam, Lao PDR,
Australia, Brunei, Canada, Chile, China, Hong
Myanmar and Cambodia)
Kong, Indonesia, Japan, South Korea, Malaysia,
Mexico, New Zealand, Papua New Guinea, Peru, From to promote active collaboration and mutual
Philippines, Russia, Singapore, Chinese Taipei, assistance on matters of common interest in the
Thailand, Vietnam and the United States. economic, social, central, technical, scientific and
administrative field.
88
To promote South-East Asian studies. Asian Infrastructure Investment

To promote regional peace and stability through
abiding respect for justice and the rule of law in the
Bank (AIIB)
relationship among countries of the region and It is a multilateral development bank with a mission to
adherence to the principles of the UN Charter. improve social and economic outcomes in Asia.
It is headquartered in Beijing and began its operations
International Financial Institutions in January, 2016.
Some important international financial institutions are It is established by the AIIB Articles of Agreement
as follows : (entered into force on 25th December, 2015) which is a
multilateral treaty. The Parties (57 founding members)
Bank for International to agreement comprise the Membership of the Bank.
The members of the Bank have now grown to 97
Settlements (BIS) approved members worldwide. There are 27
It is an inter-governmental organisation of Central prospective members including Armenia, Lebanon,
banks which “fosters international monetary and Brazil, South Africa, Greece, etc.
financial cooperation and serves as a bank for Fourteen of the G-20 nations are AIIB members
Central banks.” including France, Germany, Italy and the United
It is not accountable to any national government, Kingdom.
headquartered at Basel, Switzerland.
The mission of the Bank for International Asian Development Bank (ADB)
Settlements (BIS) is to serve Central banks in their It is a regional development bank established on 19th
pursuit of monetary and financial stability, to foster December, 1966.
international cooperation in those areas and to act as
ADB now has 68 members, 49 from within Asia. ADB is
a bank for Central banks.
headquartered in Manila, Philippines.
The Basel Committee for Banking Supervision
It aims to promote social and economic development in
(BCBS), while technically separate from the BIS, is a
Asia.
closely associated international forum for financial
regulation. ADB is committed to achieving a prosperous, inclusive,
resilient and sustainable Asia and the Pacific, while
The BCBS is responsible for the Basel Accords,
sustaining its efforts to eradicate extreme poverty.
which recommend capital requirements and other
banking regulations that are widely implemented by
national governments. The BIS also conducts India and the ADB
research on economic issues and publishes reports. n India’s act of coordination with this bank is done by
Finance Ministry.
European Central Bank (ECB) n As of 31st December, 2020, ADB’s five largest
It is the Central bank responsible for monetary shareholders are Japan and the United States (each with
15.6% of total shares), the People’s Republic of China
policy of those European Union (EU) member
(6.4%), India (6.3%), and Australia (5.8%).
countries which have adopted the euro currency.
This region is known as the Eurozone and currently
comprises 19 members. New Development Bank (NDB)
The principal goal of the ECB is to maintain price It is a multilateral development bank jointly founded by
stability in the Euro area, thus helping preserve the the BRICS countries at the 6th BRICS Summit in
purchasing power of the Euro. It is the Central bank Fortaleza, Brazil in 2014.
of the combined Eurozone.
It was formed to support infrastructure and sustainable
It is headquartered in Frankfurt, Germany. It has development efforts in BRICS and other undeserved,
been responsible for monetary policy in the Euro emerging economies for faster development through
area since, 1st January, 1999. innovation and cutting-edge technology.
The ECB coordinates EU monetary policy, including Its headquarters is at Shanghai, China and it is also
setting the region’s target interest rates and known as the BRICS bank.
controlling the supply of the Euro common
In 2018, the NDB received observer status in the United
currency.
Nations General Assembly, establishing a firm basis for
The ECB’s primary mandate is to achieve price active and fruitful cooperation with the UN.
stability through low inflation.
89
Appendix
Committees/Commissions Related to Indian Economy
Committees/Commissions Year Related Subject Committees/Commissions Year Related Subject
Kothari Commission 1964 Reforms in education Chandratre Committee 1997 Security analysis and
systems investment
Basel Committee 1974 Reforms in banking sector Mahajan Committee 1997 Sugar industry
Tandon Committee 1974 System of working capital Meera Seth Committee 1997 Development of handlooms
financing by banks
Tarapore Committee 1997 Report on capital account
SP Talwar 1975 Restructuring of weak convertibility
public sector bank
UK Sharma Committee 1998 NABARD’s role in RRB
Dantwala Committee 1977 Unemployment estimation
in the country Vasudev Committee 1998 NBFC Sector Reforms
Shivraman Committee 1979 Establishment of NABARD RV Gupta Committee 1998 Small Savings and
Agricultural Credit
Marathe Committee 1982 Recommendation for
urban cooperative banks JS Verma Committee 1999 Current account carry
forward practice
Sukhamoy Chakravarty 1982 To assess the functioning of
Committee the Indian monetary Kumarmanglam Birla 1999 Corporate governance
system Report
Hanumant Rao 1983 Fertilisers SN Verma Committee 1999 Restructuring the

Committee commercial banks
Vaghul Committee 1987 Money market in India Dave Committee 2000 Pension scheme for
unorganised sector
Khusro Committee 1989 Agricultural credit system
YB Reddy Committee 2001 Review of Income Tax
Goiporia Committee 1990 Improvement in the Rebates
customer service at
primary (urban) Abhijit Sen Committee 2002 Long Term Food Policy
cooperative banks
Mashelkar Committee 2002 Auto Fuel Policy
Raja Chelliah Committee 1991 Tax reforms
Sapta Rishi Committee 2002 Development of domestic
Narismhan Committee 1991 Banking sector reforms tea
Rekhi Committee 1992 Indirect taxes Udesh Kohli Committee 2003 Analyse fund requirement
in power sector
Jankiramanan Committee 1992 Securities transaction
JJ Irani Committee 2004 Company Law Reforms
Swaminathan Committee 2004 To find the problems faced

GV Ramakrishna 1993 On disinvestment
by the farmers
Committee
Suresh Tendulkar 2005 Redefining poverty line
Malhotra Committee 1993 Broad framework of Committee and its calculation formula
insurance sector
Mashelkar Committee 2005 With respect to Euro
NN Vohra Committee 1993 Relation (nexus) of standard
politicians with criminals
Shuglu Committee 2006 Sardar Sarovar
Goswami Committee 1993 Industrial sickness in India Rehabilitation
Ajit Kumar Committee 1997 Army Pay Scales Rakesh Mohan 2006 Improvement the financial
Committee sector
Abid Hussain Committee 1997 On Small Scale Industries
90
Committees/Commissions Year Related Subject Report/Index and Issuing body

Percy Mistry Committee 2007 Making Mumbai an Report/Index Issuing body
international financial
capital World Development Report World Bank
BK Chaturvedi Committee 2008 Financial condition of oil Gobal Economic Outlook World Bank
companies Report
Bhurela Committee 2010 Increase in motor vehicle Ease of Living Index World Bank
tax
Global Finance Stability International Monetary Fund
KC Chakrabarty 2011 To analyse the financial Report
Committee condition of the Regional
Rural Banks In India World Economic Outlook International Monetary Fund
Report
C Babu Rajiv Committee 2012 Reforms in Ship act, 1908
Gobal Competitiveness Report World Economic Forum
and Ship Trust Act, 1963
Environment Protection Index World Economic Forum
Kelkar Committee 2012 Tax structure reforms
Human Capital Index World Bank
C Rangrajan Committee 2012 To review the methodology
for measurement of Global Gender Gap Index World Economic Forum
poverty
Global Education Monitoring UNESCO
Deepak Parekh 2012 To financing infrastructure Report
Committee through PPP model
Gender Inequality Index UNDP
Raghuram Rajan 2012 Central assistance to the
Committee state Global Hunger Index International Food Policy
Research Institute (IFPRI)
Urjit Patel Committee 2013 Monetary policy
Children Climate Risk Index UNICEF
Som Committee 2013 New income tax structure
Hunger Hotspot Report World Food Programme
Dhanuka Committee 2013 Current capital market
regulations Global Cyber Security Index International
Telecommunication Union
Chandra Shekhar 2013 Venture capital
Committee Global Liveability Index Economist Intelligence Unit
Nachiket Mor Committee 2013 Committee on Report on Gobal Remittance World Bank
comprehensive financial
World Press Freedom Index Reporters Without Borders
services for small
businesses and low income World Happiness’ Report UN Sustainable Development
households Solutions Network
MB Shah Committee 2014 To investigate black Trade and Development UNCTED
money, mostly hoarded Report
abroad
Corruption Perception Index Transparency International
PJ Nayak Committee 2014 To evaluate governance of
board of banks and World Investment Report UNCTED
examine criteria to select
directors, as well as their Technology and Innovation UNCTED
term Report
Human Development Index UNDP

Ak Mathur commission 2014 Seventh Pay Commission
Climate Change Performance New Climate Institute/ Climate
K Kasturirangan 2017 To head drafting
Index Action Network
Committee Committee of National
Education Policy Global Innovation Index (WIPO) World Intellectual
Property Organisation
Bimal Jalan Committee 2018 To decide the appropriate
level of reserves that the Digital Quality of Life Index Surfshark
RBI should hold
SDG India Index NITI Aayog
Malegam Committee 2018 Reforms in the primary
market and repositioning India Innovation Index NITI Aayog
of UTI
Poverty and Shared Prosperity World Bank
Prasad Panel 2018 International trade and Report
services
91
India Organic Mark It is a

Certification Mark in India certification mark for organically
ISI Mark It is a standards-compliance farmed food products manufactured
mark for industrial products in India in India. The certification
since 1955. The mark certifies that a mark certifies that an organic
product conforms to an Indian food product conforms to the
Standard (IS) developed by the National Standards for Organic
Bureau of Indian Standards (BIS), Products established in 2000. The certification is issued
the National Standards body of by testing centres accredited by the Agricultural and
India. The ISI mark is mandatory for certain products Processed Food Products Export Development
to be sold in India, such as many of the electrical Authority (APEDA) under the National Program for
appliances and other houshold products. Organic Production of the Government of India. Even
FPO Mark It is a certification though the standards are in effect since 2000, the
mark mandatory on all processed certification scheme and hence, the certification mark
fruit products sold in India such as came into existence in 2002.
packaged fruit beverages, Eco Mark It is a certification mark
fruit-jams, squashes, pickles, issued by the Bureau of Indian
dehydrated fruit products and Standards (the National Standards
fruit extracts. The mark got a Organisation of India) to products
mandatory status after the Food conforming to a set of standards
Safety and Standards Act of 2006. aimed at the least impact on the
AGMark It is a certification ecosystem. The marking scheme was
mark employed on agricultural started in 1991. Under this Scheme, the Government of
products in India, assuring that India has notified the final criteria for the 17 product
they conform to a set of standards categories.
approved by the Directorate of Silk Mark It is a certification
Marketing and Inspection under mark in India for silk textiles. The
Ministry of Agricultural and certification is managed by the ‘Silk
Farmers Welfare. The AGMark Mark Organisation of India’, a
Head Office at Faridabad (Haryana) society set up by the state-controlled
is legally enforced in India by the Agricultural Produce Central Silk Board of India. The
(Grading and Marking) Act of 1937 (amended in 1986). certification scheme was founded by
The present AGMark standards cover quality the Central Silk Board in 2004.
guidelines for 224 different commodities.
Vegetarian Mark The symbol is in
BS Mark It is certification for effect following the Food Safety and
regulating the output of air pollutants Standards (Packaging and Labeling)
from internal combustion engine and Act of 2006, received a mandatory
spark-ignition engine equipment, status after the framing of the
including motor vehicles. Vehicle respective regulations (Food Safety
emission norms were introduced in and Standards (Packaging and
India in 1991 for petrol and in 1992 for Labeling) Regulation in 2011.
diesel vehicles. Since 2000, Euro norms are followed in According to the law, vegetarian food should be
India under the name Bharat Stage Emission Standards identified by a green symbol and
for four wheeled vehicles. Bharat Stage III norms have non-vegetarian food with a brown
been enforced across India since October 2010. symbol.
BIS Hallmark It is FSSAI Mark The Food Safety and
a hallmarking system for gold as Standards Authority of India
well as silver jewellery sold in India (FSSAI) has been established under
certifying the purity of the metal. The Food Safety and Standards, 2006 which consolidates
BIS system of hallmarking various acts and orders that handle food related issues
of gold jewellery began in April 2000. in various ministries and departments. FSSAI has been
BIS introduced hallmarking for silver created for laying down science based standards for
jewellery in December 2005 under IS articles of food and to regulate their manufacture,
2112, the standard specification for hallmarking of storage, distribution, sale and import to ensure
silver. availability of safe and wholesome food for human
consumption.
92
Glossary
Invisibles An invisible trade is an international Cascading Effect This effect is when there is a tax
transaction that does not include an exchange of on tax levied on a product at every step of the sale.
tangible goods. Customer service outsourcing, The tax is levied on a value that includes tax paid by
overseas banking transactions, the medical tourism the previous buyer, thus, making the end consumer
industry, etc are the examples of invisible trade. Any pay “tax on already paid tax”.
transaction that is associated with a value but not Commercialisation of Agriculture
with physical goods could be called an invisible trade. Commercialisation of agriculture is a phenomenon
De-reservation It implies opening up of those where agriculture is governed by commercial
industries for the private sector that were consideration i.e. certain specialised crops began to
exclusively reserved for the government sector. It is be grown not for consumption in village but for sale
one of the important policies that was followed in national and even in international market.
under the policy of privatisation as a part of the Commercialisation of agriculture in India began
New Economic Reforms. during the British rule.
Devaluation It is an official lowering of the value of Demographic Transition It is a phenomenon and
a country’s currency within a fixed exchange-rate theory which refers to the historical shift from
system, in which a monetary authority formally high birth rates and high death rates in societies
sets a lower exchange rate of the national currency with minimal technology, education (especially of
in relation to a foreign reference currency women) and economic development, to low birth
or currency basket. The opposite of devaluation, a rates and low death rates in societies with
change in the exchange rate making the domestic advanced technology, education and economic
currency more expensive, is called a revaluation. development, as well as the stages between these
Opportunity Cost It represents the potential two scenarios.
benefits lacked by an individual, investor or Quantitative Restrictions Quantitative restrictions
business while choosing one alternative over are the limits imposed on the quantity of goods
another. Understanding the potential missed which are exported and imported in the global
opportunities when a business or individual market. These restrictions discourage the imports of
chooses one investment over another allows for goods and protect the domestically produced goods
better decision-making. from competition. But these restrictions were
Import Substitution It is a strategy under trade abolished by WTO to facilitate world trade.
policy that abolishes the import of foreign products Balance of Payment (BoP) It is also known as the
and encourages production in the domestic market. Balance of International Payments. It is a statement
The purpose of this policy is to change the economic of all transactions made between entities
structure of the country by replacing foreign goods in one country and the rest of the world over a
with domestic goods. defined period, such as a quarter or a year. It
Tariff A tariff, is a tax levied on an imported good. summarises all transactions that a country’s
These are two types. A ‘unit’ or specific tariff is a tax individuals, companies and government bodies
levied as a fixed charge for each unit of a good that complete with individuals, companies and
is imported. e.g., $300 per ton of imported steel. An government bodies outside the country.
‘ad valorem’ tariff is levied as a proportion of the
Disinvestment It is when governments or
value of imported goods.
organisations sell or liquidate assets or subsidiaries.
Consumption Basket A basket of goods is a constant Disinvestments can take the form of divestment or a
set of general goods produced in an economy whose
reduction of Capital Expenditures (CapEx).
prices are tracked over time. The basket is used to
Disinvestment is carried out for a variety of reasons,
measure inflation over time, such as with the
such as strategic, political or environmental. After
Consumer Price Index (CPI).
1991, disinvestment began in India.
Bureau of Energy Efficiency The Government of
India set up Bureau of Energy Efficiency (BEE) on 1st Foreign Institutional Investors (FIIs) These are an
March, 2002 under the provisions of the Energy institutional, individual or group entity seeking to
Conservation Act, 2001. Its aim is to assist in invest in the economy of a country other than
developing policies and strategies with a thrust on where the entity is headquartered. FIIs are
self-regulation and market principles, within the important to emerging economies because they
overall framework of the Energy Conservation Act, bring funds and capital to businesses in developing
2001. countries.

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Administrative & Production Offices

Sales & Support Offices

Chapter 2. National Income and Accounting 7-9

Chapter 3. Economic Planning 10-15

Chapter 4. Poverty and Unemployment 16-22

Chapter 5. Rural and Urban Development (Basic Infrastructure) 23-30

Chapter 6. Agriculture 31-40

Chapter 7. Industry and Industrial Policies 41-51

Chapter 8. Money and Banking 52-64

Chapter 9. Public Finance, Fiscal Policy and Budget 65-73

Chapter 10. Foreign Trade and Balance of Payment 74-80

Chapter 11. Liberalisation, Privatisation and Globalisation 81-83

Chapter 12. International Organisations 84-88

Capitalist Economy In this type of economy, the

On the Basis of Development Size of Indian Economy

Sectors of Economy Features of Indian Economy

Economic Development 2. Multi-dimensional Poverty Index (MPI)

Human Development 6. Ensure availability and sustainable management of

National Income Intermediate Goods Such goods are used by other

Calculation of National Income Calculation of GDP in India

Planning in Indian Economy History of Planning in India

Objectives of Planning in India FICCI’s Proposal

Its main objective was doubling the per capita

On the Basis of Duration NITI Aayog

Planning Commission Objectives and Functions of NITI Aayog

12. Twelfth Five Year Plan (2012-2017)

Five Year’s Plan : At a Glance

Abolition of Five Year Plans

15 Years Vision Document in Place of Five Year Plan

Poverty and Unemployment

People can help themselves even with a small

Poverty Line On the basis of consumption, there are two

Lorenz Curve of Income Distribution is given as Committees Associated with

Young people after a long time of unemployment PM Svanidhi Yojana

Rural and Urban

The Ministry of Rural Development is a branch of

2. Rural Marketing Shift of Workforce from Agriculture to

Rural Development Schemes Its beneficiaries include people belonging to SCs/STs,

— At least 75 % of male main working population

Urbanisation in India Atal Mission for Rejuvenation and Urban

List of the Some Major Rural and Urban Development Programmes

Due to low productivity and use of outdated

Contribution in Economic Labour Intensive Cultivation Due to the increase

Consumer Oriented Policies Agricultural Marketing Policies

It works towards restoring soil fertility and

According to estimates of the Central Statistics Government Steps Related to

Due to spread of technology in Green Evergreen Revolution

Industry Industrial Sectors in India

3. Joint Sector It classified industries into four broad areas :

Industrial Policy Resolution, 1956 classified Industrial Policy, 1980

Fair Trade Companies Act, 2013

Annual Survey of Industries (ASI) Presently there are 11 Maharatna Companies.

Criteria for Grant of Miniratna Status Micro, Small and Medium

Abid Hussain Committee on Small Scale Industries Startup India

of credit, service, technology assistance, infrastructure, low Stand-up India

Money and Banking

Introduction Types of Money

In past times, there was no concept of money and people

Money is the most commonly accepted medium of Limited Unlimited